Since the launch of legal recreational cannabis sales two years ago, California consumers have felt the pinch of some of the highest marijuana tax rates in the country. And while many speculated that prices would fall as the industry got on its feet, the fact is that come New Year’s Day, dispensary customers will actually pay more for their products thanks to an impending tax hike.
California’s Department of Tax and Fee Administration (CDTFA) — the agency charged with determining the cannabis mark-up rate — recently put the industry on notice that effective January 1, 2020, the mark-up rate will jump from 60% to 80%. The mark-up rate serves as the basis for the Golden State’s 15% excise tax, which means consumers can expect to see the 20% increase reflected in their dispensary tabs.
Why Is the Cannabis Tax Hike Happening?
Industry analysts and operators alike have voiced much opposition to the hefty cannabis taxes levied by California’s government. Chief among their concerns is that exorbitant prices in legal marijuana stores will drive more consumers to the illicit market. And despite the health hazards associated with non-regulated, non-tested products, more and more customers are choosing to take their chances with black market marijuana rather than pay the state’s fees to obtain their cannabis through legal channels.
The fact is, though, that the tax bump is baked right into the Prop. 64 legislation that voters passed in 2016. Under the law, the CDTFA is required to analyze statewide market data and recalculate the wholesale cannabis mark-up rate every six months.
Breaking Down the Tax Increase
Unfortunately, cannabis retailers can’t do much to change the coming tax hike or prevent their customers from absorbing the cost increase. But as a dispensary owner, you can prepare yourself to talk to customers about sales taxes and explain to them exactly what each line on their receipt means.
Here’s a quick breakdown of the mark-up rate and how it affects the amount of excise tax paid by consumers: Say the retailer’s wholesale cost is $35. At a mark-up rate of 80%, the average market price — that is, the retail price — would be $63 (35 x .8 = 28; 28 + 35 = 63). That means the 15% excise tax in this case would come out to $9.45.
Of course, the final bill will also include the state sales tax as well as the cannabis business tax, which is imposed by local governments. When it’s all said and done, California consumers may be facing tax rates between 45% and 80% come New Year’s Day.
Get Cannabis Retail News and Industry Insights Delivered Straight to Your Inbox
Stay up to date on all the latest cannabis retail news and receive industry insights, tips and best practices right in your inbox — sign up for our free newsletter today!