California Eliminates Cannabis Cultivation Tax, Effective Immediately

California’s regulated cannabis market just got a little bit more competitive with the robust illicit market that has continued to flex its power in the state. 

Following Gov. Gavin Newsom’s signing of a $308-billion state budget on June 30, California’s weight-based cannabis cultivation tax was eliminated—effective July 1, 2022.

The cultivation tax, which imposed a $161-per-pound rate on licensed growers—regardless of the current market value of cannabis—was abolished via Assembly Bill 195, which was attached as a trailer to the state budget.

On June 29, the California Senate passed A.B. 195 via a 34-0 vote, while the Assembly passed the measure, 69-1. Assemblymember Rudy Salas casted the lone no vote before Newsom signed the budget the following day. 

Among the measures included in A.B. 195, the bill also maintains a 15% cannabis excise tax but moves the collection of that excise tax from distributors to point of retail sale by Jan. 1, 2023.

The tax reform included in the legislation will help brace the licensed industry, California Cannabis Industry Association (CCIA) Executive Director Lindsay Robinson said in a statement to Cannabis Business Times.

“The survival of the regulated industry is vital to providing ongoing tax revenues for the state and the advancement of public health and safety,” Robinson said. “Eliminating the cultivation tax is just one step towards stabilizing our industry but it’s an important one.”

California’s cannabis cultivation tax, which had been in effect since the state first launched adult-use sales in 2018, has generated roughly $500 million in state revenue: According to data from the California Department of Tax and Fee Administration (CDTFA), the cultivation tax has generated nearly $468 million through March 31, 2022, with $32.7 million generated in the first quarter of this year.

But by eliminating the cultivation tax, many industry advocates argue that the state’s total revenue from cannabis will continue to grow by way of greater participation in the legal market through less-burdensome policies that incentivize entry—both by growers and consumers.

A six-part study published May 4 in a 42-page report by Los Angeles-based Reason Foundation, a non-profit libertarian think tank, suggests eliminating the cultivation tax with no other changes to the state’s tax structure would still generate roughly $145 million in total monthly revenues by December 2024, while keeping the cultivation tax would generate $152.8 million—roughly 5% more.

RELATED: New Study Finds Keeping or Eliminating California’s Cannabis Cultivation Tax Yield Similar Revenues

That $145 million in the Reason Foundation’s projected total monthly tax revenue for December 2024 represents a 48% increase from the average total monthly tax revenue of $98 million generated in the first quarter of 2022, according to CDTFA data.

While A.B. 195 eliminates the cultivation tax and moves the collection of the state’s 15% cannabis excise tax to the point of sale, it also puts a freeze on that excise tax rate for the next three years.

“By consolidating the state’s cannabis taxes into a single excise tax imposed at the point of retail sale, the state can tax the entire cannabis supply chain—from cultivation to sale—in a manner that is more efficient and transparent, thereby lowering barriers to entry into the legal, regulated cannabis market,” language from the bill states.

After three years, A.B. 195 allows state officials to revisit the excise tax and adjust the rate to what they estimate will generate an amount of revenue equivalent to the amount that would have been collected had the cultivation tax not been eliminated. However, in no case can the cannabis excise tax exceed 19% of the gross receipts of retail sale, according to the bill.

While the bill is not perfect, according to a CCIA news release, zeroing out the cultivation tax indefinitely and shifting the excise tax collection to retail are “big wins” for the state’s licensed cannabis industry.

“This bill represents genuine tax reform,” Tiffany Devitt, vice president of the CCIA Board of Directors, said in a statement to CBT. “Whether it is sufficient to transition the majority of consumers from the illicit to the licit cannabis market remains to be seen. Nonetheless, we commend and thank the Legislature and governor for making substantial progress.”

Per CCIA, additional measures in A.B. 195 include:

• Social Equity: Equity licensees will be able to retain 20% of the excise taxes they collect to reinvest into their businesses. They will also be eligible for a $10,000 tax credit.
• Tax Credits: Includes $40 million in tax credits, of which $20 million will be earmarked for tax credits for qualified storefront retail (Type 10) and microbusinesses (Type 12) dubbed cannabis “high road” employers, and $20 million for cannabis equity operators. The bill allows qualified businesses to claim tax credits of up to $250,000 for qualified expenditures beginning in the 2023 taxable year. 
• Enforcement: Adds additional enforcement tools against the illicit cannabis market, modeled after legislation introduced in the Assembly. Specifically, it states that a person who knowingly rents, leases or makes available for use, with or without compensation, the property, building, room, space or enclosure for the purpose of unlawfully cultivating, manufacturing, selling, storing or distributing cannabis is subject to civil penalties of up to $10,000 per day for each violation. The bill authorizes a county counsel to file a civil action relating to unlawful water pollution and unauthorized water diversions due to unlicensed cannabis cultivation on behalf of the state. 
• Labor Protections: The bill lowers the LPA threshold requirement from 20 to 10 non-management employees.
• State Reporting Requirements: Imposes additional reporting requirements on the state Cannabis Tax Fund providing greater accountability and transparency, so the industry and the public knows how cannabis tax revenues are being spent.
• Minimum Baseline: Maintains the $670 million minimum baseline for Allocation 3 (tax revenue to environmental groups, youth prevention groups, and law enforcement) until 2028 and will set aside $150 million in the General Fund to backfill any revenue loss associated with the zeroing out of the cultivation tax. 
• Economic Impact Study: Requires that an economic study be conducted to measure the impacts of tax reform on tax revenues.
• Retail Access: Establishes a $20 million Cannabis Retail Access Grant Program to encourage cities and counties with existing bans on commercial cannabis retail to implement retailer licensing programs with funding prioritized for jurisdictions that incorporate social equity programs.