Last week, Assembly Bill 286 was introduced by Assembly Member Rob Bonta which would eliminate California’s cannabis cultivation tax and reduce the excise tax from 15% to 11% through 2022. The measure is a reintroduction of a similar bill from last year, AB 3157, which would have also temporarily reduced California’s cannabis tax rate.
Supporters of the temporary tax reduction argue that California’s high tax rate on cannabis makes it almost impossible for legal operators to compete against illicit operations. Opponents of the reduction say that it is premature and that the real problem lies at the local level where more than half of the state’s local jurisdictions have refused to allow cannabis business activity. In addition, education and mental health groups believe that the tax reduction will delay and/or reduce much need funding to support youth drug prevention and equity programs in communities that were impacted the most by the war on drugs. Discussions on funding these vital programs will heat up in May after the Department of Finance has a clearer picture of tax revenues generated from cannabis.
In a committee hearing on AB 3157 last year, committee members expressed concern over the state’s ability to repay the outstanding loan of $135 million that was provided to state agencies to fund enforcement and oversight. In Governor Newsom’s first budget released in January, more than $200 million was allocated to cannabis enforcement and oversight. How much of that is a General Fund loan that will need to be repaid and how much pressure this creates to maintain the current tax rate is to be seen. Stay tuned.
If you have questions about the budget process or AB 286, please contact me at email@example.com.
On Thursday, Gavin Newsom released his first budget as California’s Governor. The budget – totaled at $209 billion including special funds – estimates California’s cannabis excise tax will generate $514 million in revenues for 2019-20. This estimate is significantly lower than the $630 million anticipated in last year’s budget.
Governor Newsom’s budget includes $200 million for statewide enforcement, licensing and oversight over the industry. During the Q&A session, the Governor said that this budget allocation would support expedited licensing to ensure businesses are able to enter the legal market in a timely manner. In addition, the Governor stated that his Administration would be very engaged in cannabis-related policy, including policies that impact licensing at the local level.
The budget also includes $2.9 million in additional funds for California’s tax collection agency to increase tax compliance within the cannabis industry. This should come as welcomed news for licensed businesses that are struggling to compete against non-licensed and compliant entities.
Although the budget anticipates nearly half a billion in revenues, funding for Proposition 64 related programs is put on hold until the May Revise. The budget also acknowledges that the outstanding loan made by the state to establish California’s enforcement and oversight capabilities would be paid first in addition to funding the various programs required by the proposition.
In the coming weeks, the Legislature will review the Governor’s budget in greater detail.
The release of the Governor’s budget sets in motion the Legislature’s detailed review over the coming months. If you have questions related to the 2019-20 budget, or want to learn more about California’s budget process, please contact firstname.lastname@example.org.
Today, the Assembly and Senate Appropriations Committees met and decided the fate of hundreds of bills including several that directly impact the cannabis industry. Here’s a run down of the most watched cannabis-related bills in the California State Legislature that were heard in one of today’s hearings:
Held in Committee – this means the bill is done for the year.
Passed to Assembly/Senate Floor – this means that the bill will be heard and potentially voted on before the full Assembly or Senate membership. I say “potentially voted on” because bills can still be placed on the “inactive file”, sent back to a policy or fiscal committee for review, etc., depending on a variety of reasons.
This bill was recently amended to establish the Cannabis Collaboration and Inclusion Act, which will require the Bureau of Cannabis Control (BCC) to establish an equity program beginning January 1, 2020, and requires the Bureau to provide technical support to state and local equity applicants and licensees.
This bill updates current law related to the production and cultivation of industrial hemp, and allows the California Department of Food and Agriculture (CDFA) to establish and implement an agricultural pilot program.
This would have allowed the BCC to issue a temporary retailer license for cultivators and manufacturers to sell their products directly to consumers at events.
Friendly Reminder: Public Comments on Proposed Statewide Cannabis Regulations Due by August 27.
Information regarding the regulations proposed by the BCC, CDFA, and the Department of Public Health can be found by clicking here on this link.
If you are interested in submitting comments on the proposed statewide regulations and need help, or have questions about any of the bills mentioned above, please contact us at email@example.com or by clicking here.
Tax revenues collected by the state in the first quarter of FY 2018 are far below January estimates
A bill to temporarily suspend the cannabis cultivation tax and reduce the excise tax passes its second legislative committee
A New York based medical marijuana manufacturer expands its presence into California
The Bureau of Cannabis Control Cannabis Advisory Committee holds its next meeting in Oakland
Cannabis Taxes Collected in Q1 of FY2018 Lower than Expected
On Tuesday, the Legislative Analyst Office (LAO) released a cannabis tax updated that showed California collected $34 million in excise tax in the first quarter of 2018. The Governor’s January budget assumed that the state would collect about $175 million in the first two quarters of 2018, far more than what the state has seen so far. For some in the industry, the lower than expected tax revenues reflects the clumsy rollout of a statewide legal system. Primary among the concerns by many in the industry has been 1) the slow process from reviewing and approving licenses at the state level; 2) the high-cost of complying with state regulations; 3) the widespread prohibition of cannabis business activities in many of the state’s cities and counties and; 4) the high tax burden that incentivizes consumers to buy in the illicit market.
Later today, the Governor will release his May Revise with updated estimates and potential funding and policy changes that may directly impact the industry. I will provide a brief recap of the Governor’s May Revision this week.
Does a Temporary Tax Reduction Have Legs?
On Tuesday, the Assembly Business and Professions Committee voted unanimously to temporarily suspend the cannabis cultivation tax and reduce the excise tax for three years. Supporters of AB 3157 say that California’s high tax rate makes it almost impossible for legal operators to compete against illicit operations that do not pay licensing fees or state and local taxes. Opponents of the bill say that the temporary tax reduction is premature, and the real problem lies at the local level where more than half of the state’s local jurisdictions have refused to allow cannabis business activity. In addition, education and mental health groups believe that the tax reduction will reduce much need funding to support youth drug prevention and equity programs in communities that were impacted the most by the war on drugs.
The Committee did express concern over the state’s ability to repay the outstanding loan of $135 million that was provided to state agencies to fund enforcement and oversight. As written in Proposition 64, taxes collected must be first used to cover he administrative costs of state agencies to implement cannabis laws. The next stop for AB 3157 is the Assembly Appropriations Committee. Stay tuned.
New York is Coming to California
Earlier this week, Etain, a women-owned and managed New York based medical cannabis company announced that they have joined forces with delivery company West Sacramento Management and Daily Green to produce and deliver products beginning this month. As one of ten medical dispensaries in Manhattan, Etain’s expansion into the Golden State follows approval in their home state to offer a water-soluble marijuana powder to medical patients. Approval for the water-soluble solution comes after New York regulators search for ways to jumpstart the state’s medical marijuana program in which growth has stalled since its approval in early 2016. Etain’s move to California is another in a series of investments by non-California businesses and investors. Recently, CannaRoyalty, a Canadian-based cannabis company announced several acquisitions of distribution assets throughout Northern California. The recent moves by both of these companies could signal more to come.
The State’s Cannabis Control Advisory Committee Meets in Oakland
Next Thursday, May 17, the Bureau of Cannabis Control’s Advisory Committee meets in Oakland California to discuss possible action on recommendations to modify the state’s licensing application, manufacturing and microbusiness requirements. The discussion will also include potential pathways on how to proceed with approved recommendations that require statutory change. Click here to review the agenda.
The initiative, sponsored by the California Business Roundtable argues that one of the main purposes of the measure is to overturn the “loophole” created by Cannabis Coalition v. City of Upland.
The case involved a 2014 initiative in Upland, CA that would repeal the city’s prohibition on medical marijuana dispensaries, create regulations permitting medical dispensaries, and would imposed a $75,000 annual licensing and inspection fee to cover Upland’s administrative costs.
The proponents of the initiative requested that the measure be considered at a special election, but the City of Upland believed that the annual licensing and inspection fee was actually a tax and therefore, belonged on the general election ballot as required by Proposition 218 passed in 1996.
The coalition challenged the City and initially the lower court sided with Upland. The California Appeals Court reversed the lower court’s decision and the California Supreme Court upheld the Appeal Court’s reversal.
In the majority’s opinion, the Supreme Court ruled that nothing in the State’s Constitution prohibited or restricted citizens’ to place a measure on the ballot to approve fees or taxes. What was left uncertain in the opinion, however was whether or not citizens’ initiatives are subject to the Prop. 218 two-thirds vote threshold required for local government sponsored initiatives. And that’s where the currently proposed initiative comes into play.
The sponsors of the current initiative, the California Business Roundtable, made of some of the state’s largest companies including Wells Fargo, Albertsons, KB Home, Blackstone Group, Chevron and others, argues that the proposed ballot initiative will close this loophole by ensuring all fee and tax proposals meet the high two-thirds threshold.
This measure, however, could have much broader impacts that stated or anticipated. Since the passage of Proposition 64 in 2016, one of the main sticking points in many local jurisdictions has centered around the ability of local governments to collect an fair and appropriate amount of fees and taxes to support local law enforcement and programs with cannabis generated tax revenue. Recently, the O.C. Register released a database that showed that fewer than one in three California cities allows any cannabis business activity in their area.
If a two-thirds vote requirement is required to implement local cannabis-related fees and taxes to cover enforcement and oversight administration, where’s the incentive for local governments to adopt cannabis friendly business policies? The “carrot” included in Prop. 64, was the ability for cities and counties to raise revenues to fund local priorities. With a higher-vote threshold, it’s not hard to imagine many of the local jurisdictions that are still on the fence will decide to sit on their hands and not approve cannabis business activity in their area. Without easy access to licensed retailers statewide, consumers will continue to be forced into to buy their products from the illicit market.
As of this article, the proposed initiative had gathered 25% of the signatures needed to qualify for the November ballot. The coalition has until July 25, 2018, to gather all 585,407 valid signatures to qualify.
On Tuesday, the Sacramento Bee reported that in the first few months of legalized adult-use, gross retail sales of cannabis is about 13% or $44 million lower than original state estimates. While this may seem disconcerting to some, there are several key caveats to the data.
First, licensing agencies are currently in the process of reviewing and approving temporary and annual licenses for businesses across the supply chain. In the 2017-18 California State Budget, the Legislature approved several million dollars and hundreds of positions to staff the three main licensing agencies and various support departments. Despite this influx of resources, the state is currently in the process of hiring the necessary staff to process the thousands of applications received since January 1. As the state hires additional staff, the industry can expect to see more licenses approved and a potential increase in overall amount of retail sales.
Second, many in the industry cite the high regulatory fees and tax rates as a serious impediment for businesses that seek to enter into the legal market. As we covered here, several California legislators have called for an immediate and temporary reduction in the cultivation and excise tax rate with the intent of leveling the playing field for business in the legal market. The California Growers Association estimates that with tax rates averaging between 40% – 60%, legal retailers find it extremely difficult to compete with the illicit market. AB 3157, which attempts to provide some relief by suspending the cultivation tax and lowering the excise tax from 15% to 11% for three years, is up for its first committee hearing April 23, in the Assembly Revenue and Taxation Committee.
Finally, the refusal of local governments in many parts of the state to allow cannabis businesses to operate has created what some have called a “pot desert.” On Tuesday, the OC Register unveiled a database that showed that nearly one in seven California cities had approved the retail sale of cannabis within their boundaries. The data also showed that in certain parts of the state, consumers are required to travel fifty miles or more to purchase from a licensed or recreational retailer. This inability for consumers to purchase cannabis products from licensed retailers close to home frustrates efforts to create a truly statewide legal adult-use system.
Despite the seemingly lower than expected economic activity in the newly legal cannabis market, there is reason to be optimistic for the foreseeable future. Stayed tuned for future updates on the status of the California’s cannabis industry.
California’s tax collector issues a reminder on how to collect excise tax for retailers.
California’s three licensing agencies release an online search tool to find licensed cannabis business across the state.
Former NFL player partners with a Southern California lab to develop and distribute cannabis products.
Canadian cannabis company acquires California heavyweight distributor, RVR to expand it’s presence in the state.
On Monday, the California Department of Tax and Fee Administration (CDTFA) issued a reminder for retailers on how to collect the cannabis excise tax from their customers. With the first quarter of the fiscal year closing March 31, quarterly return must be filed by April 30. Click here to view the Department’s prepayment and quarterly reporting due dates.
The Administration is eagerly waiting to see how much the state collects in taxes generated from legal cannabis sales. In January, Governor Brown released his constitutionally-mandated budget proposal, and estimates the state will generate approximately $600 million in new cannabis taxes in FY 2018-19. When the Legislative Analyst Office (LAO) analyzed the fiscal impacts of Proposition 64, they conservatively estimated that state and local governments would collection in the high hundreds of millions of dollars to over a $1 billion in annual tax revenue. The state will have a clearer picture when the Governor’s May Revision is released in mid-April. Stay tuned.
Where are all the licensed cannabis businesses in California?
On Wednesday, California’s Bureau of Cannabis Control (BCC) announced an online tool to find state licensed cannabis businesses. According to the Bureau, California’s three licensing agencies (BCC, Department of Food and Agriculture, and Department of Public Health) have issued a combined 5,300+ licenses to date. One of the major complaints among many in the industry is that the state has been slow to grant licenses for major parts of the supply chain creating a major bottle neck. It now appears that the state is making progress on that front. The Bureau also released a list of licensed event organizer entities. Below are the links to the search tools for the three agencies and the list of event organizers:
Former NFL superstar launches cannabis business in Southern California
Former NFL star and Heisman Trophy winner, Ricky Williams has teamed up with a laboratory in El Cajon, California to develop herbal-based wellness products to be distributed throughout Southern California. Williams spent over a decade of his life as a professional football player, and knows the constant stream of aches, pains, and injuries that come from battering his opponents on Sunday. Williams was also a controversial figure in the NFL for his early embrace of cannabis as alternative pain relieving method to traditional pain killers.
Williams’ business, Real Wellness offers a unique line of products that combines CBD and THC with herbal extracts such as arnica, lavender, and turmeric. The news of Williams’ entry into the cannabis market follows recent news that fellow NFL player and Hall of Famer, Joe Montana has also benefitted from the pain relieving properties in cannabis. In is post-professional football life, Montana has been a vocal advocate in support of the pain reducing properties of cannabis, and has invested in cannabis technology company, Herb, to educate the public and athletes on cannabis.
Studies have shown that professional football players are four times more likely to abuse painkiller medication as average Americans. Recently, the NFL Commission, Roger Goodell made comments that while the league does not support recreational use, the league is open to allowing players to use cannabis for pain management. The league is currently studying the issue. More to be seen.
Canadian cannabis company expands in California
On Tuesday, the Canadian cannabis company, CannaRoyalty announced that they had acquired West Sacramento based distributor, River Distribution (RVR). The move consolidates RVR with Alta Supply, an Oakland based distributor creating what is poised to be the leading distribution company in Northern California, if not the state. According to CannaRoyalty, Alta Supply and River Distribution generated a combined ~$30 million in revenues in fiscal year 2017. The acquisition of both companies by a Canadian firm is part of a larger investment by Canadian-based companies investing in California’s legal market. What can we expect next from the Canadians? We will see.
Happy Friday! Welcome to the Weekly Roundup. Here I highlight some of the key pieces of legislation, regulatory changes, industry updates, and anything else I find interesting from the past week. Enjoy!
A temporary solution to the banking crisis?
One of the more important and interesting pieces of legislation to emerge this year is SB 930 (Hertzberg), which would create a state-chartered banking system for banks to offer basic services to the cannabis industry. Unlike the state-owned bank proposal considered in the State Treasure’s Cannabis Banking Working Group paper released last November, Senator Hertzberg’s proposal is seen by some in the industry as a potentially workable fix in lieu of a federal solution. The Cannabis File will publish a more in depth analysis of SB 930, on Monday, March 26. Stay tuned and subscribe to receive the update.
Will lower taxes stimulate the legal market?
On Monday, I wrote about AB 3157 (Lackey), that would temporarily suspend the cultivation tax and lower the excise tax from 15% to 11%. The idea behind the temporary tax reduction is modeled after tax adjustments in Colorado and Oregon to stimulate their adult-use market early in its formation. The critical question that remains is whether a local tax cap or sometime of prohibition is needed to ensure the tax burden isn’t merely shifted from the state to local level. The bill has yet to be set for its first policy committee hearing.
Dear Feds: Stay out of California!
On Tuesday, the Assembly Business and Professions Committee passed AJR 27 (Low), which urges the federal government to use their limited enforcement resources on other public health and safety priorities, and not California’s growing cannabis industry. Since President Trump took office, the tension between state and federal rights has been high and seems to be rising. We’ll see if the federal government takes notice and stays out of California’s cannabis business. Based on previous statements and actions, it seems unlikely.
Does the future of work in cultivation equal automation?
On Tuesday, the Assembly and Senate Labor Committees held a joint hearing on the impact of technology and automation on workers rights and job quality. Two academic experts provided a broad overview of the challenges facing the workforce in the age of technology, and also heard direct testimony from workers that have felt the impact of an increasingly automated workplace.
The concept of using technology, namely automation and artificial intelligence to improve productivity and quality of products in not new in the cannabis industry. What will be interesting to see is what impact automation and AI has on the type and quality of jobs that are produced in the industry. Remember, a part of the argument for approving adult-use in California and in other states across the nation was that the industry would create thousands of new jobs. This is an area of interest for The Cannabis File, and will be explored in detail in future posts.
Regulatory changes are a comin’
On March 15, the Bureau of Cannabis Control’s Cannabis Advisory Committee held an all-day meeting in Los Angeles to discuss and review several recommended regulatory and statutory changes related to everything from clarifying the outdoor cultivation definition online advertising. The final recommendations from the Advisory Committee will be used to inform the Bureau’s proposed changes during permanent rule making process that is expected to begin within the next few months.
Is California a Pot Desert?
On Thursday, the Sacramento Bee released a map that showed the distribution of dispensaries across California. According to statistics used by the SacBee from the Bureau of Cannabis Control, about 30% of people are within 30 miles of at least one dispensary; 29% within 30-60 miles and; 38% is within 60-120 miles. What the map and the data highlight is that California is still far away from a statewide adult-use market.
It has been about ten weeks since the recreational use of marijuana became legal in California, and a group of key lawmakers think it’s time to lower the tax rates imposed by Proposition 64.
AB 3157, which was recently amended, would temporarily halt the $150 per pound cultivation tax, and reduce the state’s excise tax from 15% to 11% for three years.
This temporary reduction, it is believed, will help level the playing field for legal cannabis businesses that are being undercut by cut-rate black market prices.
The sticker shock that many consumers felt purchasing cannabis products after January 1, 2018, was well documented by the media. To add some perspective on what customers faced, one estimate places California’s cumulative cannabis tax rate as high as 45%. This cumulative rate includes the cultivation, excise, and state and local sales tax, but does not including local cannabis taxes that vary by jurisdiction. When local taxes are added, another study puts this number as high as 60%.
Although studies show that other states with legal adult-use, such as Washington and Oregon experienced significant growth in their legal cannabis industry following a reduction in the state’s tax rate, how will the California’s Legislature and regulators deal with two additional issues: enforcement and local taxes.
On the enforcement side, California has the largest cannabis market in the world that is primarily fueled by a deeply entrenched, mature and sophisticated black market. Both state and local regulators understand that a leveling of the playing field between legal and illicit operations will eventually require a strong enforcement mechanism. It will be interesting to see if the Legislature appropriates additional funds in this year’s state budget to enhance statewide enforcement.
Second, the reduction in state taxes in Colorado and Oregon, two states that are highlighted as successful examples of the growth that occurred after tax rate relief, also combined the state level reduction with lower or capped local sales taxes. It could be tempting for local cities and counties to view the state tax reduction as proposed by AB 3157, as a way to increase their taxes to fund enforcement or other local priorities. If this happens, the benefit of leveling the playing field through tax reduction would simply create a new status quo.
Finally, there maybe a question to whether or not changing the tax rate would require another vote of the people. It will be interesting to watch if any of the proponents challenge the legality of AB 3157.
This is an interesting and welcomed effort by many in the industry that are unable to compete with the black market due to the disadvantage high taxes place on their business. This bill that has yet to be heard in its first policy committee as amended. As the bill moves forward in the legislative process, I will keep you updated on any developments.