The world’s largest legal cannabis market just had its best quarter on record.
The California adult consumption industry reported nearly $ 1.4 billion in taxable cannabis sales and $ 333.2 million in total tax revenue from the program, according to the California Department of Tax and Fee Administration (CDTFA). These record numbers represent 91 days of April, May and June.
Yes, the legal market seems to be picking up pace, said Graham Farrar, co-founder and president of Glass House Brands. Its Santa Barbara operation spans more than half a million square feet of sustainably grown, artisanal cannabis.
And yes, there are more and more legal cannabis users in California, he said.
Since the state started its first adult-use sales in January 2018, the cannabis industry has had total sales of $ 2.8 billion over the past 3 1/2 years.
But are the taxes too high? The answer to that is also yes, said Farrar.
“California could do a better job of helping the legal market compete with the illegal market while increasing tax revenue by lowering the tax rate,” he said. “This would make it possible [tax collectors] take a smaller piece of a much larger cake. They could also drastically simplify the tax collection process and make fraud more difficult, which increases tax revenue by completely offloading tax collection to the point of sale. The current system is difficult to manage and enforce. A lot is getting better and there is still a lot that we can improve. “
When California’s Adult Control, Regulation, and Taxation Act went into effect, the state began to impose a 15% excise tax, a sales tax, and a cultivation tax on cannabis.
The current California growing tax is based on the CDTFA at $ 9.65 per ounce dry weight for cannabis flowers, $ 2.87 per ounce dry weight for cannabis leaves, and $ 1.35 per ounce of fresh cannabis plants weighed within two hours of harvest. At $ 40.4 million in the second quarter of 2021, the California grow tax accounted for about 12% of the state’s total cannabis tax levied during that period.
The program’s total revenue of $ 2.8 billion since adult sales began in 2018 came primarily from nearly $ 11.7 billion in taxable sales.
The CDTFA is responsible for administering California’s sales and consumption, fuel, tobacco, alcohol, and cannabis taxes, as well as a variety of other taxes and fees that fund specific state programs.
“The programs managed by CDTFA make more than 73 billion municipalities annually,” the department said in a recent press release.
But consumer spending and sales alone are not a telltale sign of the health of California’s legal cannabis industry, said Adam Spiker, co-founder and executive director of the Southern California Coalition, a cannabis trading organization.
“I don’t think there is necessarily a direct correlation with legal health, really not,” he said. “I think it has more to do with the fact that more licenses are being issued and more operators are moving into the legal area. And when I look at these numbers it still tells me that since we know there are a lot of dry markets or underserved markets across the state, it just tells me that there is demand for [cannabis] is very powerful. “
Spiker went on to say, “If the state could look at things a little differently from the trajectory point of view, for now they are just squeezing a turnip from all the people who want to get it right, not taking into account that there is much broader market out there that is still much bigger than the legal one [market] which we have to immerse ourselves in much faster. “
In terms of cannabis tax revenue for the second quarter of 2021, California cannabis excise tax of 15% generated record sales of $ 172.3 million over the 91-day period, up 9.2% from the first quarter .
Cannabis company sales tax revenue for the second quarter was a record $ 120.5 million, up 11.8% from the first quarter. Sales tax applies to the sale of cannabis, cannabis products, and other tangible personal items.
And the second quarter crop tax generated $ 40.4 million – up 3.1 percent from the first quarter of 2021 but a decrease of 6.9 percent from the all-time high of $ 43.4 million in the third quarter of last year.
Overall, the state’s $ 333.2 million in total tax revenue for the second quarter represents a 9.3% increase over the first quarter of 2021 and a 26% increase year over year.
On paper, these numbers may seem like a huge boost to state and local basic services to some. But tax rates are too high to foster a full legal industry for maximum impact, Farrar said.
“Lowering the tax rate would increase the taxes levied and help the legal market exploit the illegal market and make legal cannabis more accessible,” he said. “Three great public order wins with one change.”
The reality on the ground is that the illegal market still far outstrips the legal market as the price gap between legal and illegal cannabis is still way too big, Spiker said.
RELATED: California’s cannabis industry is overshadowed by limited supply chain and heavy taxation
The Legislative Analyst’s Office – an independent financial and policy research firm under the California Legislature – estimates that adult cannabis companies operate in less than a third of the state’s jurisdictions.
This severity of the price differentials is largely due to cannabis tax burdens, but can also be attributed to other regulatory and licensing factors, Spiker said.
“If you look at the top single costs, it’s without a doubt state taxes,” he said. “But the rest is a kind of death by 1,000 cuts. There’s likely a lot of waste in access costs. Not that we shouldn’t be doing laboratory tests, but I think it’s pretty well accepted that cannabis probably doesn’t need to be tested more than ten times more extreme than vegetables and fruits. I think that’s an area. “
Packaging criteria can also get expensive, he said.
“There is no cumulative discussion or reminder of how each of these levels of regulation will affect the cumulative market,” said Spiker. “Anything you do in the area of regulation is another thing that sets you apart from the illegal that doesn’t have two [hoots]. “
With all that said, California is well on its way to surpassing $ 5.2 billion in sales this year. If the numbers keep rising from quarter to quarter, that number will be higher.
In 2019, the Arcview Group – a vertically integrated company providing market research to the cannabis and hemp industries – forecast California consumer spending on legal cannabis of $ 7.2 billion in 2024, with an average annual growth rate of $ 7.2 billion 19% over the next five years of forecast.
However, if California continues to report record sales quarters, that $ 7.2 billion forecast could be realized much sooner.
“I think there are those who will say, ‘Ah, we’re getting there. We’re getting there, ‘”Spiker said of the rising dollar figures as a sign of an improving legal market.
“[Bull]. We’re not getting there, ”he said. “Or we get so slowly that the unbearable happens; We’re seeing more and more cannabis operators either not wanting to get into the legal realm or trying to be in the legal realm and because it was too expensive they couldn’t survive and are back to doing things the way they used to be . “
Industry stakeholders still don’t have enough country-level decision makers to weigh all sides of the equation, he said.