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Sticker Shock Coming With California’s New Cannabis Market

November 6, 2017
Donnie Anderson, a Los Angeles medical marijuana cultivator, retailer and co-owner of Western Caregivers dispensary, poses for a photo in Los Angeles at one of his shops on Friday, Nov. 3, 2017 . Anderson predicted the high level of state taxation next year is “just going to help the illicit market thrive.” He said more needs to be done to cut the cost for medical users, many of whom won’t be able to absorb a big price jump. (Richard Vogel/AP)
LOS ANGELES (AP) — California’s legal marijuana marketplace is coming with a kaleidoscope of new taxes and fees that could influence where it’s grown, how infused cookies and other munchies are produced and the price tag on just about everything.

Be ready for sticker shock.

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On a retail level, it costs about $35 to buy a small bag of good quality medical marijuana in Los Angeles, enough to roll five or six joints.

But in 2018, when legal sales take hold and additional taxes kick in, the cost of that same purchase in the new recreational market is expected to increase at the retail counter to $50 or $60.

Growers sell a trash bag stuffed with clippings to manufacturers for about $50. But come January, the state will tax those leaves at $44 a pound.

At the high end, that’s about a 70 percent jump.

Medical marijuana purchases are expected to rise in cost too, but not as steeply, industry experts say.

Or consider cannabis leaves, a sort of bottom-shelf product that comes from trimming prized plant buds. The loose, snipped leaves are typically gathered up and processed for use in cannabis-laced foods, ointments, concentrates and candies.

Growers sell a trash bag stuffed with clippings to manufacturers for about $50. But come January, the state will tax those leaves at $44 a pound.

That means the tax payment on a bag holding 7 or 8 pounds would exceed the current market price by five or six times, forcing a huge price hike or, more likely, rendering it essentially valueless.

“All it would become is compost,” predicted Ryan Jennemann of THC Design in Los Angeles, whose company has used the leaves to manufacture concentrated oils.

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Governments struggling to keep up with the cost of everything from worker pensions to paving streets are eager for the cascade of new tax money from commercial cannabis sales that could eventually top $1 billion statewide.

The reshaping of such an expansive illegal economy into a legal one hasn't been witnessed since the end of Prohibition in 1933.

But higher taxes for businesses and consumers give the state’s thriving illicit market a built-in advantage. Operators in the legal market have been urging regulators to be aggressive about shutting down rogue operators.

Donnie Anderson, a Los Angeles medical cultivator and retailer, predicted the higher level of state taxation next year is “just going to help the illicit market thrive.” He said more needs to be done to cut the cost, especially for medical users, many of whom won’t be able to absorb a price jump.

The increased tax rates are just one part of California’s sprawling plan to transform its long-standing medical and illegal markets into a multibillion-dollar regulated economy, the nation’s largest legal cannabis shop. The reshaping of such an expansive illegal economy into a legal one hasn’t been witnessed since the end of Prohibition in 1933.

The change has come haltingly. Many cities are unlikely to be ready by Jan. 1 to issue business licenses, which are needed to operate in the new market, while big gaps remain in the system intended to move cannabis from the field to distribution centers, then to testing labs and eventually retail shops.

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The path to legalization began last year when voters approved Proposition 64, which opened the way for recreational cannabis sales to adults. Medical marijuana has been legal in California for about two decades.

Come January, state taxes will include a 15 percent levy on purchases of all cannabis and cannabis products, including medical marijuana.

Local governments are free to slap on taxes on sales and growing too, and that has created a confusing patchwork of rates that vary city to city, county to county.

In the agricultural hub of Salinas, southeast of San Francisco, voters approved a tax that will eventually rise to $25 a square foot for space used to cultivate the leafy plants, a rate that’s equivalent to about $1 million an acre.

But farther north, in the cannabis-growing mecca of Humboldt County, rates will be a comparative bargain, ranging from $1 to $3 for a square foot for cultivation space.

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By some estimates Humboldt County has up to 15,000 unregulated cannabis grows, and Supervisor Ryan Sundberg said he was eager to fashion a tax scheme that would encourage cultivators to come into the legal system and adhere to environmental regulations.

“A high tax rate, that would be one more barrier to getting people regulated,” he said.

Lower-tax areas could also be a lure to businesses looking to save on costs.

Here’s a snapshot of how new taxes will roll out for an average consumer in Los Angeles:

Currently, for legal medical marijuana, there is no specific state tax on cannabis and the city tax is 6 percent, which is usually incorporated into the sale price at the counter.

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When the recreational market opens in January, an eighth-ounce bag that sells for $35 will be subject to a 15 percent state tax. A city business tax that typically gets passed on to consumers will add another 10 percent, and then the buyer will be hit with the usual sales tax, about 10 percent in L.A.

“The existing black market for cannabis may prove formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources.”
Fitch Ratings report

Businesses are being saddled with new taxes and costs on cultivation, distribution and testing, which will be rolled into the consumer price.

Together, operators say, that will push retail prices to $50 or $60 for that eighth-ounce purchase.

As for medical, the city tax would be lower, 5 percent, but retailers say that’s sometimes not passed on to the consumer. Consumers with a valid medical marijuana identification card would not pay sales taxes.

A report last week from financial analysts Fitch Ratings concluded that state and local taxes could balloon to 45 percent for recreational marijuana in some communities.

“The existing black market for cannabis may prove formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” the report warned.

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Some predict that prices will eventually come down as the legal market matures.

Other states with legal recreational cannabis have restructured taxes over time.

Washington state, for example, initially imposed separate 25 percent taxes up to three times: when the grower sold it to the processor, when the processor sold it to the retailer and at the point of public sale. In 2015 that was pushed down to a 37 percent tax at the point of retail sale, plus sales tax. In Seattle, that combined rate is about 47 percent for recreational sales.

“While our members, like any other business sector, would like to see a lower tax rate, we have not seen any evidence that current tax rate is diverting people into the black market,” Aaron Pickus, a spokesman for the Washington CannaBusiness Association, an industry group, said in an email.

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There are other barriers to unregulated businesses entering the new system.

Nicole Howell Neubert, a marijuana industry lawyer, said a retail business could easily ring up $200,000 in permitting and other costs associated with compliance in the new legal market.

“When you add to that high tax rates, you increase the number of reasons why someone might not be able to become regulated,” she said.

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  • cureforstupid

    Well they can suck my……..well, you know……..people will just continue to by weed on the street and the State can just kiss my ass…..not a fuckin nickle from me!

  • Mo Jo

    Oregon, Washington and Colorado figured it out. Their taxes and fees are mostly very reasonable. All California has to do is engage in “Legal Parallelism” and Copy/Paste those same statutes, ordinances, regulations and laws. Why are they making this so hard on themselves? One of the problems is that the State, Counties and Cities are hiring advisors with little experience in the industry. Then the advisor has to hire someone who actually has experience dealing with these laws, which is just bureaucratic inanity.

    • Excuse me

      Don’t include Washington in the reasonable category. Seattle combined tax of 57% is government sanctioned theft.

  • Excuse me

    California is going to try to bleed the industry dry. Should have saw that one coming.

    • Marlitt Arnouville

      I believe your right, it’s called greed!

  • Sonny Cole

    this is what the people wanted,do you remember the old saying,make it legal,tax it ,and leave us alone.
    the tax sucks, but do you remember a time you could not even buy cannabis without the fear of getting caught and going to jail?
    put it this way,this is jerry brown’s way of paying for all your free(he.he)stuff you get.

    • Paul

      What free stuff would that be????

      • Sonny Cole

        snap cards,phones,look around paul you know what i am talking about

  • 360dunk

    In Nevada, medical cardholders pay the regular 8% sales tax while non-cardholders pay that plus an extra 10%. If you over-tax products, you risk losing customers. What these states should have done was to:

    1. make the initial tax rate lower.
    2. encourage people to buy legally at dispensaries.
    3. dry up the cartel and black market sales.
    4. then in a year or two, gradually increase the tax in small increments so your steady customers don’t feel it.

    But instead, we ended up with greedy policy makers who want to milk the consumer as much as possible. That results in less dispensary shopping and more back alley purchases. Kind of defeats the purpose.

  • rsteeb

    Taxing MEDICINE is unconscionable– PERIOD.

  • Mercy

    Learn to grow.