California’s Cannabis Cities Reap Millions in Sales Taxes, the Rest Miss Out

California cities that approved legal cannabis sales beginning January 1 will net hundreds of millions of dollars in combined local sales tax revenues this year, an exclusive Leafly analysis has found. Meanwhile, the vast majority of the state, which continues to ban cannabis sales is on track to forfeit their millions to local street dealers.

In pro-cannabis San Diego, officials report collecting $2.26 million in cannabis taxes from January 1 to July 13 of this year. In its budget for the current fiscal year, the city projects $5.99 million in cannabis-tax revenue total. More cannabis businesses are coming online in the city, so tax receipts will continue to rise, and might even outpace the budgeted amount.

Similarly, Sacramento tax coffers added $2.9 million in the first half of 2018 from cannabis sales, according to reports.

In the much-smaller city of Santa Rosa, right in the heart Northern California’s cannabis (and wine) country, city tax receipts from cannabis for the first quarter were $116,693 (second-quarter numbers won’t be determined until July 31).

And Oakland, which was unable to provide revenue amounts for the year so far, projects revenue of $11 million from cannabis sales taxes for the full fiscal year.

“We have had positive success in Oakland, both in terms of significant tax revenue, and in terms of our permit and regulation system helping to provide for safe and responsive behavior by cannabis businesses, while reducing the waste and injustice associated with criminalizing it,” said Rebecca Kaplan, a member of the Oakland City Council who has been instrumental in guiding the city’s approach to cannabis policy.

“Cannabis, like any other business, can and should be responsibly run, and pay into public services,” she said.Shop Licensed Dispensaries Near You

Most Cities Missing Out

California legalization Proposition 64 passed in 2016 by 56 percent of the vote and levied a variety of both state and local cannabis sales and excise taxes, plus a cultivation tax. In all, a fully operational cannabis program should generate $1 billion per year in tax revenue to the Golden State. But California is still years away from that goal.

Pile On: California Tax Levels

Total taxes: 22.25 – 35.25 percent*

Breakdown:

Sales Taxes

• 7.5 percent state
• 0-3 percent local

Excise Taxes

• 15 percent state
• 0-10 percent local

*The state also collects taxes from commercial growers at a rate of $9.25 per ounce of flower and $2.75 per ounce of leaf. All of that is passed down to the consumer, who might be paying an effective total rate of much as 45 percent.

Lofty tax rates have pushed consumers toward the illicit market, and discouraged illicit operators from coming into compliance with state and local regulations. Cannabis businesses often have a hard time when it comes to paying their taxes.

And since marijuana is still federally illegal, banks tend to refuse cannabis deposits. So while some companies have found workarounds, others must carry sacks of cash to the tax collector each much. That’s what San Diego retailer Adam Knopf of Golden State Greens does.

“We have to walk in our cash” to San Diego City Hall, Knopf said. “On drop-off day, there are armed guards there from the [California Highway Patrol].”

A San Diego cannabis operator pays his taxes at City Hall monthly as armed officers stand by. (Courtesy of Golden State Greens)

But the biggest factor dragging down tax revenues is the cities themselves. Regulators did not predict that recreational cannabis sales would be banned by 85 percent of the state’s localities. So the state government revenues aren’t anywhere near its projections: California took in $34 million in the first quarter of the year — about a sixth of earlier projections.

Many city bans will be lifted in the coming years. And cities with sales will continue to issue new licenses, boosting revenues from taxes and license fees. But to get to the $1 billion a year in state excise tax revenue, many more licenses will have to be issued first.

Cities Begin to Compete on Taxes

Cities have tended to be much more conservative with their revenue projections and seem to be pulling in at least as much as they had estimated.

Moody’s Investor Service in May issued a report concluding that in general, cannabis taxes in states and cities nationally bring in more revenue than is spent on regulating cannabis. But it won’t save a state: on average state tax receipts from cannabis make up only about 2 percent of government budgets.

“Oakland has been successfully raising millions of dollars to help fund vital public needs, with our cannabis taxes,” Kaplan said.

Oakland, though, has the state’s highest local tax rate for cannabis sales: 10 percent of gross monthly receipts on recreational sales. Local cannabis sales taxes levies average eight percent.

Local Cannabis Sales Tax Flows in California Cities

San Francisco has no special cannabis excise or sales tax beyond the local 8.5 percent sales tax, though Supervisors are considering up to a four percent gross receipts tax.

Oakland’s tax makes buying cannabis products “cost prohibitive” for many consumers, said Katie Rabinowitz, general manager of Magnolia Wellness, which is headquartered in the East Bay city.

“People can just go to Berkeley,” she said. That city lowered its cannabis sales tax to five percent this spring.

If you don’t like taxes, you’re living in the wrong country.

The Oakland City Council is considering a measure to give itself more flexibility to set tax rates. “That way, we could modify rates based on market conditions and what other jurisdictions do,” Kaplan said. It seems likely that if the measure is passed in November, tax rates will fall to about five percent.

“Even less than that would be better,” Rabinowitz said.

Like Berkeley, San Diego also levies a five percent sales tax, which strikes Knopf as just about right. “Consumers aren’t complaining,” said Knopf, who operates two shops in San Diego.

Santa Rosa, meanwhile, has one of the lowest rates in the state, at three percent for retailers. Growers are taxed at a two percent rate, and manufacturers pay one percent of their monthly revenue to the city.

“We like to promote local production and local businesses,” said City Councilmember Julie Combs.

Bigger companies, she noted, are better able to pay higher rates. If cities levy too much, that could put a squeeze on mom-and-pop operations. At the same time, she said, the city has to be able to finance regulation enforcement and other expenses that come with legal pot, she said, but one of the city’s missions is to “help folks who are new to the business,” and who are already facing enormous startup costs.

Cities that are now getting on board are taking that kind of approach. Hi-Fidelity, part-owned by Debby Goldsberry, owner of Magnolia, recently opened in Berkeley, which has actively worked to attract pot businesses.

Meanwhile, Santa Barbara’s first licensed pot shop recently opened its doors, and several more have been approved. One of them is a third Golden State Greens store owned by Knopf, who has a message for people who are opposed to cities levying any taxes at all:

“At the end of the day, we’re all Americans,” he said. “If you don’t like taxes, you’re living in the wrong country.”Shop Licensed Dispensaries Near You