CANNABIS TAXES
Growers and legislators call for reform
As Humboldt County’s small cannabis farmers continue to struggle amid a market collapse, proposed legislation to eliminate the statewide cannabis cultivation tax signals an immediate path to relief.
State Sen. Mike Mcguire (Dhealdsburg) argued that the current cultivation tax structure “is simply not sustainable,”
“Cultivation taxes are crushing small family farmers across the state and right here at home on the North Coast. Basing the tax off of the product’s weight doesn’t account for a significant dip in the market or a complete collapse,” Mcguire told the Times-standard. “We will be introducing legislation in the new year that would roll the cultivation tax into the excise tax which is charged at the time of sale.”
Assemblymember Jim Wood agreed, “This legislation will give needed relief to the smaller cannabis growers throughout the North Coast district I represent and I’m very supportive of Sen. Mcguire’s proposal.”
Cannabis cultivators are subject to two primary taxes at the state level: the cultivation tax and the excise tax.
The cultivation tax for flower per dry-weight pound will increase from $154.40 per pound to $161.28 beginning Jan. 1, 2022, according to the state Department of Tax and Fee Administration. This means sun-grown farmers who are getting as little as $300 per pound are being disproportionately impacted in comparison to indoor operators who are getting a much higher rate.
“The cultivation tax strikes our membership very directly in that way,” said Ross Gordon, Humboldt County Growers Alliance policy director and Origins Council policy chair. “When it’s based on weight, it has a really negative impact, especially when the price of cannabis has dropped 70% or more in the past year, from maybe $1,000 a pound to $300 a pound. The state cultivation tax stays the same and, in fact, increases annually with inflation. It ends up being more than 50% of the price of the product.”
The excise tax, a 15% tax imposed upon retail purchasers of cannabis or cannabis products, is levied based on the final retail price of the product rather than weight.
“For that reason, we’ve really prioritized the elimination of the cultivation tax, rather than elimination of the excise tax,” Gordon explained. “As proposed by Sen. Mcguire, we could eliminate the state cultivation tax and then make the excise tax a little bit higher so the net amount of money to the state is still the same, that really takes the burden off the farmer.”
Several California counties and municipalities have sent letters and passed resolutions calling on state legislators to eliminate the state cultivation tax.
Humboldt County did not return the Times-standard’s request for comment on whether the Board of Supervisors would consider such a move, however, the Rio Dell City Council approved a resolution on Dec. 14 urging the state government to consider dramatically reducing or eliminating the state cultivation tax.
“This is a case where what is going up should be going down, and what’s going down needs to be going back up.” Rio Dell Mayor Debra Garnes said in a prepared statement. “It’s upside down. The state needs to correct this. The state needs to respond. They are by far taking the lion’s share of cannabis tax receipts and they risk killing the concept of the small legal cannabis farmer. That’s not good for anyone in Humboldt.”
Rio Dell city manager Kyle Knopp credited the county for turning the newly legal industry “into something that benefits Rio Dell as a whole.”
“We’ve been able to pave roads and invest in public safety, in good part because of cannabis legalization and how we’ve approached it. But the state’s taxation system is now putting these local benefits at risk, perpetuating the black market and shutting down legal North Coast cultivators,” Knopp said in a prepared statement.
Natalynne Delapp, executive director of the Humboldt County Growers Alliance, called for local tax reform as well. Measure S, which was approved by Humboldt County voters in November 2016, imposed a cannabis cultivation tax of $1 to $3 per square foot to maintain and im
prove county services.
“The passage of Measure S was prior to the passage of Proposition 64, which legalized adult-use cannabis in California,” Delapp said. “It was voted in prior to the California Cannabis Equity Act of 2018. Measure S was passed very early on and it seemed like a fair and simple tax rate. However, also at that time, the perception was that this was going to be a very lucrative business venture.”
No other agricultural industry is taxed simply for the opportunity to exist, Delapp noted.
“These farmers are paying property taxes that have increased because, as their properties are assessed with new development, they get increased property tax bills. They’re paying heightened property taxes because of their cultivation because of reassessment,” she said. “They pay state income tax, federal income tax, they’re also paying this state cultivation tax.”
The taxes and the compliance costs add up and ultimately inflate the price of cannabis at the consumer level.
“We’re in a situation where licensed retail cannot compete against the illicit market because it’s cheaper to go buy a bag of weed from your neighbor than going to a licensed retailer,” Delapp added.
In addition to cutting taxes for cultivators, Gordon underscored the importance of creating a direct pathway between the farmer and the consumer. As an example, he pointed to last weekend’s Emerald Cup in Santa Rosa.
“There were booths and spaces specifically for small farmers from Humboldt and from other counties to be able to connect directly with consumers. They weren’t selling their product, but they had samples to show their product to consumers so they could smell it and look at it then go across the hallway and buy it from a licensed retailer,” he said. “The Department of Cannabis Control’s enforcement team started enforcing against these farmers.”
Again, Gordon said the farmers were not selling or giving away their products.
“I think it really highlighted the need to create that pathway for cultivators to interact directly with consumers and not have any fear that that’s going to make them noncompliant,” he said. “These are small farmers who really just want to show the work that they’ve done, show off their crafts.”
Mcguire credited cannabis farmers throughout the Emerald Triangle for stepping up and doing the right thing to become compliant. “But the current tax structure on top of COVID, on top of this collapsing market has been devastating.
“They are now legal and now they are faced with a crushing tax structure that has taken a huge toll on their family’s livelihood and the state must step in proactively to take action,” he said.
“This proposed legislation would provide some relief, in particular to small family farmers (who) are bearing the brunt of the burden of the tax structure that was embedded in Proposition 64.”
More information on the proposed legislation will be announced in the new year, Mcguire said.