Green, Red, and Black
Sorry, this article is not about the Pan-African flag.
(However; cultural kudos if that was your first reaction to those colors.) This piece is a look inside California’s green market, the seemingly endless red tape businesses must go through to sell marijuana legally, and how because of these hurdles the black market for selling marijuana is stronger than ever. It’s estimated that for every $1.00 spent on legal marijuana, $2.81 is being spent on it “illegally” in California. Let that sink in for a bit.
2018 was a strange year for California in regards to legal marijuana sales. In the year 2017, the estimated income from selling solely medical marijuana was $3 billion. In 2018, the year recreational sales begun, the state saw a decline to $2.5 billion in net cannabis sales. How could opening a market to anyone over 21 reduce the total income compared to the year before where marijuana could only be bought and sold for medical reasons? The answer is the same as the reason our forefathers decided to split form Great Britain back in the 1700’s…taxes.
If you plan to start a marijuana growery and live your dream of selling weed legally, let me grab you a glass of wine and some ibuprofen. You’re headed down a path of many headaches, frustration, and a slew of questions with no answers. California is no stranger to high tax rates. However, an aggregate taxation rate of 77% will make any Golden State warrior cringe. The state imposes a 15% retail excise tax on marijuana, and a base sales tax of 7.25%.
And that’s just the tip of the iceberg.
Producers also are faced with potential county, city, and state taxes, and a cultivation tax that amounts to $9.25 per ounce of flower and $2.75 per ounce of leaves. Through Prop-64, marijuana growers must wholesale their product through licensed distributors who also collect excise and cultivation taxes, as well as send product samples to laboratories for testing. In a lump sum, according to “State of the Legal Cannabis Markets,” aggregate legal taxation could hit as high as 77% in some Californian cities. To put that in a different perspective, for every dollar that a grower makes from selling their marijuana product legally, they may get to pocket less a quarter of it. That’s not including the cost of production, equipment, employees, etc. That is, if a grower decides to sell their products legally.
2019 is expected to be a much more profitable year in terms of marijuana sales. Many believe the net income from recreational and medical cannabis products to be about $3.1 billion in the state alone. Unfortunately an estimated $8.7 billion in “illegal” marijuana is projected to be sold on the black market this year as well. Given the math, it’s hardly surprising.