Commentary: Reform cannabis tax now

Joining forces with another local trade association in the Sonoma County cannabis industry, whose legalization under Proposition 64 was approved by 59% of county voters in 2016, the Cannabis Business Association of Sonoma County (CBASC) — which represents plant-touching cannabis and hemp businesses — and the Sonoma Valley Cannabis Enthusiasts (SVCE) today called on the Sonoma County Board of Supervisors to implement resolutions that would result in immediate tax relief reform at both the county and state levels.

Taken together, the resolutions would eliminate state cultivation tax and suspend Sonoma County collection of cultivation taxes for a predetermined period of time. Sonoma County is one of five counties being asked to participate in a multi-county effort to seek state suspension of cultivation taxes.

Unlike other agricultural products, cannabis cultivation is taxed before production. California’s current cannabis cultivation tax is $9.65 per dry-weight ounce for cannabis flower; $2.87 per dry-weight ounce for leaves; and $1.35 per dry-weight ounce for cannabis plants. All of which were announced to increase for 2022 on the same day that California also announced a $31 billion budget surplus for 2021 and a sales report from industry analyst BDSA showed that legal sales in California fell by more than 11% year over year, with a nearly 8% drop since August of this year alone.

“Our industry is in deep trouble,” said Erich Pearson, CBASC co-founder and CEO of SPARC, which operates a biodynamic cannabis farm in Glen Ellen as well as dispensaries in San Francisco and Sonoma counties. “We’re impacted on several important fronts. Our industry is taxed like no other, we have few retail outlets available to us, the illicit market continues to boom, and we face unparalleled regulatory hurdles. Frankly, what we’re experiencing is a market collapse.”

Left to local jurisdictions, retail roll-out for legal cannabis has been slow. California has just 823 licensed dispensaries to serve over 29 million possible adult customers, with 68% of the state completely unserved. According to the Press Democrat, Santa Rosa’s dispensaries provided over $36 million a year in sales in 2019, while the Sacramento Bee reports that third quarter sales this year brought the state $322.34 million in tax revenue, of which $42.41 million was from the cultivation tax alone. Yet Politico reports that the true value of California’s cannabis market is closer to $1 billion per month, of which only one-third is legal. The rest is reportedly sold across the country on the illicit, or “traditional,” market.

“Every licensed cultivator is in dire survival mode,” says local cannabis regulatory attorney Joe Rogoway, who helped draft the two resolutions to be presented to the Sonoma County Board of Supervisors on Dec. 7. “Right now, there is an imminent risk of licensed cultivation collapsing in Northern California. Excessive taxation on cultivation by the county and by the state almost entirely benefits the illicit market, which is not taxed. Licensed cultivation businesses cannot maintain profitability, or even break even, under the current tax regime which is forcing many to go out of business. Every licensed cultivator that goes out of business ends up creating a corresponding benefit to the illicit market. The entire point of Prop. 64 is to create a robust legal market but, ironically, because of extreme over-taxation on cultivation and municipal prohibitions on retail businesses, parts of Prop. 64 are actually crashing the legal market and undermining the core premise of legalization.”

Rogoway continues, “In order to fulfill the cannabis policy mandates of the voters, we need to reconceptualize the implementation of how we tax and regulate cannabis. Elimination, or at least suspension, of cultivation taxes is one of the things that urgently needs to happen. The Sonoma County Board of Supervisors is empowered to address some of these issues directly and it must exercise their powers immediately in order to prevent the worst outcomes from being realized. Through this pair of resolutions, our Supervisors can blunt the precipitous demise of legal cannabis farming and stop a very problematic displacement of local business owners out of the regulated marketplace.”

Michael Coats, president of SVCE, applauds the two new resolutions. “We have to give our farmers a break,” he says. “Sonoma County has the promise, the land, the weather — it has everything we need to have a healthy and robust agricultural movement that will bring tourists and keep us on the map as a desirable place to visit. But none of that matters unless we’re able to protect our farmers.”