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Cannabusiness: A Taxing Issue in the Golden State

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cannabusiness, money and marijuana

By year’s end, the green revolution will be considerably greener. Voters in at least 10 states will be deciding on cannabis initiatives in November elections in a surge of dank democracy that spans the country from Florida to North Dakota, Maine to Arizona.

The big prize is California. The seventh-largest economy in the world will vote on the Adult Use of Marijuana Act, AKA AUMA or Prop 64. If passed, AUMA will allow adults to possess up to one ounce of marijuana and cultivate up to six plants; it will launch a regulate-and-tax plan for the sale of marijuana and reduce many of the current weed-related felonies to misdemeanors.

How will this gargantuan new entrant into the adult-use sector change the industry? Not much will happen until January 1, 2018, when AUMA would kick in. After that, it’s a bit of a guessing game.

“Things are very fluid right now,” said Mark Putney of Second Sun, a cannabis production and management company. “We spend a lot time with the lawyers, trying to get a handle on how we can maneuver within the coming changes.”

Ganja business owners will need a JD to navigate the transition, in part because there will be more regulation—seed-to-sale oversight, warning labels, permit allocation, etc.—but also because local jurisdictions will be setting their own rules and taxes within the AUMA framework.

It’s the taxes that some fear could cripple the nascent industry.

Cathedral City in Riverside County is proposing a whopping $25 tax per square foot of cultivated green, along with another $1 per gram levy on concentrates, and on every unit of cannabis infusion produced. In Fresno County, Coalinga will be laying down the same $25/foot tax on the first 3000 acres cultivated, with “only” $10 taxed on each additional square foot. Monterey County will be voting on whether to tax farms $15 per square foot, a rate that would automatically jump to $20 in 2020 and $25 in 2021. (Since wholesale prices are expected to decrease once the state goes fully legal, these automatic tax hikes over time are particularly onerous for small businesses trying to turn a profit.)

Municipalities have already begun earmarking the coming revenue. The city of Coachella has begun developing a comprehensive cannabis taxation scheme, even though the city currently does not yet allow dispensaries or delivery services within its own jurisdiction. The Desert Sun reported the tax could add $4 million to its current $22 million budget.

Speaking of $22 million, that happens to be the amount of tax revenue that San Diego expects to generate in just the first year of the coming green rush. The plan is to tax five percent of gross receipts in year one, bump it up to eight percent the second year and give the City Council the option to hike it to 15 percent in the future. Medical marijuana, at least, would be exempt from such rapacious plundering.

What does the massive tax proposals portend for growers?

“One of the fears we have is that a lot of these expenses will bump out small farmers, and that will have an impact on quality,” Stephen Gieder, CEO of cannabis consultancy Green Humboldt, explained. “Giant companies are ready to jump in. If large pharmaceutical gets involved… they seem to be destructive all over the world, I don’t know why cannabis will be any different.”

California is aware, at least, in the danger of over-taxing.

A recent state commission report—chaired by pro-AUMA Lt. Governor Gavin Newsom—recommends that tax policies are periodically adjusted as needed, but not with all the focus on maximizing revenue. It also wants the state to “engage the federal government on changing IRS rules,” which currently do not allow business deductions for cannabis companies.

That sounds nice, in theory. We hope the golden goose isn’t cooked before it hatches.

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