Marijuana shops say higher taxes will boost black market

Excise tax formula will change next year
Posted at 3:40 PM, Dec 03, 2019
and last updated 2019-12-03 23:10:18-05

LA MESA, Calif. (KGTV) -- Local cannabis shops are sounding the alarm, saying higher state tax rates set to take effect next year will drive more customers to the black market.

Starting January 1, the state will change the way it calculates the excise tax on all marijuana products, effectively raising the rate by 12.5 percent. The state will also adjust a fee charged to growers by the rate of inflation, raising it to $9.65 per ounce of flower from $9.25 per ounce.

Marijuana is also subject to sales tax and local taxes, which at the Reserve dispensary in La Mesa is an extra 8.5 percent and 4 percent respectively.

RELATED: Exclusive: Police raid illegal Chula Vista pot shop, as prosecution efforts ramp up

“What we have here is a clean, safe product, but those extra taxes push people away because they don’t want to spend the extra money,” said Reserve budtender Owen Horsman. “And when that happens, they go and find their product at an unlicensed or illegal spot.”

Industry analysts estimate the illegal market still overshadows California’s legal industry, capturing $3 dollars for every $1 spent at a licensed shop.

Reserve owner Gregg Holda said the higher taxes will only widen the price gap between the two markets, and further incentivize customers to buy unlicensed cannabis products, which may be counterfeit or untested.

“Unfortunately you could be consuming pesticides, molds, stuff that’s really bad,” he said.

RELATED: 6 arrested at Chula Vista pot dispensary

In a statement, the California Department of Tax and Fee Administration said the changes were required by the language of Proposition 64. The agency said it analyzed thousands of transactions and determined the state excise tax wasn’t capturing 15 percent of gross receipts of all cannabis sales, as the law requires.

The CDTFA is required to analyze cannabis transactions and set the tax rate every six months. The agency said the changes are designed to capture the appropriate amount of tax revenue that voters approved.

The explanation has not reassured marijuana industry leaders.

“We believe that the CDTFA’s decision to increase tax burdens on compliant operators is counter to developing a safe industry,” said the California Cannabis Industry in a statement.