California tax officials released their first report on legal cannabis sales taxes since marijuana legalization first began, and according to the figures, the actual revenue is as much as 40 percent below original estimates while 80 percent of sales are still taking place on the gray and black markets.

According to West420 Newsweekly, the gross reported $34 million in excise tax breaks down to $32.4 million raised under the sales tax rate of 15 percent, and another $1.6 million from the growers excise tax (collected by marijuana distributors) set at $9.25/oz. of dry flower and/or $2.75/oz. of dry leaves. Subtracting the excise tax revenue, this comes to a three-month total for sales from all legal outlets of between $215 and $224 million.

Based upon 2017 pre-legal sales, as much as 78 to 82 percent of the California consumer market appears to be coming from the state’s gray/black market. And it looks like this number has not changed much since the Jan. 1, 2018 launch of recreational sales.

Why So Low?

“We may have a problem with the state’s ‘markup assumption’ or with [industry] compliance,” a senior California official said according to West420.

The state’s markup assumption sets a retail figure upon which to assess the excise tax, which is then collected by the distributor licensees.

Conversely, the low excise tax collection may be exposing a problem with legal retailers under-reporting their initial tax (and, hence, sales) responsibility. Or it could point to a significant rate of non-filing throughout the state’s estimated 700 retailers active on April 30, 2019, when the tax was due.

Across the state, local sales taxes (and special assessments) brought in an additional $27.3 million in the first quarter, reported the Legislative Affairs Office.

What Were They Thinking?

Governor Jerry Brown’s staff’s estimates for the first six months of 2018 were $175 million in excise tax which would require nearly $1.2 billion in retail sales.

Further analysis is expected by mid-May as the California Department of Tax and Finance releases its excise tax calculations.

The reality of the matter may mean that the Brown administration (and overly-optimistic pro-64 supporters) will have to significantly revise revenue estimates.

The Licensing Bottleneck

While many local cities and counties are still taking their time in finalizing rules for cannabis licensing, close to 85 percent of California towns and counties have banned licensing altogether.

In Los Angeles, only 140 licenses have been issued, leaving hundreds of growers, infused manufacturers, micro-businesses, and new retailer applications in limbo.

With only 4 full-time regulators in place, lack of staff in LA is a major factor in processing the applicants. Many of these applicants are locked into expensive leases or other overhead items with no revenue being generated.

A scan of market conditions shows that some tightly run cities such as San Diego, Oakland, San Jose, and West Hollywood have been able to keep up with local response to applicants.

“We still have many consumers farther than 15 miles to a legal MJ dispensary,” noted a southern California operator who claimed that these consumers continue to rely on unlicensed suppliers or gray-market delivery services.

With the sluggish rate of local cannabis license issuance, the state has sought to extend their prior January 1 “temporary permits” by issuing about 500 “temps” according to Bureau of Cannabis Control spokesman Alex Traverso

“We have, over the past couple weeks, been accepting annual license applications from those first licensees to get a temporary license on January 1. As soon as their applications come in, our licensing system issues them a new temp license that’s good for an additional 90 days while we review their annual application,” Traverso said.

What’s The Fallout?

Some estimates say the 600 to 650 retailers licensed represent less than five percent of the state’s total. Meanwhile, many which are still operating as “collectives,” have until January 31, 2019 to transition to for-profit ventures

Where local rules have been set, many manufacturers of edibles and other infused products have reported additional costs and delays from local officials putting strict “food-level” regulations on those items which are consumed by humans.

On the cultivation side, California Growers Association’s Hezekiah Allen remained pessimistic, reporting some 90 percent of the state’s growers are still unwilling to submit to the time and expense of becoming licensed.

Small growers also are afraid of the 2022 deadline when new corporate growers will be able to enter the market and grow on a large scale.

Even at a full annual tax contribution based on an eventual billion dollars per year in sales, the total tax impact on California’s huge budget is tiny.

Nonetheless, a $135 million loan used to launch the legal industry will not be getting repaid in an expedited manner. And other Prop 64-touted funds earmarked for drug prevention programs, environmental-remediation, and cannabis research will also have to wait for tax revenue growth.


This article by CN Editor Rick Schettino was originally written for and posted on PotNetwork.com.