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California Governor proposes slashing state’s cultivation tax

If Governor Gavin Newsom’s plans go ahead, cultivation tax could be eliminated in July this year, but retailers are expected to be hit with tax hikes to compensate.

California Governor Gavin Newsom has proposed cutting the state’s cultivation tax to $0 in his recently released budget. The proposal comes after protests from the state’s struggling distributors calling for tax relief.

The cannabis industry in California faces one of the highest tax rates in the US. with a state-wide excise tax of 15 per cent along with sales and use tax that can be as high as 10.75 per cent. Meanwhile, local business licenses can be up to 15 per cent in some parts of the state.

And that’s not all. Cannabis growers also have to contend with a cultivation tax of $161.28 per pound of dried flower.

When wholesale prices are high, most companies can swallow the high taxes but the market has been volatile in recent years with prices slumping to as low as $650 per pound at various points over the past two years. As a result, many businesses have struggled to scrape a profit.

“Excessive cultivation tax makes it harder for legal cannabis businesses to operate profitably and for legal businesses to compete against black-market competitors,” said Steve Gutterman, CEO of California-based B2B distributor of cannabis brands, Falcon Brands.

After protests were held earlier this year calling for lower taxes, Governor Newsom indicated that relief was on the way for cultivators. Now, with the recent update to the Governor’s budget proposal, cannabis companies could see the cutting of cultivation tax come into effect in July this year.

“Cutting the tax could dramatically improve profitability for California-based cannabis companies, particularly those that have significant exposure to cultivation.  This, in turn, benefits the state – a robust cannabis industry creates jobs, sales and tax revenue,” Gutterman added.

Although the proposal is good news for cultivators, the same might not be true for retailers. To prevent a loss of revenue for the state, Governor Newsom has proposed increasing retail tax from 15 per cent to 19 per cent. Gutterman said the move could put pressure on grassroots dispensaries.

“It depends on the details, of course, but this could make it more difficult for mom-and-pop operators to succeed,” Gutterman said. “To be successful in an environment where cultivation taxes are reduced or eliminated and retail taxes are increased, it would be important to be large and vertically integrated, like our company.”

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