California cannabis industry tax tab nears $300 million

The California cannabis industry has a serious tax problem. The cash-strapped industry’s state tax bill has ballooned by almost 15% from December 2022 – when the industry as a whole owed California tax authorities just over a quarter billion dollars – to now just under $300 million as of mid-February.

“The cannabis industry has an outstanding balance of nearly $287 million” as of Feb. 16, a spokesperson for the California Department of Tax and Fee Administration told Green Market Report this week.

“This is based on what taxpayers reported to us on their returns and the amounts they paid to us,” the spokesperson clarified in an email. “It does not include any amounts the industry may owe but has not reported such as from illegal or unregistered businesses.”

But the actual taxes owed are likely far higher that what the CDTFA is aware of, according to Los Angeles-based cannabis consultant Avis Bulbulyan, CEO of SIVA Enterprises. He predicts that the outstanding tax tab will continue to grow, in large part because many companies can’t afford to pay.

“Until they fix the regulatory environment, nothing’s going to change. This number, for taxes owed, is going to go up, while the industry growth is going to slow down,” Bulbulyan said, adding that the systemic issue is “probably one of the top three topics of discussion, anytime you talk to somebody who’s got a (cannabis business) license.”

On top of that, it’s easy for operators to walk away from state tax bills, he said, pointing to an auction held on Feb. 16 to sell off seized assets from 10 cannabis companies. Those companies owed a cumulative $44 million in unpaid taxes but only brought in $2,075 to cover those bills.

The pittance of an auction result, Bulbulyan said, is further evidence that policymakers need to help the industry by deregulating and allowing businesses to cut costs.

“The problem is, the state has taken the approach that businesses are forced to pay whatever we tax them, and the reality is, you might think so, but they have options. And one of those options is to not pay. The other option is to burn those licenses and go get new ones,” Bulbulyan said.

He insisted that many cannabis companies are profitable, but due to state industry rules, they’re often forced to spend every penny of profit to maintain their own compliance with those rules.

“The bigger issue is, regulators have created a ridiculously constrictive business environment, where every dollar you make is either going to compliance issues, regulatory mandates, taxes,” Bulbulyan said.

There’s also still the enormous illicit market in California that’s posing a major competitive threat to the legal cannabis trade, and almost certainly cutting into profits, which then cuts in turn into state tax revenues, Bulbulyan noted. But despite ongoing enforcement efforts, the underground trade appears as strong as ever, which he argued was a policy flaw that needs to be corrected.

“The way you go about fixing it is not by targeting the black market. It’s by fixing the regulated market. You fix the regulated market, you’re not going to have a black market,” Bulbulyan said, arguing that California policymakers need to help legal marijuana businesses drive down product price points and get more retail access to consumers in order to supplant the illegal trade.

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