California Department of Tax and Fee Administration (CDTFA) revealed that the markup rate for the marijuana excise tax will increase on New Year’s Day.

The markup rate is used to provide the basis for California’s 15% excise tax.

The increase will also raise the state cultivation tax to adjust for inflation, raising those taxes as well:

$9.65 from $9.25 for an ounce of flower, or an increase of 4.3%.

$2.87 from $2.75 for an ounce of leaves, or an increase of 4.3%.

$1.35 from $1.29 for an ounce of fresh marijuana plant material, or an increase of 4.6%.

The notice also revealed an increase in the state’s cannabis markup rate from 60% to 80%. The mark-up rate — the average difference between the wholesale cost and the retail selling price of cannabis and cannabis products — is used to determine the state excise tax on cannabis products. Regulators are required to recalculate the cannabis mark-up through an analysis of statewide market data every six months.

The increase in taxes comes despite the burden already borne by licensed businesses struggling to compete with a continuing unregulated market, which is estimated by BDS Analytics to be worth $8.7 billion per year in California, more than twice as much as the regulated market.

The CDTFA’s markup rate is based on the wholesale average market price of cannabis, and the agency had previously declined to increase the state marijuana tax rate.

The agency statement said the markup rate change was based on “an analysis of statewide market data,” and a CDTFA spokesman wrote in an email to Marijuana Business Daily that the tax adjustments are a result of existing state law.

“When implementing (Proposition 64), the Legislature moved the incidence of the tax from the retailer to the distributor, requiring CDTFA to determine the average markup rate every six months,” CDTFA spokesman Casey Wells wrote.

“The purpose of the markup is to have the actual tax match the 15% gross receipts rate approved by voters. After analyzing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80%.”

When asked if the excise markup rate will change again in another six months, Wells said that will depend on wholesale market data. But the cultivation tax, since it’s based on inflation, would only be adjusted once a year, he said.

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To date, legislative efforts to lower state taxes have fallen short, meaning the legal supply chain has continued to struggle to attract customers.

Nicole Elliott, senior advisor on cannabis in Gov. Gavin Newsom’s Office of Business and Economic Development, emphasized that the tax hike “is not a discretionary action” by CDTFA, but rather a natural outcome of laws established in 2017 by the legislature.

“We support policies that lead to less cash flow issues for small businesses, establish more parity across the industry, simplify compliance for everyone involved and support a healthy legal market,” Elliott wrote in an email to MJBizDaily.

“We remain committed to working with stakeholders and the Legislature to further develop a framework that realizes all these things.”

Phil Blurton, the owner of All About Wellness, a cannabis dispensary in Sacramento, said earlier this week that it’s difficult to compete with unlicensed operators.

“Our city license now is $20,000 a year,” Blurton said. “The state license is $96,000. Then we pay 8.75% sales tax to the state.”

Blurton said he also pays an additional 4% cannabis tax to the city, plus the 15% tax to the state, “which is making the cost of our product so expensive the black market is booming now.”

“I would like to see our taxes lowered,” Blurton said. “I would like to see the price of our licenses lowered.

Jay Handal, the co-owner of the Erba Markets dispensary in Los Angeles, said that the current regulatory environment in California is encouraging illicit businesses.

“The reason the black market continues to exist is because taxes are too high,” said Handal, upon learning of the tax increase. “People are looking for the best value and the government, both state and city, are woefully poor at shutting down black market stores. Raising taxes will only exacerbate the situation by continuing to keep black market store prices ridiculously lower than legal dispensaries that carry tested products.”

Some local businesses are shuttering or moving out of California due to the high operating costs.

“The latest tax hike is disappointing news as both a consumer and an operator,” says Leone Posod, CEO of CBD skincare company, Treat Yourself.

“I fear that this increase will do nothing more than strengthen the illicit market since the regulated market is already expensive as it currently stands. We are in the process of moving our business out of California because it simply does not make financial sense for us to operate here, no matter how much we want to. I hope that the many California cannabis businesses that I support and admire will pay close attention to how this increase affects their operating expenses and make the necessary adjustments to stay in business. Too many incredible California cannabis businesses have been priced out in the last two years, we can’t afford to lose anymore,” laments Posod.

On the flip side of the issue, some illicit farms are generationally family-owned and are barely breaking even. Many illicit growers say they cannot afford to pay the necessary state-required entrance fees to become compliant, let alone the additional taxes.

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