The California Department of Tax and Fee Administration (CDTFA) issued data this week on taxable sales and cannabis tax collections for Q4 2021. Taxable sales for Q4 were $1.26 billion, down 2.8% from an upwardly adjusted $1.29 billion in Q3 2021, suggesting any holiday bump in sales was diminished in part by falling cannabis prices. Year-on-year, Q4 2021 sales were up 1.1% from Q4 2020 sales of $1.24 billion.
Total cannabis tax revenue collected in Q4 2021 was $308.6 million, down 7.6% from an upwardly adjusted $333.8 million in the prior period. Q4 2021 total tax receipts include excise taxes of $157.4 million, cultivation taxes of $39 million, and sales tax of $112 million. Total tax collections for Q4 2021 were up just 1% from Q4 2020 total tax collections of $305.3 million.
Excise tax receipts fell 10.2% quarter-on-quarter in Q4 2021 following a downwardly revised 0.7% drop in excise taxes in Q3 2021. Excise tax is levied on both adult use and medical retailers based on the wholesale price paid, plus a mark-up rate set by CDTFA in the case of bilateral trades between two unaffiliated parties. Year-on-year Q4 2021 excise tax collections are up 3% from Q4 2020.
Sales tax data in the table below shows quarter-on-quarter increases in sales tax collections through 2020, except for Q4, when collections slipped following the pandemic sales boom that peaked in Q2 and Q3 2020, according to CDTFA sales data. California’s general sales tax is applied to retail purchases of cannabis by adult use consumers, but not medical patients, and varies by municipality.
2021 saw resurgent pandemic effects through Q2 2021; but unemployment fell across the year, federal subsidies ended, and cannabis prices fell. Lower sales tax collections in Q3 and Q4 2021 especially were exacerbated by sharply lower cannabis prices from the end of Q2 through Q4 2021. 2021 sales taxes collected from adult use retailers were $462.9 million, a 17.5% increase over 2020’s total sales tax receipts of $394 million.
CDTFA also provided Cannabis Benchmarks with a breakdown of cultivation tax receipts for Q4 2021. As California’s cultivation tax is a flat tax by weight for each product type, the data provides for quarterly and annual comparisons of the volume of product that entered California’s regulated market in recent periods. Tax receipts for flower, fresh plants, and leaves all fell in Q4 2021.
Quarterly wholesale sales volume figures, extrapolated from CDTFA cultivation tax data, are shown in the table below. The cultivation tax is levied on product when it “enters the commercial market,” which is defined by CDTFA as when the product clears required testing.
Year-on-year wholesale volume of products entering the market fell across the board, with Q4 2021 flower sales down 1.4%, leaves (trim) volume down 20.9%, and fresh plant volume down 9.1% year-on-year, suggesting that while purported production keeps growing, some amount of product is not making it into the market, instead being destroyed to avoid the tax burden or perhaps ending up in the illicit market.
While the 2020 pandemic year saw steadily rising product volumes, in 2021 volumes dropped initially with Q1 2021 product volume falling across the board versus Q4 2020. The Q4-Q1 decline was likely also due to the seasonal characteristics of the production side of the market, with trading volume in the final quarter of any given year typically inflated due to the fall outdoor harvest. That said, 2021 flower and fresh plant volumes increased from quarter to quarter until Q4, while volume of leaves increased in only one quarter in 2021. It is clear cannabis volumes recorded for tax purposes have fallen with a corresponding drop in tax collections, yet cannabis prices reflect a market that is significantly oversupplied.
Total cultivation tax collections fell in both Q3 and Q4 2021, as the table above shows, as oversupply issues continue to plague the market, driving prices lower so that some growers are not harvesting product because taxes and fees make it unprofitable to do so, according to Forbes magazine.
The downturn in Q4 2021 cultivation tax receipts and the volume of product entering the market is especially notable as the final quarter of any given year is the period in which the autumn harvest takes place. As noted, some crops were reportedly not harvested at all, while other growers may also be unable to move their crops or holding back inventory intentionally in the hope of better market conditions as the year progresses.
Again, California’s cultivation tax is only levied upon product that “enters the commercial market,” which occurs when it has been transferred to a distributor and passes the state’s required testing. As alluded to above, due to severe oversupply conditions that became apparent in the summer of 2021, distributors in Q4 2021 may not have been looking to aggressively take in new inventory as they usually would in the wake of the autumn outdoor harvest.
As noted, the significant downward price pressure that began last year became undeniable in the summer. Outdoor flower’s price peaked in March 2021 and began selling off in earnest in June 2021. Greenhouse product’s price peaked for the year in April and started a strong downtrend in late July. Indoor flower prices also peaked in March 2021 but did not begin their strong downtrend until the first week in September 2021. California’s Spot started reflecting the 2021 sell-off in late July.
Given the staggered dates of the sell-off across products, it is clear there has been price contagion from outdoor up through greenhouse and indoor flower. There was also a notable tightening of the spread between greenhouse and outdoor product that began in September 2021. The greenhouse / outdoor spread went from $439 in May 2021 to $135 at the end of December, suggesting there is more outdoor-like greenhouse product on the market than there is indoor-like greenhouse product. However, it still remains the case that the overriding issue is the vast oversupply in legal and illicit markets and price will remain under pressure until one, or both issues, are addressed.