California’s Legal Market Continues to See Strong Sales Growth
The California Department of Tax and Fee Administration (CDTFA) recently issued data on taxable sales and cannabis tax collections for Q2 2021. Additionally, Q1 2021’s figures were updated and completed after many businesses took advantage of an extension to remit granted by the state in light of the coronavirus. Overall, the data shows retail sales growth continued to be strong, while the amount of wholesale supply entering the licensed system in Q2 did not expand quite as much as retail demand.
Taxable sales for Q2 2021 reached almost $1.36 billion, up by over 11% from Q1 2021’s taxable sales of $1.22 billion. Q2 2021’s taxable sales were up by 24.5% year-on-year.
Total California Cannabis Tax Receipts Surge 26% Year on Year
Total taxes collected in Q2 2021 were $333 million representing a 9.3% increase quarter-on-quarter and a 26% increase in total cannabis tax revenue year-on-year. The expansive quarterly gains seen through the first pandemic period last year have tapered off in 2021, which may be due in part to people returning to work and having less leisure time. Additionally, the rather sharp 21.9% drop in the wholesale flower price observed by Cannabis Benchmarks from November 2020 – January 2021 may also have played a role in slowing sales and tax revenue growth.
In 2021, however, excise tax receipts began a slow climb that coincided with a gradual recovery in price, with January to June price climbing 15.3%. California’s 15% excise tax is levied on retailers and is calculated based on the wholesale price paid, plus a markup rate set by CDTFA, in the case of bilateral trades between two unaffiliated parties.
While there has been a good bit of volatility in quarterly tax receipts, the most significant take-away from the data is the steady year-on-year growth in California cannabis taxes. The pandemic ‘bulge’ in tax collections was not followed by lower tax receipts. In fact, in regard to the state’s general sales and use taxes, which are levied on purchases made by adult-use consumers, quarters following the pandemic-related surge in taxes gave back very little, sinking just 1.8% in Q4 2020 and 2.3% in Q1 2021. When extraordinary events spike market peripherals, a reversion to the mean value is far more common than a trend reversal in said peripherals, as demonstrated below.
CDTFA also recently provided Cannabis Benchmarks with a breakdown of cultivation tax receipts for Q1 and Q2 2021. As California’s cultivation tax is a flat tax by weight for each product type, the data provides for quarterly and annual comparisons on the volume of product that entered California’s regulated market in recent periods. For the first two quarters of 2021, shown in the table below, tax receipts continue to increase, albeit at a slower rate than increases seen in 2020
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 product sold climbed rather sharply with Q2 2021 flower sales volume up 22.2%, leaves (trim) up 33.6%, and fresh plant volume up 17.9%.
Wholesale product volumes depicted in the table above reflect increased production meeting expanding demand in 2020 amid the pandemic bulge; the period of time in which lockdowns were in place, unemployment was skyrocketing, the unemployed were helped with federal subsidies, and millions of workers were tasked with working from home. The jump in sales volume of all product types from Q2 to Q3 2020 is evident. However, while wholesale sales volumes for Q2 2021 are up year-on-year, they are below those recorded in Q4 2020 owing to the fall harvest supply surge that occurs in the final quarter of any given year.
Subsequent quarterly changes into 2021 show fewer taxes paid than in Q4 2020 coincident with less product volume entering the commercial market in each of the first two quarters of this year. From Q2 2020 to Q2 2021, cultivation tax receipts, shown in the table below, have climbed 31.5%, reflecting annual gains despite quarterly volatility.
Recent Tax and Sales Data Not Reflective of Current Market Landscape
How quarterly data will look for Q3 2021 will be interesting considering that currently-observed market dynamics appear to have changed dramatically from the prior quarter. As we noted at the outset of this section, sales and tax collection data through Q2 2021 paints a picture of a market in which retail demand is expanding at a greater rate than production. Indeed, our California Spot Index trended upward through Q1 and Q2 of this year, coincident with the data examined above. However, as we have noted recently, wholesale flower prices are falling and reports out of California indicate a buyer’s market.
The Eureka Times Standard recently reported on overproduction in Humboldt County and other areas weighing on price. Growers say the answer for overproduction of this magnitude is for the state to provide relief in the form of lower taxes and fewer licenses, but such changes will not stop overproduction from already-licensed large-scale growers across the state. The Humboldt County Growers Association is pinning their hopes on national and international legalization so that they might market locally produced cannabis across the country and around the world.
Cannabis Benchmarks California Spot Price Dives Below Long-Term Trend
Spot prices are for immediate delivery of a commodity; they contain no cost of carry surplus and generally reflect the cost of a commodity in the present and for immediate, or within several days, delivery of the purchased commodity.
Cannabis Benchmarks California Spot Index from the start of 2020 through last week is depicted in the chart below. Note the longer term trend, dating back to Spring 2020, has been broken by the current late summer sell-off. Indeed, as seen below, California’s Spot has reached a new year-to-date low as of August.
With outdoor and light deprivation harvests beginning, prices may continue lower. Although demand for freshly-harvested material could help steady price initially, as has been the case in some previous years, accounts out of California suggest an early harvest price bump may not be in the cards this year due to significant supplies from 2020 and this summer’s light-deprivation crops swamping the market.