The California Department of Tax and Fee Administration (CDTFA) issued data on taxable sales and cannabis tax collections for Q1 2022. Taxable Sales for Q1 2022 were under $1.2 billion, down 9.9% from an upwardly revised $1.3 billion (previously $1.26 billion) in Q4 2021. California Spot price slipped 5.3% in Q1 2022, which may account in part for the sequential decrease in taxable sales. Year-on-year, Q1 2022 sales are down 6.1% from Q1 2021’s $1.24 billion.
Total cannabis tax revenue collected in Q1 2022 was $294 million, down 7.3% from an upwardly revised $316.6 million (previously $308.6 million) in Q4 2021. Q1 2022 total tax receipts include excise taxes of $156.4 million, cultivation taxes of $32.7 million, and sales tax of $104.5 million. Total tax collections for Q1 2022 were down 5.9% from $312 million collected in Q1 2021.
Excise tax receipts fell 3% to $156.4 million in Q1 2022, from an upwardly revised $160.6 million (previously $157.4 million) in Q4 2020. This is the third consecutive quarter of lower excise tax revenues.
California’s excise tax is levied on both adult use and medical retailers based on the wholesale price paid, plus a mark-up rate set by the CDTFA in the case of bilateral trades between two unaffiliated parties. Year-on-year, Q1 2022 excise tax collections are down 3.4% from an upwardly revised $161.9 million (previously $159.4 million) in Q1 2021.
Sales tax data in the table below shows quarter-on-quarter changes in collections from Q1 2021 through Q1 2022. Q1 2022 collections represent a 4.8% drop from Q1 2021 and, with the exception of Q2 2021, continue the recent trend of lower sales tax collections in each quarter. California’s general sales tax is applied to the retail purchases of cannabis by adult use consumers, but not medical patients, and varies by municipality.
Q2 2021 sales tax collections likely reflect the 15.2% increase in California’s Spot market prices between the end of January through the beginning of June 2021, as well as the resurgence of the pandemic during that time. Spot price moved from just below $1,300 per pound to nearly $1,500 per pound in that timeframe, likely on pandemic and 4/20 holiday demand.
California’s unemployment rate in January 2021 was 8.2% and fell to 7.9% by June 2021, after which it fell in each subsequent month, reaching 4.8% by the end of Q1 2022. During this time, most federal subsidies rolled off and cannabis prices underwent a steep downtrend, taking price down nearly 40% from the July 2021 peak per pound price. The reduction in tax collections from Q3 2021 through Q1 2022 suggests retail prices are just beginning to reflect steep losses in wholesale prices in late 2021 and into 2022.
CDTFA also provided Cannabis Benchmarks with a breakdown of cultivation tax receipts for Q1 2022. Tax receipts for flower and leaves fell quarter-on-quarter, while receipts for fresh plants rose.
As California’s cultivation tax is a flat tax by weight for each product type, that allows us to extrapolate the volume of product that entered California’s regulated market in recent periods. The table below shows that the amount of flower entering the commercial market had been on the rise throughout 2021 but contracted sharply in the opening period of this year. The amount of trim entering the market has been declining since Q2 2021, while the volume of fresh plants used to make extracted products bounced back in the most recent quarter. However, fresh plant volume remains down significantly from its peak in Q3 2021.
Overall, in Q1 2022, cultivation taxes brought just $32.7 million into state coffers, down over 18% from an upwardly revised $40 million in Q4 2021, a quarter in which cultivation taxes might be expected to rise as the outdoor harvest occurs and holiday demand takes hold. Instead, cultivation tax collections have fallen in the past two quarters with cannabis growers either withholding product from the market, destroying product that is too costly to deliver, or possibly diverting product outside the legal market.
In any instance, California Spot has fallen 39.5% since summer 2021, indoor flower is down 34.8%, greenhouse is down 41.9%, and outdoor product is down 41.5%, squeezing the margins of legal growers of all types. The last time cultivation taxes rose from the third to fourth quarter was in 2019.
The CDTFA also announced the new “markup rate” that will go into effect on July 1, 2022. The rate has been cut from 80%, which prevails until June 30, 2022, down to 75%. The markup rate is adjusted every six months.
According to the CDTFA, “the markup rate is used to compute the average market price of cannabis or cannabis products sold or transferred to a cannabis retailer by a distributor in an arm’s length transaction. In these transactions, the average market price, which is subject to the state’s 15 percent cannabis excise tax, is the cannabis retailer’s wholesale cost of the cannabis or cannabis products plus the CDTFA’s calculated markup rate.” Based on how the excise tax is calculated, the reduction in the markup rate will result in a roughly 3% decrease in the excise tax paid by retailers in the case of an arm’s length transaction.
On the legislative front, according to the California Cannabis Industry Association, cannabis reform bill SB 1281 – which eliminates the cultivation tax, reduces the excise tax from 15% to 5%, and switches the burden to retailers instead of distributors – passed the California Senate last week. As well, SB 1293, which establishes the Cannabis Equity Tax Credit for equity applicants and licensees to apply up to a $10,000 tax credit to help defray costs, also cleared the Senate. Both bills are headed to the Assembly, after which they will be sent to Governor Newsom.