The California Department of Tax and Fee Administration (CDTFA) recently issued data on taxable sales and cannabis tax collections for Q3 2021. Taxable sales for Q3 were $1.24 billion, a steep 12.5% quarter-on-quarter decline from over $1.41 billion in Q2 2021. The quarterly downturn in sales is notable, as Q3 is frequently the strongest sales period of any given year for legal cannabis markets. Year-on-year, Q3’s taxable sales are down 1.8% from over $1.26 billion in Q3 2020.
Total cannabis tax revenue collected in Q3 was $322.3 million, of which excise taxes were $169 million, cultivation taxes were $42.4 million, and sales taxes from cannabis businesses were $111 million. The $322 million in total taxes collected represents a 6.6% decrease from the upwardly adjusted Q2 total taxes of $345 million. Total tax collections were down by 0.8% year-on-year in Q3. Quarter-on-quarter and year-on-year total sales revenue are lower due to lower demand beginning in the summer, as well as a significant drop in Q3 California cannabis prices.
Excise tax receipts were down 4.7% from the prior quarter in Q3 2021, after gaining an upwardly revised 10.7% in Q2 2021. California’s 15% excise tax is levied on retailers – both medical and adult use – based on the wholesale price paid, plus a markup rate set by CDTFA in the case of bilateral trades between two unaffiliated parties.
As shown in the table below, 2020 saw strong and steady increases in sales taxes collected from adult use retailers – including a 29% quarter-on-quarter increase in Q2 2020 – with the exception of the final quarter of 2020, in which tax revenue fell slightly. 2021 sales tax revenues have fallen two out of three quarters, yet total revenue in the first three quarters of 2021 is $61.3 million higher than that of the first three quarters of 2020.
The average quarterly sales tax revenue in 2020 was $98.6 million while the average quarterly sales tax revenue to date in 2021 is $115.2 million. At this pace, 2021 sales tax revenue will outpace 2020 by some $66.3 million.
CDTFA also provided Cannabis Benchmarks with a breakdown of cultivation tax receipts for Q3 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. Tax receipts for flower and fresh plants are up quarter-on-quarter, but revenue from leaves was down nearly 10% in Q3.
Lower tax revenues for leaves – or trim – are perhaps an effect of waning pandemic demand. Seasonal factors may also be at play. With such material largely used by extractors and product manufacturers, those operators may have been waiting for the current quarter’s fall harvest to bring in more, cheaper raw material for their production lines.
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 put in a mixed performance with Q3 2021 flower sales volume up 6.5%, fresh plant volume up 11%, and leaves (trim) down just over 12%.
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 inflated due to the fall outdoor harvest. That said, volumes have generally increased from Q1 2021, with the exception of leaves (trim) in Q3, when the volume that entered the market fell 10.2% from Q2 2021.
Cultivation tax collections have remained surprisingly steady after the massive 40.9% jump in Q3 2020, which was likely spurred by expansive pandemic demand and increasing production capacity coming online. While cultivation taxes were marginally lower in Q4 2020 and Q1 2021, it appears the $40 million handle is here to stay until the next big figure at $50 million – an event that is likely to occur next year as explained below.
Cultivation taxes are set to increase on January 1, 2022 in an inflation adjustment, a requirement of the Cannabis Tax Law effective January 2020. The new rates apply to cannabis product the cultivator sells or transfers to a manufacturer or distributor, according to the CDTFA.
The California spot market has undergone a steep sell-off in 2021, losing just over 34%, from its current annual high to the current low. The cultivation tax record indicates there has been very little change in the amount of cannabis being taxed in 2021.
Lower excise and sales tax collections are likely due in part to lower retail prices corresponding to the downturn in wholesale rates, especially in Q3 2021. Consumer demand and retail sales also softened in California in Q3, as in many other markets around the country. We might expect tax revenues from retail purchases to sink again in Q4, with spot pricing down 17.4% two-thirds of the way through the quarter. Additionally, October and November are typically slower retail sales months in legal cannabis markets.