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Governor Gavin Newsom signed legislation on Thursday to bring immediate tax relief to struggling cannabis farmers. 

AB 195, the cannabis tax reform trailer bill, permanently eliminates California’s cannabis cultivation tax – which increased from $154.40 per dry-weight pound to $161.28 per pound earlier this year – and guarantees three years of net tax relief to the cannabis industry as a whole.

“Since Proposition 64 passed it has been a major priority for farmers and trade organizations to really push back against this tax on cannabis cultivation,” Ross Gordon, policy director at the Humboldt County Growers Alliance (HCGA) and policy chair at the Origins Council, told the Outpost. “…It’s a tax that is not applied to any other agricultural product and it places a really unfair burden on farmers.”

The new law will freeze the state’s cannabis excise tax rate at 15 percent. After three years, the excise tax will increase to as high as 19 percent to make up for revenue lost due to the elimination of the cultivation tax. Beginning January 1, 2023, excise tax collection will shift from distribution to point of sale, Gordon explained, meaning the wholesale markup rate calculation will go away entirely.

The bill also provides significant tax relief for equity businesses. “Equity retailers are receiving essentially a 20 percent rebate on their cannabis excise taxes, which amounts to effectively a decrease of the excise tax for equity retailers from 15 percent to 12 percent,” he said. “There’s also a tax credit for equity operators that could be worth up to $10,000 for any given equity operator.”

The bill will also strengthen labor peace requirements and protect programs funded by cannabis taxes by allocating $150 million of the state’s General Fund to backfill lost revenue. Plus, it will make illegal cannabis operations liable for unpaid taxes, according to the Department of Cannabis Control (DCC).

The passage of the tax reform initiative is a great start, but “it’s not enough,” Gordon said.

“The Industry is still in crisis,” he said. “I think that’s true across the state, but even more so here in Humboldt. …The price of cannabis has dropped from $1,000 per pound to $300 or less. Farmers have been taking essentially a 70 percent pay cut and it’s not sustainable.”

Earlier this year, the Humboldt County Board of Supervisors voted to slash Measure S, the county’s cannabis cultivation tax, by 85 percent to provide relief to farmers struggling amid a market collapse. The drastic tax cut was “critical to keeping farmers alive” who did not have cash on hand, but they needed state intervention as well, Gordon said.

“So this is a really substantial step forward and I think it’s going to make a significant difference,” he continued. “That said, I think it’s important that we don’t view this as the industry and farmers in Humboldt are no longer in crisis because the situation continues to be really problematic. We absolutely need additional action and additional action quickly to really give us a fighting chance.”

One of the big issues is direct sales.

AB 2691, introduced by North Coast Assemblymember Jim Wood (D-Santa Rosa), would authorize the DCC to issue temporary event retail licenses that would open the door for cannabis cultivators to sell their product directly to consumers at cannabis events like the Emerald Cup. As it stands, small-scale cultivators can participate in such events, but they cannot sell directly to the buyer.

The other big issue is the normalization of cannabis as an agricultural product, Gordon said.

“Cannabis farmers are farmers and they need to be treated on par with other types of farmers,” he said. “…We really need a major philosophical shift in how cannabis farming is regulated and treated. And we really need to see the normalization of cannabis farmers as farmers more broadly beyond just this tax policy.”

The following is a press release from the DCC:

Good Afternoon,

Yesterday, Governor Gavin Newsom signed legislation implementing the 2022-23 state budget, including a trailer bill focused on measures that will bring tax relief to the cannabis industry, support equity businesses, strengthen enforcement tools against illegal cannabis operators, and protect youth, environmental, and public safety programs funded by cannabis tax revenue. 

The cannabis tax reform trailer bill will:

• Indefinitely suspend the cannabis cultivation tax effective July 1, 2022 
• Move cannabis excise-tax collection and remittance to retail in 2023, establishing one point of collection and remittance and greatly simplifying tax requirements for the entire cannabis supply chain  
• Retain the current 15-percent excise tax rate until at least 2025, and thereafter increase the tax rate (no higher than 19 percent) as necessary to make up for cultivation-tax revenue 
• Allow eligible equity retailers to keep a percentage of the excise tax they collect 
• Create new tax credits for equity licensees and some cannabis businesses with stronger labor standards    
• Strengthen labor peace requirements   
• Protect programs funded by cannabis taxes by allocating $150 million General Fund to backfill potential lost revenue 
• Make illegal cannabis businesses liable for all unpaid tax and allow bad actors to be held personally liable for tax evasion  

Among many things, this bill invests millions of dollars into equity operators and retailers and expanding retail access, and contains reforms that will help stabilize the cannabis market, provide relief to farmers, incentivize stronger labor standards and crack down on the illegal market. You can access the bill language here.  

This historic budget also provides further economic relief to Californians, expanding healthcare, boosting small businesses, and pouring billions into public schools. 

DCC is grateful to Governor Newsom and the Legislature for their commitment to improve California’s cannabis policies and further support an equitable, safe, and sustainable cannabis industry in California.   

Thank you,

Nicole Elliott DCC Director