.Legal Weed Avoids Total Collapse… This Year

In its nearly six years of existence, California’s legal pot market hasn’t developed in the way many advocates for legalization promised it would. The industry remains plagued with problems, most of them due to government policy: high taxes, the refusal of many localities to license pot businesses and the continued federal illegality of cannabis.

All of this has put lots of companies out of business and dissuaded other would-be entrepreneurs from bothering to enter the industry. Profits, where they exist, aren’t anywhere close to what they could be.

But that doesn’t mean it’s been a total bust. The market for legal weed in California has grown from about $2 billion in 2018, the first year of legal recreational sales, to more than $5 billion now. The trade publisher MJ Biz estimates that there will be close to $6 billion in legal sales this year.

And according to new figures released by the California Department of Tax and Fee Administration the state has collected about $5.5 billion in taxes from cannabis sales since the first legal purchase was rung up on Jan. 1, 2018. That figure would, and should, be much higher, but it’s still a lot better than zero dollars, which is what was collected every year before 2018.

The CDTFA issued its third-quarter report last week and all things considered, it looks pretty good, especially compared with last year. The state collected $269.3 million in the third quarter, a figure that includes both the state’s 15% excise tax, $156.9 million, and regular sales taxes, $112.4 million. Those figures don’t include any local taxes, nor do they include tax returns that haven’t been filed or which are still being processed.

As reported, the third-quarter receipts are down by 7% compared to the second quarter, though that will likely be revised upward. More importantly, notes GreenWave Advisors, receipts are 17% higher than during the same period last year and will likely also be revised even higher than that.

Last year was a particularly rough one for the industry as two years of declining prices pinched profits for everyone. Industry observers say stabilizing prices in recent months might have saved the industry from outright collapse. At least for the moment.

This quarter’s tax numbers reflect the states’ new vendor compensation program. During the third quarter, eligible cannabis vendors retained $845,272 in vendor compensation. Starting April 1, 2023, cannabis retailers eligible for the vendor compensation program may retain 20% of the cannabis excise tax due on their retail sales of cannabis or cannabis products for a 12-month period. Cannabis retailers must be approved by the Department of Cannabis Control and CDTFA before claiming vendor compensation. The vendor compensation program runs through Dec. 31, 2025.

The total tax revenue taken in by the state since legalization began includes just over a half-billion dollars from the cultivation tax, which was eliminated in 2022 to give relief to beleaguered growers and to the industry as a whole. Growers have continued to flee the industry, albeit perhaps more slowly than they otherwise would have. Still, the exodus has been severe: In July of 2022, there were nearly 7,900 active cultivation licenses in California. Now there are about 5,727.

Other sectors, including manufacturing and distribution, have also shrunk. The “good” news is that the retail and delivery sectors continue to grow, albeit more slowly than they might if California’s tax and regulatory regime were revamped. Much depends on whether the legislature and Gov. Gavin Newsom decide next year to finally do something to save the industry from ruination.