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Tax Reform May Be Coming Soon to Beleaguered Cannabis Shops
Friday, May 20, 2022

Tax Reform May Be Coming Soon to Beleaguered Cannabis Shops

A growing chorus against what California’s cannabis industry characterizes as overly burdensome taxes has catalyzed momentum for reform.

In the latest example, State Sen. Scott Wiener has introduced SB 1336, a tax credit program aimed at commercial cannabis businesses, in an effort to bring relief to an industry struggling to compete with a still-flourishing black market. 

The bill would allow cannabis businesses to deduct the cost of expenses for employee compensation, safety-related equipment and services, and employee workforce development and safety training.

Employee compensation costs would be deductible equal to or above 150% of minimum wage, including benefits. The tax credit would also be able to be carried over through multiple years. 

“We wanted to put this particular approach out there so it’s in the conversation,” Wiener said in an interview, calling the bill a “stop-gap measure.”

“The legal cannabis industry has its fair share of problems. The costs are really high: There’s state taxes, there’s local taxes and there’s heavy regulation, so these businesses are really struggling and the prices are high, which fuels the illicit market,” he said.

SB 1336 is one of a raft of cannabis reform bills making their way through in the state legislature. Among these are SB 1074, introduced by State Sen. Mark McGuire, which would eliminate the cannabis cultivation tax, while increasing the retail excise tax.

During a news conference in January unveiling his 2022-23 budget proposal, Gov. Gavin Newsom pledged to reexamine the industry’s tax burden. Locally, San Francisco officials delayed the implementation of a new cannabis sales tax until the end of 2022.

Wiener said that in line with the governor’s stated priorities around reform, he expects multiple cannabis bills, including SB 1336 and SB 1074, to be resolved through the state budget process. 

Wiener has made preserving access to medicinal cannabis for patients a key part of his legislative agenda. Earlier this month, he introduced SB 1186, which would require cities and counties to allow either licensed medicinal cannabis retail stores or licensed medicinal cannabis deliveries. Currently, local governments can opt to ban those businesses. 

“Medicinal access is extremely important, and when prices in the legal market are high, a lot of medical cannabis patients shift over to the illicit market where there are no health and safety rules in place,” Wiener said. “We need tax reform so that the taxes are tied to the world of reality, which they aren’t right now.”

California’s illicit cannabis market generates about $8 billion in sales annually, roughly double that of legal sales, according to the consultancy firm Global Go Analytics.

Because of the legal status of cannabis nationally, the industry is often ineligible for federal tax aid and tax credits, leaving businesses looking to the state for relief. 

“As a cannabis retailer, we are heavily taxed and unable to take advantage of federal tax breaks offered to other businesses,” said Kevin Reed, founder and president of San Francisco cannabis dispensary The Green Cross. “With the challenges of the pandemic, inflation, and the cost to do business in California, it has been a very challenging time for us.”

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Reed said while there are still open questions about SB 1336, “we welcome the passage of any bills that would ease the financial burden our organization continues to face.”

The legislation is sponsored by the United Food and Commercial Workers (UFCW) Western States Council, a private-sector union that represents mainly grocery store workers. More recently, however, the union has put focus on organizing the cannabis industry.

Last month, UCFW helped strike a statewide labor agreement in cannabis with Shryne Group International, which owns dispensaries across the state, including four in San Francisco.

Prop. 64, which established the regulated cannabis market in California, created a tax system that applied to growers and retailers in the industry. Since the law’s passage in 2016, the state has collected more than $3.4 billion in revenue from cannabis taxes. 

In recent months, however, cannabis merchants have increasingly vented frustration about the heavy tax and regulatory burdens faced by the industry, which they say have functioned as a fiscal handcuff amid upheaval caused by the pandemic. Some business owners have even weighed withholding tax payments as a form of protest.

Correction: This story initially mischaracterized the labor contract signed by Shryne Group International.

Kevin Truong can be reached at [email protected].

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