California's marijuana legalization initiative was sold to voters partly on the promise of huge amounts of tax revenue. The initiative will apply a 15 percent excise tax on both medical and recreational marijuana, with an additional 7.5 percent sales tax on recreational marijuana once sales start.
According to an opinion issued by California's high court on tax policy last month, however, the 62-page initiative accidentally eliminated the medical marijuana sales tax already in effect, while the new regulations won't take hold until January 1, 2018. Prior to the election, the court advised medical marijuana dispensaries to cease collection of the sales tax in the event of the initiative's passage.
The court's ruling could mean that medical marijuana sales in California will remain tax-free through the end of 2017. Officials have estimated the state could lose a potential $49.5 million in tax revenue during that time, according to the San Francisco Chronicle.
The snafu would also permanently alter the tax picture for recreational sales, since many Californians are hurrying to get their medical cards and avoid paying sales tax for the next year.
Nevada, Maine and Massachusetts also approved making recreational marijuana legal in the recent election. While many Colorado cannabis businesses have already started partnering with companies in Nevada, they say they're staying away from California until the situation becomes more clear.
Even before the tax uncertainty, the cannabis industry faced complications in California, which doesn't have a statewide regulatory framework — leaving the crafting of regulations up to individual municipalities, which move at differing paces and in different directions. "Lots of people are operating in what would generously be called a 'gray-market area,' and many more people are operating in a black-market area, and we're just not comfortable operating that way," says Nancy Whiteman, co-owner of Wana Brands, a leading edibles company in Colorado. "What we would want to see is what the regulatory structure will actually look like."
Another consideration, according to Whiteman, is the size of the state and the sheer number of different rule sets that a business would have to navigate.
"California is such an enormous state that if you're operating in a situation where you have a patchwork of different regulations in different municipalities, it would make production very difficult, because there could be different rules," she says.
Colorado municipalities are able to create their own tax rates for marijuana sales, on top of state taxes. Medical marijuana in Colorado is subject to the state's 2.9 percent state sales tax, as well as any local taxes. Recreational sales are subject to that tax as well as a special 10 percent marijuana tax and any local taxes.