Taxes going up is as natural as prices going up. In this episode, host Tony Frischknecht talks about a realization during an MJBizCon event in 2019. A lot of what was being discussed through the different people that he met along the way was California and their tax increase. With this tax growth comes a normal feeling of being scared especially when competing with the black market. Tony explains to us why tax is being raised, including the ramifications of these taxes and how they’re going to hit you, most likely devastating your businesses.
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Getting Hooked On The Tax
Before the end of the year, I was doing a bit of traveling for the show. I went out to Las Vegas. There was an MJBizCon event in 2019 and that was in the middle of December. I went to The Emerald Cup, which is in Northern California, a couple of hours outside of San Francisco. A lot of what was being discussed through the different people that I met along the way, it was California and their tax increase. I know this was talked about when the California Department of Tax and Fee Administration decided that they were starting to raise the tax. They got a lot of business owners scared and understand why the tax is being raised and there are different theories out there that they’re not collecting enough cash so they have to raise the taxes. I asked around a lot of different people while I was at each of these events. I’m going to try to give you some information to hopefully be helpful.
The reason why I think it will be helpful, even if your state isn’t California, a lot of things that happened in our country. It flows from the west and in the middle or the east and in the middle so we’re going to get some of that across. You’ll feel a wave into your district or your area because of what’s happening in California. It is such a massive market. They say it’s the ninth biggest economy in the world. That comes with a lot of power behind it. What I mean it by the economy. There was a lot of decided on what California does throughout a large part of the US. I’m not saying all of it, but a large part. At first, my travels went through and talked to several different people whether they were dispensary owners or not, they all understood what was happening with the taxes. They realize that it’s a part of the business.
One of the big things that I saw was simply for the fact that the state is divided. A lot of what Southern Cal is doing, Northern Cal could give the crap or give two shits, I should say. It seems as if regulation is happening down in Southern Cal and that’s driving a lot of the industry to do their black market stuff up north, which is where a lot of it takes place anyway. There are some interesting challenges that are happening. That is causing the black market to thrive. One of the high taxes makes it harder for the business owner to compete with the black market because you’re not on the level playing field and it’s so hard to get there. It’s like push and pulls, “We want taxes.” “Cut taxes.”
It slides back and forth until you find somewhere in the middle where the black market can thrive and the regulated market can. For those out there in the black market, I’ve been there, but if we want to see this industry progress into a legal market where you don’t have to look over your shoulders or worried about being arrested at any point in time, this is what’s going to happen. I know there are a lot of people out there that have lived in this area for decades. There are families that are built so they’re survival of the black market. It’s like asking these families to stop what are 2, 3, 4, sometimes 5 generations deep. It’s like asking a cigarette smoker to quit smoking cold turkey after they’ve smoked for 35 or 40 years. It’s almost impossible.
These people are not giving up easily. I’m not saying it’s good or bad for me but it’s definitely bad for the regulated market. If you want to be in that area, this is something I struggled with for a long time. I wasn’t in the black market for decades but I was for a short period. Teaching these families to change is going to take us some time. With that said, they could be forced to change eventually. The black market is thriving because there is little to no enforcement in a lot of these areas. These people were still growing and selling freely without being taxed. I was at The Emerald Cup, where they were showing tax licensing in some places and there was also a lot of product that was being consumed.
I personally had never seen that to that extent and this is up north. The north is not interested in dealing with regulation. There’s the survival of these families for decades. I’m not trying to say that it’s solely the black market’s fault because it’s a lot of things around it. A lot of things that are out of everyone’s control but in order to understand the depth of the taxes, I went to the California Department of Tax and Fee Administration website, CDTFA is what it is. I wanted to get some real ideas on what is going on. They are functioning on the guidelines of the fact that these laws were established in 2017. According to their website, they are required by law to adjust the taxes up or down depending on the regulations. The only reason they’re raising taxes is because of the regulations that were established in 2017.
These are over a couple of years old now. When you’re working in this industry, light-years are going by in front of your face and your nose. This comes up, they think it’s happening to them all of a sudden but in actuality, this is according to the website, they are the ones that are following regulations and this is how it works. Here are some stats. In total, they’re saying the tax increase on the markup is 80%. For example, $50 for the product and there was a $40 tax on it, plus an excise tax of $6.75 or 15% on $50. On every $50, you’re looking at $46.75 in tax. That’s the market part. I don’t want to get too far into this, but that is how I read it on the website.
To make it a little simpler, for every dry house that’s out there that they’re selling, there’s a $9.25 tax added to that. That was increased to $9.65 so it went up 4.3%. It’s not massive but when you add up everything and you start adding up all the taxes. We’re not even talking local. We’re not talking any of that. These taxes are going to be paid by somebody, either the owner or the customer or both. That’s all going to depend on if the owner gets priced out of the market. Say the owner is selling $50 quarters and then there are taxes on top of that, we’ll say $10, put some at $60 but his neighbor down the streets is at $50. Where does that put you at? It prices you out of the market.High taxes make it harder for business owners to compete with the black market because you're not on a level playing field. Click To Tweet
As a business owner, you end up saying, “I guess I’ll eat the tax on it so I can be competitive to sell my product.” It’s a race to who can give as much as they can on the way down if you’re trying to survive. This is an extremely stressful place to be at because you’ve got bills to pay. There is little to nothing you can do about it except going to get involved in the legislative process and changing these rules. If they’re coming up every six months, you better start getting together with the rest of your owners or your association group and start getting a say in this because it won’t change unless you do. The other harsh tax that they have is what’s called an excise tax. What an excise tax is they do a standard average wholesale cost on the flower or cannabis.
We’ll say its $2,000, you have to pay 15% on that once it’s transferred from the cultivator to the retail. Keep in mind, that doesn’t mean that you paid $2,000 for that. You could have paid $1,500 for that product. We’ll say pounds. You could have paid $1,500 for that pound and then pay the tax on $2,000 pounds. How is that fair? It’s not but this is how it’s regulated in a lot of places and how the taxes are set up. You’re losing money even more on the taxes because you’re effectively in an average scale, you’re not an actual what was sold. It took a long time to wrap my mind around how much money I was losing on a monthly basis when I was buying for $1,000 but I had to pay taxes on $2,000, so you’re losing there. However, there are some tax reliefs for people with medical marijuana.
From what I see here, they’re showing that you’re allowed not to pay this excise tax but I think there are some stipulations that you have to follow. If you want to know that further, go ahead and check that out on their website. To utilize getting into business in California, this is key for you to know this. Hopefully, you’ve got somebody on your side that’s like, “This makes sense.” You need to understand what you’re getting into. When I had started, we didn’t have any of this stuff so I had no idea. Now that we see other states do it, you need to be aware that this is a significant part of you being able to be successful and have something at the end of the day.
You can put all your entire life savings into this and friends and family’s life savings into this. If you don’t understand the ramifications of these taxes and how they’re going to hit you, it’s devastating to businesses. People that are starting out there, please know this. The big deal for people that are in it now, you’ve got some decisions to make. We’re making money enough to pay our bills. How long can you do that for it? You’re going to have to ride this out. Every six months, something could be happening so you’ve got to be paying attention. For people that aren’t in California, remember it doesn’t just apply to California. You can catch the wave of this in your state and your county could pick up something similar to this.
A lot of people like to copy. It’s simpler and back-up anything. There are a lot of legislators that will take and copy other states and other local regulatory and tax guidelines. Remember that this could come to you. If you don’t have it, make sure you stay involved with your association group, make them aware of this. This is great information to have. Make them aware of this and say, “Look what California is doing. We always have to keep in mind that these could be pushed on us later down the road.” With Illinois being out of the gate as they started, I guarantee you they’re not thinking about any of this. Chicago would be a great place to do the same thing.
If you have any questions about this document or tax in California, they’ve got a contact email that you can contact there and ask them any questions you want whether you’re in business now or you were thinking about it. They also have some good information here to walk you through how the taxes were. They have some examples and stuff. Anyway, taxes, I pay my fair share, but I will pay no more than I’m supposed to. I get mixed feelings from different people. As a business owner and entrepreneur, I believe in keeping taxes low and allowing me to use my money to grow my business, my company and help others around. You know the old saying, “It’s not what you make, it’s what you keep.” I live by that daily. In a high-tax industry, you’ve always got to be thinking about how you can save on taxes. I hope I give you some great information.
If you are interested in knowing a little bit more about taxes or 280, which is the Federal Tax Regulation that’s crushing the retail companies out there in the US, please let me know. I know some amazing tax people. I’m planning to have them on. Give me some ideas or comments about what you dislike in the cannabis tax world and what you’re working towards or if you have any ideas for solving some of these problems. I’m more than happy to share with my audience out there at PlantProblem.com. Give me your feedback and I’d love to dive into that deeper on another episode. Thank you for reading. My audience is awesome out there. I look forward to bringing you some other information. I’ve got some new interviews that are coming that I’m excited about. These people know the market inside and out. I will give you some more information as that gets closer. Have a great day out there. You are awesome and I look forward to talking to you again soon.