Cannabis taxes will drive consumers back to unlicensed channels

Common sense, anecdotal conversations and third party reports tell us that the unlicensed pot industry is growing and will always be larger than the licensed industry. One report in September 2019 estimated that the unlicensed industry in California is three times larger than the licensed industry. In other states the unlicensed industry approaches 100% of the market.

My own rough calculations put the illegal pot industry at 0.1% to 1.5% of a state’s overall economy. In locally depressed areas like where I live, the economic impact could well be larger.

Regulation, taxation and licensing issues are all significant reasons. Taxes are the largest driver of the unlicensed market and will remain so over the long term. Tougher state laws and increased enforcement will have minimal effect on changing the overall market trend.

Motley Fool writes:

“The first concern is the taxation of recreational marijuana sales which, as noted, should represent a clear majority of global revenue in the decade to come. California, the fifth largest economy in the world by gross domestic product, has imposed a 15% excise tax, a cultivation tax on growers of $9.25 per ounce of cannabis flower, or $2.75 per ounce of cannabis leaves, and state and local taxes. Add this up, and some locales could be paying as much as 45% in aggregate tax on adult-use cannabis, which could wind up sending legal consumers back to illicit channels.

Remember, black market marijuana growers don’t have to wait for cultivation and processing licenses or sales permits. They also won’t be paying state income tax, federal income tax, or the cultivation and excise taxes imposed in the state. Illicit weed will easily undercut the Golden State’s legal pot industry on price, and first-year tax revenue collection figures show this to be true. Having originally expected $643 million in full-year 2018 sales following the sale of adult-use weed in dispensaries, actual collection totaled just $345.2 million last year. If U.S. states or foreign markets fail to tax cannabis appropriately, it could seriously reduce the industry’s potential.

California’s problems are of particular concern to Origin House (OTC:ORHOF), which has bet big on being a distribution kingpin in the state. Origin House has been gobbling up some of the smaller pot distributors in California, thereby nabbing the few distribution licenses outstanding. But if consumers aren’t actively staying within legal channels, then rampant oversupply and reduced demand could sap Origin House’s potential, at least over the next couple of years.”

The unlicensed industry is likely already worth billions of dollars. Every participant, even home growers, shares significant tax risk and legal risk. Those risks should to be considered for their impact on other financial planning objectives. Yet most with risk exposure don’t seek help beyond a criminal attorney when the need arises.

The most common questions I am asked on how to tackle this messy issue: Are discussions with an accountant protected in the event of a legal procedure? Can “above the table” activities be protected from risks of “under the table” activities? What’s my “worst case exposure? Can my spouse and family be financially protected?

All of these topics should be carefully addressed in our early and ongoing work.

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