- Posted by Ryan Reaves
- On May 19, 2017
- AUMA, CETRA, commercial cannabis, commercial cannabis business, los angeles, Marijuana Tax, Measure M, Prop 64, recreational, regulation, taxation
Measure M, or the Los Angeles Cannabis Enforcement, Taxation, and Regulation Act (CETRA), was approved in the city of Los Angeles with 80% of the vote in March 2017 and paves the way for regulation in a metropolitan area of approximately 4 million people. CETRA repeals Proposition D, which passed in 2013. Since the passage of Prop D, the City Attorney’s Office has filed more than 1,700 criminal complaints against individuals involved in “non-immunized” medical cannabis businesses.
Measure M focuses heavily on taxation and enforcement while leaving the licensing and regulatory framework to public hearings and debate. The City has a September 30, 2017 deadline to complete this process. Medical and Recreational cannabis businesses that do not have a city issued license or permit beginning January 1, 2018 will be operating in violation of the ordinance and may be liable for fines up to $20,000 a day, and criminal misdemeanor liability punishable by a fine of not more than $1,000 or by imprisonment in the County Jail for up to six months, or by both a fine and imprisonment. Each day that a violation continues is deemed to be a new and separate offense.
The tax structure under CETRA seems manageable on a ballot, imposing a tax rate of only ten percent (10%) of gross receipts for recreational sales, five percent (5%) tax for medical sales, and a two percent (2%) tax for manufacturing and cultivation business activities within city limits. The tax structure influencing the industry appears more daunting when you consider the system in its entirety. All local taxes and permit fees will be in addition to the state tax structure established under AUMA. This includes a cultivation tax of $9.25 per dry-weight ounce of flower and $2.75 per dry-weight ounce for cannabis leaves, which is roughly $148 and $44 dollars per pound respectively. This is a tax that is paid by the licensed cultivator after the cannabis is harvested and does not scale with the quality grade of the cannabis. All cannabis flower and cannabis leaves sold to dispensaries and manufacturers must pass lab testing, the cost for which falls on licensed distributors, further influencing the wholesale cost of product moving onto retail dispensaries.
A state excise tax on cannabis of 15% will be issued at the point of sale of cannabis and cannabis products in addition to the sales and use tax, which for Los Angeles is 8.75%. That’s a 23.75% total tax paid by the consumer on a retail sales price influenced by a 10% tax on total sales paid to the city of Los Angeles by the dispensary, who purchases wholesale cannabis or cannabis product from a distributor which was taxed before the flower even left the cultivation site.
Keeping in mind existing federal policies which prevent cannabis businesses from deducting operational costs from their state and federal taxes, CETRA’s 10% tax on recreational cannabis begins to appear more challenging. Cannabis businesses face many hurdles to navigating costs and regulations while the industry matures and stabilizes in the coming years. Will the sheer volume of the Los Angeles market ultimately offset costs incurred by a Cannabusiness? Will the total tax rate felt by the industry adequately reduce the prevalence of the black market?
If you have any further questions about the impact of CETRA on your cannabis business in Los Angeles, or are otherwise interested in Cannabusiness, please contact CannaBusiness Law for legal assistance in compliance with cannabis licensing, permitting and the application process relating to commercial cannabis.
Ryan Reaves is a Public Policy Analyst for CannaBusiness Law and Master of Public Policy candidate at the Lorry I. Lokey School of Business and Public Policy at Mills College in Oakland, California.