California's Cannabis Market Under The Spotlight, Taxes, Employment And Expectations

By Lauri Kibby.

The inexorable march toward legalized marijuana for recreational use continues to gather momentum, fueling social change, economic growth, and, often overlooked, financial windfalls for state governments.

California, the world’s largest cannabis market, was among the first states to make recreational use legal and, given its size, demonstrates the powerful impact the industry has on government coffers. 

The state collected $236.4 million from the cannabis industry in the fourth quarter of 2020 alone. This included $123.4 million in excise tax, $31.6 million in cultivation tax, and $81.4 million in sales tax, according to the California Department of Tax and Fee Administration. This does not include taxes paid to local jurisdictions within the state.

Importantly, these are only preliminary figures that are likely to grow when tax returns are finalized. Because of the pandemic, most cannabis companies were provided a three-month extension – to April 30 -- to file tax returns with CDTFA. 

Between the start of 2018 and the close of 2020, California generated $2.07 billion in cannabis tax revenue – a staggering sum for an emerging industry with a long runway for growth. It was nearly two-thirds of the total sales tax generated in South Dakota during the same period – a much smaller state, of course, but it gives you a sense of the industry’s revenue heft. 

Lingering illicit market influence clouds the industry’s full potential, but to generate billions of dollars in tax revenue in just a few years speaks for itself. 

A study by consulting firm ICF International concluded that, in California, the cannabis sector has generated more than 80,000 jobs in the last five years – either directly by cannabis companies or by employers that work in partnership with the industry. It also estimated that labor income in the state has increased by more than $3.5 billion since cannabis was legalized.

Since 2012, when Colorado and Washington first approved ballot initiatives that legalized marijuana for recreational use, nine additional states quickly followed: California, Alaska, Oregon, Nevada, Maine, Vermont, Massachusetts, Michigan, and Illinois, as well as the District of Columbia. Voters in four more states – South Dakota, Arizona, Montana, and New Jersey -- approved marijuana for personal use in 2020, with formal legalization slated for this year.

This explains why merger-and-acquisition activity is heating up, amplified most recently by Jazz Pharmaceuticals Plc’s $7.2 billion planned buyout of GW Pharmaceuticals Plc, announced in February. It marked the largest merger for the cannabis industry to date.

We think it is just the beginning. The industry is increasingly attracting investor attention. Acquisitive companies see the value that cannabis is creating and are looking to buy in, creating the current surge in M&A activity.

The progression toward national legalization undergirds this mounting momentum. We’d expect to see some form of synergy between state and federal activity given the amount of M&A activity taking place and the behemoth businesses that are being created. To date, the states and the federal government appear disjointed. While states are legalizing cannabis and earning tax revenue, the federal government is slow to bring conformity between the federal and state regulations. 

M&A is happening across the country as companies try to gain a foothold in other states. As the largest cannabis market in the country – California is an essential holding for companies looking for a national play. California’s well-developed cannabis industry and a massive population that feeds demand make it the most likely ground zero for M&A. 

As this evolves, increasingly larger and more prominent companies will contribute steadily more to California’s tax base – and, over time, to states’ revenue across the country. 

To be sure, no company – or industry – wants to pay any more than its fair share in taxes. My point here is that cannabis is in enormous demand. As our industry evolves and excels, it is important to note that states – and eventually the federal government – stand to benefit as well.

This bolsters the case for legalization, for the industry’s future, and the support it provides to states and, in time, the country as a whole.

Lauri Kibby is co-founder and chief financial officer of Kings Garden, California's preeminent cannabis cultivation, processing, distribution, and manufacturing company. 

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