Without tax relief, California cannabis stores need ‘significantly’ more customers

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Licensed cannabis stores in California would have to attract almost 200 extra customers a month to keep revenue steady if taxes increase on July 1, according to one retailer’s analysis.

And that’s simply an unreasonable expectation at a time when cost-conscious shoppers are further encouraged to find cheaper cannabis on the illicit market, industry representatives told MJBizDaily.

“With every new tax, we’re pushed to the edge of survival,” said Rami Kassis, the general manager of Mission Cannabis Club, a legacy retailer with three locations in San Francisco.

Despite widespread concerns about overtaxation and the illicit market, California’s current 15% excise tax is nonetheless set to increase to as much as 19% this summer.

That increase is baked into an agreement that eliminated the state’s per-ounce cultivation tax.

Farmers blamed that cultivation tax for massive losses, and the industry overall welcomed its elimination.

But whatever relief the elimination of that tax might have granted – for the industry or for consumers – was canceled out by the excise tax.

Tax burden shifts to marijuana retailers

The upshot of all this, retailers say, has been an increased tax burden that falls more heavily on stores.

This development comes despite acknowledgement by the state that more taxes “will reduce the size of the licensed cannabis market” even further, California’s Legislative Analyst’s Office reported in March.

Sales are already down in major markets across the state, according to a recent report.

Overall sales tumbled from $5.1 billion in 2023 to $4.6 billion in 2024, according to state data.

As part of the deal to cut the cultivation tax, overall marijuana tax revenue must stay level – or “revenue neutral,” in lawmaker parlance.

To keep state marijuana tax revenue consistent after cutting the per-ounce cultivation tax, two other changes were made:

That tweak by itself meant retailers owed more taxes than before.

In turn, retailers had to draw more customers to keep their own baseline revenue level, Kassis said.

Increasing the excise tax another four points would mean a retailer would have to attract 200 more customers every month just to stay at that baseline, he added.

California marijuana consumers are spending less

But things could get even worse if another trend continues: customers buying less.

The “average basket size,” or the common per-customer spend per visit, in California has steadily declined over the past few years, retailers say.

The shopper that might have spent $80 per visit in 2021 or 2022 is now spending closer to $50, Kassis said, offering a rough estimate that other operators and industry advocates agree is accurate enough.

Basket sizes are expected to decline further amid the general cost-of-living concerns and economic turmoil caused in part by President Donald Trump’s evolving tariff policy.

And any increase in taxes will further incentivize cannabis consumers to turn to the illicit market, piling more pressure on licensed retailers.

“With the upcoming tax hike, we anticipate a decline in consumer spending, particularly reflected in a drop in average basket size – a trend consistently observed in previous years following similar tax increases,” Kassis said.

“To offset this impact, businesses would need to attract a significantly higher number of customers – a challenge that is increasingly difficult amid widespread reports of restaurant and retail closures.”

Tax-cut proposals might be too late

Some state lawmakers acknowledge the dire circumstances.

A bill introduced in February by state Assembly Member Matt Haney, a San Francisco Democrat, would freeze the planned increase.

However, with the increase scheduled for July – before typical legislation can be passed, signed into law and implemented – any pause in the tax increase would have to involve Gov. Gavin Newsom.

Newsom, an early champion for marijuana legalization in California who’s now considered one of the favorites for the 2028 Democratic presidential nomination, declined to give the cannabis industry any tax relief in his 2024-25 budget.

But with California’s upcoming annual budget deficits projected to be in excess of $10 billion, and with the Trump administration punishing the liberal state by cutting federal funding even further, Newsom is under pressure to find dollars, not cut tax revenue.

Higher cannabis taxes, fewer customers

The picture could easily become bleaker if customers of licensed marijuana businesses react to the tax increase by spending even more money in the illicit market.

And that’s what they’re likely to do, retailers told MJBizDaily.

The illicit market in California is still almost twice as big as the regulated market, according to an economic analysis commissioned by the state’s Department of Cannabis Control.

Seeing even a few more dollars go toward taxes on their receipts encourages customers to spend less overall, said Zoe Schreiber, a board member of the California Cannabis Industry Association and the director of compliance at the Highlands Boutique Dispensary, a retailer in Livermore.

“They are going to find less expensive products,” she said. “We’ve noticed that as a trend.”

Kassis’ analysis quantifies “a common sense point that I agree with,” Assembly Member Haney told MJBizDaily.

“If you keep on taxing these folks, there’s not going to be any revenue to collect. They’ll go out of business.

“And I agree. But that’s not how the state budget works, unfortunately.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.

Sponsored cannabis industry news from MJbizdaily.com

Without tax relief, California cannabis stores need ‘significantly’ more customers