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Santa Barbara County’s revenue valve is open for the cannabis taxes expected to start flowing into the General Fund in October, but at this point it’s uncertain whether those dollars will be a flood, or a trickle.

The county has yet to collect its first quarter of cannabis taxes, which were authorized by voters in the June primary election.

But if the county’s revenue mirrors what the state has collected this year, it could be less than initially hoped.

California’s second-quarter take was up 22 percent from its disappointing first-quarter revenues, but the income from cannabis in the nation’s largest legal marijuana market is still $41 million short of initial projections.

Even though the county has yet to issue any use permits or business licenses for cannabis operations in unincorporated areas, it’s still in line to collect taxes from the 1,058 temporary medical marijuana state licenses that are active in the county.

“Anybody with a state (cannabis) license is subject to taxes,” said Dennis Bozanich, deputy county executive officer, who has his finger on the pulse of cannabis in Santa Barbara County.

Bozanich said the county will collect its first cannabis tax revenues from sales that took place between July 1 and Sept. 30.

“They’re due Oct. 1 and payable by Oct. 31,” he said.

That’s when the county will have a better handle on how much revenue to expect from future tax payments, and Bozanich said he expects to deliver a status report at the Santa Barbara County Board of Supervisors meeting Nov. 13.

Estimates vs. reality

Prior to the state taxes kicking in Jan. 1, Gov. Jerry Brown’s office estimated California would pull in $175 million in cannabis revenues in the first six months of 2018.

Actual revenues for that period fell considerably short at $134 million, which included $6.1 million from the cultivation tax, $75.5 million from the excise tax and $53.6 million from sales taxes.

State officials are blaming the shortfall on three factors, two of them interrelated. One factor is that many city and county jurisdictions have either banned legal cannabis operations or severely limited them, reducing the number of taxpaying businesses.

The two interrelated factors are the burgeoning black market and the high cumulative tax rates that are feeding it, a situation correctly predicted nearly a year ago by the global credit ratings firm Fitch Rating.

Some local jurisdictions have set cannabis taxes so high that, when combined with the state taxes, business owners in some areas are paying rates as high as 50 percent, according to state regulators.

That’s driving cannabis operators from legal sales into illicit sales on the black market, which was already well-established, to maintain their profit margins.

“Regulators must adapt before California’s lawful cannabis businesses are obliterated by the black market,” Assemblyman Evan Low, D-Campbell, chairman of the Business and Professions Committee, was quoted as saying by Marijuana Business Daily.

The Board of Supervisors took the compounding effect into consideration when setting county cannabis taxes, directing the staff to come up with rates that wouldn’t push the cumulative total past 10 percent.

As a result, nurseries and distributors in this county will pay 1 percent, while manufacturers will pay 3 percent, cultivators will pay 4 percent and retail and microbusinesses will pay 6 percent on gross sales.

“It’s kind of nice to see where we are today and know we’ve given (cannabis) operators a reasonable chance to succeed,” Bozanich said.

In December 2017, consulting firm HdL Companies estimated cannabis taxes could generate between $4 million and $64 million a year in Santa Barbara County, but the county staff was more conservative.

They estimated revenues would range between $5 million and $25 million per year, or an average of $1.25 million to $6.25 million per quarter.

If county revenues fall an average of 77 percent below estimates, as the state’s tax proceeds have, the average quarterly income could be anywhere from about $962,000 to a little more than $4.8 million.

Market variables

The wide range in the initial high and low estimates was the result of market variables.

If cannabis operations remained stable at the anticipated level, staff said the tax revenues could be $25 million annually.

But if the market became oversaturated with cannabis operations and supply exceeded demand, prices could plummet, and smaller, undercapitalized operations would dry up.

In that case, the county would end up levying its tax on fewer operations with lower gross sales than anticipated, so the annual tax revenue could be closer to $5 million.

Bozanich said the number of active state temporary medical marijuana licenses in Santa Barbara County has dropped from a previous peak of 1,350.

But the industry still seems to be strong here.

“We continue to have the most cultivation licenses of any county in the state,” Bozanich said. “And more entities are coming in.”

Most of the currently active 1,058 temporary state licenses in the county are for cultivation, and most of those licenses are held by large operators.

The amount of cannabis now being grown on about 300 acres in Santa Barbara County accounts for about one-quarter to one-third of the state’s medical marijuana use, Bozanich said, adding the county just can’t absorb any more cultivation.

“What we need are local distributors and local testing labs,” Bozanich said. “Those are essential. With the quantity of locally grown cannabis, we don’t want them to go to some other county (for those services).”

But the number of cultivators will still likely be affected by the slide in cannabis prices, which prior to legalization were hovering around $2,500 a pound wholesale.

“They’re somewhere south of $1,100 a pound now,” Bozanich said. “That’s just not sustainable (for small operators). Even if they go down to $400, $500 a pound, (large operators) will still survive. But if prices are only half that … .”

The implication is that if prices hit $200 to $250 a pound, even bigger operations would begin falling out.

That, in turn, would plunge county tax revenues into the lower levels of the estimate range.

“Overall, the market’s got to get stabilized, both locally and statewide,” Bozanich said.

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