California’s Regulated Cannabis Market Sees Decline in Sales and Tax Revenue in Q1 2023

LOS ANGELES– California’s hopes of increased consumer participation in the regulated cannabis market did not translate into a boost in licensed retail sales or state tax revenue during the first quarter of 2023. According to figures released by the state’s Department of Tax and Fee Administration (CDTFA) on May 23, adult-use dispensaries reported $1.25 billion in taxable sales for the quarter, reflecting a 6% decrease compared to the first quarter of 2022.

It’s important to note that the reported taxable sales figure includes sales of cannabis, cannabis products, and other retail sales of tangible personal property reported on tax returns. For a more accurate depiction of the actual cannabis sold, adult-use dispensaries reported $859 million in sales subject to the state’s 15% cannabis excise tax in Q1 2023, averaging around $286 million per month.

The reporting of this “cannabis sales” total is a result of recent changes to California’s cannabis excise tax collection. Starting January 1, 2023, the responsibility for collecting and paying the 15% excise tax shifted from licensed distributors to retailers. This means that distributors no longer collect the excise tax from retailers, and retailers now collect the excise tax from their customers based on gross receipts.

Despite the shift in tax collection, the total tax revenue from first-quarter returns, including excise and sales taxes, amounted to $216 million, marking a 13-quarter low dating back to Q4 2019. This downward trend can be attributed in part to the elimination of California’s weight-based cultivation tax in July 2022, as well as declining sales figures and market challenges. From 2021 to 2022, taxable sales decreased by 7% statewide.

Although it was anticipated that the elimination of the cultivation tax would enable licensed operators to better compete with the illicit market and drive higher sales and tax revenues, the $216 million in tax revenue from Q1 2023 represents a 40% decrease from the peak of $362 million in Q2 2021. This decline raises questions about the effectiveness of tax-related measures in combating the illicit market.

While access to retail is a significant factor in increasing consumer participation in the licensed cannabis market, California still faces challenges in this regard. Despite licensing over 350 new adult-use dispensaries since July 2021, the state has one of the lowest rates of storefronts per 100,000 people among legacy markets in the nation.

Nevertheless, California’s population makes it the largest cannabis market in the country by sales volume. Since January 2018, licensed cannabis businesses have contributed approximately $4.9 billion in tax revenue to the state, including over $2.4 billion in cannabis excise tax, according to the CDTFA. Adult-use dispensaries have reported nearly $22 billion in taxable sales since the commencement of their operations.