Cannabis businesses owe California $732 million in taxes

California’s cannabis is deep in the red, but unfortunately for the state, most of those debtors are already out of business.

That’s according to a new report from Greenwave Advisors that determined that the state of California is owed approximately $732 million in cannabis sales & use, excise, and cultivation taxes, but about 72% of the companies that owe simply don’t exist anymore.

Greenwave said it reached that conclusion by analyzing data on delinquent taxes provided by the California Department of Tax and Fee Administration. In addition to the uncollected taxes, the CDTFA said it also assessed $173 million in taxes on unlicensed sales, which Greenwave says translates to $1.2 billion in sales through unlicensed channels, or a quarter of the total market.

California reported $4.4 billion in sales in 2023, a 16% increase over 2022’s $3.8 billion.

Distributors also likely owe the state $1.2 billion in taxes, up from $1 billion which represents amounts owed for both taxes (to the state) and to the brands.

In September, one of California’s largest distributors Herbl went out of business. At the time Green Market Report wrote that vendors complained about not getting paid by the distributor, which in turn was allegedly being stiffed by strapped dispensaries after taking inventory. Herbl filed several collections claims in the Los Angeles County Superior Court against operators.

Greenwave surmises that if taxes aren’t getting paid, then the brands likely aren’t getting paid either.

According to Cova Software, “Between California’s excise tax, regular sales tax, and local business tax, adult-use customers are paying anywhere between 28% and 40% cannabis retail taxes on every purchase.”

The main excise tax of 15% is set to increase to 19% in 2025. It isn’t hard to imagine that if companies can’t pay the taxes they have now, increasing them will only amplify the problem.

If companies don’t pay the tax bill and the accompanying 50% penalty for late or missed payments, their properties can be seized. But the results of those actions often fall far short of the actual debt.

For example, the CDTFA held an auction in February to sell property seized from 10 cannabis businesses in Los Angeles. The department noted on its website that the items were seized as a result of search warrants served to collect taxes owed by 10 cannabis businesses. Nine were illegal businesses, and one was a legal dispensary with unpaid taxes.

That auction generated only $2,075 against the unpaid $14.4 million in taxes.

In April, the state announced it had also seized products from the Kush Spot and Verlton Glaspie, which does business as Whittiers Cure Cannabis Dispensary, for unpaid taxes.

“Seizing and auctioning property from cannabis businesses that evade the law is a tool to recover the taxes owed to the state,” said CDTFA Director Nick Maduros.