How to Prepare for the Reversal of San Francisco And New Jersey Cannabis Tax Enforcement

The legal cannabis industry is a dynamic and growing market both within the US and worldwide. As more states continue to legalize the sale of marijuana, state and local revenue departments are considering their cannabis tax options moving forward.

However, states and municipalities are realizing the negative impact that immediate taxation could have on legitimizing the cannabis industry as businesses grapple with federal restrictions, increased costs, theft, and black-market competition. This realization has led to the decisions from several major tax authorities to delay and, in some cases, revoke plans for cannabis tax enforcement. Cultivators, manufacturers, retailers, and others in the business should take the time now to prepare for future cannabis taxes that could be coming for their sales.

Why Are States and Cities Suspending, Delaying, and Revoking Certain Cannabis-Related Taxes?

San Francisco approved a 1%-5% tax on gross receipts (depending on your sales volume) for cannabis businesses and dispensaries in 2018. Last year, the state's board of supervisors passed an ordinance that suspended the cannabis business tax for the 2021 and 2022 tax years. More recently, the board further delayed the effective date of its cannabis business tax to January 1, 2026.

Rafael Mandelman, a Supervisor on the Budget and Finance Committee, defended the move as the city manages an existential issue for the legalization project. Unfortunately, the illegal cannabis market has been flourishing by undercutting the prices of legal businesses. Despite the boom, illegal cannabis businesses do not pay taxes, threatening the economy. As a result, he acknowledges the cannabis market is not where it should be.

Other examples of recent revocations or phase-outs of cannabis taxes include New Jersey’s removal of sales tax on medicinal cannabis sales or California’s removal of its cultivation tax.

How Can Businesses Prepare for Reversals of Cannabis Tax Suspensions and Future Changes?

The delays in enforcement and revocation of burdensome cannabis taxes are a short-term win for those in the industry. These announcements also showcase a broader tax concern for cannabis businesses – the uncertainty from frequent changes in tax systems. Is your business prepared for a sudden turn of events?

Generally, since cannabis businesses might not be subject to taxes, their operating costs should decline or stay consistent. Consequently, they will be able to offer their products at competitive prices and attract more customers.

But when they start paying taxes, their operating costs will skyrocket.

Here's how they can prepare for a turn of events:

Establish a Good Relationship with Cannabis Suppliers and Cultivators

Most cannabis businesses, especially those starting, do not manufacture their own products. Instead, they rely on suppliers to get the products and sell them to customers.

Therefore, now is the time to establish solid connections with reliable suppliers and cultivators so that when prices shoot, you’ll still have access to the products at an affordable cost.

Expand Your Cannabis Business

This may be the right time to grow your cannabis business and establish a broader customer base. The tax suspension means you'll have more capital to expand your market position. You may consider opening other branches in different states that have also legalized recreational and medicinal sales.

If you were operating your business in a rented facility, now is the time to build your own facility to reduce your business operating costs.

Build Your Customer Loyalty

A loyal customer will always buy their products from their preferred business regardless of any changes in cost, packaging, and more. However, if the state governments revert to taxing cannabis businesses, you'll have to increase the cost of your products.

However, some customers will shy away from your products, especially those that don't understand the link between taxation and business costs. But when your customers trust your business, they'll stick with it even when the costs go up.

Understand How Local Cannabis Tax Regimes Align with Your Business Operations

The novelty of the legalized sale of cannabis has many tax authorities and their agencies getting creative in how they apply the tax. A variety of different cannabis tax structures exist across states, which means your business may notice more favorable treatment depending on where its located and how it conducts operations. Now is the time to understand how these taxes will apply, identify opportunities to save on taxes (e.g., streamlining sales or maximizing exemptions), and to develop a tax strategy moving forward.

Get Professional Cannabis Tax and Licensing Help Today

The thriving illicit cannabis market and increased crime have triggered San Francisco and New Jersey to alleviate tax burdens on legal cannabis businesses (at least temporarily).

But just in case that tax suspension ends, the cannabis industry businesses must prepare to deal with the increased costs of operations and other administrative complications. If you have cannabis tax-related issues, including claiming refunds or applying for a retail license, Tobacco Tax Consultants is here to help.

Contact us for a free consultation.