September 4, 2025

California Increases Cannabis Sales Tax to 19%

California, September 4, 2025

News Summary

California will raise its cannabis sales tax from 15% to 19% starting July 1, marking the highest rate allowed under state law. This decision comes amid declining cannabis industry revenues and increasing competition from illegal markets. The increase is part of a mandate following a law enacted by Governor Newsom. Meanwhile, industry representatives express concerns about the sustainability of businesses under such high tax rates.

California is set to increase its cannabis sales tax from 15% to 19% as of July 1, marking the highest allowable rate under state law. This decision was made in response to declining revenue in the cannabis industry, which faces significant pressures from illegal competition. The industry continues to struggle, with many businesses closing and overall sales decreasing.

Ryan Burns Collective, a cannabis retailer, has been ordered to pay a tax liability of $120,600 following an audit conducted by the California Department of Tax and Fee Administration. The audit, which covered the period from July 2018 to June 2021, concluded that the business license tax charged to customers must be included in the gross receipts used for sales tax calculations.

The decision to raise the cannabis tax stems from a law enacted by Governor Gavin Newsom in 2022, which dictates that tax rates must increase when cannabis excise revenue declines. This increase of 26% is part of an initiative to compensate for revenue shortfalls and was confirmed in a recent advisory meeting by state tax officials. Industry leaders contend that this hike will further strain legal cannabis retailers, impeding their ability to compete with prices in the illicit market.

California’s cannabis sector has been beset by a range of challenges including high taxes and stringent regulations, making it difficult for legal operators to thrive amidst mounting competition from illegal sources. Research indicates that a significant portion of cannabis users continue to purchase from unlicensed suppliers. In 2024, the excise tax from the cannabis market generated nearly $595 million, with funds allocated toward child development and environmental recovery initiatives.

San Francisco Assemblymember Matt Haney has introduced a bill (AB564) aimed at preventing the imminent tax hike, which recently passed a committee vote and will now proceed to the State Senate for further consideration. Meanwhile, the updated budget proposal from Governor Newsom fails to address any potential tax relief for the cannabis industry, further complicating the operational landscape.

Industry representatives have expressed concerns that operating under a 19% tax rate is unsustainable, particularly as they navigate ongoing declines in sales and tax revenue. The legal cannabis market in California has been experiencing year-over-year losses since the COVID-19 pandemic, leading to numerous business closures.

The complexities surrounding the cannabis tax system and the ongoing pressure from the illicit market highlight the challenges facing California’s legal cannabis retailers. Unless measures are taken to alleviate the burden of high taxes and create a more competitive environment, the outlook for the industry remains uncertain.

FAQ

When will the cannabis tax increase take effect in California?

The cannabis tax will increase from 15% to 19% starting on July 1.

What is the reason for the tax increase?

The tax increase from 15% to 19% is mandated by state law due to declining revenues from the cannabis industry, which faces challenges from illegal markets.

What is the impact of high taxes on legal cannabis businesses in California?

High taxes and regulations make it difficult for legal cannabis businesses to compete with illicit market prices, hindering their profitability and sustainability.

What action has been taken to block the tax increase?

Assemblymember Matt Haney introduced a bill (AB564) aimed at blocking the tax increase, which has passed a committee vote and is proceeding to the State Senate.

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Author: here-intlog

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