A change in tax reporting has caused sales figures to plunge.
California has given the state’s cannabis revenues a $6 billion haircut, the result of a shift in sales reporting to regulators, according to a new report.
Matt Karnes, founder of Greenwave Advisors, crunched the numbers based on the pivot in California and estimated that the switch caused sales numbers from 2018-2022 to be as much as 40% less than previously thought.
The state had very generous terms when it came to what was included in cannabis sales before the change. Original cannabis sales figures included sales of smoking accessories, such as pipes and other merchandise, along with taxes. In other words, if a customer spent $100 at the dispensary and was charged a 15% excise tax, the state counted the sale as $115 rather than $100.
The first quarter of 2023 is when the effect of the change became clear. The state recorded cannabis sales in the first quarter of 2022 of $1.034 billion under the old method; with the new method, sales plunged by 17% to $858 million.
There are numerous other reasons as to why cannabis sales in California dropped, including illicit market competition, bankrupt companies (for example, Herbl), and generally difficult business conditions. A supply chain beset with nonpayments has destroyed smaller companies with little cash to bear such setbacks.
Still, Greenwave noted in its report, “Our methodology and calculations were confirmed by a representative of the California Department of Tax and Fee Administration.”
According to that agency, as of May 16, total cannabis tax revenue from first-quarter returns was $216.2 million. This includes California’s cannabis excise tax, which generated $104.3 million, and $111.9 million in sales tax revenue from cannabis businesses. The state did say that the total reported cannabis excise tax does not include $24.9 million that retailers previously reported and paid to distributors in 2022.
The analyst cautioned California cannabis investors to consider this change in sales reporting when making decisions about the size of the market.
Karnes noted, “I felt it important to communicate my analysis because:
The difference is material.
It impacts the largest market in the U.S. and thus the total U.S. market size.
In contemplating potential investment opportunities in the California market, valuations in some cases may be impacted by the market size.
(It) provides a more meaningful (apples-to-apples) comparison to other state markets.”
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