Nevada County cannabis tax revenue yet to meet expectations
A little over six months since the first businesses subject to Nevada County’s cannabis tax were opened, the green gold rush the county was hoping to see from tax revenue after allowing pot sales has yet to materialize.
According to Treasurer-Tax Collector Tina Vernon, the county has collected $6,500 from cannabis businesses in the first two financial quarters they were required to report earnings. One estimate from the county executive office projected 2019/20 fiscal year tax revenue would be $60,000 and anticipated $210,000 for the following year.
Of the 44 county-approved cannabis businesses, 25 submitted their mandated quarterly returns and only a handful of those reported actual earnings, according to Vernon. The rest reported zero sales.
According to Nevada County Cannabis Alliance Executive Director Diana Gamzon, the evolving landscape of the young cannabis industry, both in terms of market dynamics and regulations, create a myriad of challenges for cannabis cultivators.
“The legal industry is in turmoil right now,” Gamzon said. “There’s an over-saturation in the market and there’s a lack of retail access. Farmers are dealing with heavy competition and high state taxes. In addition, many distributors have terms that do not pay farmers immediately, so even if sales are made, payments may be months out.”
Under the county’s cannabis tax, licensed business are required to report a quarterly tax statement whether they make any sales or not. The companies are then taxed at 2.5% of their gross receipts.
One cause for the lag in tax collection is that cultivators must sell their product to distributors who then sell to retailers. Most Nevada County cultivators aren’t paid when their product is taken to a distributor but instead when it is sold at retail, and even then some businesses aren’t receiving payment until much later.
“This last quarter it was really brought to light the legal process and how cannabis is actually pushed through the system and at what point in time it’s actually taxed,” Vernon said. “That’s part of the reason why we have not seen the returns we hoped we would’ve seen by now, I would guess that this would change over the next two quarters, based on what products are actually out there.”
According to the cannabis alliance, the number of distributors, which cultivators are required by state law to sell to, is shrinking, leaving some growers without ways to move their product through the supply chain. With fewer options and more distribution companies going out of business, coupled with the timing of the cannabis grow season which leads to many growers flooding the market around the same time and driving down prices, this has caused some growers to wait for better economic conditions before heading to market.
“This time of the year — January through March — historically going back decades has always been the slow time of the year when prices are down,” Gamzon said. “Our Nevada County farmers can only cultivate up to 10,000 square feet, which is a small license by statewide standards, and have a difficult time competing in the wholesale game when the prices are low. Many farmers are waiting for prices to go back up and work with retailers and distributors who want high-quality and strain-specific craft cannabis.”
Gamzon and county officials said they expected the market to pick back up by the spring when the market settles and growers decide which distributors they will work with, which retail outlets will take their products, and prices level.
“The season has ended, but a lot of the permitted growers have not really gotten rid of the product yet,” Nevada County Supervisor Heidi Hall said during a board workshop last month. “Their season ends within the next quarter. The expectation is that we’ll get a lot more within the next quarter or two.”
In their most recent board objectives, supervisors prioritized continuing to improve the cannabis permitting and enforcement, including looking into additional license type within the supply chain, a move that the cannabis alliance said would allow growers to do more on their own, or in cooperatives, and not have to pay other businesses within the supply chain.
“On-farm vertical integration could be helpful to farmers looking to streamline their costs,” Gamzon said. “The alliance has advocated for a license type called a micro business, which would allow for vertical integration of multiple license types of the same premise.”
As the cannabis permitting and enforcement process continues to evolve, how well the expected tax revenue matches reality may be the fulcrum on which support for the industry sits.
“I appreciate the growers that have come into compliance early on,” Supervisor Dan Miller said at the workshop. “It’s just the ones that haven’t that are dragging their feet and waiting for the county to roll over and give them more time. Those are the ones that are bothering me. Where’s the return on investment we’re looking for? Right now it’s not there. Somewhere along the lines growers forgot to put together an adequate business plan to help account for all these other impacts and challenges they have to deal with.”
County officials and cannabis advocates have come closer together since an attempted ban in 2016, with the county last year tweaking the ordinance’s off-site manufacturing regulations after feedback from stakeholders.
“We are learning and growing along with the cannabis community to adapt to this newly regulated industry,” Director of Cannabis Compliance Craig Griesbach said in a release. “There are challenges for everyone, but working together is the best way to get through them.”
According to Vernon, the county has reached out to growers during cannabis alliance workshops to ensure they have the information needed to report their earnings. The alliance will also host a cannabis accounting workshop from 4:30 p.m. to 7 p.m. Feb. 25 at the Foothills Event Center. The meeting is open to the public, though there’s a $30 fee. The county will hold a cannabis season kick-off workshop giving insight on the permitting process at 5 p.m. March 5 at the Eric Rood Administrative Center, with another scheduled for May.
According to county officials, while the process will continue to evolve, they still expect tax revenue in line with earlier projections.
“Before we make any changes or lower our estimates, I think we just need to get through that first year,” Vernon said. “It’s a very hand-holding process right now, on both sides. We’re building relationships and it’s going well.”
To contact Staff Writer John Orona, email firstname.lastname@example.org or call 530-477-4229.
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