The spreadsheet immediately below was the starting point for our August 6th article. This spreadsheet illustrates the division of the proceeds, including all taxes collected from consumers, of the retail sale of flower as adult-use cannabis through conventionally structured businesses. In this illustration we have assumed a sale of 250 packages of flower for $40 per 8-gram package. The $40 sale price includes the taxes collected from consumers. We have assumed a Local Cannabis Tax rate of 10.0% and a Sales Tax rate of 8.75%. The operating costs and profits of the dispensary, distributor and cultivator we have assumed are as stated in the spreadsheet below.
The $10,000 paid by the consumers for the packages of flower as adult-use cannabis through conventionally structured businesses will be divided among governmental agencies, and the dispensary, distributor and cultivator, as is reflected in the spreadsheet below.
The $10,000 paid by consumers for the flower as adult-use cannabis is divided as follows: (1) governmental agencies for taxes collected, both directly and indirectly, from consumers, 30.2%; (2) dispensary revenue, 27.6%; (3) distributor revenue, 20.4%; and (4) cultivator revenue, 21.8%.
In the spreadsheet immediately below, we have assumed the same 250 8-gram packages of flower are sold as medical cannabis to consumers at a price per package that produces the same gross revenue for the dispensary, excluding the taxes directly collected from consumers, as the sales reflected in the first spreadsheet. We have further assumed that the Local Taxes on sales of medical cannabis are 5.0% instead of 10.0%. Since medical cannabis is not subject to Sales Tax, the sale of the 250 8-gram packages for $8,827 will produce a gross revenue of $7,355 for the dispensary. The $7,355 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 packages of flower for $10,000 as adult-use cannabis.
We have included the spreadsheet immediately above to illustrate the changes in the flow of funds caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis. The sale of the 250 packages of cannabis flower as medical cannabis provides the consumers with a 11+% discount even though the gross revenue of the dispensary, distributor and cultivator remain the same.
The basis for both of the preceding illustrations is an assumed sale by a cultivator to a distributor of one kilogram of flower at a price slightly over $1,100 per pound including Cannabis Cultivation Tax (“CCT”). The distributor assumes the CCT. The net to the cultivator is a little over $950 per pound. We assumed the cultivator has production costs of $1,410 per kilogram for the flower. These assumptions produce a before tax profit for the cultivator of $766 per kilogram. We have assumed the distributor has additional costs of $1,278 per kilogram, and a profit of $766 per kilogram. For the dispensary we assumed additional costs of $1,226, and a profit of $1,531, per kilogram. The additional costs and profit for the dispensary are based on 60% mark-up of the wholesale cost from the distributor.
The division of the sale proceeds between governmental agencies and the three cannabis businesses changes when the flower is sold as medical cannabis. The sale of the flower as medical cannabis significantly reduces the taxes collected from consumers. The allocation of the sales proceeds of $8,827 is: (1) governmental agencies, 16.7%; (2) dispensary revenue, 31.2%; (3) distributor revenue, 23.1%; and (4) cultivator revenue, 29.0%.
The costs, profits and income taxes of the dispensary, distributor and cultivator in the two preceding spreadsheets are the same. The sole difference in the preceding spreadsheets is the reduction in the taxes collected from the consumer when the flower is sold as medical cannabis. In both of the preceding illustrations we have assumed the cultivator and distributor each have a profit before taxes that is one-half of the profit before taxes of the dispensary. We have also assumed a 40% income tax rate is applicable to each of the businesses.
In the spreadsheet below we have assumed the same 250 8-gram packages of flower move from cultivator to consumer as medical cannabis through a fully integrated CCA. We have also assumed the operating costs for the dispensary, distributor and cultivator remain the same with the additional assumption any income tax liability of the dispensary is included in its costs. We have further assumed the profit to the cultivator is doubled through the use of a CCA. We have further assumed the reductions in costs and profits at the distributor and dispensary levels from the use of a CCA are passed on to the consumers.
The shifting of the amounts to which the tax rates are applied through the use of a CCA produces dramatic savings for the consumers. We saw this result with adult-use cannabis. The savings are more dramatic when medical cannabis is sold through a fully integrated CCA. In the preceding spreadsheet a total of $6.989, including Sales Tax and Local Cannabis Tax, is paid by the consumers for the same 250 8-gram packages of flower. The sale of this flower as medical cannabis drops the price per package to the consumers from $40 to $27.95. The total of $6,989 paid by the consumers for the flower as medical cannabis through a fully integrated CCA will be divided: (1) governmental agencies for taxes collected from consumers, 22.1%; (2) dispensary revenue, 17.5%; (3) distributor revenue, 18.3%; and (4) cultivator revenue, 42.1%.
The preceding illustrates why we have been touting CCAs since before this legislation became effective. The same packages of flower that cost consumers $10,000 as adult-use cannabis can be sold to the consumers as medical cannabis through a CCA for less than $7,000. California collects all of its CCT and Cannabis Excise Tax (“CET”), and local governmental agencies collect all local cannabis taxes. Best of all, the cultivators who grow the cannabis make twice as much money. This is the reason the Legislature created CCAs.
The use of a CCA to move extracted oil from cultivator to consumer as medical cannabis produces even more dramatic results than the movement of flower as medical cannabis. We will shortly publish an article describing the financial benefits of moving oil from cultivator to consumer through a CCA as medical cannabis.
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