Cannabis – Revenue Growth and Taxation

s part of our ongoing involvement in the legal cannabis marketplace this article is designed to help explain market developments to a wider audience.

The legal cannabis industry experienced 37% growth in 2017 to reach $9.5 billion in consumer spending globally. Fully $8.5 billion, was generated in the US market, where 31% growth was driven by the five states; Alaska, Colorado, Nevada, Oregon and Washington. 2018 growth figures will include California which became operational on January 1^st.

What does this mean in terms of consumer numbers? The number of adults who can purchase cannabis legally on a global basis went from 17 million to 47 million. That figure is now over 75 million with the addition of Canada.

By 2022 it is confidently predicted that cannabis spending in the United States will grow to $23 billion while global sales will reach $32 billion.

Cannabis Consumers

Marketing teams are starting to build an understanding of cannabis consumers, Arcview have used the following to segment adults in markets where cannabis is legal.

• Consumers—adults who have consumed cannabis in the prior six months
• Acceptors—adults who may consider future consumption
• Rejecters—adults who say they would not consider future consumption of cannabis

According to BDS Analytics ­e Majority of US Adults (21+) and Canadian Adults (18+) are Consumers or Acceptors.

The legalization and regulation of cannabis sales is a global trend. While North America is expected to continue to generate the majority of legal spending, top international markets are significantly contributing to spending as well. South America has some of the most liberal medical programs and is the home of the first federally legal adult-use market in the world in Uruguay. Followed recently by Canada.

Germany has positioned itself at the top of European legal markets

The United Kingdom and France are currently very limited markets.

It was always assumed that legalization would have nothing but a positive effect on the market as a whole. However, the two largest, and most recent, California and Canada have illustrated how uncertain legalization can be. Strict regulatory regimes limit the legal market’s ability to compete with well-established illegal growers.

“Sin Taxes” and Cannabis

Government wants to cash in on cannabis but needs to find that sweet spot that generates revenue without limiting demand for legal product.

Sin taxes have a long and varied history both worldwide and in the United States. One of the earliest examples of a sin tax is Britain’s excise tax on distilled spirits, which was enacted in 1643.

Alcohol, Tobacco, Casinos/Gambling, and more recently Cannabis and Sugary Drinks are being taxed. Governments have long sought to benefit from consumers’ tastes by taxing their vices.

It wasn’t lost on those states that have legalized the use of recreational cannabis that with legalization comes the ability to generate tax revenue.

Let’s take Colorado as an example. Colorado legalized the recreational use of marijuana in 2012 and the state began to regulate sales of marijuana on January 1, 2014. The tax is structured as an approximately 15% tax on the average market rate of wholesale cannabis, plus a 15% state tax on retail cannabis sales, a second state sales tax of 2.9% on retail and medical cannabis, local sales tax, plus local marijuana taxes (i.e., a 3.5 % tax in Denver), creating an average overall tax rate of approximately 34% for retail purchases of cannabis.

There were over $1 billion of marijuana sales in Colorado 2016, bringing in over $152 million in tax revenue for Colorado as of February 2017 for its year-to-date fiscal year. This is significantly more tax than the state’s collections for other sin taxes. In comparison, Colorado collected approximately $70 million in liquor excise taxes in January through November 2016.

While recreational cannabis remains illegal at a federal level and therefore unable to be taxed at a federal level the various states and local governments have seized the opportunity.

Of course sin taxes aren’t just about raising revenue they are also about influencing consumer behavior. Economists, behavioral scientists, and lawmakers have long debated whether sin taxes are actually successful in discouraging the behavior that governments are seeking to adjust. Studies show that a number of factors come into play in determining how successful a sin tax is, as well as the behavior it is seeking to adjust. However, the longer a tax is in place, the more difficult it may be to determine if the tax is actually curbing the behavior, or rather, other societal, social, or cultural pressures are causing the change in use.

Where do those taxes go?  The answer is quite complex, this graphic sums up the beneficiaries.

First published by Adrian G Stewart at OOKII.Company