Statewide cannabis tax hike hits SLO dispensaries as legal market struggles

Just days after California’s statewide cannabis tax hike went into effect, customers at Megan’s Organic Market were already feeling the impact on their bill.

“We have customers who come for the exact same order every single week and they bring exact change,” said Megan Souza, co-founder and CEO of Megan’s Organic Market, a San Luis Obispo dispensary. “They notice the difference.”

As of July 1, the excise tax for cannabis has increased from 15% to 19%. The increase ends a three-year pause on cannabis tax hikes, part of a 2022 state budget agreement meant to give the cannabis market time to stabilize.

Except, now three years later, cannabis shops are still struggling to compete with the illicit market, and SLO County is no exception.

“Hundreds of retailers have shut their doors over the last year, and I’m afraid this increased tax will continue the trend,” said Austen Connella, owner and co-founder of SLO Cal Roots. SLO Cal Roots has two locations in SLO County, in San Luis Obispo and Grover Beach, along with a location called Root One in Guadalupe.

An excise tax is a levy on a product from the state before sales tax. It is one of three taxes levied on cannabis products here that reflect in customer pricing, along with sales tax and a county business tax or city business tax. Some cities in SLO County set their own tax rate.

The 2022 state budget agreement eliminated a cultivation tax that taxed all harvested cannabis that entered the commercial market.

The recent percentage increase is meant to cover the amount the cultivation tax would have collected if the cultivation tax was still active, according to the California Department of Tax and Fee Administration.

The cultivation tax was ended by the Control, Regulate and Tax Adult Use of Marijuana Act with the intent “to tax the cannabis supply chain in a way that reduces barriers to entry into the legal market and drives out the illicit market.”

“If the goal was to eliminate the illicit market, this is the wrong approach,” Connella said. “We are pricing people out of the legal system.”

Taxes boost cost of cannabis products by a third

Ultimately, consumers will eat the cost of the tax.

The average cannabis consumer spends $50 when they go into the store, meaning that they now have to pay an extra $2, said Zed Scholtt, vice president of retail at Urbn Leaf, which has locations throughout California, including one in Grover Beach.

Although that may not seem like a big jump, cannabis shops are operating on such thin margins that the tax increase makes the street more competitive, Connella said.

When the act passed three years ago, it set July 2025 as the official date for the tax hike, something that local cannabis dispensaries had been watching.

“Smaller retailers have it even harder because sometimes we don’t have the purchasing power or the financial backing to withstand a downturn in sales over the next year if it takes a year or two to get this tax appealed,” Connella said.

Dispensaries are responsible for paying both state and local taxes.

In SLO County, dispensaries are required to pay a 6% cannabis business tax on their gross receipts. The tax is set to increase 2% each year unless discontinued by the county. This past June, the county Board of Supervisors voted to maintain the tax for another year.

Dispensaries are then responsible for collecting the sales tax, excise tax and any county or city tax on top of that, according to Souza.

In a city like SLO, where the sales tax is 8.75%, that brings the total taxes on cannabis to 33.75% as of July 1.

Souza believes the high taxes and oversaturation are to blame for the struggling industry. There are 55 active cannabis licenses in SLO County, according to California’s Department of Cannabis Control database.

How dispensaries are fighting back

Dispensaries are trying to rally support to convince state legislators to reverse the tax.

To address the increase, Urbn Leaf is offering 30% off its products for the month of July.

SLO Cal Roots has been writing letters to representatives in hopes of convincing them to reverse the tax.

Megan’s Organic Market has been sending out information to customers about how to contact representatives, asking them to support the bill.

Megan’s Organic Market also spoke with the SLO Chamber of Commerce to ask it to support AB 564, a bill moving through the state Legislature that would delay the tax hike until 2031.

It passed unanimously in the Assembly but is pending approval by the state Senate. Gov. Gavin Newsom agreed to sign a proposal to halt the tax bill if it ever reaches his desk.

“We are really hoping AB 564 will pass,” Souza said. “If it doesn’t, it is 4% more difficult to compete with the illicit market.”