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New Taxes for California Cannabis Industry

By Jasmine Davaloo
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Welcome to the evolving world of cannabis legislation and taxation in California. With the recent 2018 midterm election, a green wave of new laws and regulations has washed ashore, and Taxnexus, a cannabis tax compliance service provider for cannabis businesses, has analyzed the results, looking for insights to guide cannabis business owners in 2019.

In summary, the trend of local counties and cities imposing new cannabis taxes on dispensaries, distributors and cultivators continues, but with some important lessons being learned.

A Brief History of California Cannabis Tax Regulations.

The legalization of cannabis in California brought with it cannabis excise tax and cultivation taxes with the hope of bringing in significant amounts of income in cannabis taxes. The state had projected $185M in cannabis tax revenue for the first six months of 2018. Although California has since collected tens of millions of dollars fewer than anticipated, it did bring in over $135M in the first and second quarters from a brand new industry.

Local governments are able to collect these taxes directly from cannabis businesses.  With the green light from the state and the need for a new source of revenue, many local governments followed suit and passed laws to impose taxes on cannabis businesses operating in their jurisdictions. The need for additional revenue is even greater for localities that allow cannabis business operations given that the state takes virtually all of the state-imposed cannabis taxes while the local government entities are burdened by the related costs of regulations and enforcement at the local level.

Cannabis business taxes have an extra allure for local jurisdictions. Unlike local sales and use taxes, the state does not require local cannabis business taxes to go through the state before a portion of it gets funneled back to the localities. Local governments are able to collect these taxes directly from cannabis businesses.

Since January 1, 2018, many local jurisdictions have come onboard and placed ballot measures for their voters to decide whether to tax cannabis businesses. According to research conducted by Taxnexus, by the end of the second quarter this year, there were over 500 different local cannabis tax rates in California.The new cannabis tax measures are also continuing the trend of widely ranging local cannabis tax laws.

Midterm Results Continue Overwhelming Support for Cannabis Industry

With over 50 cannabis tax measures placed on the November 6 local ballots, most of which passed with overwhelming support from voters, the number and variation of local cannabis business taxes continue to grow. This demonstrates the continuing trend of local governments welcoming cannabis businesses, the evolving voter attitude toward recreational cannabis, and perhaps most importantly, the localities’ desire to take their cut of the new industry’s tax revenue.

The new cannabis tax measures are also continuing the trend of widely ranging local cannabis tax laws. Given that the Medicinal and Adult-Use Cannabis Regulation and Safety Act granted local jurisdictions control over deciding their own cannabis business regulations, there is no statewide uniformity. Here are a few examples of the cannabis business tax measures that were on local ballots on November 6:

San Francisco

While some local jurisdictions were quick to impose cannabis taxes, others have delayed in taxing their local cannabis businesses. San Francisco’s Proposition D, which received a 66% voter approval, won’t go into effect until January 1, 2021. It imposes taxes on cannabis businesses that do business in the city, whether or not they are physically located there. The new cannabis business taxes are as follows:

  • For cannabis retail businesses, 2.5% of gross receipts up to $1M and 5% of gross receipts over $1M.
  • For cannabis non-retail businesses, 1% tax of gross receipts up to $1M and 1.5% of gross receipts over $1M.

These taxes do not apply to the first $500,000 of recreational cannabis gross receipts nor revenues from medical cannabis retail sales. The measure allows the Board of Supervisors to adjust the tax rates up to 7%. The cannabis businesses taxes are expected to generate $5M to $12M in cannabis tax revenue, and will go into the City’s general fund.The new tax measures underscore the lack of uniformity in local cannabis business taxes throughout the state. 

Emeryville

Emeryville passed a new cannabis business tax measure to increase its current nominal rate. Measure S imposes a cannabis business tax of up to 6% of gross receipts. This is estimated to generate $2M in tax revenue to be used for unrestricted governmental purposes.

Oakland

Oakland is among the few local jurisdictions that placed a measure on its November 6 ballot to lower its existing cannabis business tax rates. Previously, Oakland imposed a 5% tax on medical cannabis and a 10% tax on recreational cannabis, for all cannabis activities throughout the supply chain. These are among some of the highest cannabis tax rates in the state and are squeezing out small operators. Although Oakland has long been seen as the leader in California’s cannabis industry, the high taxes are making it difficult for its cannabis businesses to compete with nearby cities that charge lower taxes. While the city acknowledged the hardship its high taxes imposed, it maintained that it could not lower the rates on its own and required the voter approval. On November 6th, Oakland voters passed Measure V by 78%, which gives the City Council the authority to lower the city’s cannabis tax rates through an ordinance. To give additional relief to the cannabis businesses in the city, this measure also allows them to deduct the cost of raw materials from their gross receipts- something they cannot do on their federal tax returns. Furthermore, local cannabis business taxes can now be paid on a quarterly basis instead of one annual payment at the beginning of each year, which was severely burdensome for most businesses.

Lake County

Voters in Lake County approved Measure K by a majority vote to tax cannabis businesses in the unincorporated county effecting January 1, 2021. The county was previously only taxing cultivators at $1 to $3 per square footage depending on the method of cultivation. These rates will be reduced to $1 per square footage for cultivators and nurseries, and other cannabis businesses will be taxes between 2.5% and 4% of their gross receipts.

Mountain View

While there is a maximum of four cannabis businesses permitted to operate in Mountain View, over 80% of voters approved Measure Q to tax them. The measure imposes up to 9% of gross receipts to fund general city purposes, with an estimated annual revenue of $1M.Some have even set the effective dates of their cannabis tax laws several years out to allow their local cannabis businesses an opportunity to establish roots and drive out the black market.

Lompoc

Some jurisdictions have passed more creative cannabis business tax regimens than one rate applicable to the entire supply chain. Voters in Lompoc in Santa Barbara County approved Measure D2018 to authorize the city to impose following cannabis business taxes:

  • Up to $0.06 per $1 (6%) of recreational retail sales proceeds;
  • Up to $0.01 per $1 (1%) of cultivation and nursery proceeds;
  • An annual flat fee tax of $15,000 if net income is less than $2M of manufacturing and distribution proceeds;
  • An annual flat fee tax of $30,000 if net income is $2 Million or more of manufacturing and distribution proceeds;
  • A total aggregate tax of $0.06 per $1.00 (6%) of microbusinesses proceeds, not including medical cannabis transaction proceeds; and
  • No tax on testing.

Riverbank

There are signs that other localities that waited to jump onboard have learned from these high-taxing jurisdictions and opted for lower rates. There are even those localities that although they do not statutorily permit cannabis businesses to operate in their jurisdictions, they still want a piece of the action when it comes to cannabis taxes. The city of Riverbank in Stanislaus County currently does not allow cannabis businesses to operate without first obtaining a permit from City Hall and entering into a development agreement with the city that negotiates how much of their revenue the city would take. However, the voters just passed Measure B, which authorizes Riverbank’s City Council to impose a business license tax of up to 10% of gross receipts on cannabis businesses in the event the city allows cannabis businesses to operate within its city limits in the future. This tax has incentives other than the apparent potential of tax revenue. This guarantees the city a cut of the earnings of any illegal cannabis businesses, and serves as a protection in the event the permit and development agreement scheme the city has enacted is later found to be invalid.

The Chaos Continues

The new tax measures underscore the lack of uniformity in local cannabis business taxes throughout the state. Compliance is especially burdensome for delivery companies and multi-location and multi-license cannabis businesses. Cannabis businesses are required to keep up with new and evolving cannabis tax regimens, which, judging by the shortfall in cannabis tax revenues compared to their projections so far, is a difficult feat for these highly-regulated businesses.Of course, there are still some local governments that appear to have missed all the signs and have passed new high taxes. 

The overall trend in 2018, persisting through the midterm elections, is that more local jurisdictions are joining the cannabis tax bandwagon, and while the tax rates and structures are still all over the map, there appears to be some movement toward honing the cannabis business rates toward that “sweet spot.”

Cities like Oakland and Berkeley that immediately began to tax cannabis businesses at high rates have lowered or taken steps to lower their tax rates to keep their competitive edge and retain cannabis businesses within their jurisdictions. There are signs that other localities that waited to jump onboard have learned from these high-taxing jurisdictions and opted for lower rates. Some have even set the effective dates of their cannabis tax laws several years out to allow their local cannabis businesses an opportunity to establish roots and drive out the black market.

Of course, there are still some local governments that appear to have missed all the signs and have passed new high taxes. In due time, they, too, will give in to the market pressures and make necessary adjustments if they want to continue to benefit from the legal cannabis industry in their jurisdictions.


Taxnexus is an automated transaction-to-treasury cannabis tax compliance solution for the entire cannabis supply chain that provides point-of-sale state and local cannabis tax calculation, sales and use tax calculation, tax data management as the authority of record, and timely filing of returns with all applicable taxing authorities.

How To Select The Best Monitoring System For Your Cannabis Greenhouses

By Rob Fusco
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Maintaining an environment that supports cultivation and keeps plants healthy is not an easy task. In cannabis growing, there are a variety of factors that greenhouse managers and personnel must monitor to ensure that their plants are in a healthy environment that fosters growth and development. Temperature, humidity, lighting and CO2 levels are a few of the conditions that need to be tailored to each cannabis greenhouse operation. However, it can be difficult to constantly monitor the status of your equipment and the greenhouse environment, especially after hours or during the off-season.

A remote monitoring system that’s properly selected and installed can help greenhouse managers keep their cannabis plants healthy, multiply their yields and increase return on investment. This type of system also helps operators identify patterns and trends in environmental conditions and get insight into larger issues that can prevent problems before they arise.

Cloud-based monitoring system base unit in weatherproof enclosure

Here are some tips on key conditions to monitor and what you need to consider when selecting a monitoring system for your cannabis greenhouse operation:

Temperature

Temperature plays a crucial role in any cannabis grow operation. The climate in your greenhouse must be warm enough to nurture photosynthesis and the growth of cannabis plants. Setting the incorrect temperature will significantly impact the potential yield of the plant and the rate at which it develops. A temperature too low will slow the growth of the cannabis, but too hot can lead to heat stress for your plants. The ideal temperature for a standard greenhouse is between 70 and 80 degrees Fahrenheit. However, depending on the stage of plant and desired growth densities, the temperature of the greenhouse needs to be adjusted accordingly.

Humidity Levels

Humidity directly affects plant photosynthesis and transpiration, so controlling humidity is vital in greenhouse growing. The ideal relative humidity (RH) for cannabis growth is around 60%. A low humidity level can cause water to evaporate too quickly for photosynthesis, while a humidity level that is too high can cause poor growth and possible mold and fungal disease. Monitoring the moisture content in the air of your greenhouse will help the plants during the transpiration process, increasing absorption of nutrients and overall health of the cannabis. 

Lighting

Your cannabis may be getting an abundance of natural light during the summer months, but maintaining adequate sunlight during the winter months can be a challenge. As a solution to this, many greenhouse managers equip their facilities with additional lights to supplement natural light during off-seasons or off-hours. To achieve the best possible yield, a cannabis plant in the budding stage should receive twelve hours of light each day, while other stages could require additional lighting. For example, the growth stage could require your cannabis to be exposed to sunlight for up to eighteen hours a day.

CO2 Levels

Like any other plant, cannabis requires CO2 to breathe. Greenhouse managers must set and monitor the CO2 levels in their facility to make sure that there is an adequate amount for the plants to develop, grow and be healthy. The amount of carbon dioxide required for your cannabis depends of the size of the facility and the amount of light the plants are receiving. However, a standard grow area for cannabis can maintain a CO2 range from 1000 to 1500 parts per million (PPM). A level below that threshold can result in slower growth of the plants, while a level above would lead to unused and wasted CO2.

Soil moisture sensor

Irrigation and Soil Moisture

One way to ensure a good yield from your cannabis is to water it regularly and monitor your soil moisture. Overwatering your plants can have the same effect, if not worse, than letting the soil become too dry. Plants’ roots need oxygen to survive, unlike leaves that breathe CO2, and when the soil is waterlogged the roots can’t provide their function. The lack of oxygen interferes with the roots’ nutrient uptake and photosynthesis causing the cannabis plant to wilt. The exact moisture content of the soil depends on the size of your greenhouse, temperature and humidity. Whether you hand water or are using a drip irrigation system, being aware of your soil moisture is vital to the long-term health of your cannabis.

Air Circulation

Your greenhouse environment should mimic the ideal conditions in which cannabis plants flourish. With an indoor facility, you have the ability to control air circulation by venting hot air out and blowing fresh air in. Creating a circulation of air inside your greenhouse will increase your cannabis plant’s growth speed and yield. Additionally, an exhaust system helps control the temperature and humidity, while also preventing the invasion of mold and pests that thrive in hot, stagnant air.

Greenhouse Security

When growing something of value, like cannabis, there will always be a threat of intruders. Whether your greenhouse is in a populated area or around hungry wildlife, any intruder could be detrimental to your overall yields and profit. Remote monitoring systems can give you peace of mind and instantly alert you when there is an unwanted presence in your greenhouse.

Knowing all the possible threats to your cannabis greenhouse helps you evaluate your specific needs, and ultimately identify the proper remote monitoring system.

Selecting the Right Monitoring System

Other factors to consider when choosing a monitoring system right for your operation include:

  • Base unit and sensors
  • Wireless or hardwired sensors
  • Communications to your site (Phone, cellular, Wi-Fi, etc.)
  • Alarm notification
  • Programming and status checks
  • Data logging
  • Return on investment

Base Units and Sensors

Each condition in your greenhouse that you want to monitor requires its own input on the base unit of the monitoring system. You must match your needs with the number of inputs available. A good fit for a smaller cannabis greenhouse may be a lower-cost, non-expandable monitoring system. However, larger facilities have many monitoring points and more people to alert when there’s a problem. If your cannabis operation is poised for growth, purchasing an expandable system could add value to the initial purchase because you wouldn’t have to replace your entire system in the future.

Your monitoring system should also have an internal rechargeable battery backup to ensure continuous monitoring and alerts in the event of a power outage. It is also recommended to have each base unit in a sheltered enclosure to protect it from moisture, dirt and other hazards.

Placement of sensors is also crucial. For example, temperature sensors in your greenhouse should be placed throughout the facility. They should be next to your thermostat and in the center of your greenhouse, preferably away from direct sunlight.

Wireless or Hardwired Sensors

Remote monitoring systems offer the option to have sensors hardwired directly to the base unit or sensors wirelessly connected. A hardwired monitoring system connects the sensors to the base device with wires. Generally, trenching long distances for wires is time consuming and costly. So alternatively, a wireless system uses built-in radio transmitters to communicate with the base unit. Some monitoring systems can accommodate a combination of hardwired and wireless sensors.

Communications to Your Site

Monitoring devices that use cellular communications must be registered on a wireless network (like Verizon or AT&T) before you can send or receive messages. Because cellular devices perform all communications over a wireless network, it is important that there be sufficient signal strength at the greenhouse. It is a good idea to check the signal quality in the area before purchasing a cellular product. If the cellular network has less than desirable coverage, it is possible to install an external antenna to help increase cellular signal.

Alarm Notifications

When monitoring systems identify a change in status, they immediately send alerts to people on the contact list. If you don’t want all of your personnel to receive notifications at the same time, certain devices can be programmed to send alerts in a tiered fashion. It is important to consider the reach of the communications, so that you’ll be notified regardless of your locations. Multiple communications methods like phone, email and text provide extra assurance that you’ll get the alert. Also, note of the number of people the system can reach and if the system automatically cycles through the contact list until someone responds. Make sure the system allows for flexible scheduling so that it doesn’t send alarms to off-duty personnel.

Programming and Status Check

If you’re responsible for maintaining a commercial greenhouse facility, you want a system that will provide real-time status of all monitored conditions on demand. There are a few different ways to access your sensor readings. Options include calling to check status, viewing a web page, either on a local network or on the cloud, or accessing the information via an app on your mobile device. With a cloud-based system, the devices supervise themselves. This means if the internet or cellular connection goes down, the device will send an alarm to alert the appropriate personnel.

If you don’t select a cloud-based system, you will be limited to logging in through a local area network, which will allow you to make programming changes, access status conditions and review data logs. If internet connectivity is not available at your location, you will want to choose a cellular or phone system rather than Ethernet-based option.

Data Logging

Sample greenhouse monitoring data log

Data history is valuable in identifying patterns and trends in your cannabis greenhouse conditions. Manually monitoring and recording environmental parameters takes a significant amount of personnel time and detracts from other important workplace demands. However, many monitoring systems automatically save information, recording tens of thousands of data points, dates and times. Cloud-based logging provides an unlimited number of records for users to view, graph, print and export data trends.

Analyzing data samples may lend insight to larger issues and prevent problems before they arise. For example, if the data log shows power fluctuations occurring at a regular time, it could be indicative of a more serious problem. Or, if the data shows signs of a ventilation fan or supplementary lighting beginning to malfunction, they can be repaired or replaced before total failure occurs.

Return On Investment

When deciding how much you should pay for a remote monitoring system, tally up the entire cost, fully installed with additional peripherals and sensors and any labor fees for installation. Then consider the value of your cannabis plant inventory and greenhouse equipment. Finally, factor in the cost of downtime, should an environmental event shut down your operation for a period of time.

Final Thoughts

Choosing the right greenhouse monitoring system and sensors could mean the difference between life and death for your cannabis plants. Understanding the conditions you need to watch and monitoring systems’ capabilities are they best way to protect your investment.