California County to Lower Cannabis Cultivation Tax as Outdoor Flower Price Drops to $277 Per Pound

Local officials in Sonoma County, Calif., gave preliminary approval April 16 to lower the cannabis tax rates for cultivators and manufacturers while also hiking the rates for retail operations in unincorporated areas.

A second reading of the amended Cannabis Business Tax Ordinance is scheduled to go before the five-member Board of Supervisors on April 30 after the board unanimously voted to pass the amendment on its initial reading last week.

The amendment would increase the cannabis sales tax from 2% to 3% on dispensary operations, and lower the cultivation and manufacturing rates as follows:

• The tax rate for cannabis manufacturing operations will be lowered from 3% to 1.5%.
• Outdoor cultivation will be taxed at 69 cents per square foot (down from 75 cents).
• Mixed-light cultivation will be taxed at $2.51 per square foot (down from $3).
• Indoor cultivation will be taxed at $7.58 per square foot (down from $12.50).
  

Several cannabis cultivators who operate in Sonoma County’s unincorporated areas said in the comment section of an annual report commissioned by the county that the square-footage tax structure doesn’t make sense considering they have to pay the tax on the square feet they’re licensed for, regardless of whether they cultivate a full canopy under the license.

“Taxes need to be adjusted to a more sustainable formula for cultivators. We pay tax on [square feet] whether we cultivate or not,” one cultivator wrote in the anonymous comment section. “High and unfair tax effect along with adverse market conditions are putting cultivators out of business. Please act to readjust the tax structure so we can continue to stay in business.”

Another cultivator wrote, “I strongly believe that we should be taxed on what we sell not square feet. The way we grow is not full canopy, so we are taxed even higher.”

The county’s tax ordinance allows for maximum square footage rates of up to $10 for outdoor cultivation, $22 for mixed-light cultivation and $38 foot for indoor cultivation, according to the county, which reevaluates market conditions to adjust the rates each year.

Sonoma is one of 30 counties (among 58 in California) that allows for at least one cannabis business type in unincorporated areas, according to the state’s Department of Cannabis Control (DCC). The county also has six cities that allow at least one cannabis business type and three cities that prohibit all cannabis businesses. Land outside these cites that is not governed by a local municipality is considered an unincorporated area.

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In addition to responding to market changes, Sonoma County’s proposed tax rate adjustments are in response to its projected cannabis tax revenue amount of $1.4 million for fiscal year 2024-2025, a slight decrease from last year’s estimate, according to a county press release. The county’s overall cost associated with managing the local cannabis program, which includes staff in five departments along with contracted services, is projected to be $1.7 million for the fiscal year, according to the release.

“Adjusting these taxes is a conservative approach to a complex issue and will hopefully offer support to local small businesses while reimbursing the county for program expenses,” Supervisor David Rabbitt, who chairs the board, said in the release. “I look forward to having the opportunity for a broader review when this comes back to the board at a later date.”

The county expects the 1% tax hike on retailers to generate an additional $160,000 in revenue. However, this amount does not make up the roughly $300,000 difference between the projected tax revenue and the county’s cost of running a cannabis program. The opening of additional dispensaries in unincorporated areas could help close the gap.

While there are 37 active dispensary licenses in Sonoma County, according to DCC data, only six of the licensees are located in unincorporated areas, county spokesperson Daniel Virkstis confirmed with Cannabis Business Times. Five of these dispensaries are operational, while the sixth plans to open later this year, he said.

The five dispensaries are Riverside Wellness, Suspiciously Delicious, Redwood Herbal Alliance, Pine and Co., and social equity retailer Loe Dispensary, according to county cannabis use permit records. The county has been issuing land-use permits for dispensaries since 2007 with no more than nine retail facilities allowed in unincorporated areas.

Meanwhile, the county expects to experience a $30,000 revenue decrease by lowering the tax rate from 3% to 1.5% on manufacturers, according to the release.

Sonoma County also has 86 active cultivation licenses, including at least a dozen that operate in unincorporate areas, per county records. (Editor’s note: For security purposes, the DCC’s licensing database does not include addresses for cultivation licensees and therefore locations for this business type are not always easy to track.)

Sonoma County has roughly 500,000 residents, representing just a fraction of California’s overall population of approximately 39 million, and cannabis operators in this Northern California region are not immune to the struggles of the broader state market.

Between 2023 and 2024, the average volume of outdoor cultivation capacity in unincorporated areas of Sonoma County decreased by 31%, according to an HdL Companies report commissioned by the county and provided to Cannabis Business Times.

This downward trend is reciprocated at the state level: California’s active cultivation licenses decreased 31%, from 7,672 permits at the beginning of 2023 to 5,296 permits as of April 25, 2024, according to the DCC.

Among myriad factors related to this cultivation exodus from California’s market—and perhaps the licensed market in general—are burdensome taxes and price compression.

RELATED: 15% of California Cannabis Businesses Default on Taxes as 2025 Hike Comes Knocking

In addition to engaging the services of HdL to conduct a revenue review of cannabis businesses to determine the impact of potential tax changes, Sonoma County also commissioned the company to provide an annual analysis on market tends and wholesale prices to determine how they affect the county’s square-footage tax as a percentage of gross receipts.

Between 2023 and 2024, the company found that the average wholesale price for premium large-bud flower grown indoors decreased 23.4%, from $1,230 to $942 per pound, while the average price for premium large-bud outdoor flower increased 50.3%, from $308 to $462 per pound.

“The decline in price for indoor flower could be reflective of aggressive pricing by some of the largest mixed-light cultivators in the state who are exploiting their ability to compete with indoor cultivation on quality and consistency while competing with outdoor cultivation on operational costs,” according to the HdL report. “Some of these largest cultivators have been very open about their goal of reducing their cost of goods sold (COGS) to as low as $100 per pound as a way to force the market down and increase their market share. Wholesale buyers may not be willing to pay as much as they did previously for similar product, forcing other growers to accept a significantly lower price.”

When taking weighted averages into account for the overall volume of subcategories—large buds, small buds and leaf/trim—being sold at wholesale by licensed cultivators in Sonoma County, the wholesale price was $606 per pound for indoor flower, $335 for mixed-light flower and $277 for outdoor flower, according to HdL.

For many small farms in Northern California, these prices represent business losses when factoring in various fees and taxes associated with operating in the regulated marketplace.

The proposed square-footage tax rates for cultivators in Sonoma County are roughly equal to a 2.5% tax rate on gross receipts when factoring in the current weighted average wholesale prices, according to HdL.

“As a small craft farmer these rates are extremely unequitable and unsustainable with all the other fees, taxes, etc. It only looks like the market is getting worse as well,” one cultivator wrote in the comment section of the HdL report. “All of my rooms were small and have been running on old equipment, so I'm trying to remodel to be more efficient as well as be able to compete, but it's pretty hard to pay for when I have no money to even pay myself a living wage. I have a business degree in accounting, and I am on food stamps. That is wrong on so many levels.”