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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

This is the last of the four articles we decided to publish to illustrate the savings for consumers, and additional profits for cultivators, that can be produced through the use of a properly organized Cannabis Cooperative Association (“CCA”). This article describes the savings for consumers, and the additional profits for cultivators, that can be produced through the movement of extracted oil as medical cannabis through a fully integrated CCA.

 

As we have said on multiple occasions, a CCA is the most financially efficient structure for engaging in business in California’s cannabis industry. The use of a CCA to move extracted oil as medical cannabis produces even greater price reductions for consumers than are produced in the movement of flower as medical cannabis. More costs are incurred between the cultivator and the consumer in the movement of extracted oil than in the movement of flower. The financial benefits from the use of a fully integrated CCA increase as a consequence.

 

The spreadsheet immediately below was the starting point for our August 8th article. The spreadsheet immediately below assumes that consumers pay a total of $10,000, including all taxes collected directly and indirectly from consumers, for 250 cartridges of refined cannabis oil ($40 per 0.5 gram cartridge). The spreadsheet immediately below assumes the dispensary, distributor, manufacturer and cultivator are conventionally organized.

 

The spreadsheet immediately below illustrates the distribution of the $10,000 paid by consumers among the governmental agencies, and the dispensary, distributor, manufacturer and cultivator. We have assumed each of the manufacturer, distributor and cultivator have a profit before taxes that is one-third of the profit before taxes of the dispensary. We have also assumed a 40% income tax rate is applicable to the profits of each of the businesses.

 

The basis for the spreadsheet immediately below is a sale of five kilograms of trim by a cultivator at a price $304.60 per kilogram including Cannabis Cultivation Tax (“CCT”). The manufacturer assumes the CCT. The net to the cultivator is $1,051 which is approximately $95 per pound. We further assumed the cultivator has a production cost of $394 for the five kilograms of trim which produces a $657 before tax profit for the five kilograms.

 

For the manufacturer we assumed additional costs of $1,094 and a profit of $657 on the extraction of the five kilograms of trim. We further assumed the manufacturer passed on the CCT to the distributor. We assumed the distributor had additional costs of $657 in packaging and handling of the oil, and had a profit of $657. We assumed a yield of a total 125 grams of refined oil (250 packages of 0.5 gram). For the dispensary we assumed additional costs of $789 and a profit of $1,971 on the 250 cartridges based on a 60% mark-up of the wholesale cost of the cartridges from the distributor.

 

 

A total of $10,000, including all taxes directly or indirectly collected from consumers, is paid by consumers for the refined oil in the preceding spreadsheet. The $10,000 is distributed as follows: (1) governmental agencies for taxes other than income tax, 31.4%; (2) dispensary revenue, 27.5%; (3) distributor revenue, 13.1%; (4) manufacturer revenue, 17.5%; and (5) cultivator revenue, 10.5%. We have included the spreadsheet above as a baseline for illustrating the advantages of a CCA as a business structure.

 

The dispensary in the spreadsheet above has gross revenue of $7,356, COGS of $4,598 and income of $2,758. The dispensary has an after tax profit of $1,182 on its income of $2,758; the distributor has an after tax profit of $394 on its income of $1,314; the manufacturer has an after tax profit of $394 on its income of $1,751; and the cultivator has an after tax profit of $394 on its income of $1,051.

 

In the spreadsheet immediately below, we assume the same 250 cartridges of refined oil are sold as medical cannabis to consumers at a price per cartridge that produces the same gross revenue for the dispensary, excluding the taxes directly and indirectly 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 cartridges for $8,827 will produce a gross revenue of $7,356 for the dispensary. The $7,356 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 cartridges of refined oil for $10,000 as adult-use cannabis.

 

 

We have included the spreadsheet immediately above to illustrate the changes in the distribution of money that are caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis. The sale of the 250 cartridges of refined oil as medical cannabis provides the consumers with a 11+% discount even though the gross revenue, costs and profits of the dispensary, distributor, manufacturer and cultivator remain the same.

 

In the preceding spreadsheet the total of $8,857 paid by consumers for the cartridges of refined oil is distributed as follows: (1) governmental agencies for taxes other than income tax, 22.2%; (2) dispensary revenue, 31.2%; (3) distributor revenue, 14.9%; (4) manufacturer revenue, 19.8%; and (5) cultivator revenue, 11.9%. The change in the distribution of the money collected from consumers in the spreadsheet above is solely caused by the change in the taxes collected from consumers.

 

In the spreadsheet below we have assumed the cannabis moves from cultivator to consumer, and is refined, through a fully integrated CCA. We have also assumed the profit to the cultivator through the use of the CCA is doubled by the shifting of the profit of the manufacturer in the two illustrations above to the cultivator. We have further assumed the profits of the dispensary and the distributor, and the reductions in costs of conducting business that are achieved through the use of a fully integrated CCA, are passed on to the consumers.

 

 

The costs for the cultivator, manufacturer, distributor and dispensary in the spreadsheet immediately above are the same as in the first two spreadsheets. The tax rates also remain the same. We have assumed any income tax at the dispensary level is included in the $787 of costs. The shifting of the amounts to which the tax rates are applied produces dramatic savings for the purchasers of the cartridges of refined oil notwithstanding the doubling of the cultivator’s profits.

 

The preceding spreadsheet reflects the sale of the same 250 cartridges of refined oil as medical cannabis through a fully integrated CCA for a total of $5,673, including all of the taxes collected directly and indirectly from consumers. The $5,673 total amount paid by consumers for the cartridges of refined oil is distributed as follows: (1) governmental agencies for taxes other than income tax, 25.1%; (2) dispensary revenue, 13.9%; (3) distributor revenue, 11.6%; (4) manufacturer revenue, 19.3%; and (5) cultivator revenue, 30.1%.

 

Through the use of a CCA the cultivator has an after tax profit of $788 on income of $1,708. The consumers purchase the same refined oil, including all taxes, as medical cannabis for over 43% less than the cost for the same cannabis when conventionally structured businesses are used to move the cannabis from cultivator to consumer even though the cultivator’s profits are doubled.

 

The preceding illustrates how the total cost, including taxes, to consumers of refined oil that is sold as medical cannabis can be reduced by over 43%, and the profit to the cultivator doubled, through the use of a fully integrated CCA.

 

Can anyone doubt a CCA is a “Better Mousetrap”? Consumers pay substantially less for the same cannabis product. California collects all of the taxes it is owed. Local governments collect all of the taxes they are owed. Cultivators make twice as much money.