The Harm of the Excise Tax

On The State of Craft, he discussed the harm that the Excise Tax is having on small businesses and what we can do about it.

There's one big article of reform that could really improve this industry and give producers a chance. It's excise tax. 

We've seen some awesome success stories coming out of smaller producers. They come to market with a promise of quality, get an audience largely digitally, don't spend a ton of money on marketing, and the audience is fired up and stoked about the quality of the product.

They start selling, blow up, and then start not having enough product. That's a good problem to have. They sell products at a price point that allows them to take a margin and they're profitable. Then they have to pay their excise tax. This is absolutely heartbreaking. We're taking the excise tax out of the middle of the supply chain, and we're loading it all onto producers. It creates a ripple effect, raising prices along the way.

These craft operators would be profitable enough to grow their businesses organically, but then the CRA takes 20%, 25%, even 30% [of their top-line revenue] in some cases. That's all of their profit, and then some. The excise regime is ridiculously punitive; maybe unintentionally punitive, but at $1/gram, it just absolutely cripples a craft producers’ ability to make money and stay on the playing field. It just rips me up that the government's milking a calf to death. 

It's definitely true for us at Tantalus Labs - we had good financial health, and then every month, we have to pay hundreds of thousands of dollars just to keep going forward. We're still in the minority of sales in Canada when it comes to legal versus illicit market cannabis. I know a ton of illicit suppliers that are doing great right now. And they don't have a strong incentive to legalize because they can't see how to make a half decent living. We're not talking about getting rich - we're talking about making enough profit to be able to reinvest into your business. We need a sustainable business model that functions across businesses of different scales. 

The large LPs don't really care – they’re substantially subsidized by their shareholders. They take a negative 40% gross margin on some products. That means that they are getting their shareholders to pay 40% of the price of that so they can actually make money or “make shelf space”. And that's not a position any craft mom and pop style operation can take. I can't sell my product at a loss - we can’t sell our Shake if we’re paying more for packaging and distribution than we are receiving for it. The large LPs can go on for five years even if the tax regime isn’t sustainable, and they just wait for all their competitors to die. 

We're not going to get any help here from the big guys; this is going to have to be a bunch of small producers coming together representing small businesses.

At Tantalus Labs, We pay maybe 3x as much in excise tax as we do in labor. We have 65 employees. We pay living wages and make sure our people are well compensated so they feel committed to staying. And every month, that's 1/3 of what we pay in excise tax. Crazy, right? Originally, they built this tax model to say they take the larger of $1 or 10% of the price/gram. It's called an ad valorem tax. That means that you get two options, and they'll take whatever is more. When they wrote that policy, they figured some would be sold at $15/gram, and it would be charged more. What they didn't realize is that the ad valorem tax has never once been levied. There's never been a wholesale price of cannabis that was above $10, and the average in the market right now is probably more like $5. And it's been pulled down substantially over the course of this year. 

Luckily, we sell for a bit above average, not a crazy amount above average. There's some people that can sell for a lot above average, but they just don't get a lot of volume. So maybe that's the best micro model. But there's cannabis that sells for $2/gram out there, and $1 of that is excise tax. They thought that wholesale prices would normalize maybe around $8-$9, but that's not what's happened. I think Health Canada and CRA might not have been aware of what a huge cut it was going to be. But the way it's played out, it's really just drinking the blood of these tiny businesses.

I think that's why we need to motivate change by standing together and saying: “Look, you don't tax oil and gas this way. You don't tax alcohol this way. You don't tax consumer packaged goods this way. You don't tax maple syrup this way. You don't tax any other product in this country, the way you're taxing cannabis at the beginning of an infant industry. And you're taxing us all to death.” We are in the most regulated industry in Canada. 

Here’s my solution.

First, the $1/gram minimum does not make sense in a price compressed market where prices on average are $5 or less per gram so we have to change that. It's not simple, because 75 cents of every dollar in excise tax goes to the provinces, and the provinces want to hold on to that. A lot of the distributors have lost money in the last couple of years and they get bad press for it. But if the industry dies, it’s much worse. We need some coordination between provinces advocating for tariff reform, as well as Health Canada Finance Ministry and the CRA all advocating for excise reform. 

I recommend changing it to a floating percentage. There's no other jurisdiction in the world that taxes cannabis so heavily, and even in jurisdictions where it’s 15% at the point of sale at the end customer, they still have taxation issues. They’re still competing with the illicit market. We have to be mindful that it's a young business; let's make sure it has every resource it needs to go out and convert people and bring people into our way of thinking and get it regulated - and do it by showing it makes financial sense.

The second piece is that I think we've got an amazing model in craft beer. If you brew below a certain amount of beer, you get taxed at a certain level. If you brew more than that amount of beer, you get taxed at a higher level, which you can afford to pay because you have economies of scale that make your margins better on higher volume products. At the local distillery level, there's a whole other tax category. We've done that with licensing categories in cannabis. We know the difference between a standard, a processor, a micro, and outdoor. These businesses need to be treated differently, like with beer. The economies of scale in cannabis are huge - a good outdoor grower can grow for 30-40 cents/gram, while the best greenhouses are growing for 60-65 cents/gram, so they could afford to pay a bit more for their share. So real simple - put the alcohol regulations in front of policy makers and say “we should tax cannabis the same way.”

What can you do to help?

Contact public entities and government officials. There's a degree of strategy around approaching them if you want to get results. It's all about thinking from their shoes. They have to protect the status quo as some element in their jobs, and they’re working hard, so always be super nice. Frame that problem in a really concise way so you can articulate it clearly and show who it affects. Then, come with a few ideas on how we can make some changes that lead towards solutions.

I’ve communicated a lot with the Finance Ministry, Health Canada, and CRA, but sometimes the greatest traction that you can get can be from your own MLAs and stakeholders who will listen. I’m happy to help and make connections, but your own MLA and representatives should be able to plug you into the right people. Foster relationships with local politicians to get your message in the right places and create long term relationships with them if you want to be in the game in 10 years. Make it known that you're here to work towards solutions and always be respectful.

Right now, nobody is going great. Large LPs are losing money by the hundreds of millions a year. We need to be able to demonstrate financial success; to say that this is something you can do, that you can make a good living and pursue your dream of being in the cannabis industry.

I've been told a thousand times that many different things that Tantalus Labs has now accomplished would be impossible. It can seem like I’m preaching doom and gloom, but I believe it can change. And I believe that over 10 years, this is a great industry to become a part of. There's a good phrase: ‘the best time to plant a tree was 20 years ago. The second best time is now’. I think we all need to work together to push regulations in the right direction and facilitate the growth of a global example of what a healthy cannabis industry should be. 

Do you want tax reform?  Support Dan’s movement, Stand for Craft.