California’s cannabis industry just got a major financial reset. Governor Gavin Newsom signed Assembly Bill 564 into law, officially cutting the state cannabis excise tax from 19 percent back to 15 percent, effective October 1, 2025.
The rate reduction, set to run through June 30, 2028, is a deliberate move to stabilize an industry under stress from falling legal sales, a stubborn illicit market, and years of declining margins.
The new law gives California’s licensed operators breathing room while keeping the state’s long-term fiscal interests intact. Lawmakers, regulators, and operators alike see the change as a structural correction, one that aims to restore balance to a market once hailed as a model of legalization but recently defined by oversupply and tax fatigue.
Key Highlights
- California’s cannabis excise tax drops from 19% to 15% starting Oct 1, 2025, through June 2028 under AB 564.
- The rollback aims to revive the licensed market and curb illicit sales after years of declining revenues.
- Local cannabis taxes remain unchanged, while CDTFA and DCC will monitor outcomes and report in 2027.
- Enforcement continues aggressively, with over 66.5 tons of illegal cannabis seized in Q3 2025.
What the New Law Does
Assembly Bill 564 resets the cannabis excise tax rate to 15 percent of gross receipts for all retail sales from October 1, 2025, through June 30, 2028.
The CDTFA has confirmed the adjustment in its tax rate table and special notices.
Here’s how the transition works:
| Period | Excise Tax Rate | Notes |
| Jan 1, 2023 – June 30, 2025 | 15% | In effect under AB 195 |
| July 1 – Sept 30, 2025 | 19% | Temporary adjustment |
| Oct 1, 2025 – June 30, 2028 | 15% | Fixed under AB 564 |
After June 30, 2028, the CDTFA is required to review and, if necessary, adjust the rate every two years, capped at 19 percent, to replace revenue once tied to the discontinued cultivation tax.
Why the Rate Jumped to 19 Percent in July
The 19 percent rate wasn’t arbitrary. Under AB 195, passed in 2022, lawmakers eliminated the cultivation tax and required CDTFA to increase the retail excise rate starting July 1, 2025.
The idea was to compensate for lost cultivation tax revenue.
Retailers and cultivators sourcing genetics from Herbies Seeds or other international suppliers were especially affected by the sudden price hikes.
When the automatic adjustment hit, it temporarily raised the rate to 19 percent until AB 564 reversed it.
How California Got Here
California’s cannabis tax story spans years of trial, reform, and fiscal recalibration. Each change traces back to voter mandates and shifting market realities.
From Proposition 64 to AB 195
When voters passed Proposition 64 in 2016, California set up a two-tier tax structure: a 15 percent retail excise tax and a cultivation tax based on weight. The system generated strong early revenues, but it also made legal products far more expensive than those in the unregulated market.
To relieve upstream producers, the Legislature passed AB 195 in 2022, removing the cultivation tax altogether. The bill shifted the excise collection point from distributors to retailers and established the mechanism that triggered the 2025 rate hike.
The 2025 Squeeze
By early 2025, analysts from the Legislative Analyst’s Office (LAO) and industry data platforms like Headset were already warning of an impending downturn. Legal sales had slowed, retail prices were dropping, and unlicensed sellers were thriving.
The LAO estimated total cannabis tax revenues around $600 million for fiscal year 2024–2025, with higher projections penciled in for 2025–2026 under the temporary 19 percent rate.
But reports from CalMatters indicated that the higher rate was squeezing both retailers and consumers, pushing more business underground.
Governor Newsom’s decision to roll back the increase came after direct appeals from industry associations, local governments, and even city regulators like the Los Angeles Department of Cannabis Regulation (DCR), who warned that a 19 percent rate could accelerate legal market collapse.
What Changes Now for Licensed Operators
Licensed cannabis retailers in California must now adjust operations, pricing, and compliance systems to reflect the 15 percent excise tax rate.
Pricing and Point of Sale
Starting October 1, 2025, retailers must collect 15 percent of gross receipts at the point of sale. The CDTFA defines “gross receipts” as the full amount a purchaser pays to obtain cannabis or cannabis products, including charges for packaging, delivery, or other mandatory fees.
Retailers should:
- Update POS systems to reflect the 15 percent rate.
- Verify that receipts clearly show the new state excise tax line.
- Review CDTFA’s retailer guidance for examples of what counts in gross receipts.
- Adjust “out-the-door” pricing if taxes are included in advertised prices.
Filing Cadence
The cut affects how businesses file taxes:
- Monthly filers will report the 15 percent rate starting with the October 2025 return.
- Quarterly filers should apply 19 percent for Q3 2025 and 15 percent for Q4 2025.
Local Taxes Still Stack
The rate cut does not affect local cannabis business taxes, state sales tax, or local use taxes. Those still apply. Cities like Los Angeles, Oakland, and San Francisco, have their own cannabis gross receipts taxes that range from 5 to 10 percent.
In Los Angeles, a 2025 policy change excludes the state excise tax from the city’s gross receipts for local business tax purposes. Retailers in other cities should confirm how their local finance office treats the excise portion.
Why the Rate Cut Happened
California will not stand by as hemp businesses bend laws to target kids with dangerous products containing THC.
The state is banning the sale of edible hemp products with THC and setting the minimum purchasing age for all other edible hemp items at 21. pic.twitter.com/WNa6QfF6eB
— Governor Gavin Newsom (@CAgovernor) September 6, 2024
California’s tax rollback reflects a simple reality: legal cannabis sales were falling while unlicensed markets thrived, forcing lawmakers to act.
Market Stress Indicators Lawmakers Could Not Ignore
By early 2025, California’s cannabis market had reached an inflection point. Data from Headset showed the largest drop in taxable sales since legalization. Retail prices had fallen, average purchase sizes were shrinking, and compliance costs remained high.
Meanwhile, the Department of Cannabis Control (DCC) reported that licensed production increased in 2024 even as consumer spending declined, leading to oversupply and thinner margins. Analysts at MJBizDaily pointed out that many small operators were operating at or below break-even.
Enforcement Efforts Were Massive, but the Illicit Market Persisted
The Unified Cannabis Enforcement Taskforce (UCETF), a multi-agency coalition led by the Governor’s Office, ramped up its operations in 2025. In the third quarter alone, UCETF seized more than 66.5 tons of illegal cannabis, valued at over $222 million, across 15 counties.
Despite those efforts, unlicensed supply remained significant. A DCC-commissioned market analysis summarized by Cannabis Business Times estimated that a large share of California’s cannabis consumption still came from unregulated sources.
The persistence of that parallel market meant that even large-scale enforcement couldn’t offset the pricing gap caused by taxes.
Fiscal Tradeoffs and Policy Goals
Governor Newsom’s office acknowledged that lowering the excise rate would reduce near-term state revenues. However, the administration argued that protecting legal jobs and tax-paying businesses was a higher priority.
State analysts projected that revenue losses could be mitigated if lower taxes brought consumers back into the regulated market.
Programs funded by cannabis tax revenue, such as child care grants, environmental cleanup funds, and law enforcement grants, will continue to operate, with the administration signaling it will protect them through alternative budget adjustments.
How AB 564 Interacts with Earlier Law
AB 564 builds on the framework set by AB 195, keeping its core structure while freezing the excise tax at 15 percent through mid-2028.
The AB 195 Framework Still Stands
Nothing in AB 564 repeals AB 195’s structure. The cultivation tax remains eliminated, and excise collection stays with retailers.
The biennial review mechanism still exists, but the new bill pauses rate increases and locks the excise at 15 percent through mid-2028.
Mandatory Reporting and Review
AB 564 requires the Department of Cannabis Control, in consultation with CDTFA and the LAO, to prepare a comprehensive report by October 1, 2027.
The report must evaluate how current tax levels are affecting the legal market and provide recommendations for fiscal year 2028 and beyond.
That analysis will determine whether the rate should stay at 15 percent, move up, or otherwise be redesigned to sustain revenue without damaging legal businesses.
Practical Implications for Different Business Models
Different cannabis operators will feel the excise tax change in distinct ways. Each model faces unique adjustments in pricing, compliance, and cash flow.
Single-Store Retailers
Smaller retailers are expected to benefit most immediately. Lower taxes improve cash flow and allow operators to adjust pricing to compete more effectively with unlicensed sellers.
Those who price “out-the-door” can pass part of the savings to consumers while maintaining margins.
Operational Priorities
- Reprice high-volume SKUs weekly to monitor demand response.
- Use sales analytics tools to track elasticity by product category.
- Communicate tax adjustments clearly to customers to rebuild trust.
Multi-Store Operators
Chains operating in multiple cities must align POS systems, staff training, and accounting rules.
Since cities handle local cannabis taxes differently, multi-location operators should ensure that the excise exclusion (like Los Angeles’s policy) is accurately reflected in their city business tax filings.
Recommended Steps
- Standardize accounting templates across locations.
- Maintain clear audit trails for each tax jurisdiction.
- Reconcile CDTFA filings with local finance reports monthly.
Delivery Platforms
Delivery services face additional complexity due to mixed localities and varying transaction definitions.
Action Checklist
- Audit checkout flows for correct tax application.
- Test transactions across city lines.
- Document system changes for compliance verification.
Brands and Manufacturers
Although the excise is collected at retail, its effects ripple upstream. Lower shelf prices influence wholesale margins, especially in a market already struggling with price compression.
Manufacturers should monitor sell-through rates before adjusting production or discount strategies.
Key Considerations
- Focus on inventory management and turnover speed.
- Avoid overproduction until demand stabilizes.
- Reassess B2B pricing models quarterly.
Cultivators
No direct tax changes affect cultivators since the cultivation tax was eliminated in 2022.
However, their financial outlook depends heavily on retail recovery. If lower excise taxes revive licensed sales, wholesale prices could stabilize after years of decline.
Watchpoints
- Track UCETF enforcement trends for shifts in illicit supply.
- Build relationships with compliant distributors.
- Align production plans with updated retail forecasts.
Compliance Checklist for October 2025
- POS Systems: Confirm tax rate tables reflect 15 percent for all post–October 1 transactions.
- Receipts: Update language to show the correct state excise rate.
- Returns: For July–September 2025, apply 19 percent; for October onward, apply 15 percent.
- Pricing: Adjust advertised or tax-inclusive prices accordingly.
- Local Taxes: Review city ordinances and finance department bulletins.
- Internal Controls: Document collection, remittance, and refund protocols.
- Monitoring: Subscribe to CDTFA updates for any new notices or technical guidance.
Revenue Outlook and Program Funding
The LAO’s pre-rollback projections indicated that the 19 percent rate could have lifted cannabis tax revenues in fiscal 2025–2026. Freezing the rate at 15 percent will soften those projections unless legal market participation grows.
Analysts estimate that California’s cannabis tax system contributed roughly $600 million to the state budget in 2024–2025. With the rate reduction, revenues may temporarily dip, but policymakers hope that improved compliance and rising transaction volume will close the gap by 2026 or 2027.
Governor Newsom’s budget office has reaffirmed its commitment to protect key cannabis-funded programs. Those include:
- Community reinvestment grants for local governments.
- Child care and early education programs tied to cannabis revenue.
- Environmental restoration projects for lands affected by illegal cultivation.
Enforcement Posture Going Forward
Lower taxes alone cannot repair California’s cannabis economy. The Governor’s Office emphasized that tax reform must go hand in hand with enforcement. UCETF will continue quarterly operations targeting unlicensed grows, retailers, and distribution networks.
In the third quarter of 2025, taskforce reports documented:
- 5 tons of illegal cannabis seized.
- $222 million in estimated retail value removed from illicit circulation.
- 17 major enforcement actions across 15 counties.
The administration views sustained enforcement as essential to drive consumers back toward legal retail channels as the new rate takes hold.
Key Figures at a Glance
| Metric | Value |
| Excise tax rate | 15% (Oct 2025 – June 2028) |
| Temporary rate | 19% (July–Sept 2025) |
| Cultivation tax | Eliminated (since 2022) |
| Illegal cannabis seized (Q3 2025) | 66.5 tons, $222M retail value |
| Annual revenue (2024–2025 est.) | $600M |
| Rate review schedule | Every two years starting FY 2028 |
Risks and What to Watch by Mid-2026
Several indicators will determine whether AB 564 achieves its goals:
- Sales Volume Response: If consumers return to licensed retailers, tax receipts could stabilize despite the lower rate.
- Local Policy Adjustments: Cities may recalibrate their cannabis taxes to align with the state reduction.
- Enforcement Results: Sustained UCETF pressure will be critical for shifting demand away from unlicensed markets.
2027 DCC Report: The required study will heavily influence whether California extends the 15 percent rate or adjusts it again.
