Saving the Cannabis Industry From a Downward Trajectory
From my perspective, I think nearly every business operator in the legal California cannabis space would agree the industry is struggling to stabilize after 4-plus years of Prop 64 guidance. Some legal cannabis businesses, after enduring exorbitant licensing fees, daunting state and local regulatory demands, and burdensome taxation have permanently shuttered their doors. Many have found survival in a highly competitive, volatile market to be more than they could navigate.
It is not too late to save the industry from its downward trajectory. Changes to state and local regulations could not only immediately reverse its course, but these changes could breathe new life into the suffering industry.
Once a gray-market industry, California regulators created a framework for existing cannabis businesses to become compliant. The undertaking to transform businesses accustomed to operating outside conventional avenues was no small task. Much was asked of business operators, both in costs incurred and in transparency required to reveal sensitive business details. Those committed to evolving, made the sacrifices to acquire the coveted legal status that meant they could operate openly within their communities. It was no smooth transition.
As with any new government program, there were — and continue to be — issues that directly affect business operators. From the onset, state and local agencies burdened licensees with unprecedented taxes. High licensing fees have kept many from transitioning from Proposition 215 markets to adult-use markets. State licenses can range from $1,205 annually for a specialty cottage cultivation permit to $300,000 annually for large-scale microbusinesses. Additionally, district licenses can be equal to or greater than state fees. Many districts also charge a percentage of annual gross revenue and a percentage for community impact programs. These are not initial costs; they are annual costs. The expense of legal licensure can be a tremendous barrier to entry for anyone without deep pockets.
Furthermore, the cannabis industry has burdensome taxation beginning at cultivation and continuing through manufacturing, distribution and retail — taxed at each licensee. This causes retail prices for legal cannabis to exceed illicit market prices. It seems no other industry is taxed as excessively as California cannabis, and operators are forced to pass those burdens on to consumers. Consumers often see only pricetags, making it difficult for legal products to compete with illicit pricing — one of the reasons we have a robust illegal market in California.
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What I believe is needed is a level pricing field, which could disincentivize consumers from shopping in illegal shops. A reprieve from cultivation and excise tax would allow legal businesses to compete and capitalize on the opportunity to grow. In turn, the state may realize its revenue goals once the excise tax is gradually re-introduced. However, if nothing is done to rescue the cannabis industry, I fear we could lose access to safe products in California.
Additionally, operators complain that little is done to mitigate the damage from a thriving illegal market. As cannabis tax rates continue to increase, consumers will likely choose to spend their money where it goes further. Illegal retailers open shop and are shut down, only to reopen elsewhere a few hours later. I was told by one such operator that they already have the next two locations prepared to open long before their illegal shop is shut down by authorities. It seems these operators are two and three steps ahead of the Department of Cannabis Control (DCC).
As of January 2022, the DCC had issued 12,221 cannabis business licenses. Despite California voters choosing to develop a legal cannabis industry, the state allows individual districts to decide whether or not they allow safe access to cannabis — 56 percent of counties do not allow any kind of cannabis business license. Make no mistake, consumers are spending their dollars on cannabis products in every district throughout the state. If they are denied access to legal cannabis, consumers could turn to illicit products. State regulators should ensure access in all districts by forcing them to write policies for their respective communities or be forced to adopt a statewide mandate for inclusion. I believe this step would guarantee safe access to legal cannabis for all.
In a letter penned to the Governor of California Gavin Newsom, Senate President pro-Tempore Toni Atkins and Speaker of the Assembly Anthony Rendon, 29 large cannabis operators throughout California stated, “Without meaningful change, many, if not most licensed cannabis companies, will face a desperate choice: pay exorbitant taxes into a system designed for failure or pay employees so they can feed their families. None of us want to make this choice.” These industry leaders appealed for an end to the cultivation tax, a reprieve of excise tax and increased issuance of retail licenses, warning that the “industry is collapsing.”
On May 13, 2022, in a letter from Governor Newsome’s office regarding his revised 2022-2023 state budget, it stated California would be “Setting the cultivation tax rate at zero beginning July 1, 2022.” This will provide a small measure of relief for cultivators and help stabilize the raw cannabis market. The budget proposal also addressed the shortage of licensed retailers within the state with a “one-time allocation of $20.5 million to help expand access to legal retail throughout California.” Districts can apply for funds to develop a framework for cannabis commerce in their communities.
The 2022-2023 budget revisions acknowledge the desperate state of the cannabis industry and addressed a few of the issues causing its downfall. However, not every point was met with action. There was a minor adjustment to state excise taxes. The mark-up rate was reduced from 80 percent to 75 percent. Furthermore, there are no promises made to tackle the illicit market in a meaningful way, but it appears the concerns of the ailing cannabis industry were at least heard, which means there is hope for a recovery.