California Dreaming or Nightmare?

CA flag

By Marc Brandl

[Note:  A version of this article originally appeared in 8th Revolution’s Monthly Playbook – subscribe here]

Friday May 13th saw big news released from Governor Newson’s office on the future of the cannabis industry in California.  The world’s biggest cannabis market has struggled with a host of interrelated problems; high taxes, slow approval of licenses and a legacy grey market some estimate could be as high as 80% of total cannabis sales.

Some of the proposed changes to the regulations include:

  • Elimination of the cultivation tax, which is currently at $161 per pound of flower
  • Changes to how tax revenue is allocated
  • After three years the excise tax would be increased from 15% to 18%
  • Point of Collection and Remittance of the excise tax would be shifted from Distributors to Retail operations
  • Launching a $20.5 million grant program to help municipalities implement retail licensing efforts; on top of $100 million already allocated to help develop local and legal cannabis markets.

The Governor of California’s proposal will need to be amended and approved by the state legislature before becoming law by the end of the 2022 legislative session ending August 31st.

Advocates welcomed eliminating the cultivation tax but there are still broad concerns within the industry about how much change these proposals will really bring about.

The California cannabis industry faces daunting challenges.  A recent survey by the National Cannabis Industry Association of 396 cannabis operators found 26% of California operators are unprofitable.  Federal 280E penalties on standard tax deductions combined with high state taxes are the two major barriers to profitable cannabis operations.

As of December 2021, only 161 of California’s 482 total municipalities and 24 of 58 counties allow commercial cannabis operations. This amounts to 2 retail shops per 100,000 people, a number tripled by another high cannabis state state, Washington which has 6.2 shops per 100,000 people.

The lack of access to legal cannabis retailers has ensured a thriving unregulated market continues to thrive in the Golden State.  Up to 3000 unlicensed retailers and up to 50,000 unlicensed cultivation sites are estimated to be in operation.  The math is simple, pay no state taxes and costs associated with state and local regulations and the price you can charge your customers drops by 50% or more.

One of the major concerns with the Governors proposal is that customers won’t see a reduction in the price they pay at legal retailers.  Jerred Kiloh of the United Cannabis Business Association, a Los Angeles-based trade group, said ,“All they are really doing is shifting some taxes around, and it’s not ever going to get to the customer.”  Advocacy groups such as UCBA believe the excise tax needs to be lowered to 5% to reach customers pockets and draw them in to the legal market.

The California cannabis industry is the oldest in the US with its landmark passage of Prop. 215 in 1996 which legalized cannabis for medical patients and began the path to what we see today with 37 medical cannabis states and 18 adult recreational states. However,  in the background, California operators have always faced many heavy burdens from the state.  Hundreds of federal and state police raids per year on operators were the norm not that long ago.  Unfriendly and outright hostile local politicians, sheriff’s departments, bureaucrats, and neglect from Sacramento have been a feature, not a bug of doing business in California.

Since 1996 California has seen great brands, product innovations, a thriving culture and a reputation for the best cannabis in the world.  Ambitious companies such as Glasshouse Brands, and 4Front along with many others continue to invest hundreds of millions of dollars into a golden future that always appears just around the corner.   Faced with these challenges and concerns about a broader recession and reduced consumer spending, we’ll soon see how far away that golden future actually is.

Arcview Consulting can help you navigate the challenging California market – Go to market strategy, licensing, strategic advisory, investment decks, marketing and more. Contact Sarah Falvo at [email protected] for more information.


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