California cannabis regulations are taking one step forward and two steps back.
Two landmark – and at times polarizing – pieces of legislation for California’s cannabis market are currently making waves: The state is set to raise the cannabis cultivation tax while regulators have announced plans to standardize cannabis testing.
The former needs to be stopped, while the latter should have been implemented soon after Proposition 64 was ratified for adult-use cannabis back in 2016.
Cultivating Illicit Competition
High taxes for California cannabis operators have long been the ire of the industry, but the latest news that cultivation taxes on legal cannabis will be raised 4.5% starting in 2022 (despite the state seeing an estimated $31 billion budget surplus in 2022) is a real twist of the knife.
The tax increase presents a tremendous pitfall, especially for mom-and-pop grow operations.
Aside from the tobacco industry, cannabis is the most egregiously taxed consumer good, as there is a state and local excise tax paid by buyers, a sales tax paid by customers and the cultivation tax that growers pay, which occurs before they even make a sale in the first place.
California’s cultivation tax is currently $9.65 per dry weight ounce for cannabis flower, $2.87 per dry weight ounce for leaves and $1.35 per dry weight ounce for cannabis plants. Starting January 1st, these will increase to $10.08, $3.00, and $1.41, respectively.
The increase may not seem significant when examining taxes by the ounce, but for compliant licensed growers producing hundreds or even thousands of pounds of flower per week, the tax increase presents a tremendous pitfall, especially for mom-and-pop grow operations.
It will be more difficult than ever for cultivators without a great deal of capital to stay afloat, while the tax raise will even impede well-funded highly efficient companies. This presents a real and present danger to the licensed market and its future scale potential, and many perceive this as the state subsidizing the illicit market who avoids all taxation and continues to forge ahead with limited enforcement resources, despite the massive tax revenue from those doing their best to be totally compliant.
Even consumers who are cannabis connoisseurs often still opt to purchase from underground cannabis purveyors because the products are so much cheaper.
So clearly raising the cultivation tax will continue to further challenge the licensed industry to compete with the very prominent illicit market. The latter already has a head start in the industry thanks to conducting business tax-free and being able to skirt additional expenses beyond taxes (such as costs for regulatory, compliance, licenses and permits, etc.), allowing these illicit operators to sell products at significantly lower price points.
Even consumers who are cannabis connoisseurs often still opt to purchase from underground cannabis purveyors because the products are so much cheaper. The unlicensed market continues to be estimated as twice as large as the legal industry leading to many California residents being concerned, as the unlicensed market often comes with questionable safety and quality control issues such as pesticide exposure while consuming.
Speaking of safety and quality control issues, raising the tax on cultivators could have other unintended consequences as growers could cut corners to save money and make up for their losses, potentially resulting in less successful flower yields and reduced quality and potency.
The California state government is already beginning to reap the benefits of the highly taxed cannabis market and should be able to forgo any additional increases for the next few years. In 2020, $1.1 billion in cannabis tax revenue was paid to the state and in 2021, the revenue is expected to be $1.3 billion.
But it is not all doom and gloom in the California market. In a much-needed step forward, the state’s regulators are working diligently to standardize the quality, safety and dosage testing of cannabis products. There are currently more than forty licensed cannabis testing labs in the state and while many do particularly excellent work, a lack of uniformed regulations opens the door for some producers to try and manipulate the rules through lab shopping and other practices that produce misleading product results through potency-doping batch test samples.
Standardized testing regulations will allow for more consistency and accountability among licensed cannabis testing laboratories.
Standardized testing is crucial, especially coming off recent concerning headlines where products from more than 400 dispensaries were recalled due to inaccurate testing results. In California, there is an issue with disreputable producers chasing potency results and modifying both test samples and offering lab kickbacks to manipulate THC dosage numbers.
And of course, hiding the use of contaminants is still a problem, further putting consumers’ health at risk and continuing to jeopardize consumer confidence in the market overall.
Standardized testing regulations will allow for more consistency and accountability among licensed cannabis testing laboratories. The new rules will also enable labs to perform better, more easily identifiable issues and correct problems in the flower and other cannabis products they are testing.
Business owners and advocates coming together to express the need for uniformed testing and working with regulators to get it done is a notable example of how the regulated California cannabis market can continue to be improved and live up to its full potential.
Hopefully, we can eventually raise enough awareness to achieve that same leverage regarding the taxation issues.
Editor’s Note: Skip Motsenbocker is the CEO of Pacific Stone, a market leader in California cannabis, with both large scale green-house cultivation facilities and more than a million square feet of flower.