Tax break for cannabis firms is just first step

An indoor cannabis farm in California. (Photo: Mitch M., via Shutterstock)

California’s legal cannabis industry is in a state of disarray. The market is chaotic, the regulatory landscape is in a constant state of flux, and at the same time, the black market continues to flourish. Consumers find themselves with limited access to quality and safe products as businesses struggle to stay afloat and keep up with a moving target.

On Jan. 28, California lawmakers announced an attempt to remedy this issue: a new bill designed to give legal cannabis businesses a tax break, which in turn would support the legal market while suppressing the black market.

More specifically, the bill would temporarily cut California’s cannabis excise tax by 4%—from 15% to 11%—and suspend the cultivation tax until 2022.

From 2017 to January 2018, the number of dispensaries dropped dramatically from nearly 2,500 to a mere 300.

It is promising to see bipartisan state legislators take action to address the problems that the cannabis industry has experienced since adult-use legalization passed, and their proposed tax break is a major step toward resolving a host of issues plaguing both customers and business owners.

But it can’t stop there.

Among the other key issues still to address: There is a blatant lack of legal retail outlets for customers to purchase cannabis products in California.

From 2017 to January 2018, the number of dispensaries dropped dramatically from nearly 2,500 to a mere 300. Slow growth has brought that number up to approximately 400 dispensaries today.

At the same time, the state issued a record number of licenses to cultivators and manufacturers. The decline in dispensaries, combined with increased supply, has caused major market disruption.

Retailers are now buying from the cheapest places possible—which are often unlicensed producers—effectively fueling black market sales and achieving the precise opposite of what was originally intended.

Not to mention, state regulations have changed numerous times since their initial implementation in 2018.

For example, the requirements for child-resistant packaging changed three times in the past year alone, putting cannabis businesses through the expensive process of designing and producing three separate iterations of their packaging.

The state failed to implement regulations in a way that facilitated a smooth transition

Complicating matters is the fact that each municipality in California sets its own regulations, which often end up being stricter than state-level regulations. Further, as each municipality implements its own gross receipts tax—some as high as 10%—the end cost increases for consumers.

Pricing is a major problem: there is no stabilization in the marketplace. As a result, the same product can be sold at significantly different prices within the same local market. This makes it extremely difficult for brands to control the consumer experience. After all, how can a brand maintain customer loyalty if a customer can’t even rely on consistent pricing?

California’s cannabis market has been alive and well for decades. It is, and has been, the largest cannabis market in the world, making it difficult to impose regulations.

However, the problem does not lie in the fact that Californians aren’t willing to be regulated. Rather, it exists because the state failed to implement regulations in a way that facilitated a smooth transition. High taxes, regulatory costs and complicated multi-tiered regulations all contributed to an increased cost of production. This, combined with the lack of retail stores, creates a perfect storm.

As a vertically-integrated seed to sale company operating in Oakland, NUG has witnessed the struggle firsthand. We, along with many cannabis businesses, would have benefited from lower taxes in the beginning, along with a pre-defined increase over a number of years.

This would have allowed the market to respond properly. In addition, cities should never have been given so much control over factors like taxes, packaging and labeling. In many cases regulations at the local level have caused businesses to either develop city-specific products and policies, thereby decreasing efficiencies increasing overall production costs, or not do business in that particular city.

The well-capitalized will survive. The complex tiered regulatory framework and patchwork of tax measures have significantly increased the cost of doing business in California. Many, if not most, cannabis businesses in California suffered financial losses in 2018.

Businesses that didn’t prepare, by either retaining past earnings or raising outside capital, are in a precarious position. Unfortunately, the businesses most affected are the smaller mom-and-pop businesses that Prop 64 was supposed to protect. Private equity firms and venture capitalists are descending. Consolidation is occurring rapidly.

While the proposed tax break is a great start for mitigating the problems afflicting the cannabis sector, California still has a long way to go before the system is fully mended.

Ultimately, we must urge the state to prioritize licensing retail establishments so that the distribution pipeline can be opened up once again and so that consumers will be provided increased and improved access to safe, consistent and high-quality cannabis products.

In order to stabilize and foster a fair market, the cannabis industry urges lawmakers to listen and take further action.

Editor’s Note: John Oram, Ph.D., is the CEO and founder of NUG, an Oakland-based, vertically-integrated cannabis company founded in 2014. It houses the largest cultivation operation in Northern California across three facilities.

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