(CN) — A group of cannabis business leaders are threatening to pull out of California’s $4.4 billion legal market next year unless lawmakers change state tax laws that they say are killing small businesses and driving consumers to buy pot on the black market.
“We’re getting taxed more than alcohol, any other industry,” said Darren Story, founder of the Watsonville-based cannabis and berry farm company Strong Agronomy, during a press call Friday. “Every business is saying they’re not profitable and not sustainable.”
California started taxing the cultivation and sale of state-regulated marijuana in 2018 after voters approved a 2016 ballot measure that legalized selling licensed pot to adults at least 21 years old for recreational use.
Years later, cannabis business leaders say the taxes on legal marijuana are stifling, unsustainable and have caused licensed pot growers and retailers to fold, downsize and lay off workers. One major reason is that California consumers can buy pot on the black market for half the price they would pay licensed retailers.
Businesses and industry groups sent a letter to Governor Gavin Newsom and state lawmakers this week calling for an immediate overhaul to the state's cannabis tax system.
“It is critical to recognize that an unwillingness to effectively legislate, implement, and oversee a functional regulated cannabis industry has brought us to our knees,” the letter states. “The California cannabis system is a nation-wide mockery; a public policy lesson in what not to do.”
Likening their struggle to the 1873 Boston Tea Party in which colonists dumped imported tea into the Boston Harbor to protest unfair taxes, the companies say they will forfeit their licenses and stop paying taxes if changes aren’t made by July 1, 2022, the deadline for lawmakers to pass a new state budget.
“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,” the letter states.
The business leaders cite statistics showing that 75% of marijuana in California is purchased on the black market. The 75% figure was confirmed by Arcview Research, a cannabis industry analysis group, according to the San Francisco Chronicle, though Arcview did not respond to a request for confirmation Friday.
The cannabis business advocates are asking for three major changes. They want the state to eliminate a cultivation tax, reportedly the only such tax in the world on a grown product at the farm level. They also want at least a three-year suspension of an excise tax on retail purchases. Additionally, they want the state to create a mechanism that will force certain localities to allow more pot dispensaries to open.
According to the business leaders, 68% of California lacks local regulations that allow customers to purchase pot from licensed dispensaries. They propose legislation that would require any city or county in which more than 50% of voters approved legalizing marijuana in 2016 to put a program in place for licensing pot dispensaries by July 1, 2022, or have it automatically default to a state program.
Pointing out that the state currently has a $31 billion budget surplus, the business leaders say California can afford to forego taking in a tiny fraction of that amount to help make the industry strong enough to compete with the black market over the next few years. The state collected $817 million in cannabis taxes this year, a 55% increase from the prior year.
A spokesperson for the governor said Friday that Newsom, a major proponent of legalizing marijuana in the state in 2016, is supportive of efforts to reform cannabis tax rules.
“It’s clear that the current tax construct is presenting unintended but serious challenges,” the governor's spokesperson Erin Mellon said in an emailed statement. "The administration is committed to meaningful pathways to achieve and maintain licensure for California’s small, legacy, and equity licensees, and to enforce illegal cannabis market.”
Any change to the tax rules will require approval by two-thirds of lawmakers in the state Senate and Assembly, which could pose an obstacle for efforts to reform the tax rules.
During a press call Friday, Lindsay Robinson of the California Cannabis Industry Association said business leaders have considered introducing a ballot measure to change the tax system but so far they haven’t found backers willing to commit the $20 to $30 million needed to run a successful ballot initiative campaign.
Steve D’Angelo, a cannabis rights advocate who co-founded the cannabis company Harborside, with which he is no longer affiliated, said voters were told in 2016 that legalization would make cannabis safer for consumers and allow black-market sellers to transition to a regulated, legal market. But he said that never happened.
High taxes and onerous regulations kept unlicensed cultivators out of the legal market and contributed to illegal sales making up three quarters of all marijuana sales in California today, he said.
“The legacy market needs to be welcomed into the legal system,” D’Angelo said. “Otherwise it will just stay outside and compete with the legal system.”
In December, San Francisco’s board of supervisors voted to suspend local taxes on cannabis sales through the end of 2022 to help licensed marijuana retailers compete with cheaper black-market pot sellers.
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