A group of California cannabis business owners who say their industry is collapsing are threatening to withhold tax payments unless state lawmakers commit to significant reforms.
The leaders of more than two dozen cannabis producers, retailers, testing companies and advocacy groups signed an online petition this week calling for major tax cuts and looser retail restrictions, citing frustrations over rising taxes and competition from a thriving black market.
Addressed to Gov. Gavin Newsom and leaders of the state Legislature, the petition comes after months of speculation about a cannabis tax revolt, as recent state efforts to streamline oversight of the crop have collided with widespread industry concern over a flood of legally grown cannabis leading to falling prices. Any sizable tax protests or cuts could have major financial impacts in a state that collected $976 million in cannabis taxes in the first three quarters of 2021 alone. “The California cannabis system is a nation-wide mockery,” the signatories wrote, “a public policy lesson in what not to do.”
By mid-day Saturday, the petition had attracted more than 460 signatures. Several big names in Bay Area cannabis were listed as authors, including Haborside founder and activist Steve DeAngelo, and the heads of companies like Meadow, Kiva Confections and Bloom Farms. They did not respond to requests for comment on Saturday. More on Marijuana in California
A spokesperson for Newsom did not respond to emailed questions about the petition on Saturday. Representatives of Assembly Speaker Anthony Rendon and Senate President Pro Tempore Toni Atkins also did not respond to emails.
Among the reforms that cannabis leaders are demanding ahead of the state’s annual budget process: the elimination of California’s cannabis cultivation tax, a three-year “holiday” from state excise taxes, and a new deadline for local governments to either set rules allowing cannabis retailers to operate or default to a state system. While the petition stops short of concrete threats or details as to how many in the industry might withhold taxes, the signatories say that California “squandered” its opportunity to legalize cannabis, and that they “will not remain on (their) knees” if the state declines to act. As it stands, cannabis tax revenue funds state programs for everything from drug prevention and substance abuse treatment to research on marijuana consumption and job placement training.
“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 petition reads. “None of us want to make this choice.” Despite these dire warnings, California’s legal cannabis industry was a $4.4 billion business last year, up from $2.8 billion in sales in 2019, according to an analysis by Marijuana Business Daily. The problem, the petition’s authors contend, is that high taxes and widespread retail bans are still allowing the black market to thrive.
At the same time, many in the fast-evolving industry are also worried about producing too much legal cannabis amid the regulatory uncertainty, leading to falling prices. One recent survey of Humboldt County cannabis growers found declining optimism about the industry’s prospects as a result of these concerns.
“Overwhelmingly, respondents identified collapsing market prices and overproduction as their biggest challenges, with overtaxation coming in a strong second,” according to the survey by the Humboldt County Growers Alliance.
Next year, the state’s cannabis cultivation taxes are set to marginally increase, to $10.08 per ounce of dried cannabis flower from the current rate of $9.65 — a requirement under state law to account for inflation, as noted by the California Department of Tax and Fee Administration. The state also imposes a 15% excise tax and 7.25% sales tax, and many local governments charge additional taxes, making California one of the nation’s highest-tax cannabis markets.
The cumulative effect, the petition argues, is that legal cannabis products are “50% more expensive at retail” than buying off the black market. Though precise numbers are hard to gauge in the murky world of illegal sales, California’s black market for cannabis was estimated by the United Cannabis Business Association in 2019 to be at least three times the size of the legal market.
In recent months, Bay Area cities caught a glimpse of the scale of the illegal market through a series of busts. Law enforcement raided 18 facilities in San Leandro, Oakland, Hayward and Castro Valley in late September, netting hundreds of thousands of plants, $10 million in cash and assets and 12,000 pounds of processed product. The Alameda County Sheriff’s Office called it the region’s biggest-ever raid.
The turmoil over taxes and black-market sales comes as the state reorganizes its approach to cannabis oversight.
In October, a new, centralized Department of Cannabis Control marked its first 100 days in operation. Leaders touted achievements like creating a $100 million local grant program to help companies get legal certification; assisting on 118 warrants related to suspected illegal activity; and mounting new efforts to consolidate redundant state regulations.
“We’ve made meaningful early progress as a new department,” Department of Cannabis Control Director Nicole Elliott said in a statement at the time. “But this is only the beginning.”