Licensed Marijuana Businesses Struggle to Stay Solvent as Black-Market Producers Drain Cash From Market
EUREKA (KPIX) -- For many of those trying to make it in California's legal cannabis market, just keeping the lights on has been a survival story.
One way to measure the success of California's legalization of recreational marijuana would be to compare projected state revenue versus actual revenue but those numbers have been a bit of a disaster. The state has failed to meet even lowered revenue projections.
So what's wrong and what can be done to fix things? Just ask the folks who are making a go of it, in the "regulated" cannabis market.
"I would say we are a few of the lucky ones who got started early on," said Lizandro Salazar of ArcataX, a cannabis manufacturing business in Humboldt County. "It's still not easy."
"This is our annual state manufacturing license," said Robert Gale, manager of the Humboldt Terp Council. "This is our commercial cannabis activity permit," he added, pointing to a wall covered in permits, licenses, and regulations.
A maze of state, county and local regulations, fees and tax-flow charts confronts this newly-legal industry that is, by and large, all-cash. Most small cannabis businesses long ago burned through their available cash and brought in new investors to stay afloat but, now, those resources are getting scarce too.
"If we started right now, today, I'd say we'd be struggling," Salazar said.
"If we had to start today, it would be totally impossible," said Casey O'Neil, owner of Happy Day Farms, a small cannabis and produce operation in Mendocino County.
Of course it's not just just business owners and would-be entrepreneurs staring at high taxes -- it's any single adult in California who is thinking about buying marijuana. Those purchases come with a state excise tax, a sales tax and local cannabis taxes.
"So now you're talking 15, plus seven, plus six. You're at 29 percent -- literally 29 dollars on every hundred," Gale said referring to the state's cannabis buyers. "There's not a lot of incentive for longtime users to come into the (legal) market."
"There's no incentive," says Palmdale assemblyman Tom Lackey. "In fact, the reverse is true. People are leaving the regulated market because they have no choice."
Assemblyman Lackey, a Republican and former Highway Patrol officer, might sound like an unlikely candidate to ring the cannabis alarm bell.
"It's a crisis," Lackey explains. "It truly is a crisis for that market."
Lackey and East Bay Democrat Rob Bonta have spent over a year trying to build support for cannabis tax relief but those kinds of changes will almost certainly require a push by California's chief executive. We asked the governor's office what their plan might be and were told they're not ready to comment.
"We're asking the same question and we're getting the same response," Lackey said. "It's a big empty answer."
High cost is only part of the problem because this experiment is not occurring in a vacuum.
Unlike Washington, Colorado and Nevada, California launched its legal market in direct competition with a multi-billion dollar illegal market that had operated for many years. That black market still makes more than 70 percent of the state's cannabis sales. Now that black market is going by a new name.
"The traditional market," Gale calls his illegal competitors.
"Isn't that a shame," said assemblyman Lackey. "Isn't that a shame, because what they're doing is softening the image of the market that isn't playing by the rules."
So the system plods on -- growing -- but slowly. The smaller players struggle most, highly-capitalized interests not so much, and the business owners who stuck their necks out to play by the rules can only hope and wait for changes that might make all of this pencil out.
"So they made up a whole new system," O'Neil said of the state's cannabis paradigm. "They made it very complex, very expensive and now they're mad because they're not meeting their projections."
"If the state is short of the projections, I'd love to know what those projections were," Gales said. "And if they want the market to free up, eliminate or reduce the excise tax and eliminate the cultivation tax, let's see what happens."