Looking Beyond Tax and Banking Bills to Establish Sustainable Solutions for California’s Complex Regulatory Challenges

By Dr. John Oram

Op-Ed

More than a year after California became the sixth state to legalize adult-use marijuana, the legal cannabis industry has yet to live up to the high expectations envisioned by supporters of Proposition 64. The number of retail licenses issued is thousands less than state officials originally estimated and state revenue from legal cannabis sales is also falling hundreds of million dollars short of initial predictions. The industry’s stunted growth can be attributed to a range of factors, including black market competition, high taxes, over-regulation, and lack of access to banking.

California lawmakers are proposing solutions: a new bill announced at the end of January 2019 would give legal cannabis businesses a tax break, serving to boost the legal market while combatting the black market. Specifically, the bill would temporarily cut California’s cannabis excise tax from 15% to 11% and suspend the cultivation tax through 2022.

In addition, SB 51, introduced in December 2018, aims to address another common hurdle facing legal cannabis companies: many banks and credit unions are hesitant to do business with companies while the federal government still lists cannabis as a Schedule 1 narcotic. According to the bill’s text, SB 51 would introduce “cannabis limited charter banks and credit unions for the purpose of providing banking services” so that operators can write checks to pay rent, state and local taxes, and their vendors.

These bills are a fine start, but it’s important to remember this is only the beginning. We must address a host of other issues at hand in order to help correct California’s currently chaotic landscape.

Let’s take a closer look at the state’s stark lack of legal retail outlets. From 2017 to January 2018, the number of dispensaries dropped from almost 2500 to just 300. Today, the number has only marginally increased to a meager 400.  With an increase in supply and drop in licensed dispensaries, California has created an incredibly imbalanced market. Retailers are now buying from the cheapest places possible—which are, more often than not, unlicensed producers—ultimately driving illicit market sales. Lawmakers must prioritize licensing so we can get the number of legal shops up and rate of black-market sales down.

Another obstacle is transportation. Based in Oakland, products from my seed to sale company, NUG, can be found in 80% of dispensaries around the entire state, and yet we have to constantly bear the burden of inconsistent travel regulations while transporting our goods across county lines. While the state finally implemented “permanent” cannabis industry regulations in January 2019, there are questionable provisions in the new set of rules that still raise a lot of red flags. For instance, they include a reduction in the maximum inventory allowed onboard a delivery vehicle and a measure prohibiting licensing and branding agreements with legacy operators that have been producing without a state license, which would exclude from the industry longstanding operators that have had trouble obtaining the necessary permits.

Bottom line, the state’s convoluted, ever-changing regulatory framework—posing barriers to key areas including transportation, licensing and packaging—have skyrocketed operating costs, as well as the end cost to consumers, leading customers to the black market and making it virtually impossible for businesses in the legal space to profit. While the proposed tax breaks and banking bills lay the groundwork for systemic improvements, California is still faced with a long, challenging road ahead.

Ultimately, we as an industry must advocate for our rights when it comes to sensible regulations so we can grow lucrative businesses that provide consumers with the safe, quality and affordable cannabis products they deserve. Lawmakers are beginning to take notice of these issues; let’s continue making our voices heard.