California’s Cannabis Industry Woes Spell Future Problems for Other Emerging Industries

Photo courtesy of The Telegraph

In a recent letter addressed to Governor Gavin Newsom, a group of California’s cannabis industry leaders voiced their concerns regarding the discrepancies between the state’s legal and illegal industries. The letter was signed by over 20 of the industry’s leaders, from officials to advocates to executives. Most notably, the group included: California Cannabis Industry Association, the California arm of the National Organization for the Reform of Marijuana Laws, the Los Angeles-based United Cannabis Business Association, Flow Kana Inc., Harborside Inc., and CannaCraft.” The purpose of the letter is clear: the state’s legal industry is essentially “collapsing,” and it is up to the state to save the marketplace. 

The Problems 

While the pandemic’s toll on the economy has done nothing but apply more pressure on California’s cannabis industry, the marketplace has actually already been strained for years. Much of this strain can be attributed to the heavy taxation and regulation on the industry, which renders it essentially impossible to compete with the illegal economy. The illegal industry, for its part, is not only widespread but also far cheaper and popular than the legal marketplace; according to the letter, the illegal economy’s “consumer prices are far lower and sales are double or triple the legal business.” As such, the writers believe that “the opportunity to create a robust legal market has been squandered as a result of excessive taxation.” This has led to “75% of cannabis in California [being] consumed in the illicit market [which] is untested and unsafe.” Furthermore, the letter illuminates the fact that “it is estimated that about two-thirds of California cities remain without dispensaries, since it’s up to local governments to authorize sales and production.” 

The Solutions 

It is on this foundation that the writers have declared that “the current system is rigged for all to fail [and] we need you to understand that we have been pushed to a breaking point.” So what can the governor, and the state’s legislative leaders in Sacramento, do to fix this? 

According to the letter, leaders have collectively called for a threefold approach: 

• An immediate lifting of the cultivation tax placed on growers;
• A three-year holiday from the excise tax;
• And an expansion of retail shops throughout much of the state. 

In addition, the leaders have also requested that Newsom include the above proposals in his budget proposal, which is scheduled to be released in early 2022. In their words, “the solution to these issues and the possibility of saving this industry lies in your hands.” 

Moving Forward 

According to a statement from Newsom administration spokeswoman, Erin Mellon, “the governor supports cannabis tax reform and recognizes the system needs change, while expanding enforcement against illegal sales and production.” She adds that “it’s clear that the current tax construct is presenting unintended but serious challenges. Any tax-reform effort in this space will require action from two-thirds of the Legislature and the Governor is open to working with them on a solution.” 

While it appears that all hands are on deck to fix this situation, it remains much easier said than done. Furthermore, the current situation and driving forces behind it have taken years to fully materialize and bubble to the surface. What will this mean for states that have only just recently legalized marijuana? The outcome of what happens with the requests made in this letter will surely affect the way in which New York, for example, creates and establishes its marketplace regulations. But will they work?

Founded by attorneys Andreas Koutsoudakis and Michael Iakovou, KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum as it relates to their business including day-to-day operations and compliance, litigation and transactional matters.

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