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Everything That Is Wrong with California’s Current Legal Cannabis System

Everything That Is Wrong with California’s Current Legal Cannabis System

Yes, cannabis is legal, but at what cost? Besides small businesses being pushed out of the industry and manufacturers not being able to find licenses available in their municipalities, the main things wrong with the California state system is the tax structure, driving of the black market, patients losing access to their medicine and the end of cannabis events.

CANNABIS TAXES

A 15% excise tax doesn’t sound so bad, until you do the math on the taxes added on to the raw cost of goods before they got to the retailer. Let’s take for example a 100mg edible. Prior to 2018 the wholesale rate on that type of cannabis infused product was about $6. The shops then doubled the cost and you have a 100mg edible at $12 retail, with some shops having charged their taxes on top and some shops factoring the tax into the cost.

Now, under the current state laws, cannabis is taxed at every stage in the game, 15% on cultivation, 15% on manufacturing, and 15% (“on an expected 60% markup”) on distribution activities. That means if a micro-business cultivates, manufactures and self-distributes, vape product and edible makers must charge 45% tax to the retailer. If you just manufacture and distribute the tax is 30% to the retailer. It’s a flawed tax system because no one knows who is responsible to collecting each stage of taxation. Furthermore, retailers always keystone their markup, which is a 100% markup as opposed to what the state is estimating a typical 60% markup.

With increased costs of licensing fees, compliance, attorney’s fees, and most especially new child-proof, resealable, tamper-evident, and single packaged for each 10mg dose requirements, it drives the cost of producing up severely. That $6 100mg edible just became $7 at its best lowest possible cost before all taxes involved.

We haven’t even gotten to the city, county, state cannabis excise tax and state cannabis sales tax, which all absolutely get charged to the consumer at a legal adult-use cannabis store. The exact tax rates vary from city to city and county to county, but the range of additional combined taxes out the door goes from 24-35%.

Let’s break it down so we can see it in front of us clearly:

$7.00 edible 100mg wholesale X 45% to retailer = $10.15 with taxes

$10.15 X keystone pricing (double from wholesale to retail) = $20.30 retail price before excise tax

$20.30 X state excise tax + city tax + county tax + sales tax (averaging a total of 29.75%) = $26.34

Let’s do the same math for a single dose 10mg edible at it’s average current cost:

$2.00 edible 10mg wholesale X 45% to retailer = $2.90 with taxes

$2.90 X keystone pricing (double from wholesale to retail) = $5.80 retail price before excise tax

$5.80 X state excise tax + city tax + county tax + sales tax (averaging a total of 29.75%) = $7.53

I don’t know anyone that wants to pay $8 for 10mg. At that rate, it cost less to score opioid prescription pills on the street.

While some democrats predict the average increase of cannabis products to go up 45% in the next year and level out down the road, the math here clearly denotes a 200% increase in what the consumer used to pay $14 out the door. Literally half of the new $27 product goes to taxes. Kiva Bars are a prime example which now cost $32 out the door for their 100mg bars which used to be 180mg. But what kind of market does that create if all edibles are 100mg?

We can’t exactly be mad at taxes, everyone wants their piece. Many, including ourselves foresee taxation being lowered as we have seen occur in the other legalized states over time. We’ve also seen Colorado issue a tax refund to Colorado residents for a surplus of cannabis taxes.

Tourism is a driving force behind the lines around the block at legal adult-use dispensaries. While out of towners don’t mind paying all the taxes and increased prices, there is the rest of the population who were patients before don’t have the funds for the increased cost of their medicine. This leads us to our next two points of how these increased prices drive the black market and affect actual patients.

Patients and the Black Market

Beyond the increased cost with taxes, there is almost no benefit to going through the trouble of getting your medical recommendation, state or county card. The best the medical identifier gets you is 5% off. The entire genesis of this program is based on medical patients, so why would we tax cannabis as medicine when opioids and prescription pills don’t get taxed. Even in Colorado they offer a lower rate for state registered medical patients, and in Arizona they actually acknowledge it as a medicine and do not tax medical cannabis sales.

Currently there is no difference in products if you’re in an adult-use store, and all edibles are supposed to be 100mg. While tinctures and capsules will allow 1000mg max dosages for medical patients, there are thousands of patients out there that have found products and brands that worked for them they have either already lost access to or are going to lose access to. People with debilitating illnesses that require high-dose edibles will find a way to get their medicine regardless. Even Colorado set their medical edible limits to 500mg. Making your edibles will be the only option legally, which will drive black market sales of high-dose unlicensed products. Counties that have issued bans are cutting off access to home-bound patients as well.

With the California Emergency Regulations dropping in late November, only allowing a month and a half to get legal and licensed, many producers and cannabis businesses are scrambling to get their ducks in a row or find a city that will offer a license. There are 488 cities in California, less than 20 cities have issued licenses.

That’s not a very strong foundation for a legal cannabis adult-use market. It basically puts a monopoly on adult-use sales for the few cities that had the foresight to enact regulations before the state did, like San Francisco, Oakland, San Diego and Sacramento. If you’re based in city or county like Los Angeles or San Luis Obispo, you’re for lack of a better term SOL (shit out of luck). Many people who adhered to legal practices under Prop 215 and SB 420 prior to 2017 are now faced with the reality of shutting down their business and waiting until their city issues official cannabis licenses or face fines, misdemeanors and get blacklisted for not being able to apply for a license. Even Colorado and Oregon had longer lead times to get the municipalities on board and transfer to the new regulations. One and a half months to get licensed and legal when most cities were just waiting to see what the state wanted so they could figure out what their local government was going to do, is just complete absurdity. We applaud the state for pushing through legalization, there may have been better ways to do it.

So now you have small business owners, some who have been in the cannabis game for 10-20+ years, who now don’t know how they’re going to feed their families and pay their bills or employees. Some shops are losing business because they’re charging taxes and customers would rather pay the lower price regardless if a shop is legal or compliant. Others are shutting down to avoid the risk of losing the opportunity for a license, while others are relocating their businesses to entirely different cities hours away just to get a license.

Which brings me to my next point about finding a city allowing an event license.

The End of Cannabis Events
It’s as if the state threw in the event licenses as a complete afterthought and rather than leaving it gray they wanted to regulate and tax events in this space. The fee for a state license for cannabis events (1-10 per year) is $5,000, but you must get a city to approve the event in writing, and it must take place at a location tied in with the Agricultural Association. In short, that basically means cannabis events can only happen on fairgrounds.

San Bernardino’s National Orange Show Event Center was the most cannabis friendly venue in Southern California, but with San Bernardino’s recent ban on everything cannabis and no potential for any legal cannabis microevent, it puts legal cannabis events to an end.

Even if the fees were more accessible and local municipalities were open to it, issuing letters of approvals, the state laws require that only retailers vend or distribute at a licensed cannabis event. The reason anyone ever put on cannabis events and bought booths was because the manufacturer was getting directly in front of the consumer, cutting out the middle man and educating the patient directly about their product. If a licensed cannabis event is nothing but dispensary retailers, what’s the point and what’s the difference between doing that and just going to a bunch of licensed shops (saving the drive to the fairgrounds)? To throw insult to injury, there is only one location in the Bay Area that will approve a cannabis consumption event, and one in Victorville.

Hemp CBD

In Prop 64, hemp CBD products are defined as non-cannabis products. If that is the case, then manufacturers would not be allowed to produce hemp CBD products in the same facility as a THC manufacturing facility. Distributors aren’t allowed to distribute hemp CBD products, but yet there’s a shortage on the chain of supply currently, so we are seeing licensed retailers selling hemp CBD products. But it becomes unclear who will be the one to fulfill those orders in after June 30th, 2018, following the end of California’s emergency regulation grace period.

If the consumer can acquire hemp CBD products from the health food store or any store online, paying less sales tax and no marijuana tax, what would be the incentive to buy a hemp CBD product at a licensed cannabis retailer?

There are thousands of businesses that are just dying to be legal and compliant but are stuck between a rock and a hard place with either city woes or lack of clarity from the state guidelines. While the kinks will indeed definitely be worked out eventually, this is most certainly the most uncomfortable time in the California cannabis industry. We were hoping that seeing what the other states did would give Californians the best advantage for the best cannabis legal system for arguably where the best cannabis in the world comes from.

or compliant. Others are shutting down to avoid the risk of losing the opportunity for a license, while others are relocating their businesses to entirely different cities hours away just to get a license.

Which brings me to my next point about finding a city allowing an event license.

The End of Cannabis Events

It’s as if the state threw in the event licenses as a complete afterthought and rather than leaving it gray they wanted to regulate and tax events in this space. The fee for a state license for cannabis events (1-10 per year) is $5,000, but you must get a city to approve the event in writing, and it must take place at a location tied in with the Agricultural Association. In short, that basically means cannabis events can only happen on fairgrounds.

San Bernardino’s National Orange Show Event Center was the most cannabis friendly venue in Southern California, but with San Bernardino’s recent ban on everything cannabis and no potential for any legal cannabis microevent, it puts legal cannabis events to an end.

Even if the fees were more accessible and local municipalities were open to it, issuing letters of approvals, the state laws require that only retailers vend or distribute at a licensed cannabis event. The reason anyone ever put on cannabis events and bought booths was because the manufacturer was getting directly in front of the consumer, cutting out the middle man and educating the patient directly about their product. If a licensed cannabis event is nothing but dispensary retailers, what’s the point and what’s the difference between doing that and just going to a bunch of licensed shops (saving the drive to the fairgrounds)? To throw insult to injury, there is only one location in the Bay Area that will approve a cannabis consumption event, and one in Victorville.
Hemp CBD PRODUCTS

Outlined in Prop 64, hemp CBD products are defined as non-cannabis products. If that is the case, then manufacturers would not be allowed to produce hemp CBD products in the same facility as a THC manufacturing facility. Distributors aren’t allowed to distribute hemp CBD products, but yet there’s a shortage on the chain of supply currently, so we are seeing licensed retailers selling hemp CBD products. It becomes unclear who will be the one to fulfill those orders after June 30th, 2018, following the end of California’s emergency regulation grace period.

If the consumer can acquire hemp CBD products from the health food store or any store online, paying less sales tax and no marijuana tax, what would be the incentive to buy a hemp CBD product at a licensed cannabis retailer?

There are thousands of businesses that are just dying to be legal and compliant but are stuck between a rock and a hard place with either city woes or lack of clarity from the state guidelines. While the kinks will indeed be worked out eventually, this is most certainly the most uncomfortable time in the California cannabis industry.

We were hoping that seeing what the other states did would give Californians the best advantage for creating the best cannabis legal system, for arguably where the best cannabis in the world is grown, sadly that’s not the case. What we do know from observing the transition in other legal states, is that we are in for a wave of continuous change for the next few years, making it difficult and costly to comply.

The Bureau of Cannabis Control says they welcome comments and feedback from the public and cannabis business owners, as they work through the details. Email them directly at: bcc@dca.ca.gov

B. Le Grand

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