CA: ‘This Is An Industry In Crisis.’ High Taxes, Black Market Threaten Pot Businesses

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Photo Credit: Paul Kitagaki Jr.

Three months into the start of California’s recreational marijuana market, industry leaders are voicing concerns that sales are not meeting projections, and that high taxes, complicated regulations and a thriving black market are having deleterious effects.

The leaders pressed government officials to make changes during Tuesday’s gathering of an estimated 600 people at the California Cannabis Industry Association conference at the Sheraton Grand in Sacramento.

“This is an industry in crisis,” said Kristi Knoblich, president of the association’s board and co-founder of Kiva Confections, a manufacturer of edible cannabis products. “This is me sounding the alarm.”

Government officials who spoke at the conference said they are committed to making the regulatory changes needed to help the industry achieve success. Attendees also heard from state lawmakers who are trying to make changes to the system, including some who likely would have been antagonists just a few years ago.

Assemblyman Jim Cooper, D-Elk Grove, worked for three decades in the Sacramento County Sheriff’s Department, where his duties included undercover narcotics work. On Tuesday, he took aim at Weedmaps.com, a website that charges cannabis companies to advertise on its site.

“Black market businesses can advertise on Weedmaps. How fair is that?” Cooper said, adding that he plans to introduce legislation this session to address illegal cannabis advertisements.

State Bureau of Cannabis Control Chief Lori Ajax has sent a letter to Weedmaps asking the company to remove ads from hundreds of cannabis retailers without a state license, in violation of state law. Weedmaps responded that the state’s laws only apply to license holders, not Weedmaps.

Weedmaps was one of two “platinum sponsors” of the conference, and its logo was displayed on large video screens as conference participants discussed controversy surrounding the company.

Assemblyman Tom Lackey, R-Palmdale, said another approach to combating black-market retailers is to lower taxes on legal marijuana. With tax rates as high as 45 percent in some communities, legal retailers are struggling to compete with the black market, said Lackey, who previously worked for the California Highway Patrol for 28 years and was opposed to medical marijuana.

Legalization is “off to a ragged start,” due to black-market sellers siphoning off customers who don’t want to pay high taxes, he said.

A new bill, which Lackey co-sponsored with Rob Bonta, D-Oakland, would lower the state excise tax on marijuana from 15 to 11 percent for three years and suspend a separate tax on cannabis cultivation.

California’s robust illegal market makes the state’s pot taxes an important consideration, according to a report released Wednesday by Arcview Market Research and BDS Analytics.

In the states with legal recreational cannabis sales, Oregon has the lowest tax rates, followed by California, Colorado and Washington. All states except for Oregon have state and local taxes on marijuana. In California, in addition to a 15 percent excise tax, a 9 percent sales tax is added, along with any other local cannabis taxes.

But other states don’t have California’s huge black market, which pays no taxes. “California has the largest and most developed illicit market in the nation,” the report states. “The vast majority of the 13.5 million pounds of cannabis grown in the state annually (according to California’s Department of Food and Agriculture) is destined for illicit markets, either to be shipped across state lines or sold in-state illegally.”

The ability to sell legal marijuana has been blocked in much of California because of another feature of the state’s system — local control. Counties and cities can ban commercial marijuana activity, and that has been the case in much of the state outside of California’s biggest cities on the coast and in Sacramento.

“The biggest obstacle is at the local level,” said Assemblyman Ash Kalra, D-San Jose. “Moral judgments about this will stop when they see all the money coming in.”

Cooper urged attendees to focus on the business and benefits of legal cannabis, such as jobs and tax revenue, and to avoid ethical discussions about the drug, since that debate was settled when voters approved Proposition 64 in 2016.

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