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Study: Calif. Pot Industry Staying Illegal to Escape State’s High Taxes, Onerous Regulations

Craig Bannister
By Craig Bannister | March 8, 2018 | 2:13 PM EST

Marijuana store. (Screenshot)

California’s trademark high taxes and overwhelming, onerous, costly and confusing regulations are preventing the state from reaping the revenue benefits of legalizing the $7 billion marijuana market, a new study by the California Growers Association concludes.

As of Thursday, California’s Bureau of Cannabis Control has sent about 980 warning letters to unlicensed pot sellers and ordered a marketing company to stop advertising vendors who don’t have permits, Bureau Chief of Communications Alex Traverso told CNSNews.com.

Less than one percent (0.78%) of the state’s 68,150 marijuana growers have obtained licenses, and as little as 25 percent of the cannabis consumed in California is currently being purchased from licensed retailers, “An Emerging Crisis: Barriers to Entry in California Cannabis – California Growers Association,” finds.

The reason: government greed and overregulation have made it easier and more practical to remain illegal – the same reasons companies typically cite for relocating to another state.

California’s “disregard or lack of concern for the cost (especially one-time costs) of regulatory compliance,” is keeping pot sellers underground, the study concludes.

Exceeding 60 percent, California’s effective tax rate is the highest of any state where cannabis is legal. Water, testing, and historic land use impact regulations are too costly and burdensome, the study finds. And, requiring licensed businesses to buy new generators, instead of retrofitting their current equipment to meet government standards, is both unnecessary and cost-prohibitive. Annual tax-revenue had, intially, been projected to be about one billion dollars.

More than half (57%) of the trade association’s members say a lack of clarity in the “hundreds of pages” of regulations and compliance rules is a significant barrier to entering the legal market.

And, “most Californians” are used to getting their marijuana from illegal sources and 20 percent of marijuana businesses began their operations prior to legalization, the study finds. What’s more, “as many as 30 percent of the growers in the state live off the grid.”

Overall, the California Growers Association study finds three major barriers to entering California’s legal marketplace:

  1. Taxes,
  2. Regulations, and
  3. An attractive, entrenched illegal marketplace.

Key findings of the study are listed below, by category.

High Taxes:

  • “Myths persist and the negative impacts are significant: An assumption on the part of local governments that cannabis businesses can cure budget woes leading to high taxes.”
  • “At the federal level, tax policy is designed to be punitive: IRS Section 280E prohibits cannabis businesses from taking normal deductions for business expenses, producing an effective tax rate that can exceed 60%. At the local level, many governments have passed ‘gross receipts taxes’ that are assessed on revenues at each step of the supply chain.”
  • “California’s cumulative state and local tax rates for adult use cannabis is, on balance the highest in the country.”
  • “Products donated for the benefit of severely ill patients should not be subject to cultivation or excise tax.”

Over-Regulation:

  • “The microbusiness license has produced exactly the opposite of its intended effect.”
  • “Cannabis – unlike many crops – requires a license to cultivate.”
  • “A disregard or lack of concern for the cost (especially one-time costs) of regulatory compliance.”
  • “From seed to sale, a given cannabis product is likely to pass through at least five, and sometimes more than ten, separate licensed businesses.”
  • “More important barriers, though, stem from the regulations surrounding the license itself.”
  • Water regulations: “These requirements are an unnecessary barrier to entry – especially severe for specialty and cottage growers.”
  • “57% of our members indicated that a lack of clarity on regulations and compliance was either a ‘significant’ or ‘very significant’ barrier to entry. The incredible volume of regulation is part of the issue.”
  • “Cumulatively, there are hundreds of pages of relevant regulations.”
  • “Our members have sometimes received contradictory answers to questions from different regulatory agencies.”
  • “As of February 2018, there is a major backlog of temporary permit applications that have yet to be processed or approved by state agencies. (lack of transparency) Processing has not been ‘first come first served’ and has not followed any other obvious patterns.”
  • “Members have been left waiting on temporary permits for months despite paperwork which is fully in order.”
  • “Unlike other farmers, cannabis growers are expected to address all historic land use impacts.”
  • “Many of the regulations assume reliable electricity or broadband. This is a significant barrier for many.”
  • “One-time regulatory fees are the primary barrier to entry.”
  • “Unfortunately, the Department of Food and Agriculture has adopted regulations that are inconsistent with the intent of state law.”

Illegal Market:

  • “The unintended consequence of making it so difficult at the local and state level to enter the regulated market is that 80-90% of those who were working with dispensaries prior to 1/1/2018 are being pushed to the black market.” – Sonoma County Cultivator
  • “Simply put, not all growers are interested in seeking licensure.”
  • “Other states replaced an illicit import based market with domestic production whereas California must transition an existing unregulated market.”
  • “It is widely accepted that such growth will be modest because most people in California have had access to cannabis in the past.”
  • “Survey data indicates that 20% of our members have been in the business longer than 20 years, meaning they were operating before medical cannabis was legalized in 1996.”
  • “Some growers commit a crime – like trespassing or growing on public land. The criminal activity is a barrier to entry and in order to participate in the regulated market the criminal activity must cease.”
  • “Some growers have no intention of getting licenses.”
  • “It is estimated that as many as 30 percent of the growers in the state live off the grid – or at least off a grid.”

The California Growers Association describes itself as “the largest cannabis trade organization in California, currently representing over 1,100 small and independent businesses.”

 


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