Heavy Taxes and Regulation Harsh California's Pot Buzz

More than a year after marijuana merchants began legally serving recreational customers in California, the number of licensed shops, the volume of sales, and tax revenue are all below projections. Most strikingly, legal cannabis sales totaled $2.5 billion in 2018, which was about $500 million less than in the previous year, when only medical dispensaries were operating.

What went wrong? Nothing really surprising. California is regulating and taxing the hell out of cannabis, which makes it hard for legal suppliers to compete with the state's longstanding, extensive, and highly developed black market.

To begin with, marijuana businesses need local as well as state approval to operate. As of January 30, according to a Southern California News Group database, just 78 of California's 482 cities were allowing recreational stores. The Bureau of Cannabis Control recently finalized a rule clarifying that home deliveries are allowed in towns where storefronts are prohibited, which should provide a way around local bans.

Even when there is no local ban, would-be marijuana merchants need permission from the municipal or county government as well as the state, a dual licensing system that doubles the regulatory headaches. Licensees are subject to the Medicinal and Adult-Use Cannabis Regulation and Safety Act, the Bureau of Cannabis Control's rules, and whatever additional restrictions the local government imposes.

"More and more local governments are coming around, but progress has been slow," says Dale Gieringer, director of California NORML. He says other regulatory issues include legally mandated middlemen, "excessively costly" testing requirements, and "multifarious petty regulations" regarding storage, security, transportation, labeling and packaging, financial reporting, and waste disposal.

Cannabusinesses are also hampered by a shortage of banking services, since financial institutions remain leery of serving customers who deal in products that are banned under federal law. And if they manage to get licensed, comply with all the relevant regulations, and find ways to pay expenses and process sales, marijuana merchants still must contend with black-market competitors who are not subject to those regulations or to state and local taxes, which can add as much as 45 percent to the retail price. A bill introduced in January would temporarily cut state marijuana taxes, and Gieringer thinks it has "a decent chance" of passing.

"Because we are up against high taxes and the proliferation of illegal shops, it is difficult right now," the owner of a pot store in Wilmington told the Los Angeles Times in December. "We expected lines out of our doors, but unfortunately the underground market was already conducting commercial cannabis activity and [is] continuing to do so."