BY RUTH HILL R.N.
California, with a population of more than 39 million people in 2016, was irresistible to cannabis entrepreneurs. The Golden State’s massive population meant that voters had suddenly doubled the scale of America’s market for legal marijuana by approving recreational cannabis legalization. Legal sales would take two years to launch, but capitalists wasted no time investing billions into California’s market.
Now that marijuana is legal, it appears the one thing a storied dispensary can’t survive is California’s legal marijuana market. Dispensaries are at risk of going out of business because of slumping sales caused by street problems in many neighborhoods, as well as high cannabis taxes and penalties from the state. Cannabis businesses across the state struggle to stay alive, with thousands of companies going out of business and taxes going unpaid.
According to the California Department of Tax and Fee Administration, the industry owes the state nearly $1.3 billion in late taxes and penalties. High cannabis taxes are frequently blamed for making the state’s legal industry unsustainable, yet state tax rates are set to move even higher. Come July, the state plans to increase cannabis excise taxes by 25%, a prospect that is sending panic across the industry, with some warning that it could be the “nail in the coffin” for many legal businesses.
Just as costs continue to rise, revenues are also taking a hit as wholesale prices plummet and legal cannabis sales decline year over year. Legal sales in California have been dropping for the past three years. In some cities, per capita cannabis sales have declined over 34% since 2021.
Tax bills have grown even larger because California has a particularly punitive tax law for cannabis businesses. Most companies face a 10% penalty if they don’t pay their taxes on time, but cannabis businesses face a 50% penalty if they’re late.
A growing problem
That “extinction event” could be unfolding, with widespread company failures in recent years, including the largest cannabis distributor, Curaleaf, and the largest delivery company, Coldenstate Canna, in the state and thousands of cannabis farms. It’s not clear how many dispensaries are at risk of closing.
Tax hike coming
Ironically, the tax rates themselves could be partially blamed for the taxman not getting paid. Legal cannabis taxes, which can climb over 40% in some jurisdictions in California, make legal cannabis more expensive than illicit market marijuana. California’s illegal market is thriving, and many observers say that’s because customers are balking at paying legal prices when they can find cheaper marijuana outside licensed stores.
Kiloh, a Los Angeles cannabis dispensary owner, said this is particularly true for younger people who will “just go to the cheapest price.” “You have a very nimble demographic in the under-35 demographic that is just one Instagram post away from leaving the legal industry,” Kiloh said.
That problem could worsen this summer when the state plans to increase the cannabis tax rate from 15% to 19% in July, which will be added to a list of other local and state taxes. Kiloh estimated that the increase will push cannabis taxes to over 50% in Los Angeles, where there’s an additional 10% sales tax. Kiloh said that would be the “tipping point” that will destroy even more legal businesses.
Selling food and non-cannabis drinks was thought to mitigate expenses. But despite Gov. Gavin Newsom’s legalizing cannabis cafes and a statewide law going into effect last week that allows cannabis lounges to sell food and drinks, San Francisco’s marijuana lounges are still unable to prepare food.
The disconnect is due to the fact that while cannabis cafes are legal at the state level, city law still prohibits marijuana lounges in San Francisco and other cities from selling prepared food like a sandwich or an espresso. San Francisco has at least eight approved cannabis lounges where customers can purchase and smoke cannabis.
Visit The Palm Springs Dispensary website for more details on the cannabis laws in the Coachella Valley cities.
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