Cannabis industry on California North Coast ponders its future

Many cannabis consumers use the plant to calm down, but for cannabis businesses in California, 2019 has had quite the opposite effect.

Increased state taxes and permitting difficulties have led businesses across the supply chain to lay off workers while the cheaper black market continues to thrive.

So what is the future for legal recreational cannabis and how can the industry pull out of its spiral?

One answer is allowing more cannabis operations statewide according to Joe Rogoway, a cannabis-focused attorney with offices in Santa Rosa and Southern California.

“The majority of the state of California doesn’t have a place where adults can go and legally purchase cannabis,” Rogoway said, estimating that since the recreational legalization of pot in 2018, only about a quarter of jurisdictions across California allow cannabis businesses.

Many communities are not in favor of allowing grow and sale operations within their borders or are divided on the prospect, as evidenced by the ongoing battle in Napa County over whether to allow commercial cannabis grows.

That does not mean people in those communities do not purchase pot however, Rogoway said, they just don’t do it legally. “Those people have to turn to alternative methods on the black market to get access,” he said.

Rising taxes are also a hurdle cannabis businesses have to contend with, especially since California announced last month what is known as the mark up rate will increase to over 30%. The rate is used when determining taxes on transactions like when a retailer buys bulk cannabis for resale to consumers.

Cultivation taxes will also shoot up next year because of inflation according to state law, including the tax on an ounce of dry cannabis flower increasing to $9.65 from $9.25.

Rogoway said while rising state taxes are not good news for businesses, changes in how certain localities collect cannabis tax could provide hope for the industry.

“Local governments need to take a look at reducing taxes,” he said, noting the Long Beach City Council recently voted to reduce supply chain tax and that “The tax for manufacturers and distributors went from 6.5% to 1% which matches city of Los Angeles.”

He added, “The difference in a literal sense is existential for these businesses…they can employ people rather than not be able to employ people.”

How taxes are collected is also an issue according to Ron Ferraro, owner and CEO of Sonoma County-based Elyon, a cannabis company involved in each aspect of the supply chain.

As a distributor and sometime wholesaler, Ferraro said he has to collect the excise tax whenever he supplies a cannabis dispensary with an order.

“I’m supposed to collect that tax immediately,” he said noting that it is common in the business for him to extend credit to stores but that, “It’s due for me that day.”

Ferraro said those taxes required him to wholesale a significant amount of cannabis, which he prefers to sell under his own brand, to make up the difference.

The timing of payments is an issue for growers as well like Sun Roots Farm in Mendocino County run by Forrest Gauder and Patricia Vargas.

“It’s very rare to find a cash or a check payment with the product,” Vargas said, noting that she is often forced to front products in hopes of future payment from dispensaries.

Vargas added that while good companies stick to payment plans with dates, there is no legal timetable for payouts. “It would be nice to … some accountability or regulation that payment must be made by eight months maximum or something,” she said.

Sun Roots Farms also has animals and other plants and herbs and is run based on the idea of regenerative agriculture to create sustainability. This approach also saves money and keeps costs down, which Vargas said is essential when payment is not always forthcoming.