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California North Coast cannabis advocates hopeful high-level support in Sacramento will bring tax reform for struggling industry

What is the Emerald Triangle?

Since the late 1960s, a three-county region along the northwest California coast — Mendocino, Humboldt and Trinity — has been known for growing of marijuana. California legalized cannabis medicinally in 1996 then recreationally in 2016.

With all the recent hullabaloo about a potential collapse of the regulated cannabis market and a quasi tax revolt, North Bay and Emerald Triangle industry stakeholders welcome California Gov. Gavin Newsom’s receptiveness to cultivation-tax reform while drafting the new state budget this week.

And beyond the state executive branch, they may have another foot in the door in the halls of the Legislature. The state lawmaker whose district lies in the heart of the cannabis world has stepped up his game. State Sen. Mike McGuire is working on a bill to provide tax relief to the industry, as he pledged on Dec. 8.

Details of that legislation remain close to the vest.

The Healdsburg Democrat had told the Business Journal over a month ago of his intention to move through a law that would eliminate the cultivation tax and shift that obligation to the cannabis excise tax, which is imposed on point-of-sale-transactions. McGuire planned to meet with the Legislative Counsel to explore the legality. For one thing, Proposition 64, which legalized adult, recreational cannabis use, passed in 2016 with restrictions imposed two years later when the licensing and tax systems were established.

“It’s important for cannabis businesses to understand that any tax reform effort requires action from two-thirds of the Legislature. That’s why the governor has made it clear he intends on working with them,” said California Department of Cannabis Control spokeswoman Christina Dempsey, who works under Director Nicole Elliott.

Eric Sklar, CEO of Napa-based cannabis cultivator Fume, is optimistic about recent commitments from Sacramento.

“We’ve all been asking for leadership from the governor’s office. This makes a huge difference,” Sklar told the Business Journal.

He pointed to a comment in the governor’s Monday budget announcement:

“The Administration supports cannabis tax reform and plans to work with the Legislature to make modifications to California’s cannabis tax policy to help stabilize the market; better support California’s small, licensed operators; and strengthen compliance with state law.”

Cannabis growers hurt by increasing cultivation taxes, after a glut of product has driven down the wholesale price, have made business concessions that stall operations, signed a statewide petition insisting on change and even staged rallies. A large gathering is planned at the state Capitol building in Sacramento on Jan. 26.

“The opportunity to remove the cultivation tax and essentially pass the savings down the supply chain is huge and imperative because the only way to get the consumer away from the illicit market is by lowering the sales price, coupled with enforcement,” said International Cannabis Farmers Association Senior Adviser Sam Rodriguez, who added he attended Thursday’s rally attracting about 200 people and two state senators at the Capital.

Rodriguez said he’s also enthused about recent support from state officials, presuming that “more than one proposal” may soon be in the works.

“It costs more to trim than to sell,” said Nate Whittington of Humboldt County.

The grower from Ferndale figured that selling his crops for $350 to $400 per pound leaves him with no profit, when trimming and taxes take $150 and $160 per pound, respectively, to manage in 2,000 square feet of crops. Worse yet, that’s before paying for rent, supplies and hired help.

“We’ve stopped trimming,” he said.

Instead, Whittington is turning his attention to retail. He opened The Flore Store in San Francisco on Dec. 17 as a co-op for growers, offering about $800 per pound through subsidies by distributors.

“We’re trying to stabilize small farms in this hostile environment,” he said.

California’s cultivation tax has sparked outrage from the industry, particularly when state officials announced plans to raise the tax rate from $9.65 to $10.08 per dry weighted ounce next year. At the same time, the California Department of Tax and Fee Administration reported the industry generated $42.4 million in cultivation tax out of the $322.3 million in total tax revenue among growers for the state in the last reported third quarter.

The situation has prompted some to fear small growers will go out of business. The legal industry is estimated to generate revenues of $3.1 billion a year, compared with the illicit market at $8.7 billion annually, according to a 2019 Statista report.

For the North Bay, Sonoma County taxes licensed growers $1.12–$12.65 per square foot, depending on which of the dozen categories they fall into. Two local cannabis groups, the Cannabis Business Association of Sonoma County and the Sonoma Valley Cannabis Enthusiasts, have asked the county Board of Supervisors for “immediate tax reform.” To that, county officials pledged to review the tax structure.

Then about two weeks later in a statewide Boston Tea Party-style tax revolt, more than 400 cannabis business operators signed a letter requesting the state eliminate the cultivation tax and offer a three-year reprieve on the excise tax. The coalition also seeks a plan to open up more retail establishments to sell product from the plant.

California Cannabis Industry Association Executive Director Lindsay Robinson called the current situation an “untenable dynamic,” so business as usual will not stand.

“I’m so glad to see the collaborative efforts. It’s important to recognize the governor has spoken about tax reform in the past, but the pandemic took the wind out of our sails. But we are optimistic (this time),” Robinson said.

The specifics of the reform remain to be seen, she said.

But with nowhere to turn, since conventional loans are out of the question for growers due to a reluctance for banks to do business with an industry deemed illegal by the federal government, time is of the essence.

“Unfortunately, some are forced to make drastic decisions with their businesses because this has got these folks in a chokehold,” she said.

Susan Wood covers law, cannabis, production, biotech, energy, transportation, agriculture as well as banking and finance. For 25 years, Susan has worked for a variety of publications including the North County Times, now a part of the Union Tribune in San Diego County, along with the Tahoe Daily Tribune and Lake Tahoe News. She graduated from Fullerton College. Reach her at 530-545-8662 or susan.wood@busjrnl.com.

What is the Emerald Triangle?

Since the late 1960s, a three-county region along the northwest California coast — Mendocino, Humboldt and Trinity — has been known for growing of marijuana. California legalized cannabis medicinally in 1996 then recreationally in 2016.

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