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Fearing market collapse, Sonoma County cannabis industry seeks cultivation tax removal

Stemming from a threatened raise in state cannabis cultivation taxes, the Cannabis Business Association of Sonoma County and the Sonoma Valley Cannabis Enthusiasts have joined forces and plan to ask for “immediate tax reform” from the Sonoma County Board of Supervisors on Dec. 7.

“Every licensed cultivator is in dire survival mode, said local cannabis regulatory attorney Joe Rogoway, who drafted resolutions to present to supervisors requesting the county lobby the state to repeal the cultivation tax. They’re also asking the county to eliminate or suspend its local cultivation tax for three years.

Sonoma County taxes a dozen types of licensed growers from $1.12 to $12.65 per square foot depending on the category.

Rogoway contends the unprecedented tax structure was established after voters passed adult, recreational use in Proposition 64 in 2016 based on what farmers could grow on their property. It was based on “the fiction” the industry had unlimited potential.

“That fantasy never panned out,” he said.

Ranging from lobbyists to ancillary producers to dispensary owners and advocates, many fear a collapse of an industry already reeling over a drop in prices, ongoing competition with the illicit market and already burdensome tax structures on federal, state and local levels.

From growers to retailers, cannabis businesses pay a multitude of taxes, including excise, sales and employment. Labeling an insult to injury, the U.S. government imposes taxes without even recognizing the industry as legal. But California does, and in turn, taxes the distribution channel every step of the way.

The state announced a week ago a raise in the cultivation tax rates in January to reflect a rise in inflation, which nationally stands at 6.2%. Since then, at least one cannabis business, leaders of Flow Kana, based in Mendocino, told the Sacramento Bee that it may not pay.

But the state Department of Cannabis Control Director Nicole Elliott warned that not doing so would only prompt the state “to take action.”

Elliott, a longtime industry advocate and up until July Gov. Gavin Newsom’s senior cannabis adviser, said she understands the frustration among the industry.

“State law says you pay your taxes. This is a fundamental component of tax law. But I get we’re seeing business is in this very challenging moment,” she told the Business Journal.

Elliott urged the industry and their local representatives to take their issues to the state Legislature. Calls to California Sen. Mike McGuire, D-Healdsburg — a longtime cannabis industry advocate as well — were unreturned.

“They need to explain their pain points,” she said, adding it will take “a collective effort” among all the players to pull off change.

When asked whether she believes a tax hike will drive licensed operators into the illicit market, she said: “The state does care deeply about our legal market. If they choose to drop out, they’ll lose the integrity of the benefits of being in the legal market.”

With 68% of local jurisdictions in the state disallowing cannabis operators, a solution may lie with the federal government “getting off the sidelines” in providing safe harbor for the industry and legalizing it alongside the largest state provider, she said.

“Until then, California will continue to see these issues,” she said.

California’s current cannabis cultivation tax stands at $9.65 an ounce for dry cannabis flower as an example. Come Jan. 1, growers will be taxed $10.08.

As of Nov. 16, the state collected $322.34 million in taxes for the third quarter, the Business Journal reported Nov. 29. Of that amount, cultivation taxes comprised $42.41 million.

The California Department of Taxation and Fee Administration told the Business Journal the excise tax rate — collected from consumers for goods sold — will remain the same.

But that consolation fails to fend off industry outrage.

“Our industry is in deep trouble. We’re impacted on several important fronts. Our industry is taxed like no other, we have few retail outlets available to us, the illicit market continues to boom, and we face unparalleled regulatory hurdles,” association co-founder and Erich Pearson, CEO of SPARC in Santa Rosa, said in a statement. “Frankly, what we’re experiencing is a market collapse.”

The concern has spread statewide.

“Could we experience a collapse? Yes. And I think it will be more widespread than you think. The small guys are not going to make it,” California Cannabis Industry Association lobbyist Amy Jenkins told the Business Journal.

Jenkins, whose Precision Advocacy company represents many cannabis industry clients, recommends changing the tax structure. But first, she’s suggesting the state view the market fluctuations of the product before taxing cannabis, not lump it with all other goods, which are seeing a rise in prices. A one-size-fits-all approach does not work.

“What metrics are they using? We acknowledge it’s an inflationary move. But the cultivation price is down. They need to use the wholesale price of the cultivated product,” she said.

But Jenkins stopped short of saying “not paying” is the answer.

“Some companies talk about doing that, but it violates the law, and the state will just revoke their licenses. I don’t advise my clients to do that,” she said.

Nonetheless, North Bay cannabis business operators from a variety of angles are disgruntled by the state’s plans.

“A tax boycott is what you do when you have nothing to lose,” said Tiffany Devitt, chief of government affairs for CannaCraft, a large cannabis producer in Santa Rosa. “And it’s tragic.”

Devitt said three solutions need to be implemented to fix the problem.

For one, the state needs to make good on its promise dictated in Prop. 64 to drive out the illicit market.

“The state has utterly betrayed what voters voted on,” she said.

Also, Devitt insists the cultivation tax must be removed “completely” since the product is taxed up the supply chain anyway.

Plus, the excise tax needs to drop to make a market correction.

No action is not an option for any business associated with the cannabis industry, Devitt stressed, calling the build-up of the collapse one that nears “an extinction event” if the industry is expected to simply weather the storm.

“No one in the cannabis industry is not hit by this,” she said.

“This is brutal and more of a blow to a real difficult environment,” said Eric Sklar, co-founder and CEO of Napa Valley Fume, a cannabis brand. “This will require leadership (to fix). Everyone knows (the system) is broken.”

Sklar contends the added pressure on licensed cannabis brokers will help the illicit market flourish.

“It’s getting out of control. The illegal side continues to be very big,” he said. “What this does is encourage businesses to never go legal in the first place.”

From the view of Sebastopol’s cannabis dispensary operation, Solful, CEO Eli Melrod agreed the impact of the squeeze on growers goes way beyond those cultivating the plants.

“With some, more taxes are collected than revenue coming in,” Melrod told the Business Journal.

The dispensary operator doesn’t necessarily advocate refusing to pay state taxes. Instead, he considers the proposal a form of “drawing attention” to the issue and calls it a measure of “last resort,” he added.

“This problem is very real. It’s death by a thousand cuts,” he said.

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