North Coast industry insiders weigh in on why California cannabis tax revenue slipped in 2023

California’s total cannabis tax revenue dropped in 2023 by about $30 million to $1.08 billion, 2.7% less than the prior year.

Sales tax revenue for all four quarters also declined by about $20 million compared to 2022’s collective receipts rung up at the cash registers. That figure was $461.3 million for 2023.

Total tax in the last three months of 2023 was $268.3 million, down by about $10 million from the third quarter but higher than $249.8 million a year before.

2022 represented a particularly tough year, cannabis industry stakeholders say.

But has the industry experienced the bottoming of the cannabis market?

“I sure hope so, but I don’t think we’ve hit it yet. I think we’re going to see more retail closures that will put pressure on the supply chain,” said Tiffany Devitt, government affairs chief at CannaCraft, a distributor in Santa Rosa. “California continues to struggle.”

Devitt, along with other industry insiders, blames the turmoil on issues mentioned many times — high taxes, increased costs and competition from the illicit market.

“Wages have not kept up, and consumers are way more price sensitive,” Devitt said. “And part of what we’re experiencing in the revenue picture is a decline in the unit pricing.”

She mentioned a “steep decline” in what consumers are paying for flower and pre-rolls. The average retail price for an eighth of an ounce of flower at the beginning of the decade in California ran $35.23, according to the Cannabis Business Times. Last year, it was about a third less.

Beyond the problems associated with a cash-only based business, the nature of dispensary retail locations doesn’t help the struggling industry, industry insiders say.

“There are either too many (crammed in the same area) or none in hundreds of miles,” Devitt said.

Critics of Proposition 64, which legalized cannabis when it passed in 2016, have long lamented that the state ideally should not have placed legalization in the hands of local jurisdictions. Only about a third of local governments in California have legalized the substance.

This has resulted in a cannabis desert in some regions. Sonoma County and Santa Rosa were considered early adopters of programs to legalize cannabis five years ago. Napa has come on board recently.

In terms of the cannabis business being a good investment, at least one merger-and-acquisition consultant claims it is based on the same stock market principle of buying low and selling high.

“If you have a business model that bests your competitor, there’s never been a better time to get in,” said Jeff Hamilton, law partner in Farella Braun + Martel’s San Francisco office, which manages cannabis clientele.

One such example of an existing company bucking the trend of slowed investment, Sonoma Hills Farm has increased its craft cannabis business. It has added a 15,000-square-foot greenhouse (9,000 square feet dedicated to mixed light) on the property located in the Petaluma Gap. The expansion is part of a seven-year project approved by Sonoma County.

“It was an arduous process,” Chief Operating Officer Joyce Cenali said, adding that Sonoma County officials were diligent about working with Sonoma Hills Farm.

Even with some instances of business success, Hamilton claims some “structural things need to happen” for more success to take root.

“Definitely, most people are struggling. There are so many things wrong,” he said.

Hamilton expects to see more mergers as companies share resources to survive. One such merger affecting the Bay Area was Harborside, an Oakland-based cannabis business, joining forces with Statehouse Holdings based in Toronto in mid-2022.

Another business transaction from the Emerald Triangle includes a merger this month between Eureka-based Papa & Barkley cannabis operation with Mammoth Distributors of Los Angeles.

“I think we’ll see more of that,” Hamilton said. “But we’ll see how it all shakes out.”

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. She can be reached at 530-545-8662 or susan.wood@busjrnl.com