The state of California legalized recreational marijuana, making it the most populous state to do so. Though there are numerous benefits for both consumers and tax coffers alike, the new law has brought with it significant costs. Regulators must figure out how best to regulate an industry that’s previously been in black market hands without any oversight or regulation whatsoever..
The “grow house bust 2021” is a new law that was put into effect on January 1st, 2019. The law allows the recreational use of marijuana in California. The law also has heavy financial burdens for those who are caught with weed.
The passage of Proposition 64 in California five years ago opened the door to recreational marijuana and the emergence of new local economies.
The initiative was hailed as a victory for greater tax revenue, entrepreneurship, and job creation, as well as a chance to combat marijuana’s long-standing and large illegal cannabis industry.
According to MJBiz Daily, a marijuana industry magazine, the reality of legalization has been rather disappointing, with retail companies failing to break even and illicit marketplaces still accounting for approximately 80% of cannabis sales.
While many towns have been hesitant to join the multibillion-dollar business, Vista, Oceanside, and Encinitas have all legalized recreational cannabis, allowing for retail sales, distribution, manufacture, testing, growing, and delivery.
According to Vista cannabis shop owners Jon Jesse of Dr. GreenRX and Daniel Wise of The Cake House, the obstacles to entry — taxes, fees, and other restrictions — make it difficult for small company owners to make a profit.
Prop. 64, according to Laura Wilkinson Sinton, a pro-marijuana advocate with AFC Products in Coronado, is beneficial for the state in general. The greatest problem, though, is that towns and counties have yet to legalize the business.
“Prop. 64 gives cities and counties the majority of the power,” Jesse said. “There are a lot of taxes and a lot of money in it, and there’s a lot of demand for it.”
Concerning Proposition 64
Prop. 64 legalized adult cannabis use (21 and older), established the Bureau of Cannabis Control (now the Department of Cannabis Control), imposed a 15% excise tax on retail sales and cultivation taxes of $9.25 per ounce for flower and $2.75 for leaves, established packaging, labeling, advertising, and marketing standards, prohibited direct marketing to minors, allowed local taxes and regulations, and authorized resentencing and destruction, according to the measure.
Prop. 64 revenues must be used to fund law enforcement and administration, public health initiatives to educate children and treat severe misuse, DUI enforcement, job creation, illegal sales reduction, and environmental cleaning and restoration on public lands harmed by illegal grows. Within 600 feet of schools or other places where minors “congregate,” cannabis shops are prohibited.
The California Department of Tax and Fee Administration reported $172.3 million in cannabis excise tax income and $120.5 million in sales tax revenue for the second quarter of 2021, totalling $333.2 million in tax revenue. The state has collected $2.8 billion since 2018.
Despite this boon, the illicit cannabis industry, often known as the “black market,” continues to thrive. The illicit market, according to industry insiders and media estimates, is three times bigger than the legal market, with a value of $20 billion or more. The continued success of low-cost, black-market cannabis has been ascribed in large part to a massive tax burden on legitimate businesses and a lack of coordinated enforcement.
“(The Department of Cannabis Control) is severely understaffed,” Wilkinson said, adding that there are additional organizations devoted to the sector that will be merged next year. “Having three regulatory bodies raises the danger of one telling you one thing and the other telling you another,” says the author.
Furthermore, according to Forbes, legal cannabis growers are overproducing crops but are unable to sell due to city restrictions on the number of dispensaries, leading in criminal infiltration of legal shops and “diversification” of how goods are marketed.
According to MJBiz Daily, a recent lawsuit filed by HNHPC, the parent company of Catalyst Cannabis Co., claims that the Department of Cannabis Control has “turned a blind eye” to criminals gaining control of legal distribution permits and diverting millions of pounds of marijuana out of state before it is funneled into the black market.
Wise believes the state messed up the problem by imposing such a high tax burden on respectable company owners from the start. For the first two years, Wise proposed a 0% retail tax rate so that the legal market could “destroy the illicit market.”
Wise continues to push for a much lower tax rate.
“All cannabis companies that touch the plant are not permitted to deduct taxes related to their operations outside of the cost of products supplied,” Wilkinson added, referring to IRS Tax Code 280e. “The IRS has extended it to the cannabis business, which is problematic. They’re not earning the kind of money that people believe they’re making.”
Entrance barriers
Excessive taxes, high starting expenses, and difficulties leasing space, according to Jesse and Wise, who operate cannabis shops in Vista, are major obstacles for potential cannabis shop owners.
The state now imposes a 15 percent excise tax. Furthermore, in addition to the obligatory 8.25 percent sales tax, Measure Z imposes a 7% surcharge.
One retail shop pays at least 43% in taxes in total, which simply helps to push up product prices. Both Jesse and Wise agree that legal customers pay more for cannabis than those who buy it illegally, providing criminal sellers a competitive edge.
“I believe the purpose of Prop. 64 was excellent,” Wise said, “but I believe it was drafted by individuals who didn’t understand the present condition of the business.” “It’s extremely tough to compete with the underground market because of the taxes.”
Businesses in most sectors may deduct certain company costs and wages. However, according to Jesse and Wise, this is not the case with cannabis, implying that there is less for the company and its workers.
Wise, a Navy veteran, owns 26 shops in various phases of operation throughout the state, with six completely operational. Wise claims he is successful because he simplified his company strategy and purchases in bulk at a cheaper price.
Dr. GreenRx cost between $300,000 and $500,000 to launch, according to Jesse. Wise founded his business in Los Angeles using $38,000 he got as a severance package from the military. However, according to Wise, most starting expenses will be at least $1 million. However, other difficulties such as locating a rental property, building expenses, security, and labor are not taken into account.
Some landlords, according to Jesse, will not allow marijuana companies to lease since the substance is still illegal under federal law. Because of the risk of the bank calling the note due, property owners with a mortgage are considerably less inclined to rent to a cannabis shop.
According to Wise, there have been many such instances in Los Angeles, which have harmed both the landlord and the company.
Jesse also said that while he was getting ready to start his companies, he was able to locate a site but had to pay rent for six to 24 months ahead to opening due to the time it took to get the necessary state and municipal permits.
“What it truly is is a land-use issue,” Jesse said. “For $10,000 per month, I’m tying up a property for five years.” That is a significant sum of money, and it prevents many individuals from achieving their goals. You’re holding a property worth $100,000 that you may not be allowed to operate in.”
Other stumbling obstacles
According to Wilkinson Sinton, towns are not only missing out on tax income, but they are also failing to combat the illegal cannabis industry.
Given that Democrats overwhelmingly supported marijuana and campaigned for legalization, Wilkinson Sinton said she’s surprised Democratic-led communities have maintained prohibitions. However, the county’s Board of Supervisors, which includes three Democrats, has changed course and authorized recreational use.
Regardless of political party, Wilkinson Sinton believes that any town that legalizes cannabis will be ahead of the curve in terms of increasing revenue and decreasing illicit retail outlets.
“Just because it’s cannabis, the rules of sale don’t change,” Wilkinson Sinton said. “Commercial real estate is suffering as a result of the epidemic. You’re seeing a little relaxation of that (allowing retail in buildings with bank loans).”
Wilkinson Sinton said her activism has also been met with opposition from law enforcement, since peer-analyzed studies indicate that when a dispensary opens in a community, crime decreases. Opponents argue that other variables are at play in the decrease, and that those studies are flawed.
Because governments have not legalized cannabis, criminality is on the rise around illicit grow operations, according to Wilkinson Sinton. The only bad actors, according to Sinton, are those who use shops to unlawfully export goods, while the overwhelming majority adhere to state and local rules and regulations.
The “rosamond dispensary raid 2021” is a topic that has been making headlines recently. Prop 64 unleashed recreational pot, but with heavy financial burdens.
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