60 Minutes Exposes California's Cannabis Illegal Market Problems

On the October 27 episode CBS news program exposed the California cannabis illegal grow problem. The show highlighted that more supply is grown than is sold within the state and that most of the surplus is being shipped east to states where marijuana is still illegal and can be sold at a higher price.

The program interviewed one farmer, who was trying to grow his cannabis legally, but because of onerous taxes and numerous fees, he can’t make a profit. Mikey Steinmetz, Co-founder of Flow Kana walked the CBS reporter through the company’s clean, shiny and very expensive factory to show what a legal operation looks like. He, too, bemoaned the state’s inability to control the illicit market.

Todd Kleparis, the CEO of cannabis security and distribution company Hardcar wrote, “Last month, it was announced that there had been a significant license contraction for cultivators, manufacturers, and retailers in the state. There was a 48% drop in active cultivation permits and a 29% drop in licensed manufacturers, according to statistics offered by Marijuana Business Daily. This loss in licenses for cannabis was because those who had been approved for temporary licenses for cannabis-related operations (that expired earlier this year) couldn’t meet the regulatory requirements for obtaining provisional and annual permits.”

He went on to add, “More importantly, there is a significant barrier to entry, both financially, and in terms of compliance, to the legal cannabis market in the state that once held such promise for cannabis. Those who once had a hope of moving from grey to legal are left to consider going back into the shadows, rigorously pursuing the investors needed to build capital for licensing, or give up altogether.”

Jordan Zoot pointed this out in a previous piece on Green Market Report saying, “California’s underground economy generates between $60 to $140 billion in unreported revenue annually, according to a University of California at Los Angeles Labor Center report, depriving the state of $8.5 billion in corporate, personal, and sales and use taxes each year.

A pilot program has allowed a team of agencies in Sacramento and Los Angeles to work together to investigate and prosecute the most outrageous felony-level multijurisdictional underground economic crimes in California. AB 1296 builds on the success of a state pilot program by permanently establishing law enforcement teams in Sacramento and Los Angeles and authorizing additional teams in the three other major metropolitan regions of the state: San Diego, the Bay Area, and Fresno.

Investigative teams have identified $482 million in unreported gross receipts and $60 million in an associated tax loss to the state. Additionally, through its criminal enforcement actions, the pilot program has recovered over $25 million in lost tax revenue, victim restitution, and investigation costs.

The legislation strengthens the program by ensuring multi-agency collaboration between several governmental entities, including the Department of Justice, the Department of Tax and Fee Administration, the Franchise Tax Board, and the Employment Development Department. Together these agencies combat wage theft, tax evasion and other crimes in the underground economy.

Zoot also determined that “The taxes that California should be collecting are approximately 31% of the gross receipts of cannabis businesses, or $960K for each “black market” cannabis entity, and $1.1MM per legal cannabis entity. The annual total for cannabis taxes for the “black market” and legal business should be $3.66B. It is our recollection CDTFA recently announced the cannabis taxes collected for the second quarter of 2019 were $144.2MM[3] vs. $915MM California should be collecting.”

 

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


One comment

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    William Fowler

    October 29, 2019 at 3:20 pm

    I really question that California lawmakers are really concerned about the black market. For example, why can’t law enforcement go into the 100’s of illegal dispensaries within the State and ask to verify their state license, if no license then simply shut them down. When law enforcement comes into a grow, no license they shut them down and usually send individuals to jail, but much of the black market cannabis is still going to the illegal dispensaries operating within the state of California. So the statistics here might be somewhat off as far as the amount of cannabis going out of state, look within the State of California and shut down the illegal operations…otherwise one might think that local and state governments are allowing the black market to prosper…million dollar payoffs in cash go along way to grease the hands of politics…and law enforcement efforts.

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