California Cannabis Chaos: State Bailout Might Be Needed

The legal California cannabis industry is in such dire financial straits that it may need a state-funded bailout if it’s to continue operations after this year, according to one longtime industry insider.

The most immediate problem is that hundreds of businesses are already behind on their state taxes, and might literally be unable to come up with the cash to pay those bills, said Jonatan Cvetko, the executive director of the United Cannabis Business Association.

Cvetko said one of the tax problems – which wasn’t discovered or announced by the state until late last year – is that a bill which eliminated the cannabis cultivation tax also changed the formula for how marijuana companies calculate their own tax bills to the state. The end result is many retailers in particular owe more than they think they do, and auditors are beginning to find payment shortfalls, Cvetko said.

“We’re starting to have a conversation about what a potential bail-out program could look like,” said Cvetko. “At the minimum right now, a bail-out program should include some sort of terms for repayment of taxes, as well as dismissing the excessive 50% penalty that’s in there.”

Already there are nearly 300 retailers – almost a quarter of the state’s licensed marijuana sellers – that are in arrears over state taxes, Cvetko said.

“We fully anticipate Q2 is going to be even worse,” Cvetko said. “You have a supply chain now where we had limited retailers to begin with, and if we lose 300 retailers, what does that leave us with?”

He added there are “rumors … that one of the biggest distributors in the state may not be around for much longer,” which could make continuing operations for other businesses even harder, with market contraction ongoing and a debt bubble of unpaid bills that is also reportedly continuing to grow.

The situation is creating a catch-22, Cvetko said, because the recurring headlines about California’s struggling cannabis industry are now making various city leaders hesitant to authorize new retail operations, despite the statewide retail bottleneck that has kept many brands, farmers and manufacturers frustrated on how to effectively reach consumers. Since 2018, only about a third of California’s cities and counties have embraced the legal marijuana trade, while the rest of the state has maintained strict bans on legal cannabis commerce.

“As we’re having conversations with other cities coming online, they’re seeing this data coming through, and that’s scaring them off from investing in an industry that’s failing right now,” Cvetko said.

Even if there is somehow the political will to get a marijuana industry bailout through the state legislature in Sacramento, Cvetko acknowledged that still wouldn’t solve the financial problem of hundreds of millions in unpaid debts already being carried by existing companies.

For that problem, Cvetko said, “there’s no solutions yet that we’re aware of.”

All of which adds up to more turbulence before the wider California market landscape improves.