Part Three of a Four-part series.
California’s cannabis market is on the verge of a crisis, according to a new report released by the California Growers Association (CGA), which represents more than 1,100 small and independent cannabis businesses.
According to the report, less than one percent of California’s cannabis cultivators are licensed by the state; leading many to ask: Why? What is it that is keeping cannabis cultivators out of California’s legal cannabis market? In part three of this four-part series, Green Market Report will examine the cultural and financial barriers that are keeping cultivators out of the market, as outlined by the recent CGA report.
If you’ve missed the previous parts, you can click here to view Part One and Part Two and get caught up.
The cannabis industry’s lack of adequate banking services has been well reported on. But what has slipped through the cracks are the other financial barriers that keep small to midsize cannabis cultivators out of the legal market; such as the lack of small business loans.
The single greatest barrier keeping cultivators out of the legal market, according to a survey of CGA members, is taxation. Due to the federal status of cannabis, most cannabis businesses cannot take standard deductions for business expenses like other industries have.
In many cases, this has the effect of creating an unreasonable tax burden on small to midsize cultivators; with some paying an effective federal tax rate as high as 60%. Additionally, state and local taxes have also proved to be burdensome for small-scale operators.
Many local governments have passed “gross receipt taxes” which are assessed at each step in the supply chain. More often than naught, theses taxes compound each other; turning a modest 5% into a cumulative 25% by the time it reaches the supply chain.
The CGA estimates that the effective tax rate for cannabis cultivators in California can range between 40%-60%, compared to states like Oregon where the effective tax rate is 18%. While larger operators can bear the brunt of this tax rate, many small businesses cannot.
Additionally, inefficiencies in tax collection can incur more unnecessary costs. Once a harvest leaves the cannabis producer, the cultivation tax is required to follow the harvest throughout the supply chain. In situations where a cultivator is directly supplying a retailer, this is not a problem.
However, this is often not the reality. Typically a harvest will pass through multiple points in the supply chain before reaching retailers. If the cannabis industry was not a cash-only business, this would not be a problem, but it’s not. Because of federal, cannabis businesses must physically move the cultivation tax through each point in the supply chain; creating a logistical and security nightmare.
Furthermore, cannabis cultivators must pay taxes on their harvest as soon as it moves through the supply chain; without any consideration of whether it will actually reach the market. The end result is cannabis cultivators having to pay their taxes before the even receive that money that’s actually being taxed.
Another financial burden is the lack of access to small business loans. While large-scale operations with deep-pocketed investors can get by without access to business, small-scale cultivators cannot.
Another barrier contributing to the small number of licensed cannabis cultivators is the culture in California. Approximately 20% of CGA members have been growing for more than two decades and well before medical cannabis was legal in California. These former outlaws have a deep seeded mistrust of the state and federal government and are reluctant to embrace state regulations. Conversely, many in state and local governments operate under incorrect assumptions and stereotypes about cannabis and consequently legislate accordingly.
The CGA also estimates that approximately 30% of the state’s cannabis cultivators operated “off the grid,” where electricity and broadband access is limited. The end result is that many cannabis cultivators that want to come into compliance simply can’t because they lack these basic resources.
While not necessarily an institutional barrier, some cannabis cultivators are simply not good at business. With a gossamer of state and local regulations, many small to midsize cannabis cultivators become overwhelmed by all of it and simply need more time to absorb the new rules.
The final and some would say most regrettable barrier to bringing cultivators into the market is that they simply don’t want to.
Some cultivators may be operating on public lands while others just have a general disrespect for the law. The side effect of this disregard for the law is that those that interested in becoming compliant are treated the same as those that don’t, and the CGA encourages the state to do all it can in provide a path to legality for cultivators acting in good faith.
Stay Tuned for Part 4
The greater question remains of how to address all of the other institutional, financial, and cultural barriers preventing cultivators from entering the market. Where do we go from here? What should be done? In the fourth and final part of our series, Green Market Report will examine the solutions put forward by the CGA to fix this emerging crisis.