Opportunities in California Cannabis Market

The Golden State has come a long way to becoming one of the largest cannabis markets in the world. It was first to legalize medical marijuana in 1996, then, recreational use in 2016, and has been at the forefront of social equity policies.

Despite being the oldest in the nation, the state is still working to revise its program. Illicit growers and retailers continue to operate and generate an estimated $8 billion (about $25 per person in the US) annually. Additionally, insecticides and other chemicals from these illegal marijuana operations are spilling into the environment, hurting wildlife, and poisoning the water of the state’s farmers and surrounding communities. Still, some legal businesses have engaged with “unlicensed operators” citing high taxes and competition from the black market which can undercut their prices. In response, many cannabis business owners have left the state to join other U.S. cannabis markets with more lenient laws or lower taxes.

Current Status

On June 30, Governor Gavin Newsom signed into law Assembly Bill (AB)-195 which effectively eliminated the state’s cannabis cultivation tax. Specifically, it slashed the $161 charge on 1 pound of cannabis flower after July 1, and by January 2023, the collection point for the 15% excise tax will be placed on the retailer instead of the distributor. Only until July 2025, can the state, every two years, adjust the excise rate to account for the lost cultivation revenue, however, that number cannot exceed 19%. Many in the cannabis industry see this law as a step in the right direction, but further policy may be needed.

Addressing Social Justice

Newsom, like many governors, sees cannabis legislation as a way to address “social justice” issues. The bill, responding to such concerns, has a $10,000 tax credit for “social equity cannabis businesses” to enhance the presence of underserved communities in the market. Another provision allows them to keep up to 20% of their excise tax revenue. Some Democratic lawmakers, like California Senator, Steven Bradford, wanted to eliminate the tax for minorities altogether, and others felt the bill needed to further address the cartels and the motivations for illegal operations.

Addressing Illegal California Cannabis Businesses

Provisions have been added disincentivize unlicensed operators and now, anyone who knowingly rents or leases space to an illegal or unlicensed business could face up to a $10,000 fine. Similarly, $20 million has been set aside to help “retail licensing efforts” and another $40 million in tax credits for eligible retailers and microbusinesses. Finally, nearly $670 million will go to marijuana misuse education, remedies to the negative environmental impact of illegal growers, and increased law enforcement. As a bonus, instead of the required 20 employees to enter a labor peace agreement, the bill lowers this to 10.

Cannabis Businesses

Currently, 68% of California cities have banned retail cannabis businesses, which reduces state-wide access to cannabis and may be a driver for some consumers to buy from the black market. Additionally, first-quarter revenue from 2022 was only $293.5 million compared to the $316.5 million generated in the last quarter of 2021, which amounts to a reduction of 7%.

For the first quarter, 80 dispensaries, 50 delivery operators, and 16 micro-business licenses were tallied by California’s Department of Cannabis Control, nevertheless, California is lacking behind other states in cannabis dispensaries per capita. Additionally, out of the 3,000 businesses that can be found on Google and Yelp, only 823 cannabis shops are legally operating.

California Cannabis News

The state’s Senate Appropriations Committee recently passed AB-2188 which makes it illegal for employers to discriminate against individuals who use cannabis outside of the workplace. Unless the employee is “impaired” on the job, merely testing positive for “non-psychoactive” elements of cannabis will not be enough grounds for disciplinary action or even termination. Additionally, lawmakers have introduced many other cannabis bills that touch on issues concerning packing, hemp products, vapes, decriminalization, research, and how cannabis is to be sold at events with alcohol. More information on upcoming bills can be found here.

How Can Sapphire Risk Help?

Tony Gallo and the team of experts and consultants at Sapphire Risk Advisory Group have worked to secure medical marijuana and recreational cannabis businesses in 37 states. Follow us on social media to stay up to date with more security best practices and cannabis industry updates!