Despite being one of the oldest legal markets in the country, California’s cannabis industry is still going through major changes. In July 2021, the state established the Department of Cannabis Control by consolidating the authority of three former state cannabis authorities: the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health. Since then, state regulations have been updated and more localities have opened cannabis business applications. Even still, the California cannabis industry is still facing a few challenges entering 2022.
Legal Market Challenges
Effective on January 1, 2022, an increase on the cultivation taxes required under the Cannabis Tax Law was instituted to adjust for inflation. In addition, California’s 15% excise tax and 7.25% sales tax remains for all cannabis transactions, as well as other local manufacturing, processing, and distribution taxes.
Many legal cannabis operators in California have complained that taxes associated with cannabis activities are too high and that this has contributed this to the state’s large illicit market. In December, a group of cannabis operators wrote a letter to Governor Newsom asking for a three-year tax reprieve claiming that some operators paid more in taxes than they made in revenue.
In light of complaints, California’s Department of Cannabis Control is funding $100 million to help local cannabis businesses. The funding will be dispersed throughout seventeen cities and counties to assist in staffing, license processing, and conservation efforts. This money is intended to help develop the many local cannabis markets in the state and help provisional licensees transition to annual license holders.
Out of over 12,000 legal cannabis operators in California, only around 3,400 are full annual license holders. The rest of the legal operators have obtained provisional licenses, which are meant to be a temporary measure while the business applies for full annual licensure. The Department of Cannabis Control is in the process of phasing out provisional licenses, which are less challenging to obtain than annual. Though license holders may be able to renew their provisional licenses up until January 1, 2026, after that date, all legal cannabis operators will need annual licenses to continue operating.
Black Market
California’s illicit cannabis market generates an estimated $8 billion annually and some speculate that the high taxes and operating costs of a legal cannabis business are allowing the black market to thrive. While consumers that participate in black market sales are typically just looking for cheaper cannabis, they may not know the risks that are involved with illicit cannabis.
Studies show that unauthorized pesticides and fertilizers are often used in the illegal cultivation and production of cannabis. The chemicals not only pose a dangerous health risk to California cannabis consumers, but can also seep into the environment and poison wildlife and their habitats.
Additionally, black market cannabis cultivation has exacerbated water theft in California as illegal farms siphon off water from local homes, farms, and wells. This illegal practice has continued into one of California’s worst droughts in history, and an estimated 12 billion gallons of water have been stolen in the past eight years.
Another likely contributing factor to California’s large black market is the state’s ‘cannabis deserts’ where access to legal cannabis is extremely limited or nonexistent. In these areas, municipalities may not allow legal cannabis businesses, forcing consumers to drive potentially long distances to the nearest legal dispensary or participate in black market sales. In California, it is estimated that there are only two legal dispensaries per 100,000 people, which is lower than any other legal state. Still, municipalities are continuing to come on board with the legal market, expanding access to cannabis in California.
How Can Sapphire Risk Help?
Tony Gallo and the team of application writers and consultants at Sapphire Risk Advisory Group have worked extensively in the State of California and have helped to build-out over 70 successful cannabis businesses in the state. Follow us on social media to stay up to date with California cannabis industry updates!
Author
Katharine Baxter is the Lead Technical Writer and Industry News Editor for Sapphire Risk Advisory Group and is responsible for creating compliant security plans for cannabis business license applications. Katharine obtained her two Bachelor’s degrees in Journalism and Political Science and has worked in the cannabis industry for over two years. Katharine is a published author on cannabis and security and has covered topics such as cannabis security best practices and industry legal updates.
- California Senate Bill 69 Adds CEQA Requirements for New Cultivators
- Top 5 Cannabis Security and Surveillance Violations
- Peace of Mind in the Retail Sector: Facility Security
- Opportunities in the Ohio (O-High-O) Cannabis Market
- Building Security and Trust: Verifying Identification and Payments
- The Importance of Loss Prevention
- Thoughts to Improve Cannabis Security Regulations Across the Nation
- Opportunities in the Minnesota Cannabis Market
- U.S. Cannabis Legalization 2023 Update
- How to Present Your Cannabis Business Vision to Your City
