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Hoping to Avoid Crisis, California Makes First Cannabis Tax Concession

Hoping to Avoid Crisis, California Makes First Cannabis Tax Concession

Fee waivers for equity license holders in the state will be available starting Jan. 1 but some in the industry worry it won’t be close to enough.

If most of the news you’re reading about cannabis these days seems like it’s always making mention of the high tax rates plaguing the industry, that’s because things are getting bad.

In California, for instance, Newsweek reports that last week, “dozens of executives, industry officials and legalization advocates in California’s legal cannabis industry sent a letter to Governor Gavin Newsom” in which they requested “additional tax breaks and other governmental support” to stave off an industry collapse.

In the letter, the signatories — which include major players like Harborside Inc. and CannaCraft — called on Newsom to remove the cultivation tax for growers and for him to impose a three-year hold on excise taxes. To understand why these demands are being made, it’s essential to understand exactly what the legal industry is facing right now. That’s what Harborside co-founder Andrew DeAngelo set out to do in a recent op-ed for Forbes.

“Today,” DeAngelo writes, “the underground market commands a whopping 75% of market share of all cannabis transactions in the state. This was the exact opposite outcome that was promised to voters and the cannabis community when we negotiated the details of Prop 64 and then went to the polls in 2016.”

As DeAngelo argues, legal companies paying high taxes are being forced to compete with a legacy market that is beholden neither to the IRS nor the strict (and expensive) regulations dictating everything from testing to packaging. As a result, the latter is thriving while the smaller players in the former find themselves perilously close to the brink of extinction.

Big picture, such fears are being borne out in deals like the one recently struck between American multinational pharmaceutical and biotechnology corporation Pfizer and the clinical-stage company Arena Pharmaceuticals, which Forbes reports was worth a total equity value of around $6.7 billion. The focus of the deal is a promising cannabinoid-based bowel disease treatment Arena has developed, though the headline here is that a pharmaceutical behemoth like Pfizer is continuing to invest big on what the company clearly sees as a huge upcoming opportunity.

But it isn’t only having a better chance to battle the Pfizers of the world that DeAngelo sees as the problem. It all feeds into a larger issue that essentially has left the legal industry feeling abused and ignored. For example, why pay high taxes if legal cannabis businesses, like those recently targeted in a string of Bay Area robberies, are not going to benefit from the assistance of law enforcement?

“We were promised protection of our dispensaries from the police if we secured our facilities according to local control, which we did at huge expense,” DeAngelo notes. “These are cash businesses and are vulnerable to attack from organized criminals. Even banks don’t have the cameras, vaults, alarms, and biometric locks that we do. And yet, during a string of robberies over the recent holidays in November, there was no police protection of our facilities. Some were robbed again a day or two later with the same result.”

With so many compounding factors working against smaller operators, the call for drastic action — DeAngelo advocates those affected “stop playing nice and start playing offense” — does not appear to be arriving a moment too soon. Already, some positive results have come from these efforts, even if much bigger measures will still ultimately be necessary.

As previously reported by Bloom & Oil, the San Francisco Board of Supervisors voted last month to delay the city’s forthcoming cannabis business tax in hopes of giving legal operators a boost. Now, California’s newly formed Department of Cannabis Control (CDCC) has announced it will begin granting waivers on license fees for cannabis entrepreneurs of color “affected by the War on Drugs,” according to an announcement issued Dec. 20.

Speaking with the North Bay Business Journal, CDCC Director Nicole Elliott pegged access to capital as the top challenge currently facing equity operators while acknowledging that there was still room for improvement beyond this “critical first step.”

By contrast, California Cannabis Industry Association Executive Director Lindsay Robinson was more reserved in her appraisal, telling the paper that “some relief is helpful, but we still have major issues [like safe access to banking].”

For as long as things remain at a pivotal inflection point, each move (or lack thereof) on the part of local, state, or, dare to dream, federal lawmakers will continue to have crucial implications. Now all eyes turn to Newsom and the CDCC in hopes that the letter signed by more than 400 industry leaders leads to further actions on behalf of the state’s struggling craft and equity-operated cannabis businesses.

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