Ups & Downs in Legal Cannabis in the First Half of 2018
A year ago
Late summer is always an exciting and busy season for cannabis farmers. Millions of plants are flowering and cannabis consumers across the state are beginning to anticipate new and exciting strains that will soon make their fall debut.
But this year, lawmakers, law enforcement officials and law-abiding cannabis businesses are struggling with California’s legal marijuana industry. And what’s being anticipated is far different from previous growing seasons. From the perspective of most marijuana business owners and producers, those hopeful, happy photos of excited customers eager to be the first legal cannabis consumers on Jan. 1 seem like they were taken decades ago.
Steep taxes on cannabis products have taken a toll on consumers—particularly medical cannabis patients who may not be able to afford Medical Marijuana Identification Cards that would help eliminate some taxes.
And challenges with lab testing continue to plague an industry struggling to compete with the black market, all while complying with stringent regulations. Let’s take a look at where legal cannabis in California stands today.
Taxes: Too High for Consumers, Too Low for CA
According to the California Department of Tax and Fee Administration, the excise tax on cannabis generated $32 million in revenue for the first quarter of 2018. The cultivation tax generated $1.6 million and the sales tax generated $27.3 million in tax revenues. This all makes for a grand total of just over $60 million.
This may sound like a hefty haul, but $60 million falls far short of the $175 million in marijuana tax revenues predicted by the state’s legislative office for the first six months of the year.
Prop 64 designated that revenue from sales taxes would be transferred to the general fund. During the first quarter, about $16 million was dedicated to youth drug prevention and education, and about $5.4 million was earmarked for local law enforcement. The balance of tax revenues is divided into moneys supporting
- Environmental restoration and preservation
- Funding for the California Highway Patrol
- Other research and community grants
On the consumer side of legalization, taxes are one of the main reasons shoppers continue to rely on the black market for their cannabis supply. A recent survey found that in the past three months, one in five Californians bought marijuana from the unregulated market.
More troubling for legal cannabis businesses is the fact that the survey found that 84% of these same customers are "highly likely" to continue purchasing from the black market because of "the illicit market having cheaper products and no tax.”
Contaminated Cannabis Continues: Wasn’t Legalization Supposed to Fix This?
One of the most compelling arguments for legalization was that mandatory lab testing would guarantee that products were safe to consume and free from harmful materials. But so far, the industry has experienced some serious bumps in this road.
According to the state’s Bureau of Cannabis Control (BCC), since mandatory lab testing was rolled out in July, one in five batches of cannabis has failed testing.
Bloom is one of the state’s most visible cannabis brands, selling products in nearly 100 retail locations throughout California. In July, the company announced a voluntary recall of some of its products when it tested positive for a dangerous pesticide called Myclobutanil. This pesticide is used on inorganically farmed apples and grapes, but once combusted by a flame or in a vape pen, it morphs into dangerous hydrogen cyanide.
Yet another company, Lowell Herb, which provides pre-rolls to about 74 retailers, initiated a voluntary recall only days after Bloom’s announcement. The company provided its product to one lab, where it initially passed testing. But the same products failed a second test at the same lab. Lowell Herb then had the product tested at a different facility, where the product passed, but decided to go ahead with its recall.
Are companies the victims of overly aggressive state-sanctioned testing procedures, as some farmers alledge? Are companies working with unscrupulous farmers? Could labs be using inconsistent testing standards? Because mandatory testing is the newest part of the state’s legalization rollout, it will take time to determine where the confusion lies.
And what happens to all of that noncompliant cannabis? It must be destroyed, according to the BCC. And its destruction must be logged with the agency. Just prior to the July 1 rollout of mandatory testing, one estimate suggested that over $350 million worth of noncompliant cannabis could be headed to the incinerator.
What’s in the Bag? Pricey Cannabis in an Even Pricier Package
Another challenge to marijuana producers has been the transition to compliant packaging. The process of changing over to packages that meet new regulations is complex and very expensive. What makes up a compliant package? A lengthy list of no less than a dozen packaging rules that include everything from font size to the manufacturing date and much more.
Even more troubling is a requirement from the California Department of Public Health regarding packaging. Currently, it requires that the amount of tetrahydrocannabinol (THC) and cannabidiol (CBD) in all products be stated in milligrams—something absolutely impossible for cannabis flower manufacturers to comply with.
And for cannabis product manufacturers, perhaps the most confusing aspect of packaging is the fact that package designs aren’t approved prior to—but only after—the product is on the shelves. This leaves a business vulnerable to citations for improper package design and costly redesigns.
Packages that cost a cartridge manufacturer seven cents per unit prior to legalization are now costing 55 cents per unit. The costs for these and other new legalization requirements are being borne in large part by the farmers and the end consumers.
Back to Black? How Can Legal Entrepreneurs Stay Afloat?
Cannabis startups now require up to several million dollars and more to launch. And when marijuana startups with virtually no public track record must locate investors, even those who are great at what they do have a hard time finding funding.
Some companies that have been in business prior to legalization may not have enough capital to stay afloat. One analyst even predicts that thousands of existing cannabis operators may face closing their businesses.
Alternately, cannabis companies may be forced to relocate to a different jurisdiction where their type of business is allowed. Or businesses may even throw in the towel and return to the unregulated market.
Even industry giants like Oakland dispensary Harborside have laid off workers due to increased business costs and underperforming retail sales.
Can CA Create a Regulatory Framework That’s Good for Everyone?
Though California’s legal adult-use cannabis rollout has been rocky, this has generally been the case for all states that have legalized recreational cannabis. California’s domination as a producer state has created additional challenges. Other problems are rooted in the state’s large geography.
As Los Angeles gets closer to the conclusion of its complex three-pronged licensing period, some hiccups in the area that arguably houses the state’s largest concentration of cannabis consumers will begin to ease up. As cannabis farmers, breeders and retailers report what works and doesn’t work with the state’s testing and track and trace system, more changes will gradually result in improvements to regulations that better fit the reality of the industry.
And as consumers continue to bring their voices to the table—demanding a wider array of products that represent their needs, perhaps those in Sacramento will begin to feel that they can revisit some of the most unreasonable, unworkable aspects of Prop 64. Hopefully lawmakers are willing to revamp regulations to reflect a more inclusive and sensible approach to marijuana legalization.