The barriers are High to Enter the California Cannabis Market

Proposition 64 created a taxed and regulated marketplace for cannabis cultivation and distribution in California.

California Growers Association (CGA), with an estimated 68,150 cannabis farmers working in California today, the CGA is concerned with the open question of how many of them will end up licensed in the legal market.

Essentially in every step of the process, thousands and thousands of dollars are foisted upon preexisting businesses that have been for the most part operating at a subsistence level.   For a lot of people who are just getting involved, these costs are being assessed right now. It’s a massive burden. People can’t get bank accounts, and they can’t get financing because they are too small and the industry is still illegal federally.   People are being asked to do things that are pushing them into bad situations with really little recourse.”

As of March 19, the California Department of Food and Agriculture (CDFA) had issued only 2,477 temporary cultivation licenses. O’Neill says that the path to legitimacy in California is too much to bear for many farmers; a lot of them aren’t even applying for licenses. The CDFA has received 4,451 applications; that’s a 6.5-percent application rate in the first three months of the year.

California’s regulatory costs favor well-financed businesses that focus solely on cultivating and manufacturing cannabis as a monocrop—businesses that can weather a few years of losses while the marketplace settles. Where subsistence farmers were once able to maintain their own financial pace, the market is insisting that those smaller operators boost their revenues (and, invariably, their expenses) enough to cover the baseline entrance fees of this new industry.

Through one-time application costs, annual licensing fees, hefty new tax codes, land-use modifications, ecological remediation expenses, building infrastructure improvements, water storage requirements—to say nothing of the stiff competition of well-heeled agricultural businesses entering the so-called “Green Rush”—the price of running a farm that’s survived for decades has suddenly become overwhelming.

Criminals do not pay taxes, ensure customers are 21 and over, obtain licenses or follow product safety regulations,” he said. “We need to give legal businesses some temporary tax relief so they do not continue to be undercut by the black market.

This current licenses and regulatory climate in California compelled the CGA to author a report titled, “An Emerging Crisis: Barriers to Entry in California Cannabis” earlier this year. In 38 pages, the organization laid out a case that state regulations were actually achieving the opposite of what many voters had anticipated at the ballot box in 2016. Growers with deep pockets can now waltz into the marketplace with ease, and small farmers are draining their balance sheets just to have a shot at the fringes of commerce.

The MAUCRSA regulations are only temporary for now. Licenses issued by the state of California—for cultivation, manufacturing, distribution, retail—are good for only four months. The state is expected to deliver more permanent regulations this summer.

And it may be that the regulators are aware of this problem and are addressing it.  A bipartisan pair of California lawmakers has announced a bill which would drop the state excise tax on cannabis to 11% from the current 15% for a period of three years. As Leafly reported on March 16, 2018, the bill was introduced by Assembly members Tom Lackey (R-Palmdale), Rob Bonta (D-Oakland). The bill’s co-authors include Assembly members Ken Cooley (D-Sacramento), Reggie Jones-Sawyer (D-Los Angeles), and Jim Wood (D-Healdsburg).

Since recreational cannabis became legal in California at the start of this year, medical marijuana dispensaries and cultivators have struggled to make the transition to a new market with new, often waitlist-requiring steps toward being licensed and legal. Between legal cannabis’ banking challenges, the significant regulatory changes, and California’s booming grey and black market operators, smaller businesses, in particular, have had to face a lot of legal and financial issues to survive in 2018.

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