In 2019, California’s green rush is sliding into the red.
Despite lofty expectations, the second year of legal adult-use sales in the state is ending with a barrage of layoffs for some of the industry’s most prominent companies. In October, delivery heavyweight Eaze laid off 36 employees — roughly 20 percent of their staff. That same month, cannabis advertising giant Weedmaps bid adieu to 25 percent of its workforce. November saw Sonoma County’s CannaCraft let 16 percent of its workforce go, and there have also been layoffs at Pax, Grupo Flor, and more.
The problem, in a word, is taxes.
For Michael Steinmetz, CEO of cannabis flower distributor Flow Kana, laying off approximately a fifth of his company’s workforce was an “agonizing” decision. In hopes of finding a silver lining in a tough moment, he’s making a point of speaking directly with the media about what’s led so many cannabis businesses in California to tighten their belts or delay plans for expansion.
“Cannabis didn’t get legalized on its own,” Steinmetz explains. “These problems won’t fix themselves. It’s up to us and our communities to really take the necessary steps and put in the time to educate everyone and make the change.”
In this instance, the “change” in question largely revolves around taxes. Ask anyone working in the cannabis industry and they’ll likely tell you the current structure in place for California — a system in which steep taxes compound at each step of the supply chain, with the cost ultimately forced onto the customer — is the perfect way to ensure the illicit market stays in business.
The economics are fairly simple. Despite the fact that dispensaries offer a safe, quality alternative to what can be purchased through unregulated channels, the differential in price right now is steep enough that consumers are willing to risk it in order to enjoy the savings. Illegal sellers in the state outnumber their regulated counterparts by a ratio of nearly 3 to 1, according to an analysis published by the United Cannabis Business Association in September. That would explain why cannabis market research groups Arcview and BDS Analytics projected $3 billion in legal sales and $8.7 billion in sales from the illicit market for California in 2019.
As a result, Steinmetz is asking Gov. Newsom and state officials to entertain the idea of either instituting a tax holiday that would pause taxes for a set period of time or to pivot from the current system, which relies on a fixed-rate, to one in which taxes are based on a percentage of the ever-fluctuating price of cannabis.
California’s response to this downturn from the industry was to announce an increase to the taxes being collected for 2020. As decreed by the California Department of Tax and Fee Administration (CDTFA), a raise of over 4 percent on the cultivation taxes for an ounce of dried cannabis flower will take effect on Jan. 1. The CDFTA justified the hike as “an adjustment for inflation” required by state law in a press release accompanying the announcement.
“The hardest thing is actually getting legislators to understand the consequences,” Steinmetz says. “A couple of weeks ago, they said they were raising the taxes again, which is such an ill-timed announcement in the midst of harvest season and all the ensuing expenses for farmers. To announce that in the midst of all these layoffs almost felt like a slap in the face, to be honest.”
In response to industry outcry, Nicole Elliott, Senior Cannabis Adviser to Gov. Newsom, took to Twitter on Nov. 26 to share that the Governor was “quite sympathetic to the challenges faced by legal cannabis operators” and that he was “interested in partnering with the Legislature [and] stakeholders to address these challenges, including joining them in developing cannabis tax solutions in 2020.”
Speaking with Vice, a spokesperson for the CDTFA asserted that while they “certainly understand [the] industry’s concerns,” the agency “does not have the discretion to utilize other factors in adjusting the cultivation tax rates.”
Despite his justifiable frustrations, Steinmetz is committed to seeing Flow Kana through these turbulent times and concedes that there is likely no malicious intent behind any of the state’s actions. Instead, it truly does come down to education and understanding.
“Truth be told,” he says, “I do genuinely believe that the legislators and Gov. Newsom are not trying to set us up for failure. They’re just so disconnected and removed from the actual operational challenges that we’re facing, and it’s hard to make policy changes or suggestions when you’re so removed.”
Recalling a budtender event Flow Kana held in Sacramento in September, Steinmetz says the educational offering (no pot was consumed) gave legislators a chance to look at nugs under microscopes, use scissors to trim, speak with cultivators about their work, and gain a better picture of what a modern cannabis operation truly entails.
The hope is that by directly interacting with the workers and plant at the heart of the cannabis industry, regulators will take a keener interest in helping the legal market to thrive.
“With education, it’s a process,” Steinmetz explains. “It doesn’t get solved overnight. It gets solved over time, but I do believe we’re making progress.”
In the interim, the unfortunate truth is that the speed of bureaucracy will require companies like Flow Kana to weather yet another storm in hopes things on the tax front level out. Those ill-equipped to survive such a challenge may find themselves the unwitting victims of an industry still searching for ballast and order.
“It’s going to be very, very tough in the short term in California,” Steinmetz says. “You’re seeing all these companies doing layoffs and protecting their capital, but those companies without capital are unfortunately being faced with some very tough decisions to make.”