California Cannabis Company Sues State Regulators Over High Taxes, Illicit Market

A licensed California cannabis company owner has filed a civil lawsuit against the state’s Department of Cannabis Control alleging that outrageously high taxes on lawful distributors and lack of enforcement against illegal operations has made the industry untenable for those trying to do it by-the-book.

As it stands, the state’s excise tax on cannabis is 15 percent. Municipalities can also set their own rates. Plaintiff, Catalyst Cannabis Company, alleges these tax rates are effectively smothering the legal cannabis industry in California. Operators of pot shops throughout the state are “treated as second class” members of the business community, while they burden an unfair share of taxes and receive little protection against the unfair competition of illegal operators.

In a press release, plaintiff told state media outlets the goal of the litigation was partly to glean information about what state regulators know regarding illegal distributors and partly to compel them to participate in reasonable cannabis industry tax reform that would allow legal operators to survive. As our Los Angeles marijuana business lawyers have been made aware, eking out a profit has become increasingly difficult for California pot shops because of high-taxes and the relentless (and growing) underground market. Legalization of marijuana for recreational use has been a positive in many respects, but it’s also reduced penalties for unlawful marijuana sales, allowing black market cannabis outfits to thrive.

The Catalyst lawsuit also alleges the state has done little to crack down on so-called “burner licenses,” alleged criminal enterprises that obtain legal cannabis distribution licenses with the use of front men, allowing them to conceal the identities and intentions of those actually behind the wheel. According to the lawsuit, these gray market distributors use their legal licenses to purchase huge quantities of lawfully-harvested marijuana at wholesale, and then turn around and sell that product cheap on the black market. They can do so for much lower prices compared to lawful businesses, which struggle to meet all regulatory burdens, including paying for applicable taxes and quality/safety checks.

The lawsuit alleges that state government regulators have largely ignored these actions – to the detriment of legal operators. As Marijuana Business Daily reported recently, the combination of practical and financial setbacks for legal purveyors of pot has led more than a few to reason they must break – or at least bend – the rules to survive amid such cutthroat competition. Anonymous source farmers told MBD that a fair number of legal cannabis stores have marked batches of bud “destroyed” for failing to meet the state’s stringent quality standards, only to turn around and sell it on the black market or across state lines to stay afloat.  This is inadvisable, but it does illustrate why the legal action by Catalyst has become necessary. Until the legal framework that increases the risks of illegal sales and increases profits of legal sales changes, unlawful sales are going to persist and legal operators will flounder.

Among the key regulatory issues in question:

• Widespread bans of marijuana retail operations in two-thirds of California’s cities and counties.
• Extremely high local taxation for legal marijuana.
• Substantial compliance costs for businesses large and small.

These pose not only barriers to entry but also, some say, de facto prohibition.

California cannabis companies struggling to make ends meet should consult with an experienced marijuana business attorney to ensure current and planned practices do not run afoul of state law and future enforcement actions.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.

Additional Resources:

California Cannabis Brand Sues Regulators Over High Taxes, Illicit Market, Sept. 21, 2021, By TJ Branfalt, Ganjapreneur