California’s Proposed Pot Industry Changes Met with Skepticism

The Californian pot industry has largely reacted with positive skepticism after Governor Gavin Newsom unveiled his new budget proposal, which includes significant updates for the cannabis industry. In essence, Newsom’s proposal seeks to merge three existing agencies regulating the state’s cannabis to establish a single, centralized Department of Cannabis Control, and to simplify and streamline the taxation of cannabis.

California voted to legalize cannabis use in adults aged 21 and older, three years ago now. And in that time, the legal marijuana industry has grown rapidly. Cannabis market research firm, BDS Analytics, predicts legal cannabis sales will exceed $3.1 billion this year alone, and forecasts sales will continue to grow to an estimated $7.2 billion by 2024.

Growth of this kind has come to fruition despite California’s complex legal structure, which incorporates in excess of twenty different cannabis license types, four varying  regulatory agencies, and exorbitant taxes that industry insiders say are driving customers to the illicit market for cheaper alternatives.

Regulating Nimble Markets
By current standards, our Southern California marijuana lawyers believe achieving effective regulation of the cannabis marketplace has been a challenge. Perhaps because government agencies are typically rigid institutions, that can struggle to keep pace with the more nimble new industries. Most young marketplaces experience rapid innovation in their early days, with technological updates coming in quick succession, and as those changes roll out, policy updates tend to accompany them. The pace at which those policy updates can be enacted is often the sticking point. And this has certainly been the case for California’s licensed cannabis industry, long crying out for tax reforms to better help legal businesses complete with unregulated sellers.

So Many Regulating Bodies
Cannabis in the state of California is currently regulated by no less than three different bureaus. Retailers, distributors, mirco-businesses, delivery services, lab testing and events are overseen by the Bureau of Cannabis Control. While growers and cultivators are regulated by the Department of Agriculture, and manufacturers report to the Department of Public Health.

A Complicated Tax System
California’s existing cannabis taxation system is also complicated. Business operators pay local and state taxes, cultivators pay distributors a cultivation tax, which distributors then pay to the state, and on top of that, an excise tax is also in effect.

Consumers ultimately pay the excise taxes, as they are built into retail prices, but they are collected by distributors. Most complicated within the current policy, is the part requiring the state’s tax department to twice a year estimate a wholesale tax rate that will ensure distributors pay taxes equal to 15 percent of gross recipients at retail. The governor’s new proposal instead aims to simplify things dramatically, by calling on retailers to collect tax directly from consumers, before paying it onward to the state.

Implications
By streamlining agency efforts and establishing a central Department of Cannabis Control, the industry hope is that feedback can be collected, reforms promoting industry growth enacted, and everyday regulating responsibilities carried out far more efficiently and effectively. Combining regulator efforts will also enable regulators to limit possible contradictions between agencies. While industry insiders are skeptical, after such a long haul on their part to reach this point, they are also hopeful policy changes of this nature will encourage continued innovation, and facilitate a smoother running of business throughout the entire industry.

And while updating the cannabis tax policies will streamline matters, it will also place a greater onus on retailers. With the proposed tax structure, retailers must ensure their account keeping is accurate. If not, and if they fall behind with their monthly taxes, businesses may be forcibly shut down and properties may incur liens.

As California is the nation’s largest cannabis market, statewide industry changes are expected to cause a flow-on affect to other markets that look to California to learn from, and to try to avoid any missteps.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:
2020-2021 Governor’s Budget – Proposed Budget Summary (All Chapters)