San Jose’s Cannabis Tax Revenue Dips: A Call for Regulatory Revisions and Market Expansion

San Jose, a city known for its thriving cannabis industry, is facing a significant drop in cannabis tax revenue this year. The decline, projected to be in the millions, is attributed to the growing competition from the black market and cannabis delivery services. With a predicted $19 million budget shortfall for next year, boosting tax revenue from the cannabis sector remains crucial.

The city’s budget surplus currently stands at $35 million. However, the decline in cannabis tax revenue is a significant concern. In response, the San Jose City Council has shown interest in easing the regulatory burden on cannabis businesses. Recent moves include loosening cannabis business licensing laws governing where dispensaries can establish themselves and reevaluating penalties placed on legal businesses.

Illegal sellers appear to be capitalizing on the market, often operating as seemingly legitimate delivery services, without generating any tax revenue for the city. Sean Kali-rai, a lobbyist and founder of the Silicon Valley Cannabis Alliance, expressed his concern over the growing prevalence of unauthorized dealers. He stressed the importance of the city’s Division of Cannabis Regulation in overseeing and regulating the cannabis market.

“Cities like San Jose should lower their tax rates so that they can compete with the black market,” say cannabis attorney Damian Nassiri with Cannabis Law Group.  “People are turning to the streets because the streets don’t tax and the state, on the other hand, over taxes the cannabis industry, which is then passed on to the customers.  The customers then stop shopping at the licensed stores because they can get it cheaper from a homie, or an unlicensed shop,” explained Nassiri.  “And then the customer pays a double tax – a tax on top of a tax because the state sales tax is applied to the purchase price plus the city tax.  So cities should support SB 512 to end the double taxation on the cannabis industry because that is just patently unfair and cheats the tax paying citizen whose trying to do it the legal way.  These are bad ‘businesspeople’ who wrote these laws because they are unnecessarily greedy – to a point where it is squashing the industry.  It may sound crazy, but by lowering the cannabis taxes, the city would actually increase the amount of tax revenue they recover because more people would shop in the stores if the taxes were lower, so the overall revenue would go up.  They get a smaller piece of a much bigger pie, if you will.”

In an attempt to address the local cannabis industry’s limitations, San Jose city leaders have been evaluating existing regulations since late last year. Changes have been passed to expand where dispensaries could establish their business and relax expensive annual audit requirements.

The city’s Planning Commission has also approved recommendations to decrease distance requirements between cannabis retailers and schools, daycare centers, and other community spaces, from 1,000 feet to 500 feet. This change could potentially allow up to 21 new cannabis dispensaries to open in commercial locations.

In addition to adjusting zoning and distance rules, the commission has proposed establishing an equity initiative for the cannabis industry. This initiative would permit up to 10 new cannabis businesses specifically for equity applicants, half of which could be retail storefronts.

As the legal cannabis industry continues to expand its presence in San Jose amid statewide support, the growth of the sector not only benefits the city but California as a whole. Tax revenues are reported to reach $216.2 million in the first quarter of 2023 alone. However, the persistent issue of tax leakage due to unauthorized dealers and illicit market operations remains a troubling factor that city officials must address to ensure the continued success and growth of the legal cannabis industry.

With San Jose being one of the few cities in the Silicon Valley with operating cannabis storefronts, competition from unlicensed, unregulated businesses poses a significant threat to its legal counterparts. It is crucial for local authorities to enforce measures aimed at limiting illegal cannabis sales and preserving a level playing field for legal businesses, who contribute to the city’s tax revenue and bolster its economy.

The Cannabis Law Group, led by Damian Nassiri, a seasoned cannabis attorney, is closely following these developments. The firm assists clients seeking cannabis business licenses, including cannabis retail storefront, delivery, cultivation, manufacturing, and distribution licenses. They offer legal consultations in person in their Newport Beach office, over the phone, or via Zoom, depending on the client’s preference. For more information, call them at 949-375-4734 or visit their website.

The decline in San Jose’s cannabis tax revenue underscores the need for regulatory revisions and market expansion. As the cannabis industry continues to evolve, staying informed and understanding the legal landscape is crucial for businesses and consumers alike. The Cannabis Law Group is committed to providing the necessary legal guidance in this dynamic industry.