The California Governor’s Office of Business and Economic Development (GO-Biz) announced that it is once again giving a handful of grants to various health departments and non-profit organizations on May 25. The agency is utilizing cannabis excise and cultivation taxes to fund $50 million in fiscal year 2022-2023 and awarded funds through the California Community Reinvestment Grants Program. Recipients are permitted to use the funds to help people find jobs, treat mental health or substance abuse, and provide legal services.
In order to qualify, organizations must meet various requirements, such as being in good standing for at least six months prior to grant solicitation, have tax-exempt status from the IRS and California Franchise Tax Board, and be labeled as “current” or “exempt” in the California Attorney General’s Registry of Charitable Trusts, among others.
This fiscal year’s grant recipients include 31 organizations that specifically aim to support communities affected by the War on Drugs. The highest grants awarded were $3 million for Centers for Equity and Success, Inc., Shields for Families, the Los Angeles Department of Public Health, UnCommon Law, and the Monterey County Health Department. Other grants include First Place for Youth, Goodwill of the San Francisco Bay, United Friends of the Children, and more.
According to a GO-Biz press release, the agency plans to open up the next wave of grants for application later this summer in August 2023.
The California Department of Cannabis Control (DCC) initially announced the launch of the program with $30 million in first grant recipients for fiscal year 2019-2020 in April 2020. In 2021, the California Community Reinvestment Grants Program granted $15 million to various organizations. Most recently last year in June, GO-Biz announced the distribution of cannabis tax funds in the amount of $35.5 million between 58 grants recipients.
In February, the DCC announced that it was offering $20 million in grant programs for the purpose of supporting and expanding the state cannabis industry. “Expanding access to California’s retail cannabis market is an important step towards protecting consumer safety and supporting a balanced market,” said DCC director Nicole Elliott. “The retail access grant program ultimately seeks to encourage legal retail operations in areas where existing consumers do not have convenient access to regulated cannabis.” Six study initiatives were approved at the University of California, Los Angeles, three at University of California, Berkeley, and single grants for colleges such as University of California, Davis, Cal Poly San Luis Obispo, and Cal Poly Humboldt.
Also in February, the DCC announced that it would be allocating $20 million to the Local Jurisdiction Retail Access Grant, which helps local governments enact their respective cannabis licensing programs. It also announced an additional $15 million that would be granted to support equity in the cannabis industry.
California continues to fund cannabis research efforts as well. In April, 16 colleges were granted nearly $20 million for the purposes of studying cannabis. These initiatives ranged in topics from studying legacy genetics, potency, and more. “It is the Department’s aspiration that these studies will advance the body of scientific research, further our understanding of cannabis, and aid to the continued development and refinement of the legal framework,” said DCC chief deputy director Rasha Salama. “These studies will provide valuable insights on topics of interest to California’s consumers, businesses, and policy makers and the Department looks forward to sharing them once they are completed.”
Just a few weeks ago, a California task force issued a draft of its final report, which concluded that the state issue an apology to Black Americans for discrimination experienced as a result of the War on Drugs. Additionally, it called for the payment of funds to Black Americans for “each year of residency in California during the 49-year period between 1971 and 2020.” The final version of the report will be sent to congress on June 29.
According to data from the cannabis research firm Whitney Economics, the cannabis industry paid an excess of $1.8 billion in additional taxes in 2022 alone. And, spoiler alert: This article doesn’t have a happy ending. Cision PR Newsletter reports that this number is expected to jump to $2.1 billion in 2023.
As High Times continuously writes, with deep frustration, so far, the legal cannabis industry has largely not succeeded in creating an accessible business model. California, among other states, is seeing a mass exodus as legal cannabis companies, such as Jerry Garcia’s legacy brand, leave the state due to exorbitantly high taxes and red tape. Despite ongoing efforts to help communities most impacted by the War on Drugs enter the legal market, if celebrity brands can’t make a profit, how is one starting life after the financial and mental turmoil of going to prison for a non-violent cannabis offense supposed to make a decent living?
So why are the taxes so damn high for cannabis businesses? Don’t forget that your pretty pre-rolls and vegan edibles are technically still a Schedule I substance, meaning that, according to the Feds, cannabis has “no currently accepted medical use and a high potential for abuse.” This is scientifically inaccurate and regressive, not to mention hypocritical, as 38 states and Washington D.C. currently have medical marijuana programs. The taxes inflicted on folks in the legal market indicate that legalization is not the utopia we hoped for and may help the black market, which continues to flourish. Overtaxing legal cannabis companies is not only harmful to business owners, but it raises prices and thus isolates potential clients.
Cannabis companies are subject to the federal tax provision 280E, which “penalizes traffickers of Schedule I or II drugs by disallowing the deduction of “ordinary and necessary” business expenses—such as below-the-line deductions—after reducing gross receipts by the cost of goods sold, or COGS, essentially resulting in federal income tax liability calculated based on gross income, not net income,” according to Bloomberg Tax.
If you pour the stress of 280E on top of other cannabis business hurdles, such as difficulty accessing banking services and regulations against any interstate commerce, the result is that for many companies, it’s impossible to make a profit in the legal cannabis biz. The effective tax rates are often higher than 70% for cannabis retailers.
As Cision PR Newsletter reports, as a result, 24.4% of cannabis operators surveyed indicated that they are profitable. And things are becoming more dire last year; the figure was 42%. And, while it’s tempting to blame a post-pandemic economy, other industries are actually flourishing. According to Bloomberg, in 2022, U.S. corporate profits saw the largest margins since the 1950s.
As warned earlier in this article, don’t expect the legal market to have a breakthrough and get better anytime soon. Whitney Economics is releasing a survey later this month stating that cannabis businesses are hanging on by the skin of their teeth and should not expect a positive shift in the immediate future.
“The cannabis industry is under extreme economic distress, and the current regulatory and taxation environment is untenable, even in the short term,” says Beau Whitney, chief economist at Whitney Economics, according to a press release. She adds that many state markets are on “the brink of systemic collapse.” The report suggests that tax reform is the only answer to the problem. Under the right tax laws, the cannabis industry could be bringing in billions—and not just for the government to collect in taxes. Whitney Economics predicts that with the proper reform of 280E and cannabis policy, industry employment will increase, and economic activity will rise by $35.2 billion over ten years.
Reuters reports that three Senate Democrats introduced a bill to remove cannabis from the Controlled Substances Act in July of 2022, thus nullifying Code Sec. 280E. The Cannabis Administration and Opportunity Act would impose a top excise tax of 25% on products sold by large cannabis businesses. At time of reporting, it is still pending.
New York Governor Kathy Hochul on Wednesday signed legislation to reign in the state’s illicit marijuana market that includes penalties for unlicensed cannabis retailers of up to $20,000 per day. The legislation, which increases civil and tax penalties for the illicit sale of cannabis in New York, was signed into law as part of the state budget for the 2024 fiscal year.
Hochul first proposed the new measures to address New York’s underground cannabis market in March as a way to prop up the emerging industry for recreational marijuana, which was legalized by state lawmakers in 2021. Regulated sales of adult-use cannabis began in the closing days of 2022, but so far, only a handful of licensed dispensaries have opened statewide. Meanwhile, free from the threat of criminal penalties, unlicensed dispensaries have proliferated, with a law enforcement task force study conducted earlier this year identifying at least 1,200 illicit pot shops in New York City.
“As New York State continues to roll out a nation-leading model to establish its cannabis industry, these critical enforcement measures will protect New Yorkers from illicit, unregulated sales,” Hochul said in a statement on May 3. “Unlicensed dispensaries violate our laws, put public health at risk, and undermine the legal cannabis market. With these enforcement tools, we’re paving the way for safer products, reinvestment in communities that endured years of disproportionate enforcement, and greater opportunities for New Yorkers.”
Law Gives New Enforcement Powers
The new legislation provides additional enforcement power to the New York Office of Cannabis Management (OCM) and the state Department of Taxation and Finance (DTF) to enforce regulatory requirements and close stores engaged in the illegal sale of cannabis. The new law allows the OCM to assess civil penalties against unlicensed cannabis businesses, with the “most egregious” illicit operators facing fines of up to $20,000 per day. The law also makes it a crime to sell cannabis or cannabis products without a license.
The legislation also gives the OCM new powers to conduct regulatory inspections of businesses selling cannabis and cannabis products, including so-called gifting shops that provide cannabis in return for inconsequential merchandise. The agency will have the power to seize untested cannabis products from unlicensed businesses and will seek court orders to close unlicensed shops and evict commercial tenants engaged in selling cannabis without a license.
Additionally, the DTF is now empowered to conduct regulatory inspections of businesses selling cannabis to determine if the appropriate taxes have been paid and levy civil penalties on businesses not paying taxes. The legislation also establishes a new tax fraud crime for businesses that willfully fail to collect or remit required cannabis taxes, or knowingly possess for sale any cannabis on which tax was required to be paid but was not.
“Strengthening tax laws as they pertain to the cannabis industry and providing for robust and fair enforcement will help the industry to be successful over the long term,” said New York State Acting Commissioner of Taxation and Finance Amanda Hiller.
Elliot Choi, counsel and chief knowledge officer at the cannabis and psychedelics law firm Vicente LLP, said that while the new measures passed into law are good news for the regulated cannabis industry, some of the governor’s measures will likely not have an immediate effect on illicit operators.
“Illegal dispensaries continue to proliferate in New York, especially in the City, so any movement on enforcement is welcome,” Choi wrote in an email to High Times. “The enforcement legislation in the state’s budget includes the ability for the Department of Tax and Finance to levy some hefty fines. We suspect those fines will have a deterrent effect on new illegal dispensaries. However, the tax department is going to need time to staff up and the Office of Cannabis Management will need to draft some regulations before there is a crackdown on existing ones.”
Hochul’s efforts to protect licensed cannabis retailers also include measures to lessen the demand for illicit marijuana. Last month, she unveiled a consumer ad campaign to encourage consumers to purchase cannabis from licensed dispensaries.
Montana lawmakers on Monday passed a bill to allocate revenue from taxes on recreational marijuana, sending the bill to the desk of Republican Governor Greg Gianforte for his consideration. The legislation, Senate Bill 442, was approved in a final vote by the Montana Senate on Monday after the state House of Representatives passed an amended version of the bill last week.
Montana voters legalized recreational marijuana in 2020 with the passage of Initiative 190, a ballot measure that passed with nearly 57% of the vote. Under the initiative, a tax of 20% was levied on recreational marijuana products, with revenue generated by the tax reserved for Habitat Montana, a 30-year-old wildlife habitat acquisition initiative often described as Montana’s “premiere habitat program,” according to a report from the Montana Free Press.
Governor Sought Reallocation Of Cannabis Taxes
Before the start of this year’s legislative session, the governor revealed his desire to reallocate the state’s recreational marijuana taxes away from habitat purchases and instead spend the money on law enforcement resources related to legalizing marijuana. Lawmakers responded with several new proposals, arguing that reallocating recreational marijuana taxes would allow the state to meet other pressing budgetary needs and give the legislature more control of the revenue.
In the original version of Senate Bill 442, which was introduced in February by Republican state Senator Mike Lang, a portion of cannabis tax revenue was diverted away from the habitat fund and instead allocated to funding for county roads. Supporters of the proposal maintained that the bill would support access to rural areas and open spaces. But wildlife advocates balked at the proposal, claiming it defied the will of the voters as expressed through Initiative 190.
Lang then amended the bill to divide the bulk of cannabis tax revenue among the state’s general fund, funding for county roads and a new Habitat Legacy Account, which would be used for wildlife improvements on public and private land. Smaller allocations would also be made to fund substance misuse programs, veterans services and funding for state parks and trails.
“I think we’ve made some pretty smart changes here that are intended to invest in rural Montana’s roads, lands and hunting opportunities while providing support for our veterans and a growing need for drug treatment,” Lang said after revising the bill. “At the end of the day we want to give our local counties and local people the tools and resources they need to improve the conditions of the land and be good stewards of Montana.”
The amended bill received support from state lawmakers and groups representing business interests including the Montana Stockgrowers Association and the Montana Petroleum Association, and conservation organizations such as Wild Montana, Helena Hunters and Anglers and the Citizen’s Elk Management Coalition, all registered support for the proposal. Many county commissioners and the Montana Association of Counties also indicated their approval of the measure.
“Our county roads are being used more than ever now,” said Roman Zylawy, president of the Montana Association. “Recreation and agriculture are part of our Montana way of life and this bill recognizes the importance of — and the need for — integration of all through an investment in our county roads. … The Montana Association of Counties thanks you all and we encourage, with the utmost respect, Gov. Gianforte to sign SB 442 and provide ongoing investment in our county roads.”
Competing Bill Dies In Senate
A separate bill that would have directed all cannabis tax revenue to the state’s general fund passed in the House of Representatives last month. Proponents of the measure, House Bill 669 from Representative Bill Mercer, argued that lawmakers would be able to control the allocation of tax revenue and direct it to state budget priorities.
“Under 669, it would simply say that that revenue should go to the general fund and the Legislature as a whole should decide how it wishes to spend that revenue,” Mercer told members of the House Appropriations Committee last month. “One of the reasons that I wanted to bring this bill is that I fear that, when you essentially begin to earmark dollars for special revenue accounts, they evade review on an ongoing basis. Every time we have a diversion into a special revenue account, I worry that it doesn’t get the same sort of scrutiny that it does in the general fund.”
But Jim Vashro, president of Flathead Wildlife Inc said that the will of Montana voters as expressed in the 2020 ballot measure legalizing recreational marijuana should prevail.
“We would hope that the Legislature would listen to the voice of the people,” Vashro said. “We are trying to protect the Habitat Montana funding, which was the stated intent of Initiative 190.”
House Bill 669 was tabled by a Senate committee late last month. Senate Bill 442 has been sent to the governor’s desk and awaits action from Gianforte. On Monday, a spokesperson for Gianforte said that the governor “has substantial concerns” about Senate Bill 442 but did not provide further details on his position.
The Marijuana Policy Project (MPP) released a report on May 1 with data regarding cannabis tax revenue generated by states with legalization. Between 2014 and the end of 2022, the report shows that states had collected over $15.1 billion in tax revenue.
According to MPP President and CEO Toi Hutchinson, states with legalization are seeing great benefits from cannabis sales. “States that have made the decision to legalize and regulate cannabis are benefiting from hundreds of millions in tax revenue each year,” Hutchinson said in a press release. “These new streams of revenue are helping to fund crucial social services and programs across the country, such as education, alcohol and drug treatment, veterans’ services, job training, and reinvestment in communities that have been disproportionately affected by the war on cannabis. The states that lag behind will not only be doing a disservice to their constituents—they will also be leaving money on the table.”
Tax revenue from 2022 alone showed more than $3.77 billion collected, which was actually the first year that total state cannabis tax revenues decreased in comparison to 2021 with $3.86 billion. Even with seeing mature cannabis states collecting a decreased amount in cannabis tax revenue and newer states collecting an increased amount, MPP notes that the numbers are influenced by sales comparisons from the pandemic. “It is important to note that while ’22 figures were down from ’21 in more mature markets, they were still higher than any year pre-COVID for each state.”
MPP cited Vicente LLP Director of Economics and Research Andrew Livingston, who elaborated on the demand of cannabis during the pandemic. “While 2022 cannabis taxes are lower in some established markets than they were in 2021, it’s important to know how COVID-19 and pandemic initiated lockdown orders increased cannabis demand,” Livingston stated. “People could not spend their money going to concerts, going out to dinner, or vacation travel. So many people increased their consumption of consumer packaged goods. Cannabis was a product that could still be purchased and made the difficulty of staying at home for months on end watching TV shows and movies a bit more enjoyable.”
MPP’s tax revenue report shows the individual 2022 tax revenue for 16 states. Among the highest amounts included California ($1,074,560,287), Illinois ($562,119,019), Washington ($529,443,420), Michigan ($326,049,074), and Colorado ($305,034,034). On the lower end were states including Rhode Island ($579,439), Vermont ($2,363,000), New Jersey ($20,139,655), Maine ($25,329,534), New Mexico ($36,684,235), Montana ($41,989,466).
The report also includes a year-by-year total of collected tax revenue as well. In 2014, tax revenue reached $68,503,980 and 2018 was the first year that cannabis tax revenue passed the million mark at $1,308,693,928. During the pandemic, tax revenue soared to $2,814,837,199 in 2020, $3,866,974,690 in 2021, and dipped slightly to $3,774,783,548 in 2022.
While cannabis tax revenue is at an all-time high, the topic of taxes has long been a concern for consumers and business owners. Most recently on April 17, Oregon Rep. Earl Blumenauer introduced legislation called the Small Business Tax Equity Act which would allow cannabis businesses to remain in compliance with state law by creating an exception to Internal Revenue Code Section 280e.
“State-legal cannabis businesses are denied equal treatment under 280E. They cannot fully deduct the cost of doing business which means they pay two or three times as much as a similar non-cannabis business,” Blumenauer said. “This grotesquely unfair treatment incentivizes people to cut corners. If Congress wants to get serious about supporting small businesses and ending the illicit cannabis market, it is commonsense that we allow legal cannabis operations to deduct business expenses, just like any other industry.”
What started as a massive tax-grab by governments, is now a scramble by operators to stay in business. As the higher-than-necessary prices that were first instituted, fall due to overproduction and competition, the industry is worried. But should it be? Is it really that bad if cannabis prices drop?
Problems in the cannabis industry
It’s not that some cannabis operators are doing great while other ones fail; its really that every operator is having problems. The big companies are still able to remain afloat – at least for now; but even for them it’s a tight situation. The big ones need sales so badly, some are throwing their money directly into legalization efforts to expand markets. Like in Florida. In that state, Trulieve, the biggest provider, is currently funding a huge part of Smart & Safe Florida’s push for a recreational ballot measure in 2024.
We also see it in other places, though not everyone knows of each little extra cost that businesses are subject to. Like slotting fees; a fee paid to have a product on a shelf, sort of like shelf rental space. The problem? This tactic employed by supermarkets is simply meant to ensure that a new product has selling power since the public isn’t familiar with it yet. But these fees are meant to be one time. The product proves itself and stays, or doesn’t and gets removed. The idea that dispensaries are employing these fees on an ongoing basis implies a need for money that isn’t coming in through standard means.
Plus we see it in product quality. I never had issues with vape carts before, even those bought off the street. Five months ago I bought five carts from a Las Vegas dispensary and was told if I had issues with the carts, I could send them to the company for replacement. Not the dispensary, but the company. For an on-demand product, it’s strange to offer something that will take time, and a process, to complete.
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Vegas is a city of tourists, so once out of state, that offer is useless. And who would do it anyway? The warning made me uneasy, and was followed up by problems with almost all the carts. They knew I wouldn’t send anything back; and that I’d be more likely to return to a dispensary to buy more; which increases sales. I left the state and did not; but if I had stayed and wanted more, I admit I would have. Jury’s out on if the carts are made shoddier to break on purpose, made shoddier out of cost necessity, or messed with before sale. Something is definitely up, and it almost doesn’t matter which answer is correct.
What other problems are there?
And then there are all the layoffs and restructuring activities at nearly every big company. From Canopy Growth to Clever Leaves Holdings to Curaleaf, the common headline in today’s news, is which cannabis companies are suffering losses. Aurora Cannabis even got warned by Nasdaq recently for its stock price falling below the limit to stay on the exchange; something Aurora must fix within a few months if it doesn’t want to lose its standing.
All this is related to the industry seeing lower and lower sales, which is often looked at by governments as lower tax revenue. Not only are governments not able to collect as much as they want, but companies are professing major losses in general. California was the first to actually lower the insane taxes as a result of overproduction, in order to help operators. And that took many months from the problem starting.
The thing is, we know that high taxes and overly strict regulation are the main culprits for all this. Sure, there’s a huge competitive black market, but perhaps the legal market could be competitive without the weight of the taxes or intense (and costly) regulatory procedures. It’s been spoken about in places like this TIME interview; but somehow, despite the writing on the wall, its taking way too long for governments to act appropriately.
So, what happens if cannabis prices drop?
The thing about the black market, is that it reminds people what they should pay. And this is useful when legal markets overcharge. Realistically, black markets are also affected by things like overproduction; they just drop prices more easily because they aren’t beholden to crazy government taxes and regulation. Black market overlords still want to earn; but they seem to understand better than governments what must be done to stay competitive. Bottom line: if black markets can lower prices and remain profitable, then legal markets can as well.
In a recent article by MJBizdaily, Beena Goldenberg, the CEO of Organigram Holdings, a cannabis producer out of Canada, stated that “many producers have discussed not wanting to participate in a race to the bottom, we are seeing the opposite in the market.” She warned that super low prices will affect sustainability, and hurt the industry. She went on to point out that an ounce of cannabis is now regularly under CA$100.
Then she said something interesting that shows just how senseless the legal markets are; and that the knowledge is there, though clearly not focused on. She said, “Large-format pricing in some markets has reached the point that, considering the cost of production and the excise tax burden, the products are being sold at a loss.”
Does this woman make sense? That last part only. Let’s remember, the black market also pays to produce products, so if it can do it, a legal market can too. If the price of production is too high, it refers to the price when dealing with overly strict regulation; not the actual cost of production. Plus the excise tax burden, which is just governments being greedy. Should they reduce this tax drastically, then prices lower. Some states have excise taxes over 30%, while lower ones are still around 15%. And a lot of this is for sin taxes. Fix the problem? Get rid of the extra taxes and stop making companies jump through stupid and unnecessary hoops. Viola!
What’s the reality here?
So, when Beena Goldenberg says its unsustainable if cannabis prices drop, what does this mean? It can’t mean its unsustainable for the whole market; if it was, the black market would suffer as well. Which means what its unsustainable for, are legal markets that adhere to government regulation and taxes. How she misinterprets this is unclear to me, especially when she does point out the burden of these costs. Of her own company she says the:
“low-cost structure allows us to compete at these reduced prices” but that even so, the company has “not matched the aggressiveness of our competitors and have seen some market share erosion in our large-format flower.” She reminded MJBizdaily, “we just won’t compete at the very low prices, it’s just not sustainable.”
So, she points out that her competition is able to stay afloat by lowering prices. She talks of a general structure that doesn’t support growth. And then instead of attacking the issue of all these unnecessary costs, she makes it sound like other companies are just getting cheap. She goes as far as to say her company won’t stoop to that level to survive. Truth is, either that statement won’t actually be true, or the company will go under. In the Canadian market, Organigram is the #3 licensed producer. It posted losses of CA$7.5 million for the last quarter.
How to actually solve this problem
Now, I’m no genius, and I’m not saying I am. Even for an experienced weed writer, I have no economic or legal training. But I do have a ton of common sense. And sometimes that goes pretty far. This whole problem seems like a common sense breach, for which the answer is face-palmingly obvious.
Should weed be sold like other products that are not subject to insane excise taxes, or other unnecessary taxes; that allows the customer’s price to go down, without making operators lose money. The government is cool not collecting such extreme taxes on most items, so its no massive leap in understanding that they don’t have to apply here. I mean, are sin taxes ever necessary? Really just sounds like governments making excuses to overcharge for products they deem fit…and collecting the reward.
The same idea can be applied to the grossly over-regulated system, which costs producers so much, leading them to need to up the price. This recently came up in Canada in light of the market downturn. Canada’s government is now looking at recovery moves, which include possible restructures to regulatory laws. In its notice posted March 25th, which comes with a consultation period until May 24th, it stated:
“Health Canada recognizes there may be regulatory measures that could be made more efficient and streamlined without compromising the public health and public safety objectives in the (Cannabis) Act,” and that this could improve “administrative and regulatory burdens where possible.” The only thing not touched on by the notice, is government taxes. Which shows the government desperately wants things to do better, but won’t yet sacrifice potential income. Of course, not accounting for this, automatically means it likely will, by continuing to tank out its own industry.
So, does legal operators allowing cannabis prices to drop threaten the legal industry? No, no it actually works to save it in the end, despite what is essentially government cruelty towards it. It might threaten a specific company’s ability for profit under current laws, but it doesn’t mean the industry can’t survive. If anything, it just sets a new and more realistic pricing standard, that governments will eventually have to conform laws to. If Beena Goldenberg wants to fight to keep prices up instead of focusing on these factors, she can. And she can drive her company into the ground doing it.
The silliness of the cannabis industry today is that its run by governments which aren’t seeking to effectively keep it going; and its full of operators who aren’t focusing on the reality of the situation. And rather than have realistic conversations about this, and why problems exist; there are instead weird ideas put out there that if cannabis prices drop, everything is over. If that line were true ever, we wouldn’t have black markets.
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Oregon Representative Earl Blumenauer this week introduced legislation in the U.S. House of Representatives that would allow regulated cannabis companies to take tax deductions commonly enjoyed by businesses in other industries. The bill, known as the Small Business Tax Equity Act, was introduced by Blumenauer on Monday, with bipartisan co-sponsorship by fellow Democrat Representative Barbara Lee of California, as well as South Carolina’s Representative Nancy Mace and Representative David Joyce of Ohio, both Republicans.
Under Section 280E of the federal tax code, cannabis businesses are denied most tax deductions offered to companies in other industries. State-legal marijuana companies are permitted to deduct the cost of goods sold, while other expenses including rent, payroll and utilities are not deductible for most cannabis businesses.
“State-legal cannabis businesses are denied equal treatment under 280E. They cannot fully deduct the cost of doing business which means they pay two or three times as much as a similar non-cannabis business,” Blumenauer, the founder of the bipartisan Congressional Cannabis Caucus, said in a statement on Monday. “This grotesquely unfair treatment incentivizes people to cut corners. If Congress wants to get serious about supporting small businesses and ending the illicit cannabis market, it is commonsense that we allow legal cannabis operations to deduct business expenses, just like any other industry.”
The Small Business Tax Equity Act would create an exception to Section 280E to allow marijuana businesses operating in compliance with state law to take deductions associated with the sale of marijuana like any other legal business.
“Absent this legislation, Section 280E of the federal tax code prevents cannabis businesses from deducting ordinary expenses associated with running a small business, including, rent, utilities, and payroll,” Blumenauer’s office wrote. “They cannot claim the Work Opportunity Tax Credit if they hire a veteran; they cannot depreciate their American made irrigation equipment; and they cannot take any credit or deduction relating to construction or operation costs if they want to revitalize a building for their operations.”
Cannabis businesses and reform groups including the National Organization for the Reform of Marijuana Laws (NORML) are hailing Blumenauer’s bill to grant standard business tax deductions to companies in the regulated marijuana industry, noting that many businesses are struggling under high taxes and regulatory fees, as well as competition from an entrenched underground cannabis market.
“NORML commends the sponsors of this legislation for their efforts to end the unjust federal over-taxation of licensed, state-regulated cannabis businesses throughout the country,” NORML political director Morgan Fox said in a statement from the group. “Allowing them to take the same federal tax deductions that most other businesses enjoy will facilitate new opportunities in the legal cannabis industry and make it more competitive with the unregulated market, which will directly benefit consumer health and public safety.”
“The two greatest challenges cannabis entrepreneurs are currently faced with are the lack of access to capital and unfair tax burdens,” said Saphira Galoob, executive director of the National Cannabis Roundtable. “By eliminating the impact of 280E on state-legal cannabis operations, Congress would be giving these businesses, including small and minority operators, the opportunity to remain financially viable and to reinvest in their companies, communities, and workforce through tax credits and deductions that are routinely offered to other domestic industries. This relief is crucial for an industry that employs hundreds of thousands of American workers and generates billions of dollars in annual state and federal taxes – albeit without access to traditional financial resources.”
The push to eliminate the impact of 280E is also underway in cannabis-legal states, many of which use the federal tax code as the basis for state tax rules. So far, 19 states have decoupled their tax laws from 280E, with moves to continue in other states including Connecticut, where the legislature is currently considering such a measure. Lucas C. McCann, Ph.D., co-founder and chief scientific officer at cannabis business consulting firm CannDelta Inc., welcomed the effort to do away with the Section 280E rule at the state level.
“The decoupling of 280E would allow these cannabis-related businesses to claim fundamental operating expenses,” McCann wrote in an email to High Times. “A failure to do so will inevitably lead to the insolvency of many, which will likely assist the illicit market to continue to thrive as it has prior to legalization.”
A bill pending before Connecticut state lawmakers would allow businesses in the state’s nascent cannabis industry to take tax deductions commonly enjoyed by firms in other industries. If passed by the legislature and signed into law, the legislation is projected to save businesses in the cannabis industry $4.7 million in the fiscal year starting July 1, growing to nearly $10 million by 2026.
In many states that have legalized marijuana for recreational or medical purposes, tax laws follow the lead of Section 280E of the federal tax code, which denies most standard business tax deductions for cannabis businesses. Under the rule, cannabis businesses are only allowed to deduct the cost of goods sold, while deductions for other business expenses such as rent, payroll and utilities are not allowed for most operators.
Under the bill from Democratic Representative Jason Rojas, the House majority leader, cannabis businesses would be permitted to deduct standard business expenses on their state tax returns, although Section 280E would still apply to the firms’ federal tax liability. While the measure will not result in a huge windfall for cannabis companies, the change is expected to make Connecticut businesses more competitive with recreational marijuana dispensaries in neighboring Massachusetts and Rhode Island, where prices are significantly lower.
“Everyone I’ve met says it’s an incredibly challenging business to get into, particularly because of the capital costs that are needed, but also the regulatory environment is very complicated as well because you are dealing with a controlled substance that is still illegal at the federal level,” Rojas told the Hartford Business Journal about the legislation.
“Anything that can be done to help reduce the cost of doing business, I think is to the benefit of the state, if we want to see this marketplace actually succeed,” he added.
Adam Wood, president of the Connecticut Cannabis Chamber of Commerce, said that Rojas’ bill would benefit both businesses and consumers. The tax deduction would also likely result in lower retail prices, bringing more consumers to the regulated market and increasing tax revenue over time.
“Every other business in the state is allowed to deduct overhead, equipment, labor,” Wood told CTInsider. “Our argument is that allowing for these state tax deductions will actually drive down the price because net operating costs would not be as high. When pricing is reasonable or under control, the regulated market grows, and sales taxes from these businesses will increase.”
The lack of standard business deductions makes it difficult for entrepreneurs to succeed and grow their businesses. The burden is particularly tough for social equity businesses, which often face added difficulty raising business capital to launch their enterprises. Tiana Hercules, a Hartford, Connecticut city council member who was recently awarded a provisional cannabis cultivation license through the state’s Social Equity Council, said last week that the federal tax rule has its roots in the War on Drugs.
“We’re being penalized as if we were not legitimate businesses,” Hercules said. “As a person in the social equity program, we are supposed to be developing business acumen and hopefully make a living and build some generational wealth as well. We should be able to reinvest in the business, staff and innovation as well. It makes a lot of sense if Connecticut wants a competitive and thriving cannabis industry. We’re ready to create a lot of excitement.”
So far, 19 states with legal cannabis, including nearby New York and Massachusetts, have decoupled their tax laws from the federal Section 280E to allow firms in the industry to take business deductions. The bill from Rojas, HB 5413, is currently under consideration by the Connecticut General Assembly’s Finance, Revenue & Bonding Committee.
“Connecticut is smart to look for ways to help its fledgling adult-use businesses to succeed, and providing state-level tax deductions is a time-tested method,” Brian Vicente, founding partner of cannabis law firm Vicente LLP wrote in an email to High Times. “For too long state-legal marijuana businesses have been beholden to draconian federal taxes, and allowing cannabis businesses to make traditional deductions of overhead, equipment, and labor will lead to more healthy businesses in Connecticut. Connecticut is poised to follow a trend of Northeastern states that have adopted state tax reforms for cannabusinesses, including New York and Massachusetts.”
The Legislative Finance Committee will soon begin voting on items to be included in the budget for the next fiscal year. In an interview with local media, the bill’s sponsor said he hopes his colleagues in the legislature will support the tax changes in HB 5413.
“It’s going to be part of the larger discussion on revenue and whether we can approach this differently because it is a revenue loss and there are a lot of priorities,” Rojas said. “But it’s a burgeoning marketplace and we’re seeing what the other states are doing. It’s consumer friendly. My hope is there will be room in the budget for it.”
The cannabis black market was always there, and always big. But it has seemed to surge in recent years; offering way more options than it did before. How did this happen amid legal markets opening? Maybe simply, because they did. It seems the growth of the black market is due to the legal market.
What the black market used to be
For people coming of age today, the idea of shady black-market sales with dealers, is a less common thing. Not even because these covert sales don’t exist, but because nothing feels quite as covert anymore, when there are laws saying the contraband is actually legal. I mean, sure, it’s technically illegal when bought in that covert way, but unless the product a person has can be directly tied to an illicit sale, it’s no different than the legally bought product.
Back in the day, it really was an issue though. Deals were made behind closed doors, or in back alleys. People carefully traded money for product in ways that made it hard to tell what was going on. Dealers went by funny names like ‘Dank’ or ‘Scaggs’, and their clientele rarely knew them outside of the deal. And it was just standard flower, in the few options an individual dealer had. Apart from law enforcement and government harassment, we were all cool with this process, and the product sold.
Back in the day, which is everything back to a few years ago, no one thought about gummies in connection to weed. No one thought about super hard-core extracts. It was more about the quality of the plant material; which ranged from ditch weed that looked like stuff picked off the street, to crystal-covered, brightly colored, strong-smelling buds. A few people here and there baked up brownies, but this was usually an individual project, and edibles weren’t generally a part of black-market sales.
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What the black market is today
The idea that the growth of the black market is due to the emergence of legal markets, isn’t hard to understand. Today, the two look almost identical, to the point that many people have no idea they’re buying from the black market at all. And that’s because if a legal market emerges, any black market will copy what’s popular, and often with lower prices due to no tax or regulatory burden.
Beyond the still-standard back-alley sales (which often happen more conspicuously), both markets today use dispensaries to sell goods. Which means, all the products that came out of the legal market that expanded options, are also seen in the black-market dispensaries. This includes the range of edible products that go well beyond baked goods, to include gummies and other candy, chips, drinks, tablets, and so on.
Today’s cannabis black market is hiding in plain sight, keeping up with all the advancements of the legal industry. And while operators in the legal industry are subject to strict, costly, and often difficult-to-meet regulatory measures; along with seemingly ridiculous and greedy tax structures; the black market is not. And that means the ability to buy these same (or same-looking) products, but at lower prices. This ability for lower pricing has led to growth of the black market, which is essentially all owed to the existence of the over-priced legal market.
Where the black market and legal market differ
That they often look the same on the outside, doesn’t mean they are the same. Or that they sell the same products. Sometimes this is the case, but not always. Owing to that lack of regulation, illegal dispensaries and operations can offer different products. Some which are great for consumers, and some which pose problems.
That issue of people ingesting too much THC of late? Sure, simply having something easy to pop like gummies is a factor, but it goes beyond that. Illegal dispensaries don’t have to adhere to regulation limits on THC in products. I’ve seen edibles marketed as having 40mg, 50mg, or even 100mg of THC per dose. Though anyone can go crazy and pop a full pack of legal gummies; if buying super intense products, the chance of overdoing it on THC is that much more likely. One of the things that sets the markets apart, is this ability for the black market to sell super, super high THC products.
Another thing is the use of synthetics. With literally no regulation, the black market doesn’t have to sell what it’s saying it’s selling; something that’s relevant both to edibles, as well as vape carts. While I don’t have much faith in the legal industry anymore, partly due to issues of shoddy vape carts, I definitely don’t believe that the majority of carts sold in illegal dispensaries, are what they’re said to be. Of course, having said that, the last time I bought legal carts, even the ones that should have tasted like weed, instead had the taste of fake flavoring that permeates the carts of illegal dispensaries.
When something isn’t regulated, it creates a general free-for-all. And that ability to offer more products than its legal counterpart, and at lower prices, has likely helped the growth of the black market. Which then went several steps further.
How to know if you’re buying from the black market?
Obviously, if you have your own personal dealer who isn’t a licensed retailer, it’s black market. That’s the idea most of us think of when we hear ‘black market.’ But if illegal black-market dispensaries exist, how can a person know if they’re buying from a black-market retailer or a legal one? There are a few ways to make an informed guess.
If the dispensary doesn’t check your ID upon arrival, it’s likely a suspect place. This is a legal requirement for all legal dispensaries, so a location that doesn’t adhere to this, isn’t going by enforced regulation. It’s a great way to get an idea about the legality of the location you’re in.
If the dispensary sells products with THC above legal limits, it’s an illegal dispensary. All that stuff I said above about super high THC products; well they don’t exist in legal dispensaries, because they’re not legal products. If you see gummies that boast 40mg of THC per gummy, you can be sure you’re in an illegal dispensary.
If the dispensary sells products that almost appear to be a well-known product, but with the insertion of THC; the place is an illegal dispensary. Trademark law protects companies that have legal and trademarked products, from having the likeness or taglines stolen by another company to sell a different product. So if it looks like Skittles, has a name that’s almost the same, with virtually the same packaging, but with the inclusion of THC; you’re not in a legal place.
These are just a few guidelines for establishing if where you’re buying from is technically legal. I’d be remiss, however, if I said it really matters. These dispensaries are still plenty good at providing basic products like flower, so if that’s what you’re about, you don’t have to care. You don’t even have to care if you like the edibles or carts from a place, so long as you feel like the product doesn’t negatively affect you. In fact, the reality that it’s so hard to know the difference between establishments, indicates that you’re probably fine either way.
It’s always impossible to say for sure, and black-market sizes vary by location. As black markets don’t report sales or earnings, an exact comparison is difficult to know. I can say this though, in a place like Vegas, it’s much easier to come across a black-market dispensary than a legal one, and illegal dispensaries enjoy prime locations like in the middle of the Strip.
What we keep seeing, is that dispensaries are having issues. Instituting monthly slotting fees, closing down, reporting low sales (often seen as reports of low tax revenue by governments.) So, does this strictly involve only legal dispensaries? Likely not, but it could be more of an issue for the legal ones because of higher pricing, or less-desired lower-THC items.
But then there’s another reality. If dispensaries aren’t doing as well, and people are still using weed; they’re either growing it themselves, or going back to their back-alley dealer. And that guy is now way more likely to have the same products found in a dispensary. Meaning, if the trend is to not use dispensaries as much, the black market still wins.
If the black market hadn’t copied the legal market, this might not be true. Since people like the new-age products; offering them is key to getting business. Which, again, points to the idea that the growth of the black market, is really based on the existence of the legal one. If it was just the guy doing back-alley deals, only offering flower, the legal market might have won.
For all the complaints of the black market still existing, the funniest aspect is that it is what it is today, solely because of the entrance of legal markets, and all the new options therein. This article does nothing to offer ideas for how to change this, I’m just putting it out there that if the black market has experienced growth since this began, it’s because of legal markets coming into being.
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A bill that would expand the list of qualifying conditions for medical cannabis and lower the cost of the treatment was approved by lawmakers in Arizona.
The bill, SB 1466, was approved on Monday by a legislative committee. If it were to become law, the measure would result in a host of changes to the state’s medical cannabis law––perhaps most notably, the addition of autism and post-traumatic stress disorder to the list of qualifying conditions.
It was approved by a 7-2 vote by members of the Health and Human Services Committee Hearing.
The outlet AZMarijuana has a rundown of the key points of the bill, which includes: “Reduction of medical marijuana card costs to $50, with renewals every 2 years; 100% waiver of medical marijuana card costs to veterans; Adding Post-Traumatic Stress Disorder into statute; Adds Autism Spectrum Disorder as a debilitating medical condition; Alignment of the advertising, packaging, and branding to match the rules in Smart and Safe; Requires protections for children – child resistant packaging, prohibits advertising attractive to children, adds advertising restrictions; Alignment of the definition of marijuana and marijuana products; Codifying the use of telehealth; Updating the details of the requirements in the QR Code and track/traceability; Provide a unified cover sheet for COAs to simplify consumer/patient experience; Removes a government-led lab testing council and replaces with a full public forum.”
The group Arizona Dispensaries Association has strongly backed the legislation.
“ADA supports SB1466, which gives veterans the ability to acquire a medical marijuana card at no cost,” said Ann Torrez, executive director of the Arizona Dispensaries Association, as quoted by AZMarijuana. “Often veterans suffer from PTSD, insomnia, heightened anxiety and chronic pain. A free medical marijuana card gives veteran patients access to medical cannabis treatment for any of these common conditions.”
“The ADA’s primary mission is to promote and advocate for a safe, consumer-focused cannabis industry in Arizona,” Torrez continued. “We aim to continuously educate consumers on the importance of visiting only licensed dispensaries and consuming only THC and CBD products that have been lab tested and approved.”
The bill is being considered at a time when Arizona’s medical cannabis industry is enduring sluggish sales.
Meanwhile, the state’s adult-use cannabis market, which launched in January 2021, continues to thrive.
In that same month, recreational cannabis sales in Arizona totaled $73.8 million, which was a new high.
As AZ Mirror reported earlier this year, the “crumbling of the medical program follows a pattern other states have seen with medical markets outpaced by recreational sales in the wake of legalization.”
The outlet reported in January: “The state collects 16% excise tax on recreational sales in addition to the standard sales tax; medical patients pay roughly 6% in state sales tax, levied as a Transaction Privilege Tax on cannabis outlets. Local jurisdictions charge an additional 2% or so for all marijuana sales. One-third of recreational taxes collected are dedicated to community college and provisional community college districts; 31% to public safety — police, fire departments, fire districts, first responders — 25% to the Arizona Highway User Revenue Fund, and 10% to the justice reinvestment fund, dedicated to providing public health services, counseling, job training and other social services for communities that have been adversely affected and disproportionately impacted by marijuana arrests and criminalization. The medical market has continued to bleed both sales and participants, following a trend in some states that have legalized adult-use cannabis years after establishing medical cannabis markets.”