Business

2020 Brought Unprecedented Growth, Challenges to Calif. Cannabis Industry

By Willis Jacobson Dec 21, 2020
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
See my articles
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The California cannabis industry entered 2020 in what many insiders described as “survival mode” – and that was before the COVID-19 pandemic.

The global health crisis compounded what was already a challenging landscape for operators amid competition from the illicit market, continued prohibition in many municipalities, and high taxes that many operators felt were holding back its growth.

While the past 12 months brought relief for at least some of those issues, they also saw the industry move forward in other, sometimes unexpected, ways. With the industry deemed “essential” during the pandemic, and continuing through landmark lawsuits, record wildfires, enforcement crackdowns and massive business dealings, the events of the past year helped reshape an industry that also experienced unprecedented growth.

Here’s a look back at some of the major issues that impacted the 2020 California cannabis market:

COVID-19 pandemic

The coronavirus outbreak impacted just about every aspect of 2020, and the cannabis industry was not spared. While many sectors struggled amid government-mandated closures, the cannabis industry remained largely open for business, thanks to its “essential” designation in California and most other legal states. Many within the industry viewed that classification as the industry “going legit,” with an official acknowledgement of its importance.

  • Even with the pandemic, the overall California industry continued to boom. State tax revenue, not including local taxes, is projected to top $1B this year for the first time. Those figures, according to the California Legislative Analyst’s Office, show “very strong revenue growth amid [the] pandemic.”
  • Sales grew each quarter this year, according to tax data released by the state. In Q4 2019, cannabis tax revenue was just below $60M. That jumped to $81M in Q1 2020, to $103M in Q2, and to $136M in Q3.
  • The state altered its regulations to allow dispensaries to offer curbside pickup, which has changed “in significant ways” the way consumers access products, said Nicole Elliott, Gov. Gavin Newsom’s top aide on cannabis matters.
  • Some analysts attribute the jump in sales to changing consumer behavior that prioritizes health and safety – like lab-tested products from regulated, sanitized dispensaries – over the unknowns of the illicit market.

Taxes

Statewide taxes and fees continued to be a major concern for regulators and operators. Both camps seem to agree they haven’t found the ideal framework. Many operators feel steep tax rates, which are significantly higher than in almost every traditional industry, effectively limit the legal market and bolster the illicit one.

  • While no major tax reform was enacted in 2020, state lawmakers agreed to pause markups on the state’s excise tax through July 2021 and to prevent increases to the cultivation tax through the end of 2021.
  • Elliott, Gov. Newsom’s top cannabis aide, said this month that state officials were “very willing” to engage in tax reform discussions and suggested it would be among regulators’ 2021 priorities.

Federal taxes also continued to be a point of contention. There were multiple legal challenges to Internal Revenue Code Section 280E, an industry-despised regulation that bars cannabis companies from claiming business deductions the same as other industries. Many within the industry are paying close attention to an ongoing legal battle between the IRS and Oakland-based Harborside Health Centers, which is looking to have 280E thrown out.

  • Harborside, which the IRS claims owes $11M in back taxes, has argued before the U.S. Court of Appeals for the Ninth Circuit that Section 280E is unconstitutional because, among other reasons, it imposes an income tax even if a business has no income. This effectively amounts to taxing revenue, the company argues.
  • Oral arguments are scheduled in the Ninth Circuit for Feb. 9, 2021.

Climate change

In the fall, as the industry learned to manage the pandemic, it was hit with another threat: Wildfire. Nearly 4.4M acres were burned by wildfires in California this year – a record that is more than twice the previous high of 2018 – with much of the devastation in northern cannabis-growing regions. 

  • Several farms lost all or most of their crops. This highlighted the need for cannabis operators to qualify for emergency-relief funding and insurance coverage, both of which are mostly limited to state providers due to cannabis’ federal illegality.
  • The fiscal impact of the fires on the cannabis industry has yet to be assessed, but the damage is likely to jumpstart conversations about sustainability and crop management amid climate change, said Ross Gordon, a policy director for the Humboldt County Growers Alliance (HCGA).
  • The effects of smoke and wildfire on plants and soil came under further scrutiny. While early testing doesn’t appear to show a correlation between wildfires and the presence of heavy metals in plants, further examination is likely to come. Some have suggested smoke taints the flavor of plants.
  • The industry made it through the 2020 fire season largely by cooperating and helping each other, said Gordon, with the HCGA. He pointed to “amazing” teamwork between competing companies, regulators and operators up and down the supply chain for minimizing damage, particularly in the Emerald Triangle growing region. 

Other big issues of 2020

Business dealings, regulatory changes and alleged bad behavior also highlighted the year in cannabis. Here are some of the big stories that garnered widespread attention in 2020:

  • California regulators came down hard on Kushy Punch, one of the top edibles brands in the state. State officials accused the company of manufacturing and distributing $64M worth of unlicensed gummies, one of the most notable cases of “double-dipping” within the industry. The company, which was also targeted in a wrongful death lawsuit, could face fines near $500M.
  • Subversive Capital Acquisition Corp., which bills itself as the largest cannabis-focused special purpose acquisition company (SPAC), reached a deal to create a new vertically-integrated enterprise that company execs expect to take over the state market. Jay-Z is among the high-profile names involved in the deal, which is expected to close in January.
  • Residents in more than 30 municipalities voted in November to implement or expand REC programs in their jurisdictions. This is expected to greatly expand access in 2021 and beyond, though it could also lead to supply chain issues if related issues aren’t addressed.
  • The city of Los Angeles, the world’s largest metropolitan REC market, overhauled its social equity program over the summer in response to widespread criticism. Among the changes, some of which were spurred by a lawsuit: The city will award 200 social equity retail licenses (instead of 100), and applicants no longer need to secure properties prior to applying and will be allowed to relocate. Operators and advocates in L.A. are cautiously optimistic about the changes. A separate lawsuit alleging that L.A. regulators conspired to favor some social equity applicants over others may proceed, a district judge ruled this month.
  • Lori Ajax, who oversaw the 2018 rollout of the state’s REC market and served as the first chief of the Bureau of Cannabis Control (BCC), stepped down this month. Ajax was appointed to helm the BCC in 2016 by then-Gov. Jerry Brown and was instrumental in the development of state cannabis policies. She was replaced Dec. 3, on an acting basis, by Tamara Colson, who had been the BCC’s assistant chief counsel. Colson is expected to play a lead role in the state’s consolidation of its regulatory agencies.

For a look at some of the significant new laws passed this year by the legislature, click here.