Business

“The hypocrisy has been exposed:” Cannabis can’t be essential and illegal 

avatar Dan Mitchell / May 7, 2020

A Wednesday Zoom session with several California cannabis executives was a refreshingly frank discussion on the state of the market. The word “douchebags” was used to describe bad actors. But the most arresting moment was visual. As the meeting went long, Greg Meguerian, owner of Los Angeles dispensary The Reefinery, got up, snatched up his phone, and kept talking as he set out to make deliveries. 

“I’ve lost a lot of staff,” Meguerian said as he affixed his face mask and got into his car. “I’m the main delivery driver now.” Some employees are afraid of catching the virus, and Meguerian said it’s been a challenge to replace them. 

“There’s a lot of competition among businesses for good employees,” he said. “I was [in one case] outbid by another company, and I pay really good.” 

Attracting and retaining workers is just one major challenge on a long list for California cannabis businesses. The state’s industry was in dire straits before the pandemic hit, and the structural reasons for that are all still in place. 

Taxes are high. Margins are low. Regulations are onerous. The illicit market is beating the legal one. Poor management and overspending have put many companies in jeopardy. This was all true before the pandemic struck, creating yet more uncertainty and fear.

The state government’s declaration of cannabis as an “essential” business surely saved a lot of companies from going under. And an initial surge of sales provided some relief. But the situation is still bad, every one of the Zoom participants agreed. 

Hence the title: “Essential, and on The Brink of Collapse,” organized by media and event outfit The Future Cannabis Project. The phrase references a recent quote consultant and lobbyist Jackie McGowan gave the Sacramento Bee. On Zoom, McGowan said the Bee had gotten it wrong: The industry isn’t on the brink of collapse because of the pandemic, it was already there when the pandemic hit.

Gregory Meguerian, owner of L.A. dispensary The Reefinery before he puts on his mask to make deliveries

COVID: A Positive Development?

As the participants saw it, COVID-19 and the lockdowns highlight the industry’s pre-existing and intertwined problems: high taxes, bad policy, over-regulation, and overwhelming competition from illicit weed dealers. 

Amanda Reiman, vice president of community development for Flow Kana, a processor and distributor in the Emerald Triangle, described how the pandemic has put all these problems into sharp relief. She interpreted it as a positive development. “These issues did not go away, and COVID has started to give us some talking points for discussing them,” she said. (Flow Kana is a WeedWeek advertiser.)

In fact, she said, it could turn out to be an “amazing opportunity,” because “the hypocrisy of weed being both essential and being illegal has been exposed.” It could, in other words, move politicians in both Sacramento and Washington to come to the industry’s aid, perhaps by cutting taxes, perhaps by making banking easier orfor cannabis companies, or perhaps even by legalizing cannabis on the federal level.

At the same time, state and local governments, hit by the sagging economy will be hungry for both jobs and tax revenue. “I can’t imagine a scenario where they’re not looking to the cannabis industry to be a robust economic driver,” Reiman said.

“Enforcement will never work.”

As bad as things are, Sacramento is unlikely to do much in the short term, the participants agreed. Most legislation that doesn’t deal with the pandemic, homelessness, or wildfires has been put on hold. Cutting pot taxes might generate more revenue by bringing consumers into the legal market. But such cuts are unlikely while the lockdowns are still in effect.

The main issue, pre-and post pandemic, is that the illicit market still accounts for more than 70% percent of sales in California. High retail pot taxes and “pot deserts” caused by the many local governments which haven’t licensed dispensaries, keep consumers shopping tax free on the illegal market. 

Cracking down on illicit dealers has had little effect. “Enforcement will never work,” Meguerian said. “I have a lot of friends who are still in the illegal market, and they call me the idiot, for paying taxes.” 

Enforcement “didn’t work when cannabis was a felony, and now we’re still expecting it to work when it’s a misdemeanor,” noted Shannon Hattan, co-founder and CEO of Fiddler’s Greens, a maker of tinctures, balms, pre-rolls, and other products in Sebastopol.  

Tax Burdens

A law proposed last year by Assemblymember Rob Bonta (D-OaklandAlameda) would have temporarily eliminated the cultivation tax for three years and reduced the state excise tax from 15% percent down to 11% percent for the same period. It never made it out of committee, but industry advocates were hopeful for its passage this year — until the pandemic struck.

“No other crop has a special tax put on it,” said Reiman, referring to the cultivation tax. That’s one problem; another is the fact that the tax, “is collected by distributors before they have any idea how well the product will do in the marketplace.” The tax is based on weight, not on sale price.

Given a seized-up state legislature, the participants cited some solutions that regulators at lower levels could take up. One idea is easing up on enforcement. During the state’s 20 years of legal MED before Proposition 64 legalized adult use, “we’d just throw a bag on the shelf and start selling it,” Meguerian said. He didn’t suggest going back that far, but he expressed frustration with Metrc, the state’s troubled track-and-trace system, which he and other operators say is both burdensome and expensive.

One problem is that distributors have to put sample products (which they show to retailers) through the system, as if they were for sale. Simply allowing them to stamp the samples as “not for sale” would “save us about 20 hours a week,” Hattan said. “That the difference for some distributors surviving,” she said.

AN NRA of Cannabis?

Finally, the industry itself is far from blameless, participants agreed. One problem is that big pot companies like MedMen and Curaleaf take up a lot of oxygen and, at least before they started having their own troubles, led lawmakers and others to believe that the industry as a whole was flush.

But another problem is that, since pot started to become legal for adults in various states, the industry has failed to leverage consumers in its lobbying efforts, leaving the impression that cannabis companies care only about their own well-being. In terms of political savvy, “we’re in that awkward teenage phase,” Reiman said.

McGowan said that politicians often ask her, “Is there an NRA of cannabis?” And, she said, “that might be just what we need.” 

Correction: This story initially misidentified Amanda Reiman’s title.

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Dan Mitchell
Business columnist