Sweet Opportunity: Candies made of marijuana. Big and small investors are looking at ways to capitalize on recreational pot.

Sweet Opportunity: Candies made of marijuana. Big and small investors are looking at ways to capitalize on recreational pot. Photo by David McNew/Getty Images

Proposition 64’s backers were not shy about touting the potential $1 billion yearly tax windfall the state Legislative Analyst’s Office said the legalization of recreational pot could bring to California.

But those same levies, along with a slew of potential local actions, are now drawing fire from the cannabis business community. Those stakeholders say multiple tiers of taxes and fees on marijuana could cause sticker shock and drive consumers back to black market suppliers.

Fear among business owners were stoked when Carson passed an 18 percent gross proceeds tax on marijuana operations on Nov. 8, a move that some industry players consider tantamount to a ban on legal marijuana operations. That tax, like all municipal and county tariffs on recreational marijuana sales, would be added on to a 15 percent statewide tax enacted as part of Proposition 64 as well as local sales taxes.

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John Kagia, head of industry analytics at Washington, D.C.-based cannabis research and data collection firm New Frontier, said the high taxes in California – which often result in levies of 30 percent or more on marijuana sales – could substantially slow the growth of the legal market.

“Price does have an impact on how quickly the transition to a legal market happens,” Kagia said. “We’ve seen that the higher the tax rate, the longer it takes for the transition to be made.”

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Virgil Grant, a South L.A. dispensary operator and founding member of marijuana business trade association Southern California Coalition, said local governments could be shooting themselves in the foot by raising taxes too high.

“People look at the cannabis industry as a cash cow,” said Grant. “But if you want revenue from the industry, the smartest thing to do would be to lower tax rates because there’s no way to compete (with the black market) with the current rates.”

It’s a pattern that’s already been seen in other states that have legalized pot. Data from Botec Analysis Corp., an analytics firm hired by the state of Washington, estimated one-third of that state’s $1.3 billion marijuana market was illicit last year. In Colorado, which had a rockier legalized marijuana rollout, taxes have already been lowered because of the same issue.

“We’ve seen in Colorado and Washington that when state and municipal taxes get too high, patients and adult-use consumers go back to the black market,” said Aaron Lachant, an attorney at West L.A.’s Nelson Hardiman who specializes in cannabis law.

Taxing affair

Carson isn’t the only municipality raising eyebrows in the industry. While the city of Los Angeles has yet to implement its local regulatory scheme, a March ballot measure sponsored by the City Council would add 10 percent to recreational weed sales. Long Beach, Los Angeles County’s second largest city, just passed a measure that brings retail taxes on pot up to 12 percent.

Additional costs to cannabis business owners include licensing fees and other taxes tied to every segment of the industry supply chain, from cultivators to product testers, manufacturers, and distributors.

“At every single level, we see governments exploiting opportunities to raise revenue from cannabis businesses,” said Aaron Herzberg, a principal at Santa Ana real estate investment trust CalCann Holdings, which owns marijuana properties and dispensaries in Los Angeles and Orange counties.

Another issue confronting the cannabis business community is how many licenses will be made available and where. Provisions in both Proposition 64 and last year’s Medical Marijuana Regulation and Safety Act make local licenses a requirement for businesses to obtain a state cannabis permit. If municipalities don’t approve a recreational or medical marijuana ordinance by 2018, existing businesses would become de facto illegal in that jurisdiction.

Herzberg said this could drive more of the market underground.

“The lack of dispensaries licenses is definitely another pressure point,” he said. “If there’s not an appropriate number of cities that allow licensed businesses to operate, the unlicensed market will continue to thrive.”

In the city of Los Angeles, the licensing issue is particularly acute. While the city’s March ballot measure would enact a licensing process, it does not include any language related to the number of licenses that would be granted.

“If they don’t do something about the licenses, it could jeopardize the entire system,” Herzberg said.

Meanwhile, the proposition would implement a $20,000 a day fine on any cannabis business operating without a license. That’s a price point that even the most lucrative illicit shops would have trouble stomaching, according to Grant of the Southern California Alliance.

“A thousand dollars, most guys can pay that any day,” he said. “Twenty thousand? Not many can afford that. One thing we know is that if you hit someone’s pocket, they’ll pay attention.”

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