California voters legalized recreational cannabis use in 2016, setting the stage for a regulatory framework enforced by the state Department of Cannabis Control.
Today, cannabis is big business.
California saw $4.9 billion in legal cannabis sales in 2022, down from $5.35 billion in 2021 but higher than $4.26 billion in sales recorded in 2020, according to state figures.
Southern California is home to roughly 600 active dispensary licenses, including 384 in Los Angeles County, 132 in Riverside County, 54 in Orange County and 26 in San Bernardino County, according to figures culled from state data by Tony Lange, associate editor of the Cannabis Business Times.
Since 2022, the number of cultivation licenses in California has fallen from 8,500 to 5,300, Lange said.
“If you look at a lot of businesses that are based outside of California, they’ve left California since 2022,” Lange said.
“For a lot of the operators that are based solely in California, it’s their home and they’re dedicated to it. But just by and large, it’s definitely struggling from the tax issues and the burdensome regulations and what-not.”
State cannabis control agency spokesperson David Hafner said that, while his department “does not set, regulate or administer taxes, it is supportive of efforts to reduce barriers to participation in the legal market, including reducing financial barriers.”
The department, he said via email, “has made a point of amplifying challenges voiced by licensees during critical policy discussions, including those discussions that resulted in the state reducing cannabis taxes in 2022.” While many cities and counties allow cannabis commerce, others don’t.
“In California specifically, a lot of the dispensaries have really overwhelmed the areas (and) the populated cities that actually allow retail sales,” Lange said. “ … A lot of the retail operators are going to flood the populated areas that do allow those sales, making a lot of competition in those areas and driving down the (cannabis) prices.”
Lange added: “The older the market gets, the more people (and) the more business entities are able to adjust to the supply and demand. And basically in California, if you have too much flower being grown or too much bud being grown and not enough retail outlets to sell it at, then you’re going to have that oversupply and cause flower prices to go down.”
State data show that the number of licensed cannabis products being sold in California is rising while the price of those products is falling, Hafner said. “This is extremely consistent with the law of demand and the data suggests that the market is settling into a sustainable balance,” he added.
Retailers also struggle with California’s 15% cannabis excise tax charged on top of sales-and-use tax, Lange and Piazza said.
While a tax on cultivation ended in July 2022, the excise tax is expected to rise to 19% in 2025. Earlier this month, Lange reported that 15% of the state’s cannabis operators defaulted on their excise tax obligations as of the end of 2023. “A bunch of these businesses in California are already behind on their excise taxes,” Lange said. “If you raise the tax rate, these businesses are just going to go out of business and there’s going to be less tax money given to the state.”
Cannabis continues to be illegal under federal law, meaning cannabis businesses can’t get a bank loan or file for bankruptcy. But the federal government still taxes those businesses, Lange and Piazza said.
“Unlike a traditional business where you only pay taxes on your profit … cannabis businesses have to pay (federal) taxes on all their revenue,” Lange said. “They don’t get to deduct normal business expenses like payroll and stuff like that.”
Despite legalization, the illegal cannabis trade continues to exist in California, cutting further into legitimate retailers’ profits, Lange and Piazza said.
“The lack of enforcement is a real issue because now you’ve got operators out there just operating willy-nilly without paying the taxes and the regulations and the cost,” Piazza said.
California’s cannabis control agency “works closely with all local, state, and federal partners to eradicate illegal activity,” Hafner said.
“(The department) focuses its efforts on combating illegal activity while also creating legitimate legal business opportunities and safe access to existing consumers throughout the state.”
Finding a Cannabis or Weed Plug on Telegram: Anywhere in the United States or WorldwideIn 2022, Gov. Gavin Newsom created the Unified Cannabis Enforcement Taskforce and last year, it seized more than $312 million in unlicensed cannabis and eradicated almost 318,000 illegal cannabis plants, Hafner added.
