California’s cannabis market is broken. Taxes are too high, local control has proved disastrous, the illegal market is growing, regulations are too burdensome, and there are not enough licensees (retail) and too many licensees (e.g., cultivation) at the same time.

Over the past few years, the situation has become so dire that many licensees have exited the industry, including some of the largest and most well-capitalized players in the state. In this webinar, Griffen Thorne (Partner, Los Angeles) and Hirsh Jain of Ananda Strategy discuss whether the California market is too far gone or whether it can be saved.

Griffen and Hirsh shared their unique insights on the challenges facing the industry and potential solutions. This informative session covers key topics in cannabis regulation, policy, and business strategy. Whether you are a cannabis entrepreneur, investor, or industry professional, this webinar offers valuable perspectives to help make the heaviness of California’s complex cannabis market a little lighter. Don’t miss this opportunity to learn from two of the industry’s leading voices!

Connect with Hirsh Jain on LinkedIn

Connect with Griffen Thorne

LinkedIn: /griffen-thorne

(00:01) [Music] good afternoon everybody Welcome to our latest blog, sorry webinar – it’s one of those days I guess. My name is Griffen Thorne, I’m a partner at Harris Sliwoski and a blogger for the Canna Law Blog and today I’ve got with me Hirsh Jain. I’m going to read a bio about Hirsh, Hirsh is the founder of Ananda Strategy Consultancy which advises leading cannabis Brands retailers ancillary technology businesses inventory Capital funds in the Cannabis industry Hirsh also serves as the vice chair of the Cannabis Chamber of Commerce

(00:41) and is on the board of directors of California normal   prior to working in cannabis Hirsh was the global policy lead at Airbnb in San Francisco before that he worked as an engagement manager at McKenzie and Company in New York City Hersch has a BA in Philosophy from UC Berkeley and a JD from Harvard Law School   for a little bit of background on me like I said I’m a partner at this firm   you can find my work on the Canna Law Blog I blog weekly if not more often I represent clients   in a lot of different

(01:11) Industries but a lot of clients in the Cannabis industry since 2018 doing corporate and transactional work as well as Regulatory Compliance and other types of work   I first came across first we actually worked together on a competitive licensing application   probably four or five years ago and we’ve stayed in touch I know that he’s one of the leading voices in the space and   you know I write often about the problems in California’s cannabis industry and I like to focus on specific data points I noticed a couple

(01:43) of month ago thatHirsh also does the same thing but sort of on different areas and so I thought might be a fun idea to have the two of us here and we could sort of hash out what we think is wrong with the industry and whether it could be saved   and you know how we would ideally like that to happen so   that in mind what we’ve done is we’ve created sort of a series of   topics that we’ll go through today and   hit them one by one and then at the end   we’ll leave sign for Q&A of course

(02:13) but   we’ll offer some potential solutions that we might also have   the first sort of General topic I want to talk about is the legal and Regulatory background in the state of California and you know for those who aren’t as familiar with things and sort of the problems we face I think her would probably agree with me a lot of it ties back into the fact of How It’s regulated here and how the law works so I’ll start by askingHirsh how is cannabis regulated in California yeah and thanks gin and first

(02:43) of all thank you for having me and thanks to Harris Sliwoski for having me I’m excited for this conversation   you know at its highest level you know there is one regulatory agency in in California at the state level that’s the department of cannabis control   I point that out because in the initial years of adult youth sales in California there were actually three separate regulatory agencies that would regulate different parts of the supply chain the most prominent being the Bureau of cannabis control but in 2021 those three

(03:10) Regulatory Agencies were Consolidated into a single one known as the DCC the rationale of that was to sort of provide better quote unquote customer service and to streamline different processes so that’s been the main Agency for a few years and then there are also of course agencies at the local level that cannabis operators have to engage with so for instance if you’re based in the city of La you have to engage with the Department of cannabis regulation which is the local regulatory agency so those

(03:36) are sort of the Dual sort of agencies that operators have to contend with right and I think another sort of fundamental aspect of this that our law in California that governs cannabis at the state level was passed via a voter initiative back in 2016   Hirsh do you want to talk about what the effect of a voter initiative as opposed to a state that might have say adopted   cannabis program legislatively by through the act of the state’s Congress yeah no I think that’s really important and I think a little bit of

(04:09) history is worth remembering here so folks may remember that in 2010 California actually had an adult use initiative that narrowly failed   Prop 47 because of some opposition from local government groups and from you know   police agencies and so that was a couple years before Colorado and Washington were the first two states and I think that narrow loss really colored the approach to Prop 64 so Prop 64 was the initiative that passed in in 2016 and it had a lot of different component parts but I think the organizing principle

(04:41) was a desire to appease you know different interest groups that were out there so for instance you know Prop 64 as I’m sure we’ll talk about during this conversation featured a very high tax structure right that was in part meant to sell this to the voters as a tax revenue generator   those taxes were also earmarked for specific groups right some of them Public Health groups as a way of getting those groups on board   similarly Prop 64 had really deeply embedded local control as a way of winning over local government groups

(05:11) and police agencies and so I think that’s the way to think about Prop 64 maybe not the best policy but a series of compromises designed to appease different groups and to answer your question we have seen in the eight years since Prop 64 passed that there’s a lot of aspects of Prop 64 that are really problematic for AEV its goal of establishing a functional legal market and as you alluded to because this was passed by voter initiative the ability to modify that law is much more difficult you know specifically in the

(05:42) state legislature a two-third super majority is required to modify that law and so I’m sure there’s much more we could say but at its highest level I would say the problems with Prop 64 are known problems the problems with California Cannabis are known problems you know problems like local control problems like tax reductions and we have seen bills introduced in the state legislature to deal with those problems such as a bill introduced by Phil ting to require jurisdictions to allow cannabis access or bills introduced by

(06:12) people like Rob Bond to reduce taxes and so I think these are known problems and bills have been introduced to solve those problems but because a two-thirds vote is required in the state legislature to get those bills passed we’re kind of at this impact where we have not been able to solve these very knowable problem and again like you said that’s in part because we passed this via a voter initiative that is much more hard much more difficult to amend going right and so I think part of the problem is we’re stuck with the law that

(06:43) you know we it was made as a compromise I mean look Prop 64 passed with like pretty narrow margin I don’t know the specifics but it was not a landslide for sure a lot of people forget that outside the big cities here the voters are a lot different and so   a lot of Provisions that were intended to sort of be compromised positions have   have really been detrimental to the industry in the last six seven years and so that means we’re essentially stuck with a lot of these things I mean anybody who’s familiar with this getting

(07:18) another voter initiative through will be difficult if not impossible and getting the legislature to agree on on a big change is also going to be difficult if not impossible so I mean even small things of   in terms of reforms here so you know we’re stuck with an imperfect system and that shapes a lot of the issues here I you know I should also mention something Hirsh talked about which is dual licensing   if you’re not in California and you might be in another state and just watching this out of curiosity some

(07:48) states don’t have this problem or it’s much different but here you have to have a license from the city and you have to have a license from the state and in general the local process is much more lengthy and c bersome than the state process because cities I mean it’s all over the map right some cities it’s fairly routine and easy others it’s you know years worth of construction   anyone who’s worked with a bunch of businesses I’m sure her is hor is too has seen people take three

(08:16) four years to start from applying to operating because of these local processes and how owner they can be California is also unique in that we have environmental protection laws that that make it just really hard to operate in some cases so   dual licensing means that you have to do both of these processes in some cases you have to go through a lot of Hoops locally before you can even apply for your state license and so it just makes the process much more difficult and notably much more expensive   I don’t

(08:48) think it’s unreasonable to budget a year or more in a lot of cases until you can start operating which means a year of paying money to a landlord you have to have a lease a year of   paying all kinds of expenses where there’s no income coming back so that just makes it hard for anybody to operate particularly small businesses and social Equity type businesses who just don’t have those kinds of resources so our system is sort of stacked against the small business owner and I mentioned squa

(09:16) which is our environmental law which just it is becoming harder and harder for businesses to comply especially ones that have to go through major build outs   or you know businesses that outdoor cannabis Farms things like that where there might be water issues too that are very   difficult to navigate in this state   so with that background in mind and kind of where things stand I think one of the biggest complaints I see and I mean h correct me if you’re wrong if I’m wrong on this just overregulation and

(09:45) I think a complaint that I’ve personally heard and that I’ve made on my blog a lot is that there are areas where the DCC or specifically cities have stepped in to regulate more than what they have the minim  threshold to do or or requirement to do under state law and imposed additional regulations that often just make it impossible to do business   and so I think that you know the first roadblock to a lot of businesses who are suffering right now is trying to figure out a way to for the state to relook at those regulations

(10:19) I mean   two that come to mind immediately are the prohibition on selling cannabis past 10 p.m which from what I can tell is not anywhere in Prop 64 or any other state law and really it just guarantees that the illegal Market’s going to thrive because if somebody wants cannabis at 11: 1:00 a.m.

(10:37) whatever they’re just going to call an illegal Source right or go to an illegal dispensary which are everywhere in the State   another one is the restrictions around changes of ownership a lot of which don’t track specifically to the statute and make business sales particularly challenging and I’ve seen the rules applied completely night day to different businesses so these are areas where I think the regulators can and absolutely should take a hard look at the rules and say look if this doesn’t it’s not strictly required given

(11:05) this the amount of suffering and pain in the industry we might want to think about getting rid of it   which kind of brings us to the next point which is sales performance and this one is one where hirh is really the expert between us and I want to defer to him on most of this so I’ll H I have a couple of questions for you   when we talk about sales performance we’re talking about the amount of revenue generated the amount of sales at the state level we have data now U sort of limited data but we have some data

(11:32) and we can compare it to other states so how does California’s per capita sales to other mature adult use totally quickly before I get to sales I just want to say I agree with so much of what you just said and I just kind of want to underscore how much of a paino those local government processes are just a couple things I’ll I’ll sort of highlight that you said and just want to flag a lot of these local governments are really under staffed and so when you Empower them with a licensing Authority but they don’t have the staff

(11:59) to process those those license applications that becomes really problematic and a lot of them don’t have expertise in cannabis too so even if they decide they want to pass an ordinance it can take them years to develop the knowledge in order to pass an ordinance so I completely agree with that and I also want to underscore what you said which is to say that ends up hurting small and Equity businesses the most I think often in California we have this conversation about whether we’re fulfilling our promise to develop an equ

(12:26) a racially Equitable market right a a a market of businesses and I think it’s important to understand the link between the regulatory constraints that exist and our inability to see that market through right if you’re waiting for years before opening a business   you know it’s not likely you’re able to sustain that if you’re a smaller or minority business so you know that’s just a a different way of recapping what you just said and that I’m in agreement with   on the sales question

(12:52) specifically you know I think there are different sales figures that are thrown out about California Cannabis I’ll refer to you know the quarter data that was recently released by The cdtfa and there are two different figures there one of them is called taxable sales and one of them is cannabis sales now taxable sales includes non-cannabis Goods right   like accessories but if we’re focusing specifically on cannabis sales in the first quarter of 2024 California sold about a billion dollars of legal

(13:20) cannabis now those n bers will rate rise a little bit as more Returns come in but that gives you a rough sense of where the market is today it’s approximately a four maybe you can say A4 and a half billion dollar market I point that out because previously you know a few years ago you would offy headlin saying California was a$6 billion Doll Market you know when when it was a little bigger and I think that n ber was a little inflated   you know including things like   like non-cannabis goods and so I think you

(13:48) can say roughly California has a$ four and a half billion dollar market and to answer your question how does this compare to other states you know California has objectively speaking the lowest per capita   cannabis sales of any what I would call mature adult youth State and I’ll just Define mature roughly by you know someone who legalized cannabis more than four years ago for for example right   California has the lowest per capita cannabis cities and you know we can compare it to other markets and so if

(14:16) we took Montana for example right Montana is a pretty small state it’s a state of one million people last year they generated 325 million in Canada cities and so you know if you just do some kind of quick math right Montana’s 1 million people California’s 40 million people it’s 40 times its size if California were performing on par with Montana it would be generating $1 13 billion in legal sales as opposed to you know four and a half   today I think another you know apt comparison is   Michigan right   so Michigan in March

(14:48) of 2024   generated $290 million in sales and again not to make this into you know sort of a a math you know conversation but you know Michigan has 10 million people it’s about a quarter of California right California has 40 Michigan has 10 and so if California were performing the way that Michigan was it would be generating 14 billion   in in sales and so   I think that’s relevant and I’ll just kind of conclude by saying you know first on Michigan specifically some people will point out

(15:18) that it borders a n ber of prohibition states such as Ohio and I think that’s fair right some of that is being fed by crossborder traffic from places like Indiana and Ohio although I would remind people that California gets 200 80 million tourists each year and so Imagine some of those legal cannabis sales are are are also coming from from tourists and so those are the n bers and you know just to kind of put a fine point on it we have been accustomed to this phrase you know California is the largest cannabis Market in the world and

(15:45) you know I’m I’ve lived here my entire life as as I think you have too I’m proud of the state   but I think that’s misleading in the context of the per capita n bers and well I’m sure we’ll unpack in a second what is the driver of that poor performance the way I think about it is that’s sort of like saying California has the most Republicans in the country which is like yeah that’s true that’s because one out of every eight people lives in California there’s 40 million people

(16:08) here   so that statement while factually true is somewhat misleading and obscures the the fact that the legal Market is just drastically underperforming compared to states that are not even synonymous with Canabis culture right   when we talk about these other states though   like Michigan Montana and things like that I think you do have to factor that I travel into it which probably makes the n bers even more different because I don’t I don’t I’m just guessing here but I doubt there’s a huge tourism industry

(16:37) to those places specifically for cannabis whereas here I mean I do think there is something to California cannabis and people probably come here for that reason they’ll see places where it’s grown and   so there that I mean those n bers are are seem to be devastating compared to what we’re seeing at the beginning of covid Right Where the n bers were through the roof   over the last couple of years what do you think the trend I mean obviously you said it was six million a couple of years ago do you have any insights or

(17:06) punches as to why it might be dropping so much yeah and I think Griffen you’re really right to point out covid I think the way to think about the trajectory of the California Market is that it’s been on a steady downward decline   over the past three years of course you know it’ll vary based on seasonality but it’s been on a steady decline since July of 2021 which is when the lockdowns ended in California and look I think most people familiar with cannabis are aware that you know during covid right

(17:33) cannabis was deemed an essential business people were getting tons of free money there weren’t other ways for people to spend that money because they were in their house so you know cannabis was at its Zenith and I would say that was the most optimistic moment in California cannabis and early 2021 right when were probably north of A5 billion Doll Market probably not quite at six right   even though there were reports to that effect because again that would include   taxable sales   and so I think what has happened in

(17:58) Califoria is you know what has happened in many other states right after the covid high wore off sales started to decline but the challenge   the way I would think about it is covid kind of obscured the structural challenges in the California market and once covid went away those challenges started to reveal themselves again and I would say those two primary challenges   are one just the tax structure the fact that legal cannabis not cost competitive with illegal cannabis in the state and there’s a longstanding and

(18:28) very sophisticated illegal Market here and so that price differential just drives cons ers to the illegal market so that’s one of them and perhaps you know the other driver right of the decline in performance or the stagnation   is the fact that we have not really seen retail expansion across the state you know were just talking about Michigan before if you were to look at sort of a Time series map of Michigan right over its five six years of adult youth sales and to see new stores popping up in the state it would

(18:55) be an interesting graphic right you would see new stores kind of popping up across the state which has driven its increased sales in California we have not seen that again because of the local government issues that were talking about before that even when cities pass ordinances new new retailers haven’t haven’t opened and so   that’s what I would say is driving the decline right Co obscured those challenges and   yeah that that’s   those are sort of what I would say the main things are and M maybe the final

(19:23) thing I’ll note is you know were just talking about how hey it’s now maybe a four and a half billion dollar market today so perhaps it’s declined let’s just say roughly 20% over the past few years the other thing to consider is that you know there are although retail growth hasn’t been you know rambunctious there H there have been a couple hundred more dispensaries that have opened up in that time who are fighting for that smaller p and so that shows you that the average store maybe is generating you

(19:48) know 50 60% of the revenue they were generating during Co yeah that’s I me those are all good points I think in my experience working with cannabis businesses Co actually in some senses did more harm than good I mean I remember in early 20 late 2019 there were a lot of businesses suffering and for some of the reasons we’ve already talked about some other reasons we’ll get into but there was just a lot of businesses that were suffering were probably on the verge of insolvency and covid just p ped in so

(20:19) much cash into the industry because people were staying home in this state there were lockdowns U it was one of the few things you could you could go out and get and so it just p ped a lot of money into the industry and a lot of these businesses that maybe didn’t have great business models or just weren’t for whatever reason were were not doing well got a second wind and money wasn’t it was spent in you know in some cases irresponsibly   you know Investments dried up over the last few years significantly we just don’t see a lot of

(20:50) Investments today like we did back in 2018 early 2019 and you know there was a lot of spending and businesses are now there’s a collapse right this probably something we’ll get back into but I mean I think Co ended up just kicking the can down the road in a weird way that should have been predictable I mean people should have understood better that it wasn’t going to last forever but   yeah I don’t know it was it was an interesting experiment then you add things like the fires in 2020 that that destroyed a lot or

(21:23) affected a lot of the outdoor farms and pushed indoor prices up I mean all kinds of weird stuff but   totally goes to show you can’t really you never really know what’s going to happen H you previewed a couple of points that we’re going to talk about in a minute but first I want to talk about taxes   taxes we have sort of touched on   what makes can California Cannabis interesting is   maybe that’s the wrong word frustrating I guess the better word is that the way it’s taxed   Federal level there’s there’s something

(21:57) called 280e in the internal revenue code which prohibits most standard deductions for cannabis businesses   that is potentially going away if cannabis rescheduled we did get some questions about rescheduling and whether it’s going to happen this year I don’t nobody really knows at this point     but the effect of rescheduling would being 28 EOS away from that point forward but that’s just a federal issue right so businesses also pay a state tax and a local tax at the state level we had in our law something called the

(22:29) cultivation tax that was charged on cultivation and then an excise tax of 15% charged on the sales and initially it was set up in a way   that I never really understood but that the cultivators and the retailers didn’t pay the tax they they gave the money to the distributor who paid the tax   or at least they were supposed to right did that actually happen a lot of times no and what ended up happening as a result is that a lot of Distributors got massively behind on taxes and had to help people negotiate payment PL State

(22:59) it’s a mess   the T the cultivation tax was done away with in July of 2023 and the excise tax was moved from distribution to retail which   I want to askHirsh about   in a second and then at the same time there’s cities you know when you have your license in you know San Diego San Francisco whatever they’re going to charge a tax on the local business too it’s generally gross receipts tax so a percentage of the revenue that the business generates   I’ve seen it as high as 10 Perc which is wild if you

(23:32) think about it 10% of pre-tax income and there’s some cities I’ve seen that charge tax on out of City operators who do business in the city so there’s a lot of different sources and this like just leaving aside General income tax sales and use tax things like that just just tax to the gills here and so   how does this H compared to other states like that you fam with yeah I mean   California has amongst the highest cannabis taxes of any State   in the country now there are a couple other states that people will point out also

(24:05) have high cannabis taxes you know people will point out that Washington has a 37% tax you know Allin and Illinois has high taxes but I think when you actually do the math California has the highest tax burden of any state in the country just because of the way that taxes are calculated and the local discretion that that you were talking about and there’s so many layers of Taxation here it’s almost kind of hard to tick through all of them   you know first you know we can just compare you mentioned local

(24:30) taxes right so you’re absolutely right California’s   local jurisdictions charge taxes on cannabis sales they have their local excise tax and what’s remarkable is there’s no limit on the amount of tax that they can impose there and that is striking in comparison with other states you know there are other states out there like New Jersey and Massachusetts these are liberal states these are states that often tax very hardly and they limit the amount that you can tax at the local level to 3% and

(24:57) just to give you some context on how out of Step you know sort of California is people may know that in Massachusetts that 3% tax known as an impact fee is now suffering under legal challenges as not being justified right as potentially being extorted so it’s notable that in Massachusetts a 3% local tax is considered so outrageous it’s suffering from legal challenges but in California it’s hard to find a single jurisdiction with low of a tax and look you mentioned there’s tons of   cities

(25:25) with 10% tax rates out there there absolutely are and some some of these are home to some of the most retailers in the state right the city of Los Angeles that has a quarter of dispensaries   in the state of California has a 10% tax rate the city of San Jose right another major cannabis Market has a 10% tax rate so yes taxes are really high   at the local level and you know they’re also very high   at the state level there’s a 15% State excise tax that excise tax could actually potentially or likely increase

(25:53) to 19% next year which would be devastating and I’m sure we can talk about that more   so that’s also quite High   California in general has a much higher sales tax than is imposed in other states right in many other states in the country the all-in sales tax is about half of what it is   in in California so   that’s also remarkably high and again to compare those figures with what   other states you know consider that   in in Michigan you know which were talking about earlier   there is an Allin 10% tax between the

(26:24) state and the local level and even once you know you you factor in even once you factor in the sales tax it’s about 16% you know which is which is you know a fractions of what California is Missouri right has a six% state tax and a maxim  of 3% local tax so not to be later the point but California has much higher taxes than other states   in the country and when you consider that it has a long-standing and sophisticated illicit Market you know you don’t need to be an economist to understand why most cons ers continue

(26:54) to patronize   the illegal market and so you know as as was said at at the outset like these are very knowable problems these are very well-known problems and that tax burden is just driving people to the illegal market and look there there’s much more we could say on this we could also talk about compounding right the way in which California calculates its taxes it taxes on top of taxes which are you know which is practices that are illegal in other states and so you know the actual effective tax burden in California is

(27:24) much higher   for that reason often times you know if we talk about this City of La the city and the state will fight you know about who is the last taxer the city wants to tax you based on on on the amount that’s inclusive of the state taxes and vice versa so it’s a really kind of absurd Kafkaesque situation   that we have here in California and then you know finally I’ll also note in most other states   you know you are not taxed if you’re a medical cannabis patient that is now with the norm in Most states that

(27:54) medicine not not be taxed but in California it’s much more difficult to get that kind of exemption you have to have a specific type of card issued by a county and then you’re only immune from some of the   some of the taxes not not the 15% State excise tax so   that’s the tax structure and then you know maybe I’ll just Again State the obvious the profound irony of this this very punitive multi-layered   tax structure has led to declining tax receipts   over time   because the legal Market has

(28:27) Steen yeah   these are all good points   I think that the I’m noticing there’s comments I didn’t see them before   I’ll try to read them and try to incorporate some questions on the next round but   a couple of things that I think about this you know rescheduling at the federal level is going to change the federal tax burden which will be great I think that it’s going to increase investment into the industry because people aren’t going to be as spooked knowing that there’s going

(28:56) to be essentially little to no profit the problem with rescheduling and doing that is that you’re there’s going to be no incentive for States and localities to change their aggressive ta and aggressive is like an understatement   tax practices why are they going to do that and   specifically the promise with cannabis taxes was that they’d be used for a very specific reason at the state level here and it was earlier this year or last year that Nome just took a 100 million out of the fund to use for you

(29:26) know balancing the budget you know that’s alone right it’s never going to be given back   being cynical about this a little bit but that’s what’s going to happen so there’s really little incentive to change anything at the state level and at the local level it’s kind of the same deal there is one bill that’s winding its way through the state house which is   s159 and it’s pretty simple concept it’s going to say that if you calculate gross receipts as as a city or county U so

(29:53) City LA taxing retailers of 10% of gross receipts you have to factor out excise tax you can’t include that so you it’s going to try to eliminate that compounding issue which is great   but it’s not you know it’s a drop in the bucket of what needs to happen real realistically what needs to happen to make these businesses whole is to cap local gross receipts tax to a to a very small amount like maybe one or two percent and   severely reduce the excise tax burden and I’ve seen people float the idea of like things like

(30:24) bailouts for the industry I don’t even think that’s necessary I think the state just needs to essentially wave some of the tax debt that and then that’s effectively the bailout I I mean this something we didn’t talk about yet but if you are a day late in paying your cannabis taxes in the state of California Here by law they have to charge you a 50% penalty and then that’s on top of the 10% penalty that’s not related to cannabis specifically and then you see things like interest and

(30:53) penalties so if you ow $100,000   for excise tax payment to the Department of     cdtfa Department of tax and   I always forget this one   and they and you’re literally one day late you’ll get a bill for6 something thousand right because it’ll be 50% of the principal plus 10% plus interest and fees and whatever else   which is insane I mean it’s truly insane when you these businesses a lot of times are deciding whether to pay employees or or pay the state and then they get hit with that and I’ll caveat

(31:29) the states   you know for the state that like they’ll they’ll be pretty good about negotiating payment plans and there’s ability to ask for wavers and things of that nature but like why put people in that position in the first place of having such massive and insane   tax policy that’s really not Tethered to any sort of rational policy decision I mean a 50% penalty is just ludicrous so U that’s another thing that I think if the state got rid of   it wouldn’t even have to necessarily taxes but just

(31:59) work with people on coming up with realistic solutions to these problems rather than just keep tightening the cork screws on the industry totally yeah based on something you mentioned I mean Griffen you talked about tax debt I think it’s really worth underscoring right   so you know recently   it became known that 15% of retailers in California Canabis are in default on their taxes that was actually a public records request that I submitted with one of my clients   there’s more than $700 million in outstanding debt at

(32:31) least in California Cannabis so I think that is you know just to underscore how big the sort of tax issue and deficit is there the second thing I’ll point out is and you were kind of mentioning this earlier right so there’s a lot of operators that   are in deep debt right many of these are social Equity operators that the state made a a great emphasis in trying to support   I guess I want to point out that you know some people will note hey this capitalism you know a lot of businesses fail right why should C you

(32:57) know cannabis be immune from this larger Trend that businesses failed and I think that’s fair right like there’s many California Cannabis businesses that have failed there’s more that will fail and there’s a way to look at that and say hey this capitalism that’s how things go but I think that’s at odds with the state professing to care about things like creating a small business landscape that is diverse caring to you know caring about things like racial Equity I think to the extent that political

(33:20) leaders are getting cache out of trying to promote a certain vision of a market it’s not unreasonable to highlight the structural issues that are leading to failures in those demographics in the market so   I think that’s worth pointing out as well and the final point I wanted to make you know you mentioned rescheduling I think we could spend this entire webinar talking about rescheduling I’ll simply and I’m you know as you said this an unprecedented issue you know you will find very sophisticated legal experts

(33:46) with different views on thissue so you know I can’t claim to know what’s going to happen but I’m cautiously optimistic that   you know you know a rescheduling rule could be finalized before the end of the year and as you mentioned that would lower the tax burden for California Cannabis businesses and look that would increase the the universe of business models that are feasible in the California Cannabis market for instance you know I was reading a report in Green Market report to   today an article which

(34:12) suggested you know more California Cannabis operators are going vertical because they need to do so to preserve their margins to be sustainable arguably you wouldn’t need to do that in a world where your federal tax burden was was lower so It’ll be interesting to see how that shakes out although I don’t think it’ll be sort of the Salvation of the industry and the final thing I’ll note you know just because we’re talking about rescheduling you know the profound irony to me is this should be

(34:36) California’s moment right the federal government is essentially acknowledging that the experiment that California started three decades ago was true right California in 96 gave birth to the idea that cannabis medicine and you know this really validates the idea that the future happens in California first right and so there’s a profound irony that you know 30 years later when the federal government is catching up to California’s wisdom about the utility of cannabis   California can no longer say

(35:03) it treats cannabis as medicine because it taxes it like a vice right and so there’s just a profound tension in where we are at at the federal level and in California’s tax deves yeah I mean the law was what was it called the control regulate and tax of adult use of marijuana act right so it’s that’s how it’s usually sold to voters is we’re going to just this a money maker for us and it almost never turns out to be the case no matter where you look I want to I want to just interrupt our

(35:31) flow things to get through some questions here we got one   about elaborating on the potential increase in excise tax yeah right now it’s 15% of sales and it’s going to go up to 19%   potentially next year unless that’s changed and that just means you 4% higher excise tax which means higher cost to the cons er and higher effect on on businesses you should also just note that I mean we’re going to come back to the illegal Market in a second but if you Apple’s putting aside any other Factor about the legal versus IL

(36:02) legal Market just taxes alone just taxes alone they illegal Market doesn’t pay taxes right so you can make a product that is significantly cheaper   and I mean I’ve talked to a lot of people over the years who say I don’t care I pay less what’s the difference right and no   you know knowledge campaign by the state which they’ve done about buying from the legal Market is going to persuade people in that big of a price differential so if they really were serious about combating the illegal

(36:33) Market I think taxes would be one of the biggest probably top three things that the state should do   to do that we also had a question about   H I’m sorry AB 2223 which is a bill to allow hemp within the licensed cannabis supply chain we’re a weird State we don’t do that here   currently we those markets are completely separated lots of other states they intermingle   as far as I haven’t been paying as close attention to that one but I think it’s been winding its way through the legislature

(37:03) so   if so that just opens up more business for the industry   I’ll I’ll try to get into that and write about it on our blog in the next couple of weeks but   I did write about it when it was first proposed but a lot of times in the state there’s just a million proposals and they don’t really go anywhere so   this one actually does look like it might be going somewhere so I’ll try to write on it again and then   we had a question about will rescheduling be delayed definitely the way that this works is

(37:31) that the DEA puts out a notice of proposed rulem and they publish that in the Federal Register there’s some time to   receive comments from the public and then the agency decides whether to make a final rule or amend the rule and then go through another round of notice and comment so it could take longer nobody really knows exactly I mean it’s weird to me to think that it wouldn’t happen at this point that rescheduling would just they’d say ah we changed our position but would it be this year or next year or something like

(38:01) that I think it’s hard to say   obviously there’s a lot out there by way of opposition to this there’s groups that are lobbying very hard   and submitting comments against it so if you have an interest in this topic I mean there’s a there’s a way to voice that with the agency right now and try to have your voice heard so that don’t want to j p back into the topic and talk more about the Retail Landscape which I think is another area that H alluded to this already it’s very

(38:30) different from a state like Michigan   or many other states but why is why is California different H what’s going on with retail here yeah I mean I think the first thing to note is that you know California likely needs you know at least 4,000 dispensaries to serve the legal Market you know that’s the n ber of dispensaries it would have if it were on par you know per capita with Colorado or with Oregon and other mature States   so that’s the n ber of dispensaries that California needs   right now

(39:00) California has   about 1,000 you know about 1250 dispensaries so it has about a third of the dispensaries   that   it needs and so that is one of the main drivers of the elicit Market in California the fact that there’s not a ton of retail outlets that   are out there and you know why are there so few dispensaries in California I think it boils down to local control now let’s really unpack what that means right so there’s 482 cities in California about 340 of them so about 70% of them voted

(39:31) for Prop 64 you are right Griffen that there’s a lot of political you know diversity in the state but you know way back in 2016 70% of the cities had a majority vote for Prop 64 which is pretty remarkable right   eight eight years ago and so I think you can say Californians back then support legal cannabis now despite that fact there’s only a retail cannabis business open in about one out of three cities in California today despite the fact that 70% of voted   for for Prop 64 there’s about 150 cities that have a retail

(40:02) cannabis business   open open today and so that’s the issue which is which is local control   and that is that cities in California have the ability to ban cannabis businesses most of those cities continue to ban cannabis businesses especially retail businesses and here elected officials are not being responsive to their   constituency and you know I think this a point that’s really worth unpacking right if if you think about local control on its face it’s a principle that seems reasonable right which is a community

(40:33) saying hey like we want to have some say what businesses are in our community you know the people should govern right what happens in their community and so I think this this principle has a lot of support on its face but in practice elected officials are ignoring the will of their constituents because they have much more to fear from the vocal minority that imposes cannabis than the majority who supports it and you know Griffen I’m thinking of really specific examples here you know I’m from the Bay

(41:01) Area I’m thinking about Mountain View right a town that passed an ordinance through the process right to allow legal cannabis that voted overwhelmingly for Prop 64 but then hundreds of people many of whom did not even live in Mountain View were bust into a city council meeting to make outlandish claims to City Council Members about what would happen if cannabis were to pass so I think it’s important to note that local control is often framed as a democratic   issue or a Democratic principle but in practice it allows a very it’s very

(41:30) anti-democratic it allows an you know sort of a vocal minority to block cannabis businesses and   you know I in there H because I have a a point on that one which is that a lot of times local control just means that the city council in the city   or some some Department within the city is making decisions that may be very different from what the voters wanted right so that bill that you talked about that was introduced probably 2020 was going to say hey look if your voters approve M top 64 by a majority in this in you know

(42:03) City X then you have to have at least certain amount of dispensaries which seems Democratic but it was like viciously opposed by by cities and you know this undemocratic right when you have a city council I mean I guess they are elected obviously but when there when they are making decisions that you know if you look at the will of the people in those cities is just drastically different so that was the   thing I think people didn’t appreciate when they were putting malr together 64 I always get the

(42:35) acronyms mixed up   and so you know they   it’s just shaken out to be a pretty untenable situation totally I mean I I think that’s so true and and you know not to get too wonky here but imagine a world in which it was really easy to kick this decision to the voters like what if that’s what local control looked like in California which is like okay this passed you know if you vote for then maybe you have another automatic referend  where your citizens get to vote on whether you want cannabis

(43:02) businesses in in your city right but instead the bureaucratic obstacles to putting something on the ballot for example are so high and you can only do so every two years that you know there’s a way for local there would have been a way for local control to more accurately reflect the will of people but as you just pointed out it reflects the will of these five people on on city council who as I mentioned are often not incentivized to do what most people want so I think that’s one one part of local control but Griffen I think the

(43:29) other part of local control that’s important is what I would call you know just like bureaucratic roadblocks there are many cities that have passed an ordinance right or have had voters pass an ordinance but years after right that ballot measure pass no businesses have opened because the city has essentially sat on the process and has used bureaucracy to impede the opening of these businesses in some instances has basically flouted you know   public will I mean just to give you one example example it’s great that these you know a

(43:59) couple dispensaries in enenas are now open but they passed that measure in November of 2020 right it wasn’t until 2024 that those businesses open similarly it’s great that Costa Mesa now has a few shops open but four years after they passed that ballot measure over the objections right of city council   no no businesses were open and so I think you know in addition to City’s not passing ordinances there’s also an effort to use bureaucracies to sty the will of Voters and I think the other thing that I’ll note here is you

(44:30) know a lot of these businesses and this you know I think what is meant by local control have no what I would call due process rights right they win a license to open up in a city but hey you know you’re about to open in a couple weeks and we’re not going to let you open unless you installed this like $200,000 hbac system which we didn’t tell you about before right cities are essentially allowed to operate unchecked in their dealings with these businesses such that these cannot be properly understood to be fully legal businesses

(44:57) as were discussing before right that means you got to take years to get a city to pass an ordinance then you’re styi by bureaucracy right to opening up those businesses at that time you’ve probably run out of money and so you may not be able to open up those businesses and hey if you’re a minority business owner or if you’re a small business person then you’ve definitely run out of money and so I think that’s how bureaucracy ties together   with  these other issues and you know we have

(45:21) to understand local control in that context that’s what local control means in California the ability to ignore your voters and to sort of bureaucratically stifle legal businesses that should be allowed to operate in your jurisdiction yeah so we’re sort of short on time I want to try to get to the next couple of topics I I should mention that you know delivery is important too there’s the non storefront retail businesses that are allowed to deliver there was a huge lawsuit a couple of

(45:51) years ago where a league of cities 30 or so cities sued the state I think it was the BC CC at that time trying to say that this law was interfered with local control because they were allowed to deliver wherever they wanted   again it’s I think the cities should really sort of pick their battles here like I a point I’ve made a lot is like prohibition didn’t work from you know all those years up until 2018   why is it going to work now in these cities of course there’s a cannabis Market in you know whatever

(46:22) city is outlawing dispensaries it’s just not a legal one it’s not one that they can have any tax revenue from so it’s silly so I think that they should really pick their battles and either   allow storefront or at least explicitly allow deliveries but   you know there was a lot of resistance to that back then U I’m going to combine the next two topics sort of into one which is the real actual threats to the industry Beyond just the sort of indirect thing everything we’ve talk

(46:50) about is direct but   the illegal market and in and now what we’ve seen grown in the last couple of years is intoxicating hemp products which are essentially unregulated so I think that there’s essentially three different Industries when we talk about cannabis here which is we have the licensed can maybe four Industries actually we have the licensed cannabis industry we have a compliant hemp producers we have these intoxicating hemp products that often are just completely unregulated and violate state law and then the illegal

(47:23) cannabis Market which is you know I read back in 2019 that there were estimates 3,000 businesses I would say that n ber is probably was know too small then it’s probably much bigger now I’ve heard something like three to four times the size of the legal Market   you can read reports this last week all over the Internet of you know people coming from China and opening crazy illegal weed Farms all over the country it’s a huge problem and it’s not just there I mean it’s everywhere here   and so it’s

(47:52) getting to be untenable situation and the question in this this something I’ve written about a lot is what is the state doing to stop it and I think the answer is effectively very little   every couple of months or years the state passes a new law or creates a new task force or group to combat the illegal Market   I think the last one was bont Rob bont creating some kind of   program where the Attorney General’s office would assist local prosecutors and it never really does anything I mean I looked each quarter at the state’s

(48:30) published enforcement data and the amount of search warrants tends to go down I’ll give it to the state that they tend to be larger ex it seems like they’re going after larger grows   and not you know just these small dispensaries but I don’t see why   both things can’t happen at the same time I mean I’m aware of certain cities in the state that take enforcement against illegal businesses very seriously   and it’s just doesn’t seem to be anywhere near what’s happening in other states I

(48:56) mean New York just shut down something like a 100 illegal dispensaries in the last couple of weeks   I think that we need some of that but at the end of the day I also think that enforcement alone isn’t going to do anything right again prohibition hasn’t solved you know the cannabis problem historically when it was illegal so it’s not going to do it now I think that if you without meaningful reinking of the regulations and   deregulation in certain areas people just going to open up another

(49:28) illegal business I mean it happens all the time there are effectively very limited penalties people face I mean even though these the city ordinances often have like insane penalties like 30,000 a day or the state level two that’s almost never imposed I think the state only has gone after one company for a fine like that so   there are tools that the state can use   and they just aren’t used very often so   it’s a big complaint I mean I hear from people all the time I spent however however many millions of dollars to get

(50:00) this business up and running and there’s a guy down the street with an illegal dispensary   and I know when that gets shut down someone else open in the same building so it’s hard to explain is just I don’t know what else to tell people   first I don’t know if you have any thoughts about that but   I mean I’m sure you do so what do you what do you would like to add I mean I I basically just agree with every you know with what you said right which is that the state has a massive illegal cannabis Market

(50:27) problem it’s even hard to estimate how big it is it might be 10 billion nobody knows   I agree with you that enforcement is not the Silver Bullet that would solve that problem the primary driver of that issue are you know is the very high tax burden that we’ve discussed and the lack of retail cannabis Outlets across the state that contributes to the illicit market and so you know those problems need to be solved if the illegal Market is going to be solved   I also you know if were to cut California some slack right

(50:53) we would say Hey you know it has the most long-standing elicit Market so of course it was going to be hard and you know we might say Hey you know California is going to export its cannabis to other states so long as other states remain prohibition States and a legal cannabis Market will exist so yeah I think that’s true to some extent but as you just pointed out we’d be remiss if we didn’t note that California has taken you know   a has taken a different approach than other states you know States like Michigan for

(51:18) example that also had a long-standing elicit Market but seems to be a little bit more intentional in how it might mitigate it and look I know enforcement   is a very sensitive topic because of the history of the war on drugs and I think it’s appropriate that we be sensitive to that but I’ll also say you know   we run the risk of like sort of fetishizing or valorizing the illicit market right we should consider the labor exploitation and the sexual abuse that happens   in in the illegal Market we should consider environmental

(51:46) destruction that happens as a result I think there’s a there’s a a tendency to romanticize maybe that’s the right word the illegal Market but a lot of these values that we say that we care about in California right Justice and fair treatment of workers and environmental you know protection are are totally undermined by the illegal market and so I think it’s a you know we have to be thoughtful about how we approach this issue and of course enforcement can’t be the primary driver but to just sort of

(52:12) shrug our shoulders at it is does not seem like sound policy and look the other thing is it puts a lot of the state’s residents at risk right if you live outside of these Urban centers and you live in a rural area that is terrorized right by a lot of these cartels it’s sort of like we’re saying well those people’s lives don’t matter like it’s okay for them to deal with that and that seems unacceptable yeah I mean we talk murders that have happened in the recent past

(52:39) with these illegal operations and it’s not it’s not as uncommon as you would imagine   so I mean I think that the state has if you’re going to create a regulated market you have to either disincentivize participation in the unregulated market or incentivize participation the regulated market and right now the state’s doing neither of those things effectively totally it’s it is impossible to get into this industry without a lot of money if you’re a social Equity business you essentially

(53:08) have to link up with someone with money and then at the local level they make it very difficult for that relationship to work well   and it leads to disastrous effect so I mean there’s just so many ways in which in an Ideal World this could be you could both increase enforcement against the gangs and cartels and things like that and then decrease regulatory burden on the people who are trying to do it the right way   the hemp products thing I think is interesting   we’ll talk about that briefly because we only

(53:40) have a few minutes left but you know basically when cannabis was legalized here really the big hemp product was CBD if you remember at that time CBD was like regulated by the state via FAQs on the Department of Public Health Website and just say saying like you can’t sell it but like it was sold all over the place and again there was a little bit of enforcement but not much that market seems to have changed when intoxicating cannabinoids hit the scene and things like Delta 8 thca is another big one   I’ve written about

(54:13) a lot of these cannabinoids U quite a bit on our blog I think some of them there are some good Arg ents for why they’re legal under federal law others I don’t like thda I don’t agree with those arg ents personally in most cases   that might all change federally speaking   when the new farm bill is adopted and again another thing I’ve written about there’s efforts to essentially ban intoxicating canono but state law if you read it closely I think currently does ban a lot of intoxicating canabo   in

(54:43) California yet these and especially smokable ones which are not legal to sell here   again there’s I think pretty little enforcement so   I you know bills like AB 2223 that would open the Cannabis market up for hemp products may change that   by allowing more competitive hemp offerings within the retail license program but again like people who want to go to a gas station and buy a vape at three in the morning   that stuff’s just there and there’s not a huge effort to remove that I will say it’s better here than you know

(55:21) I have family in the east coast and their states not they don’t have cannabis that’s legal when I go visit them like everywhere is selling Delta 8 like every store is has Delta 8 and kratom and all kinds of stuff and so   it’s not as prevalent here but it is still something where you can you can literally go on websites and have high THC flower mailed to your house you don’t have to get up and   that kind of thing just doesn’t exist for cannabis so again it’s going to be very hard for

(55:47) these businesses to compete   and so that’s why you see lobbying against hemp at the federal level which might even be a little Overkill but that’s kind of the situation the industry finds itself in   yeah why don’t we j p to the last topic unless you want to have anything else but interstate commerce   is it going to happen is there a timeline for it what do you think it’ll do yeah   I will just say that   you know over the past couple years there have been many people who have suggested

(56:18) that interstate commerce is imminent or is close and they have proven to be   in Incorrect and   look I will also note that   a few things right so the timeline is uncertain right some people believe it’s imminent but you know those predictions have proven incorrect   thus far the second thing I’ll note is it strikes me that just the mechanics of setting up that Interstate Market even if there were the political will be time cons ing right how you regulate things like testing and tracking and I think you know the bill

(56:49) that passed in in California that you know sort of led to the memo that was authored by by Matt Lee from The DCC regarding interstate commerce kind of acknowledged that right that you know we would have to enter into an agreements with other states along all of these different dimensions so I think the mechanics   of it will likely be time cons ing   there’s also the offens sided fact that you know some other states may not be super interested in participating in Interstate you know Commerce right because it could threaten

(57:16) their Industries I think that political risk remains a very big risk and I would also say you know the ass ption that the rest of the country will naturally want California I mean I get it makes some sense but I don’t I don’t think we can take that ass ption at face value right there may be   sort of an interest in Regional brands that develop there may be lower costs of production   you know from Cannabis from other states so you know surely there may be some producers who might benefit some

(57:43) large producers and some craft producers who might benefit from being able to Avail themselves of an interstate Market but   I don’t think we should view that as the solution to California’s challenges and right now California seems intent on a course of making it more difficult for cannabis businesses to operate Say by increasing taxes next year so   is if the question is hey is it reasonable to think that interstate commerce is a near-term solution to California’s challenges I would say my answer to that would be

(58:13) no I have two points to add to that which is personally I think interstate Commerce is it’s just like P in a sky and I don’t think it can meaningfully happen unless there’s not only Federal descheduling with Federal regulation of cannabis that creates some sort of uniform standard I mean to your point about taking time and expenses like the testing and labeling requirement vastly different among the states I mean someone mentioned in the comments that this new article about testing and pesticides issues like that drastically

(58:43) different in other states and so just harmonizing that I think it’s going to be impossible to do without some sort of uniform standard in place and then like you know if were to get into an interstate compact   the proposals have been like Oregon which also has an a massive over supply problem so who’s going to really be helped by that not us not Oregon   I think and so it would need to be with States all over the country which don’t have mature markets or which don’t have you know which have under Supply which I

(59:16) mean there just aren’t any so I think that it’s sort of unrealistic   for the time being could be wrong   but I also just don’t think it’s really even on the horizon given this the federal state of things and just the different I mean truly the amount of differences between California and just like Nevada or Oregon it’s huge so   in many cases I think those differences are insurmountable   unless states are willing to just say hey look you know you could bring your cannabis into our

(59:44) state without requirement with local regulations and I just don’t really think that’s going to be the case   hers you know we’re running out of time right now it’s 12:59 I wanted to say thank you for offering your thoughts – where can people find you   you can find me on Twitter at Ananda Strategy that’s a DA strategy you can find me on Instagram   and you can also go to my website which is

(1:00:16) Well thanksHirsh and thanks everybody for joining in   please   note that we will be posting this on our site in probably a week or so and   also on YouTube so if you want to rewatch this please do   if you want to email us or ask any questions   my email is

(1:00:43) and it’s Griffen with an “en” and happy to connect we’ll do this again soon thanks everyone.

thank you thanks for having me yeah [Music]