California’s confused cannabis industry
There are nearly 600 different cannabis regulations applied across the state of California. Cannabis businesses in the state are subject to thorny patchworks of state and municipal regulations. To boot, 393 of California’s 482 cities/towns continue to disavow legalization, as each city has jurisdiction over what cannabis regulations to adopt.
While illicit mega-farms continue to cause a supply glut in the markets, many consumers are stuck in municipalities where dispensaries are still outlawed.
Perhaps one of the reasons why things have failed to pan out as planned for cannabis regulators is that the Californian government simply wasn’t ready. For instance, in 2018, the Californian government was only able to secure $345 million of the projected $1 billion of cannabis tax revenues.
Perhaps they also failed to properly size up the pre-legalization black market, as fragments of that market are presently threatening to run over legal businesses. This presents a lot of negatives for the government and consumers alike. By turning to the ever-robust black market percolating under the noses of authorities, most cannabis consumers purchase the drug without paying due taxes, leaving the government out of the loop. This also results in those consumers forfeiting protection offered by the government through the regulated system -- for example, good quality cannabis that has been tested.
Each city and municipality is allowed to whip up its own version of cannabis laws. Source
As New Zealanders gear up for the 2020 referendum on the legalization of recreational cannabis, what can they learn from the current quagmire currently unfolding in the Californian cannabis industry?
4 major California mistakes that New Zealand can learn from
1. Half-baked laws owing to the stigma on marijuana in legislative houses: In an interview with Forbes, Josh Drayton, director of communication and outreach for the California Cannabis Industry Association, lamented the delays in progress induced by tendencies in lawmakers to sidestep cannabis issues. He claims that the stigma in the legislature caused lawmakers to skirt the real issues behind cannabis that would make for strong policy. Apparently, nobody in government wanted cannabis to be their legacy, leading to a half-hearted approach to legalisation.
2. Too many legal bottlenecks and too few entrants: The projected rapid growth of the cannabis industry has mostly been stalled by the huge number of regulations applied in the industry. While official projections put the expected number of new dispensaries at 6,000 within the first few years after legalization, only 547 dispensaries have actually been licensed by the state Bureau of Cannabis Control within the projected period. As a result, most consumers continue to turn to the illegal market for their supplies.
3. A convoluted taxing system: The applicable tax codes in most places in the state contain endless reams of information, and there’s hardly any business owner who fully understands them. Bill De Zenzo, VP of Business Development at Taxnexus, a tax compliance service, pointed out that California’s archaic tax codes hinder businesses’ abilities to properly calculate and file taes. In some instances, certain taxes need to be applied first before you apply other taxes, and getting this chronology wrong might result in significantly wide margins of error in the tax calculation.
Even POS machines, which are usually 100% accurate at figuring taxes, hardly ever get it right with cannabis taxes. This is because they must be pre-configured to make transactions tax compliant by people who may not have a full grasp of the tax code applicable in an area. As such, the government has always come up short with the cannabis taxes.
But the worst part of it all is that an inadvertent failure to calculate taxes properly might attract hefty fines. Most businesses who’ve been apprehended for noncompliance with tax codes have had to pay up to double the amount of taxes that were initially owed.
The numerous layers in the cannabis tax system of California. Source
4. Failure to dislodge the black market: The city of Los Angeles, for instance, has issued about 180 licenses to retail stores, whereas there are thousands of unlicensed pot shops scattered across the city. Since these sellers are not subjected to any taxes, they sell at a much cheaper price, and by so doing undermine the legal market. These illicit shops break the law blatantly, because regulations are quite lenient on them. They neither pay taxes nor the cost of legal services needed to stay in line with the law, nor are they subjected to quality checks to ensure that they’re selling toxin-free products.
While this article highlights the negatives currently plaguing the Californian cannabis industry, there are also numerous positives that New Zealanders can learn from. The ultimate lesson that New Zealand can learn from California’s convoluted cannabis regulation is that there is a need for measures that will lure users away from the black market into the legal market, and that might imply laws that give legal cannabis businesses a competitive edge, rather than unbearable tax burdens.