On Tuesday, the Sacramento Bee reported that in the first few months of legalized adult-use, gross retail sales of cannabis is about 13% or $44 million lower than original state estimates. While this may seem disconcerting to some, there are several key caveats to the data.
First, licensing agencies are currently in the process of reviewing and approving temporary and annual licenses for businesses across the supply chain. In the 2017-18 California State Budget, the Legislature approved several million dollars and hundreds of positions to staff the three main licensing agencies and various support departments. Despite this influx of resources, the state is currently in the process of hiring the necessary staff to process the thousands of applications received since January 1. As the state hires additional staff, the industry can expect to see more licenses approved and a potential increase in overall amount of retail sales.
Second, many in the industry cite the high regulatory fees and tax rates as a serious impediment for businesses that seek to enter into the legal market. As we covered here, several California legislators have called for an immediate and temporary reduction in the cultivation and excise tax rate with the intent of leveling the playing field for business in the legal market. The California Growers Association estimates that with tax rates averaging between 40% – 60%, legal retailers find it extremely difficult to compete with the illicit market. AB 3157, which attempts to provide some relief by suspending the cultivation tax and lowering the excise tax from 15% to 11% for three years, is up for its first committee hearing April 23, in the Assembly Revenue and Taxation Committee.
Finally, the refusal of local governments in many parts of the state to allow cannabis businesses to operate has created what some have called a “pot desert.” On Tuesday, the OC Register unveiled a database that showed that nearly one in seven California cities had approved the retail sale of cannabis within their boundaries. The data also showed that in certain parts of the state, consumers are required to travel fifty miles or more to purchase from a licensed or recreational retailer. This inability for consumers to purchase cannabis products from licensed retailers close to home frustrates efforts to create a truly statewide legal adult-use system.
Despite the seemingly lower than expected economic activity in the newly legal cannabis market, there is reason to be optimistic for the foreseeable future. Stayed tuned for future updates on the status of the California’s cannabis industry.