November 27, 2018

How Will Increases in Taxation on Commercial Cannabis Operations Impact the Black Market?


On November 6th, voters across California faced dozens of cannabis-related ballot measures in local elections. The California Cannabis Industry Association (CCIA) provided a convenient rundown of the initiatives up for approval and the results of each vote. Many of the measures put to voters involved whether to implement local taxes on cannabis businesses. Such proposals are generally affirmed by comfortable margins, and this year’s elections in California proved no different, with only a few such measures failing to gain the approval of voters.

Market participants in California’s developing regulated system have complained that the combination of state and local taxes, in addition to other compliance costs, makes their products noncompetitive with those from unlicensed sources regarding price. However, the upside of the approval of some of the tax measures could be the expansion of the state’s licensed system. Local governments frequently seek to obtain a revenue stream that can be employed to cover the costs of regulating the industry prior to adopting rules to license and oversee businesses in their jurisdiction.

With tax measures in place, it is possible that some municipalities that have maintained moratoriums on commercial cannabis activity to this point could begin to construct ordinances to permit such businesses. However, whether local governments move to formulate and implement regulations to govern commercial cannabis – and whether they do so in a timely manner – remains to be seen.

On the state level, cultivators that are hoping to gain temporary licenses prior to the end of this year must submit their applications to the California Department of Food and Agriculture (CDFA) by December 1st, according to a fact sheet from the department. If a business does not have a temporary (or annual) license in hand by the end of this year, they will technically be operating illegally come the commencement of 2019 and could face enforcement action.

Businesses that have temporary licenses will be able to extend them for up to 90 days into 2019, depending on when the temporary permit was issued, and apply for a provisional license after that if they have not been approved for an annual license by the time the temporary one expires. Provisional licenses will be good for 12 months, but one must have a temporary license and have submitted their application for an annual license in full in order to obtain one. Those businesses that hope to enter the licensed market, but enter 2019 without a temporary license, will have to qualify for an annual license outright in order to do so, a much more difficult task than meeting the requirements for a temporary permit.

Existing operations that have not yet received a temporary license by the end of this year will likely have to wait for a significant period – months, perhaps – before receiving an annual license next year. Some businesses have not been able to receive a temporary permit due to an inability to gain local approval.

Additionally, operations that have temporary licenses, but cannot meet the requirements to submit a full application for an annual license, could be forced to drop out of the regulated market when their temporary permits expire in early 2019. Such a scenario could result in a contraction in the number of wholesale sellers and buyers able to do business in California’s licensed system, although how supply and demand might be affected is unclear at this point.