The Colossal Cannabis Fiasco

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AUTHOR: “Jordan Zoot. “aBIZinaBOX Inc., CPA’s“
PUBLISHER: CANNABIS LAW REPORT

What is really happening in California’s cannabis industry? What sources are reliable? Is anyone’s opinion reliable? What opinions are worthwhile? What opinions are useful? Why is so much garbage published? What is fake news? How inaccurate must news be to be “fake news”? Is California’s cannabis industry booming or busting? The answer to the last question is easy. The answer to the last question is wholly dependent on who you ask. This is the reason we asked so many introductory questions.

California Governor Gavin Newsom has just announced a cut-back of an additional $223M in the revenue projections from the taxation of California’s regulated cannabis industry. That is a fact on which you can rely. [See California marijuana sales a far cry from state’s projections]
Millions of dollars are flowing into California’s cannabis industry from outside the State. That is another reliable fact. [See Looking For Big Returns In The Cannabis Market? Look East, Not West]
Thousands of cultivators are abandoning the industry. That is a fact. Look at the changes in real estate prices in Humboldt County over the last year. [See ‘THEY’RE DROPPING LIKE FLIES,’ CLAIMS ARTICLE WRITTEN BY MENDOCINO FARMER REFERRING TO GROWERS LEAVING THE BUSINESS]
Look at the changes in real estate prices in Humboldt County over the last year. California’s underground cannabis industry is thriving. Anyone with access to the internet knows California’s underground cannabis industry is thriving. [See California’s black market for pot is stifling legal sales. Now the governor wants to step up enforcement]

What is the reason the transition of California’s cannabis industry into a regulated industry has gone so far off-course? California’s transition has gone off-course because its roll-out of regulation was botched. California’s roll-out of regulation has proved a colossal fiasco. Why?
Not surprisingly, there are almost as many different opinions regarding the reason for this fiasco as there are opinions. Why are there so many differing opinions? That is an easy question. The reason there are so many opinions is that most of the opinions are partly right and partly wrong. Most are simplistic. Many are not particularly thoughtful. The problem that faces anyone who is interested in correcting the many problems created by California’s roll-out of cannabis regulation is that those who are most vocal in promoting their opinions are usually far more wrong than right.

As we will explain in this article, the number one reason California’s roll-out of cannabis regulation is a fiasco lies on the doorsteps of three of California agencies: the Bureau of Cannabis Control (“BCC”); CalCannabis, which is a Division of the California Department of Food and Agriculture that was established to regulate the cultivation of cannabis; and the California Department of Tax and Fee Administration (“CDTFA”). We have referred to these three organizations as agencies, although the term may not be technically correct. One obvious problem that has jumped out at us in writing this article is that some of the difficulties could have been avoided through the establishment of clear lines of responsibility and authority.

Please do not misinterpret the preceding statement. California’s roll-out of cannabis regulation would have been problematic even if the agencies involved in the roll-out had not proved so inept. Proposition 64 was ill-conceived, and poorly written. California’s difficulties with the regulation of its cannabis industry were portended by the passage of Proposition 64. BCC, CDTFA and CalCannabis have turned a challenging regulatory project into a colossal fiasco through bureaucratic ineptitude.

We want to first spend a little time discussing some of the reasons to which others have pointed as the reasons for this colossal fiasco. Excessive taxes on cannabis is the reason that appears to be highest on the list of many – at least many of the most vocal. While the taxes imposed on cannabis may be higher than would be optimal from a number of perspectives, the taxes on cannabis have had little impact on California’s lack of success in its roll-out of regulation. Excessive taxes on cannabis at most have had a modest indirect impact on California’s lack of success in its roll-out of regulation. This complaint is primarily a diversion because such complaints are always well-received.

California’s political leaders are, of course, not pleased tax revenues are lagging, but excessive taxes are not the cause. The same political leaders who are dismayed with the lack of tax revenue share in responsibility for the roll-out fiasco. The administrative agencies the legislature created and funded are the principal reason for this fiasco. The California legislature and the Office of the Governor share in responsibility for this fiasco because they have allowed BCC, CDTFA and CalCannabis to run amuck. CDTFA’s failure to properly prepare to administer the collection of two new taxes is far more a cause of the shortfall in revenue than excessive tax rates.

All of the taxes imposed on cannabis in California, whether directly or indirectly, are paid by consumers. Consumers complain because taxes on cannabis have caused dramatic price increases. The complaints of cannabis consumers are justified. The other groups that complain about excessive taxes – dispensaries, distributors, manufacturers and cultivators – are complaining because taxes cut into profits. From the perspective of a taxpayer only proper taxes are those that others pay.

The additional taxes imposed on cannabis make it more difficult for dispensaries, distributors, manufacturers and cultivators to make money in California’s cannabis industry. Lower taxes on cannabis will make it easier make money in the industry. The dispensaries, distributors, manufacturers and cultivators that complain about excessive taxes must, however, be divided into two camps – those with substantial experience in California’s cannabis industry, and those who are newcomers to the industry.

The newcomers to California’s cannabis industry jumped into the industry in order to make money. These newcomers would like to see tax rates reduced because it will be easier to make money. Those who have been active in California’s cannabis industry for a significant amount of time are being forced to adjust to a new business environment. This group is discovering that it is far more difficult to make money in a business endeavour when you must report all of income and share all profits with the government.

As we have already mentioned, improvements by CDTFA in its administration of the cannabis tax laws will accomplish far more to correct the disruptions and disparities caused by excessive taxes than any reduction in cannabis tax rates. We have already written extensively regarding the changes CDTFA must make in order to efficiently administer cannabis taxes. [See Collecting Reporting – Remitting Tax]

The complaints of dispensaries, distributors, manufacturers and cultivators relating to excessive taxes usually morph into a call for greater enforcement against the underground industry. The argument, of course, is the underground can undersell the regulated industry because taxes are evaded. Some argue more enforcement is the solution. Will more enforcement curb the underground market? Yes. Is more enforcement the solution? No.

Enforcement is increasing at all levels. Enforcement has a significant impact on California’s underground cannabis market, but it is not a panacea. Please recall that when enforcement of cannabis laws was at its height in California, when the federal government sent Marines into Humboldt County, California’s underground cannabis was not curbed. It continued to thrive. Local legend recalls that Humboldt County growers captured a squadron of Marines, took their guns away, and sent them back home. Of course, that is just a legend.

A judicious enforcement of existing cannabis laws – both civil and criminal – will curb egregious conduct in the underground cannabis industry. At this time the largest hew and cry regarding the impact of the underground cannabis industry is focused on cannabis delivery services. Non-compliant delivery services will have a relatively short life-span. An electronic record exists of substantially all underground delivery transactions. Most criminal laws have a statute of limitations of several years. Civil statutes of limitation relating to tax liabilities are generally longer. If there is a failure to file a tax return or fraud, there will generally be no statute of limitations for the assessment of additional tax liabilities.

CDTFA will eventually get its act together. It will take some time, but all non-compliant cannabis delivery services will eventually be eliminated. Some operators will be jailed. Many will pay taxes they erroneously believed they would not have to pay. Many will find something else to do when a taxing agency comes calling. California will, however, have a substantial underground cannabis industry unless and until Proposition 215 is repealed. A repeal of Proposition 215 is nowhere on the horizon so California will always have a significant underground cannabis industry. Further, medical cannabis will arise again in California like the Phoenix as we have said on other occasions. [See Keeping The Promise of Proposition 215]

Many point to over-regulation as the reason California’s roll-out of cannabis regulation is a fiasco. Over-regulation is the cause of this fiasco, but not for the reasons most have pointed to over-regulation. The legal foundation for over-regulation is, unfortunately, set forth in detail in Proposition 64. California voters passed an ill-conceived, badly written amendment to the California Constitution. Californians are stuck with the legal foundation for the over-regulation of California’s cannabis industry because it specified in Proposition 64. The United States Constitution trumps the California Constitution, but there is little solace there for Californians. The California legislature can pass laws to implement the California Constitution, but the legislature cannot nullify the California Constitution.

The California legislature has tried to cobble together legislation to establish a legal framework for the effective implementation of Proposition 64. Every session of the legislature since the passage of Proposition 64 has brought multiple pieces of legislation to adjust, correct and accommodate. This process will continue for a number of years. It is, however, the ineptitude with which BCC, CDTFA and CalCannabis have implemented California’s roll-out of cannabis regulation that is the principal reason regulation of California’s cannabis industry is THE COLOSSAL CANNABIS FIASCO!

The three identified agencies have failed both California’s citizens and California’s cannabis industry. In other articles we will specifically address the reasons these three agencies have failed so very badly in their implementation of cannabis regulation.

We find it interesting that the failures of each of these agencies arise from different inadequacies. BCC failed to provide adequate guidance, coordination and oversight. CDTFA failed to devote sufficient analysis to California’s cannabis industry and the two new taxes created by Proposition 64 to develop effective administrative systems and procedures. [See Helping CDTFA Fill Blackholes] CalCannabis engaged in bureaucratic empire-building without developing an understanding of the industry and its proper role in the regulatory scheme. [See Reasonable Rules]

It is unlikely we will ever voice an opinion on which agency performed the worst. All appear to have badly blundered.

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