California’s Legal Weed Is So Heavily Taxed and Regulated That the Black Market Might Survive

As of January 2018, anyone over the age of 21 can walk into a store in California and pick up some marijuana All you need is some cash or a credit card

To learn more about how legalized recreational cannabis sales work we tracked a product up the supply chain from seed to sale And we talked to cannabis entrepreneurs along the way to find out what's changed for them operating in a legal state market And what we found was surprising excitement, yes, but also anxiety about the future of the legal market under California's highly regulated and highly taxed system And industry insiders told us that if the legal market remains so overtaxed and overregulated the black market will continue to stay in business The story ends with the sale of the Kiva bar, the product of a company run by a husband and wife team who began working out of their Oakland kitchen

But let's start at the beginning about 100 miles away at Riverview Farms which two years ago converted from poinsettias to pot It's been a family owned business for 20 years with daughter Michelle Hackett currently serving as president This is the agricultural capitol of the world, fresh vegetables come out of this growing region, we also have great pinot noir grapes coming out of this region There's no reason why cannabis shouldn't be cultivated here Hackett is excited for the future of the market, but under immense pressure from the increased regulation and taxation that kicked in at the beginning of the year

Riverview holds 16 different cultivation licenses to grow this amount of cannabis as well as 2 distribution licenses to transport medical and recreational cannabis to retailers and manufacturers They pay a harvest tax of $925 per dry weight ounce of cannabis flower that enters the commercial market Hackett says that compliance costs have driven up prices across the state I think it's greed

People are looking for a handout and are thinking that we're weed people, we must be making all this money, but really we're running this like a farm, or another agricultural operation in the same community wanting to be treated the same The greenhouses here hold plants at all stages of development culminating in mature plants ready for harvest every 2 to 4 weeks Then workers hang the cannabis to dry before it's ready to be cut and sent to market But Hackett says that while business was booming in the era of medical cannabis legalization strict licensure requirements have shrunk her customer base significantly since recreational legalization went into effect We have to protect our license so the only business we want to do is with other licensed retailers, distributors, delivery services

In the past you had a customer list of, say, maybe 300, right now maybe you're working with 50 It's the green boom and people are wanting to jump on the bandwagon and see if they can profit from this industry but I think what people will realize is that it takes a lot of work Our next stop is Kiva's manufacturing facility in Oakland a chocolate factory with one extra ingredient People want a product they can trust and rely on and so in the sort of gray market of California we were really able to stand out by producing something that was clean and consistent every single time Edible marijuana has provoked media stories of hospitalizations and meltdowns with New York Times columnist Maureen Dowd once penning a column about the time she ate cannabis infused chocolate and freaked out in a Colorado hotel room shortly after legalization

But Kiva bars are hand packaged into distinctive wrappers that foreground the psychoactive THC content in big bold numbers so that users know exactly how much they're consuming with each bite The packaging and labelling on Kiva products is extremely important We treat every package essentially like a billboard The education process around cannabis and consumers learning dosing is gonna take a while until people have the same familiarity with cannabis dosing as they do with alcohol for example Knoblich Palmer says that although the customer base for marijuana has increased tenfold since recreational legalization that the increased taxes and regulation have forced the company to make layoffs in recent months

The situation in the market right now is pretty dire Right now there's a few hundred licenses in 2017 there were maybe 20 to 30 thousand operators so we've seen a significant drop in the number of people allowed to operate in the market Taxes are a big component of the new market there are essentially four times that the cannabis is taxed It's surprising that with the legal market in California that companies are experiencing less volume and less demand and that has everything to do with the cost of cannabis, the price of cannabis to the end consumer Our company has unfortunately had to do a layoff for the first time in our company's history

We were all really excited and kind of promised a really healthy, robust cannabis marketplace We're all sort of hanging on for our lives Noblich Palmer says she's still optimistic about the future of the industry, but that some major reforms still need to happen in order for a legal market to outcompete the black market The end consumer is walking into a regulated store and seeing prices up here and then they're walking into an unregulated store, or they're calling their guy and they're seeing prices down here So the unregulated market really has the potential to derail the entire system because it's undercutting all the legal operators at every opportunity

Our next stop is at PharmLabs, a testing facility in Long Beach Before legal weed makes it to market in California the new law requires testing for purity and potency Often several times if the cannabis is part of a manufactured product It's one of many cannabis labs that existed long before the state required testing since many companies, such as Kiva, underwent voluntary testing as a way to set their products apart from the competition The states don't have enough resources to provide testing services

I think we're really filling in a gap, these labs that have been here from the beginning Dr Robert Brodnick is the research director at this lab and has a background in counternarcotics at the Department of Defense He says his mind changed when he saw that cannabis could be a less harmful alternative to other drugs Cannabis is a potential way to mitigate or offset some of the dangers of opioid abuse

This view is in stark contrast to that of Attorney General Jeff Sessions who buys into the marijuana as gateway drug argument Heroin addiction starts with prescriptions We think a lot of this is starting with marijuana and other drugs too Studies are still limited, but preliminary data do show that states with legal marijuana tend to have lower rates of opioid addiction and overdose deaths And while testing should make cannabis products even safer for consumers, Magdoff worries that California's testing standards are a little too stringent

I think it's gonna be a rough start for California with the amount of products that are gonna fail The pesticide thresholds are very stringent here Cannabis is the most tested agricultural commodity at this point For California cannabis industry to be successful there needs to be kind of a middle ground The final destination is, of course, the storefront

Known for years and years in California as the dispensary We visited A Green Alternative in San Diego just minutes from the border and, ironically, down the road from the Drug Enforcement Administration offices The store counts Kiva as one of its top sellers and owner Zachary Lazarus says he's seen a definite spike in sales post recreational legalization The difference between operating medicinally versus recreationally is you have a plethora of people that have come out of the woodwork, have come out of the closet, that are so happy to be able to consume cannabis for the first time or to re look at it since their college or high school days But, like the other business owners we spoke with, he says that regulations are still too tight, taxes too high, and worries that local governments are too involved in picking winners and losers in the market with the licensing system

It seems like there's a lot of barriers to entry right now but that doesn't have to be that way Yes we need strict compliance and we need accountability but we also need to give all those mom and pop shop owners an opportunity a chance to give back with taxation, a chance to grow jobs and a chance to really contribute to the cannabis community And like everyone in the cannabis industry, Lazarus still lives under the dark cloud of federal prohibition Stores like his still have trouble even opening bank accounts We don't have a fair shake when it comes to being able to transact and do it above board like everybody else

Issues with the banking system and fear of federal crackdowns were a consistent theme every step of the way It's scary, I'm not gonna lie, it's a huge issue for us in terms of banking Having us federally legal would take a huge, you know, weight off my shoulder Cannabis being illegal at the federal level is certainly a challenge that the industry thinks about on a daily basis It's a natural governor of the growth potential of the industry

The words coming out of Jeff Sessions' mouth, to me, is like the words coming out of Anslinger's mouth back in the 1930s You have a lot of criticism and you have a lot of ignorance that really doesn't understand an industry When you don't understand something you tend to criticize it But despite lingering uncertainty, everyone along the supply chain remained optimistic that there will be regulatory reforms in California and eventual legalization nationwide The cat's out of the bag

More people in this country live in a state with some type of cannabis regulation now so I really feel there's no going back It's not going away, so they might as well regulate it and capitalize on the tax money The whole state really wants this with 37 and a half million people in our state you really can't go backwards I mean, that's just reality California's going to recreational market is a huge win for the industry for the cannabis plant overall It will really help cannabis become more mainstream, allow more people to have access to it and really further the movement in a way that we probably have never seen before