California cannabis vs hemp debate plays out in state tax revenue numbers

Two days before California Gov. Gavin Newsom proposed an emergency order to regulate easy access to “intoxicating hemp,” the state released cannabis tax results for the second quarter.

The tax rolls show an industry that’s continuing to a decline in revenue year over year as it competes with hemp.

The two communities that derive their products from plants are currently vying over a limited market in California that’s perceived as a stalemate due to heavy, untaxed competition.

Total cannabis tax revenue for the period ending June 30 came in as $263.1 million, about $100 million less than the returns from three years ago.

Sales tax revenue didn’t fare much better for cannabis when singled out. This past quarter added up to $108.7 million, down by over 9% year over year. It has plunged by $30 million in the last three years.

Cannabis taxable sales — which are the actual receipts for goods — amounted to $1 billion in the second quarter. That’s down by a third when 2021 brought in $1.5 billion for those three months, according to the state tax rolls.

“It’s certainly an indicator of where the industry is. The illicit market is not taxed and not regulated. On top of that, the unregulated hemp market is out of control,” Solful CEO Eli Melrod said, citing hemp products sold at Bev Mo and delivered by Door Dash as “outrageous to suggest that was anybody’s intent.”

The cannabis community blames a few factors on declining sales and less revenue. For one thing, it cites competition from the illicit marijuana market.

More recently, the cannabis community points to the hemp industry cutting into cannabis profit margins. Critics claim hemp products have become more plentiful in retail outlets and more intoxicating with rising levels of THC.

Three years ago, Newsom signed into law regulations that limit the concentration of THC in hemp beverages and food at 0.3%. Labeling restrictions were also imposed. But critics claim producers have found a way to circumvent the law. Since then, the products’ popularity has grown immensely, critics add.

Cannabis advocates, including its state industry association, want a more even playing field, regulating hemp product content and requiring it to be sold in dispensaries with cannabis.

“When the California voters passed Prop. 64, legalizing the adult use of cannabis, they were really clear that they wanted it carefully regulated and taxed,” said Tiffany Devitt, government affairs chief at CannaCraft, a distributor in Santa Rosa.

Newsom introduced emergency regulations this month banning hemp sold with detectable levels of THC, the primary ingredient that delivers a high.

Once the emergency order is approved by the state Office of Administrative Law, the regulations would require that such products contain no detectable levels of THC.

Packaged products would also be limited to five servings, and sales would be restricted to those aged over 21 — restrictions Youth Forward, a youth public safety advocacy group based in Sacramento, supports.

The nonprofit claims the hemp industry is appealing to youngsters seeking an easy high.

“On Oct. 28 of 2023, I purchased a jar of intoxicating hemp edibles (near a high school) made to look like a Hawaiian Punch pineapple gummy product,” Youth Forward Executive Director Jim Keddy wrote in a letter supporting Assembly Bill 2223.

But last session’s hemp-restricting legislation, authored by California Assemblywoman Cecilia Aguiar-Curry, D-Winters, failed in the Appropriations Committee, when the session ended Aug. 31.

Curry admitted to being “very disappointed,” given the massive negotiations on both sides and several reiterations of the now-defunct bill that spanned 44 pages of amendments.

“Was I surprised? Absolutely. I’ve had families come into my office in tears, complaining their kids are drinking these products,” she said. “I tried to get the Senate engaged. But I’m a bulldog and not giving up. We’ll be coming back to work with the industry.”

The state Legislature begins to work on its proposed bills in November for the upcoming January session.

California Cannabis Industry Association (CCIA) spokeswoman Amy O’Gorman Jenkins, speaking on behalf of the board, called it a misstep in “killing a bill that would provide protection for consumers and secure the future” of the cannabis industry.

“Since 2021, we’ve seen a nearly 20% decline in cannabis tax revenues, while an untaxed and untested hemp market sidesteps every critical measure the state has put in place to regulate this plant,” she said. “Everyone should be alarmed by this outcome. The (CCIA) remains resolute in our commitment to correct this failure.”