Local cannabis business leaders outline an industry at the crossroads

These eight cannabis business leaders in the North Bay answer our Q&A about the status of the industry.

Answers have been edited for space and clarity

Regulatory and tax issues have resulted in many cannabis companies going out of business. Do you foresee this trend continuing?

Haley Andrew: Unfortunately, many experts anticipated this trend in the California cannabis industry when Prop 64 was passed. The bill left too much control with local municipalities while also imposing steep taxation requirements from the state. What we’re seeing in the cannabis economy is that large, corporate-backed companies are still succeeding, while mom-and-pop shops are struggling to keep their doors open.

I do not see this leveling off; in fact, it will likely get worse. We will see more mom-and-pop dispensaries close their doors or sell for pennies on the dollar. If federal legalization occurs, many experts believe that large corporate companies will buy out these smaller businesses, leading to a monopolization of the cannabis market.

To keep mom-and-pop shops alive, state and local governments need to provide aid to the companies that truly need it. Small business operators are the ones who give back to the community the most. They generally live and operate their businesses in the same city, so they tend to be more involved and have a greater level of community engagement.

Leigh Anne Baker: The trend of cannabis businesses struggling under the weight of regulatory and tax burdens is likely to continue unless significant changes are made. In Sonoma County, the impact has been particularly severe, as highlighted by the 2022 Sonoma County Crop Report, which showed an 81.5% reduction in cannabis cultivation acreage and an 80.5% decrease in production.

This dramatic decline is largely due to stringent cultivation requirements, excessive fees, and complex regulations that have made it nearly impossible for small farmers to remain viable.

On the retail side, consumers face steep taxes when purchasing regulated cannabis products. In Cotati, the total tax rate for customers is 27.5%, while in Santa Rosa, it’s 27.25%. These rates include city, county, and state cannabis taxes, along with special local taxes. The heavy tax burden not only drives up the cost for consumers but also makes it challenging for legal businesses to compete with the illicit market, where prices are often significantly lower due to the lack of regulatory compliance.

At JANE Dispensary, we take pride in offering local Sonoma County products, but the number of licensed growers has plummeted making it increasingly difficult to source local products. Many legacy farmers have exited the regulated market because the current system is unsustainable for them. Without meaningful reform, including the reduction of fees, taxes, and regulatory hurdles, I expect this trend to continue, with more businesses being forced out of the industry.

Sam Hayawi: It is expected that the trend of cannabis companies facing closure because of regulatory and tax problems will continue for the next three to five years, but there could be a stabilization as the industry grows more mature.

Many different elements play a role in the difficulties experienced by cannabis companies. They face a complex network of state and local regulations that can vary greatly and must be carefully navigated. This results in operational and compliance difficulties that may come with a high cost and takes up a lot of time.

Tax responsibilities, Section 280E of the federal tax code prevents cannabis companies from deducting regular business expenses due to cannabis’ classification as a Schedule I controlled substance. This leads to increased effective tax rates, putting pressure on profit margins.

Overcrowding and rivalry in the market, in certain areas, increased market saturation has heightened rivalry, posing a challenge for smaller or underfunded businesses to stay afloat. In Santa Rosa, there are more than 24 dispensaries, it makes it very hard to compete and be different from the competition.

Capital accessibility, even with recent advancements, cannabis companies continue to struggle with restricted availability of conventional banking and financing, which poses challenges during economic slowdowns and expansion efforts.