Our staff wrote this brief commentary as an observation relating to the state of California’s cannabis industry. The principles that produce financial efficiency for California’s cannabis industry are equally applicable in other states regardless of the status of cannabis as medical or recreational or both. Financially efficient operations are universally essential for success in business. We specialize in assisting in the creation of financially efficient business operations.
We want to first describe some of our qualifications for writing this article. As our regular readers know, we provide professional advice and assistance to businesses. We create financial efficiency through a minimization of the taxes local, state, and federal governments take from businesses. Government is the unwanted partner of every business. We developed a special interest in California’s cannabis industry because the total tax load approaches 50% of the total amount a consumer pays for cannabis.
Our interest in California’s cannabis industry extends far beyond taxes. We have a substantial personal and historical perspective relating to cannabis in California. Members of our staff have been involved in California’s cannabis industry since Haight-Ashbury was the place to be in the mid-1960s. Members of our team have witnessed both the damage and the benefit of cannabis. Members of our staff have observed first-hand the injuries the federal government has caused through misguided, oppressive, and racist policies relating to cannabis.
Cannabis is a dangerous drug. Greed is also a dangerous drug. The combination of these two drugs is the principal reason for the chaos in California ‘s cannabis industry. Of these two drugs, greed is the more dangerous. Greed is insidious. The impacts of greed are more difficult to contain. Greed has no redeeming aspects unless success in building an empire large or small is such an aspect. Cannabis in comparison has substantial value as a medicine.
First, a comment regarding greed. Greed for personal or political power is more insidious than the mere monetary greed. Monetary greed is a powerful force in California’s cannabis industry. Monetary greed, of course, goes hand in hand with political power. Many conservative politicians in California became quite amenable to allowing the cultivation, distribution, and sale of cannabis when it was coupled with the promise of substantial tax revenue. When political supporters were in-line to reap the financial benefits of legalization, the merits of legalization became obvious to the most conservative subject, of course, to appropriate regulatory control.
Before we get to the principal reason for this article, we must comment on an aspect of greed that is frequently overlooked as a cause of the chaos in California’s cannabis industry. Many have pointed out that one of the reasons for the chaos in the industry is excessive and oppressive regulations. Why did California adopt unnecessarily oppressive regulations? Greed. If success for CalCannabis were to be measured by the percentage of cultivators the agency has licensed, which is the proper measure for determining success for CalCannabis, the agency has wholly failed.
Why did CalCannabis fail? The actions of CalCannabis represent an overlooked form of greed – administrative empire-building. The more questions that must be answered to secure a license, the more boxes checked and the more documents that must be submitted, the more staff and budget is necessary for an agency to complete its regulatory task. Short-sighted and ill-considered decisions relating to California’s cannabis regulatory agencies started the ball rolling. The chaos will continue until sound leadership and an exercise of sound judgment coupled with appropriate funding, ends the empire-building and requires performance from California’s cannabis regulatory agencies.
CalCannabis failed miserably in its task. The Bureau of Cannabis Control (“BCC”) and the California Department of Tax and Fee Administration (“CDTFA”) performed almost as poorly. If, for no other reason, BCC deserves a “D-” for its failure to guide and direct CalCannabis. BCC is the agency with overall supervisory responsibility for the regulation of California’s cannabis industry. BCC is ultimately responsible for every error made in connection with California’s regulation of its cannabis industry. BCC, of course, made numerous errors in judgment in its own right.
CDTFA deserves a “D-” for its failure to utilize its many resources. CDTFA is likely second solely to the IRS in its knowledge and experience relating to tax administration. CDTFA has a generally more talented staff than the IRS. CDTFA was tasked with the administration of two new taxes – Cannabis Cultivation Tax (“CCT”) and Cannabis Excise Tax (“CET”). Each of these new taxes differed in some respects from any other taxes administered by CDTFA.
CDTFA failed to devote the knowledge and experience available within the agency to the development of systems and processes specifically designed to address the unique aspects of these two new taxes. As a consequence, CDTFA is not receiving all of the CCT and CET it should be collecting. CDTFA is not receiving all of the CCT and CET that is being collected from cannabis consumers. Further, CDTFA cannot readily determine the source of the funds it is presently receiving as CCT and CET. CDTFA failed almost as badly as CalCannabis. Of course, BCC is ultimately responsible for the inadequate performance of CDTFA.
Enough ranting about the incompetence of California’s cannabis regulatory agencies. Should we blame the Legislature? No. The Legislature is just a tool. The Legislature responds to pressures that are likely to assure the reelection of legislators. Should we blame Proposition 64? No. It is too late. We opposed Proposition 64, but it passed notwithstanding our opposition.
If any group has principal responsibility for the chaos in California’s cannabis industry, it is the participants in the industry and its leaders. From outlaw growers to the most responsible dispensaries, the industry and the leaders of the industry are as responsible for the chaos as Proposition 64, or the Legislature, or the cannabis regulatory agencies, or local governmental agencies.
The participants in the industry will always follow a path of limited resistance. As long as it is far easier to make a living without being in full compliance with the law, many will skirt compliance with the law. It is leaders of this industry that have truly failed the industry. They have done so out of greed and self-interest. The leaders of California’s cannabis industry have failed to utilize the tools that are readily available. The leaders of the industry clamor for additional legislation to solve problems, but with every change comes additional complexity. Further legislation is not necessary. The tools for financially efficient, fully-complaint business operations are already available for the well-advised.
One of the reasons for writing this article is to point out Legislature has made two significant changes to California tax laws relating to cannabis – SB 34 and AB 37. AB 37 eliminates the partial conformity of California tax law with §280E. AB 37 will have a limited impact in the long-run. California’s limited conformity with §280E has only a limited impact on California’s cannabis industry for the reasons discussed in the paragraph that follows.
Tried and true tax avoidance techniques have always existed to minimize the impact of IRC §280E for the well-advised. Unfortunately for the industry, the leading tax advisors in the industry would rather “fight than switch.” A substantial part of the adverse impact of IRC §280E is easily avoided through appropriate accounting and record-keeping techniques. Additional aspects of the adverse tax impact of §280E can be prevented through changes to operating structures that can be utilized in many states, including California.
SB 34 eliminates CCT and CET for specific cannabis programs administered by local governmental agencies. SB 34 will have a substantial impact on how businesses operate in California’s cannabis industry in the long-term. SB 34 makes an important addition to the arsenal of financial advantages that flow from the movement of cannabis from cultivators to consumers as medical cannabis. We have pointed out on multiple occasions the economic benefits that exist from conducting cannabis activities in the medical space in California. SB 34 makes a significant addition to the advantage of medical cannabis for the well-advised.
The Legislature created Cannabis Cooperative Associations (“CCAs”), a special form of corporation, for California’s cannabis industry. CCAs provide a financially more efficient structure for the conduct of any commercial cannabis activity in California than any conventional business structure. Every California cannabis business should investigate how it can utilize the umbrella of a CCA to increase the profitability of the commercial cannabis activity for the owners. Few of the leaders of California’s cannabis industry have taken the time to carefully study this legislation. As a consequence, it will be several years before the benefits of this operating structure are generally understood in the industry.
We have yet to examine the operations of a California cannabis business for which we cannot create substantial financial benefits through adjustments to its systems and processes for the conduct of business. Last week we visited a newly opened cannabis dispensary to examine its wares and observe its operations. We purchased some cannabis in order to secure a receipt. We estimate based on our casual investigation of this new dispensary that we can save the operators over $15K per month before taxes through some minor adjustments to the dispensary’s record-keeping.
California’s cannabis industry has entered into a period of survival. There are far too many players at every level in California’s cannabis industry. The legislation already exists for the well-advised to survive. Additional legislation will merely prolong the period of failure for most who find they cannot succeed with the tools already available.