Why Are Small Cannabis Businesses Hemorrhaging Profits?

Why Are Small Cannabis Businesses Hemorrhaging Profits?

Small Farms Suffer While California’s Black Market Thrives

Two decades after legalizing medicinal marijuana, California became the 9th U.S. state to legalize recreational cannabis in 2016. Many Californians perceived this milestone optimistically, eager for the opportunity to make a name for themselves in what appeared to be a very profitable industry.

However, optimism has dwindled fast as the state of California continues to face considerable backlash from all sides. Many citizens have expressed frustrations regarding the force of nature that is the underground cannabis market, allowing illicit sales to skyrocket while many legal operations are struggling to keep their heads above water.

Those in the legal cannabis industry are demanding answers from policymakers, calling for effective solutions to aid the ailing cannabis industry—and perhaps rightfully so. The allegedly lucrative cannabis market was expected to thrive (or at least slightly improve) following its legalization.

Today, 6 years after legalization, only 26% of licensed cannabis business owners in the state are turning a profit. Many cannabis businesses are hemorrhaging money thanks to a formidable “triple threat” of high taxes, baffling regulations, and an extensive underground cannabis market that is estimated at $8 billion.

Why Is California’s Illicit Cannabis Market Still Kicking?

The brutal 6-year-long massacre of the cannabis industry in California has left many in need of answers. The expectation for illicit cannabis operations to dissipate after legalization makes perfect sense to many.

After all, the black market only existed because its sales were illegal in the first place. In theory, the purpose of underground cannabis trade should cease to exist. Right?

Unfortunately, this has not been the case. State officials in California were in for a rude awakening as the cannabis industry plunged into crisis following legalization in 2016. In the last year alone, law officials have seized over half a million pounds of illegal cannabis estimated at $1 billion.

Despite these astonishing figures, the underground cannabis market continues to flourish while legal operations find themselves struggling to stay afloat in the so-called lucrative cannabis market. To be fair, data supports that the market is lucrative—just not for licensed cannabis business owners.

However, you may want to think twice before blaming the black market for California’s cannabis crisis. While illicit marijuana trade is largely responsible for many problems within the cannabis industry, some participants might just earn your sympathy.

A number of licensed cannabis business owners in the state have admitted to frequenting both realms, facilitating illicit and legal sales just to break even. Considering a cannabis retail license costs as much as $100,000 a year, it might be hard to blame them, especially in light of the action (or lack thereof) the state has taken to even the playing field since 2016.

There are a few key theories as to why the underground cannabis market continues to flourish while licensees suffer or even lose their business:

  • When it comes to cannabis taxes, California has some of the highest rates in the nation. In some regions, tax rates soar as high as 50%. The issue is compounded when local governments stack additional taxes on top of state ones, imposing more financial strain on licensed cannabis businesses.
  • Ineffective regulations. The ever-changing state regulations regarding marijuana production and sales are more than baffling. Restrictions tend to disproportionately affect smaller businesses and farms, not to mention unincorporated communities, female-run businesses, and BIPOC-owned operations. Many licensed cannabis business owners struggle to keep up with a revolving door of new policies and regulations that often do legal businesses more harm than good.
  • The losing battle against “corporate cannabis.” The concept of “big business” in modern America is nothing new. For decades, smaller businesses have suffered at the hands of larger, richer, more powerful entities that tend to dominate entire markets. Companies like Amazon and Facebook (or “Meta,” if you tuned into Zuckerberg’s sneaky attempt to rebrand) aren’t the only power-hungry beasts out there. The same problem is seen in the cannabis industry as small farms continue to fall out of the competition, unable to keep up with the advanced and money-infused strategies of corporate cannabis.

In many instances, state cannabis regulations do very little to aid small business owners who choose to follow the law. The impact of high tax rates and licensing fees takes a toll on small farms and operations, leaving many of them in the dust as the underground marijuana market continues to grow instead of fade.

What Does This Mean for Federal Legalization?

Today, 19 U.S. states have legalized recreational marijuana use. Even so, federal legalization—a long-awaited landmark for many Americans who partake in cannabis use for recreational or medicinal purposes—remains a back-burner legislative issue.

Considering our national economy is still recalibrating after the COVID-19 pandemic, it’s understandable that legalizing pot isn’t as urgent as other items on America’s to-do list. However, the longstanding conversation surrounding marijuana isn’t going anywhere.

Like it or not, there is no doubt that cannabis will set an important precedent for our country as America transitions into the uncertainties of a post-pandemic economy. With direct ties to various facets of American life—healthcare, immigration, poverty, decriminalization, social inequality, and more—cannabis will play a vital role in the years to come.

Our team at Purdy & Bailey, LLP can help protect your cannabis business. Call our firm at (858) 360-7080 to request a consultation today.

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