Five years into legal adult-use cannabis sales in California, and the industry is at “a breaking point.” Top cannabis industry insiders sounded the alarm as the industry teeters towards implosion amid impossible tax rates and other serious issues.

In a letter dated December 17, over two dozen cannabis executives warned California Governor Gavin Newsom, President pro Tempore Toni Atkins and Speaker Anthony Rendon that the state’s cannabis industry is on the verge of collapse.

According to the letter, only major tax cuts and a rapid increase of retail operations can save the industry. Two-thirds of California cities lack dispensaries, since local governments authorize sales and production.

California is set to raise the cannabis cultivation tax next month—despite the Legislative Analyst Office estimating that the state will have a budget surplus of $31 billion next year. On January 1, 2022, the California Department of Tax and Fee Administration (CDTFA) will raise the state’s cannabis cultivation tax for dry-weight flower by almost five percent, raising it to a whopping $161 per pound, and over $10 per ounce. It’s this tax that is exceptionally difficult for farmers who cannot even break even. This was the reason California NORML sent out a warning about the tax hike last month.

The letter provides a solution for some of the immediate problems. Specifically, the industry leaders asked for three things that need to change in order for California’s legal cannabis industry to survive: an immediate lifting of the cultivation tax, a three-year holiday from the excise tax and an expansion of retail shops throughout much of the state.

“It is critical to recognize that an unwillingness to effectively legislate, implement, and oversee a functional regulated cannabis industry has brought us to our knees,” the letter reads. “The California cannabis system is a nation-wide mockery; a public policy lesson in what not to do. Despite decades of persecution by the government, we have been willing and adaptable partners in the struggle to regulate cannabis. We have asked tirelessly for change, with countless appeals to lawmakers that have gone unheard. We have collectively reached a point of intolerable tension, and we will no longer support a system that perpetuates a failed and regressive War on Drugs.” 

The current system “is rigged for all to fail,” they wrote.

High tax rates are pushing consumers back into the black market, where the tax-free cannabis is cheaper. “The opportunity to create a robust legal market has been squandered as a result of excessive taxation,” the letter said. “Seventy-five percent of cannabis in California is consumed in the illicit market and is untested and unsafe.” Some local governments took the issue into their own hands. San Francisco Board of Supervisors, for instance, unanimously approved a measure to temporarily suspend the city’s Cannabis Business Tax to fight illicit pot sales.

Once the higher cultivation tax rolls in, “most consumers are going to take off,” Darren Story of Strong Agronomy said during a conference call on December 17 with journalists and members of the media. Organizers are preparing for a January 2022 Boston Tea Party-inspired rally on the Capitol Steps in Sacramento to protest tax rates and other industry issues. “Forget the Boston Tea Party. Here comes the California Weed Tax Revolt,” read the headline of a The San Francisco Chronicle. The leaders represent nearly every sector of California’s cannabis industry.

The full list of industry leaders who signed the letter is listed below:

• Alec Dixon, Co-founder of SC Labs 
• Amy Jenkins, President of Precision Advocacy
• Andrew DeAngelo, Co-founder of Harborside, California Cannabis Industry Association, Last Prisoner Project 
• Conrad Gregory, President of CCIA Executive Board 
• Dale Gieringer, California NORML Director 
• Darren Story, Founder of Strong Agronomy
• David Hua, CEO and Founder of Meadow
• Dennis Hunter, Founder of CannaCraft 
• Erich Pearson, Founder of SPARC farm and dispensaries
• Ingrid Tsong, Independent Farmer and Co-founder of Beija Flor Farms 
• Jacob Heimark, CEO and Co-founder of Plus Products
• James Kim, CEO and Co-founder of STIIIZY
• Jamie Warm, Co-CEO of Henry’s Original
• Jeff Gray, CEO of SC Labs 
• Jerred Kiloh, Owner of Higher Path dispensary and President of the United Cannabis Business Association trade group
• Jigar Patel, Co-CEO, NorCal Cannabis Company
• John De Friel, CEO and Co-founder of Raw Garden
• Joshua Keats, Founder and Co-CEO of Henry’s Original
• Karim Webb, CEO 4thMVMT
• Kristi Palmer, Co-founder of KIVA Confections
• Lindsay Robinson, Executive Director of California Cannabis Industry Association
• Michael Ray, Founder and CRO, Bloom Farms 
• Michael Zumpano, CEO of Versagenix
• Flavia Cassani, Co-founder of Flow Cannabis Co.
• Mikey Steinmetz, Co-founder of Flow Cannabis Co.
• Nara Dahlbacka, Partner The Milo Group
• Ray Landgraf, Founder and CEO of Island Cannabis Co.
• Steve DeAngelo, Cannabis Rights Activist, Chairman Emeritus of Harborside Inc.
• Vince C. Ning, Founder and Co-CEO of Nabis

Newsom spokeswoman Erin Mellon responded to the letter, and said in a statement that the governor supports cannabis tax reform and recognizes the current problems, while expanding enforcement against illegal sales and production. “It’s clear that the current tax construct is presenting unintended but serious challenges. Any tax-reform effort in this space will require action from two-thirds of the Legislature and the Governor is open to working with them on a solution,” Mellon said.

The letter ensures that state leaders understand the sense of urgency and the scope of the problem. “The solution to these issues and the possibility of saving this industry lies in your hands,” they wrote in the letter.

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A dystopian reality of government-controlled drones hovering overhead is a reality for growers in Nevada County, California, but the effort to locate illegal operations is supported by local cannabis organizations such Nevada County Cannabis Alliance. 

In many areas in California, growers have the challenge of competing with illicit operations amid an epic oversupply problem—driving some operators into the black market. 

However, Nevada County officials aren’t playing anymore. According to officials, about one-third or 32 percent of cannabis-related complaints in the county couldn’t be locked gates, fences and other visual obstructions. County building director Craig Griesbach claims that two of those sites were linked to wildfires.

“One of the fire events happened during the Jones Fire of 2020, pulling air attack resources off the Jones Fire to address this concurrent threat to life and property,” Griesbach told The Union. “Cannabis-related violations, including generators that were not permitted on both sites, could have been verified with the use of (drone) technology and therefore mitigated before these fires started.”

A pilot program involving the use of drones to spot illegal cannabis grow operations is planned to kick off this spring in Nevada County, with the risk of wildfires as one of the justifications.

With a price tag of $10,000, covering the tools and staff training will fall under a general fund allocation, said Jeff Merriman, county code and compliance divisions program manager.

The plan is to purchase equipment and perform staff training from now through March. The program will last from May through August 2022. From November 2022 through February 2023, there will be a review of program activity, data and a report to supervisors.

“Cannabis Compliance Division field staff will be the only staff licensed to utilize this tool,” Merriman said. He said there will be 10 to 15 hours of training. There’s also a mandatory licensing exam and annual testing to hold a drone pilot license, which is done through the Federal Aviation Administration (FAA).

In the event that someone attempts to shoot the drone down, or if a malfunction or accident occurs, the cannabis program manager will be notified immediately and an incident report will be filed with the Nevada County office of the Risk Manager. 

Also, the FAA will be informed within 10 days, as required by law.

Support for Drones in the California Legislature

Last month, a House appropriations committee backed federal efforts to track down illicit grow operations on public lands in California. If issues around cybersecurity and domestic production can be resolved so that the drones can be fully trusted, it could become a reality in more areas. 

That effort was supported by Representative Chellie Pingree (D-ME), who chairs the Appropriations Interior & Environment Subcommittee, and Representative Dave Joyce (R-OH) co-chair of the Congressional Cannabis Caucus.

But citizens in Nevada County worry about privacy. However, Michael Vitiello, a law professor at the McGeorge School of Law at the University of the Pacific said the officials are within their rights regarding Fourth Amendment protections.

Diana Gammon, executive director of the Nevada County Cannabis Alliance, told The Union that her organization supports enforcement against illegal cannabis farms.

“We acknowledge the county needs to verify these sites,” said Gamzon. “Our organization remains concerned with drones as the primary tool for verification, and instead supports existing tools, such as planes, to obtain the required information.”

As there is currently an oversupply of cannabis in California, prices are dropping, therefore, the incentive to enter the industry is pitiful at the moment.

“To ensure our industry succeeds, our focus in Nevada County must be to support our existing cannabis businesses by creating opportunity for additional license types, including tourism opportunities,” she said.

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