In cannabis culture, 420 — April 20 — is a day to celebrate.
But for many in California’s legal cannabis industry, there’s little cause for revelry most days, according to experts who say high taxes, burdensome regulations and illegal sales are crushing entrepreneurs’ dreams.
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“I get calls every week from mom-and-pop operators that were excited about legal cannabis, that invested their life savings into doing something they were passionate about and doing it legally,” said Jason Piazza, director of real estate for WeCann, a Santa Ana cannabis business consulting firm.
Slang for cannabis smoking, especially at 4:20 p.m., 420’s origin is the subject of several theories. It’s a day when cannabis users gather and smoke the drug, often in public places.
“And instead of being rewarded, these folks are being punished,” Piazza said. “They’re really being punished.”
The situation in California today is better than it was six months or a year ago “and that’s really encouraging,” he said. “But it’s still a real challenge.”
California voters legalized recreational cannabis use in 2016, setting the stage for a regulatory framework enforced by the state Department of Cannabis Control.
Today, cannabis is big business.
California saw $4.9 billion in legal cannabis sales in 2022, down from $5.35 billion in 2021 but higher than $4.26 billion in sales recorded in 2020, according to state figures.
Southern California is home to roughly 600 active dispensary licenses, including 384 in Los Angeles County, 132 in Riverside County, 54 in Orange County and 26 in San Bernardino County, according to figures culled from state data by Tony Lange, associate editor of the Cannabis Business Times.
Since 2022, the number of cultivation licenses in California has fallen from 8,500 to 5,300, Lange said.
“If you look at a lot of businesses that are based outside of California, they’ve left California since 2022,” Lange said.
“For a lot of the operators that are based solely in California, it’s their home and they’re dedicated to it. But just by and large, it’s definitely struggling from the tax issues and the burdensome regulations and what-not.”
State cannabis control agency spokesperson David Hafner said that, while his department “does not set, regulate or administer taxes, it is supportive of efforts to reduce barriers to participation in the legal market, including reducing financial barriers.”
The department, he said via email, “has made a point of amplifying challenges voiced by licensees during critical policy discussions, including those discussions that resulted in the state reducing cannabis taxes in 2022.”
While many cities and counties allow cannabis commerce, others don’t.
“In California specifically, a lot of the dispensaries have really overwhelmed the areas (and) the populated cities that actually allow retail sales,” Lange said. “ … A lot of the retail operators are going to flood the populated areas that do allow those sales, making a lot of competition in those areas and driving down the (cannabis) prices.”
Lange added: “The older the market gets, the more people (and) the more business entities are able to adjust to the supply and demand. And basically in California, if you have too much flower being grown or too much bud being grown and not enough retail outlets to sell it at, then you’re going to have that oversupply and cause flower prices to go down.”
State data show that the number of licensed cannabis products being sold in California is rising while the price of those products is falling, Hafner said. “This is extremely consistent with the law of demand and the data suggests that the market is settling into a sustainable balance,” he added.
Retailers also struggle with California’s 15% cannabis excise tax charged on top of sales-and-use tax, Lange and Piazza said.
While a tax on cultivation ended last year, the excise tax is expected to rise to 19% in 2025. Earlier this month, Lange reported that 15% of the state’s cannabis operators defaulted on their excise tax obligations as of the end of 2023.
“A bunch of these businesses in California are already behind on their excise taxes,” Lange said. “If you raise the tax rate, these businesses are just going to go out of business and there’s going to be less tax money given to the state.”
Cannabis continues to be illegal under federal law, meaning cannabis businesses can’t get a bank loan or file for bankruptcy. But the federal government still taxes those businesses, Lange and Piazza said.
“Unlike a traditional business where you only pay taxes on your profit … cannabis businesses have to pay (federal) taxes on all their revenue,” Lange said. “They don’t get to deduct normal business expenses like payroll and stuff like that.”
Despite legalization, the illegal cannabis trade continues to exist in California, cutting further into legitimate retailers’ profits, Lange and Piazza said.
“The lack of enforcement is a real issue because now you’ve got operators out there just operating willy-nilly without paying the taxes and the regulations and the cost,” Piazza said.
California’s cannabis control agency “works closely with all local, state, and federal partners to eradicate illegal activity,” Hafner said.
“(The department) focuses its efforts on combating illegal activity while also creating legitimate legal business opportunities and safe access to existing consumers throughout the state.”
In 2022, Gov. Gavin Newsom created the Unified Cannabis Enforcement Taskforce and last year, it seized more than $312 million in unlicensed cannabis and eradicated almost 318,000 illegal cannabis plants, Hafner added.
When it comes to dealing with local government, it can take a year or longer for a cannabis business to get a conditional use permit, Piazza said.
“So once you’re at the point where you’re submitting your plans to the city, you’ve got to get through your safety and your fire (permits) and all this wonderful jazz,” Piazza said. “And they’ll keep coming back … with revisions. ‘Oh hey, we need a special kind of pipe right here that you’re not showing.’”
“So you’re looking at operators who are spending a million-plus dollars over a couple of years before they can even start to operate and that’s really problematic.”
Lauren Fontein is co-founder and chief compliance officer for The Artist Tree, a chain of dispensaries with eight California locations, including West Hollywood, LA’s Koreatown, Beverly Hills and just outside the city of Riverside — the first legal dispensary to open in unincorporated Riverside County.
Three other Artist Tree locations are being built in Riverside, Hawthorne and Laguna Woods, Fontein said via email.
“Each time we open a location, we have to go through enormous hoops to get the proper permits and land use entitlements from local cities and the state of California,” Fontein said.
“Additionally, we pay exorbitant annual licensing fees and taxes, which don’t apply to non-cannabis businesses or unlicensed operators.”
She added: “The legal California cannabis industry as a whole is crumbling under the weight of the enormous financial and regulatory burdens and something has to change at the state level to foster economic growth. As it now stands, the government’s stance on cannabis regulation is pushing companies out of business or back into the black market.”
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To help the industry, Piazza — not speaking on behalf of WeCann — said the state needs to crack down on the illegal market and put pressure on cities and counties that ban cannabis merchants.
“Don’t even start to tell me you don’t want cannabis in your city because it’s there. It’s always been there and it will always be there,” he said. “The question is (whether) you want it being done by criminal enterprises or do you want to make taxes and income from it and have it be a safe product in a safe environment.”
There also needs to be a carve-out in federal rules to ease the burden on legal operators, Piazza said.
“There is definitely a point where it’s too much and we’re seeing that without a question in cannabis and it is causing a lot of businesses to fail,” he said. “And it’s just really frustrating and sad.”