'Glaring Double Standard': Targeting California's Legal Cannabis Industry As Black Market Booms

California lawmakers have been introducing harsh regulations on cannabis industry lately, beginning with retailers having to pay taxes at the beginning of the year and the May introduction of measure A.B. 766 that proposes punishment without the hearing.

As if the situation in California is not difficult enough, some counties, such as Santa Barbara implemented even stricter measures such as introducing a penalty for late tax payments or failure to pay quarterly under pain of losing their licenses.

To discuss these and other issues facing the cannabis industry in California, Benzinga spoke with corporate and transactional attorneys, Michelle Mabugat and Alexa Steinberg of Greenberg Glusker’s Cannabis Industry Group.

Benzinga: With the growing debt crisis, is the legal framework slowly destroying the industry as a whole and can something be done to prevent it?

Alexa: Freezing an operator’s ability to do business, as provided for under A.B. 766, only furthers the debt issue and could lead to even bigger problems. The cannabis industry should be treated as any other industry and be given (i) the opportunity to negotiate payment plans with other licensees and tax authorities, (ii) the ability to conduct business on the licensee’s agreed upon contractual terms and payment terms, and (iii) the opportunity to have a hearing. The Department of Cannabis Control (DCC) is overburdened, as are licensees, with various and intricate reporting requirements at every step of conducting business - adding more will continue to frustrate the cannabis industry and promote the DCC’s already unreliable history of enforcement.

Benzinga: Did Santa Barbara County go too far?

Michelle: What bothers me about this measure is the existence of a glaring double standard, specifically targeting the cannabis industry. No other industry is treated this way by the county. I fully support tackling the issue of tax compliance, especially considering that cannabis tax revenue has proven to be somewhat of a boondoggle for the county in the last 2 years. But if we’re going to address tax compliance, it should be done fairly and consistently across all agricultural industries. It’s like giving cannabis operators a one-two knockout while other kinds of farmers in the county get a slap on the wrist.

Benzinga: Should California lawmakers view the fall of distributor Herbl into receivership as an alarm bell? What we can expect from the receivership?

Michelle: The stunning collapse of Herbl should demand the attention of California lawmakers, who should recognize it as a critical litmus test for the state’s entire cannabis industry. The Herbl situation is not an isolated incident but rather a symptom of the structural challenges of operating in California. Unless lawmakers step up in a big way and finally answer industry players’ calls for major reform, the receivership of Herbl will serve as a harbinger of the impending implosion within the cannabis industry, with its repercussions only beginning to unfold. As for what’s left of Herbl, the terms of the receivership require that East West Bank and tax collectors be prioritized over unsecured creditors, so brands with unpaid invoices from Herbl will most likely be left in the lurch.

Benzinga: California authorities seized nearly $80 million in illegal weed in January while 61% of cities and counties don’t allow retail businesses.  Would disallowing opt-outs help?

Alexa: It is in cities’ and counties' best interests to regulate the industry and put local regulations in place. However, there needs to be a give and take. Making legal operations so incredibly cumbersome by way of regulatory burdens, high barriers to entry, and expensive financial requirements further pushes operators to the illicit market just to simply be able to compete. Lowering taxes may be one option but certainly not the sole cure. The decision to lower taxes should be accompanied by robust enforcement measures to combat illegal cannabis activities. Strengthening law enforcement efforts, increasing penalties for illegal operators, and improving regulatory oversight can help deter and disrupt the illegal market.

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Photos: Courtesy of Greenberg Glusker’s Cannabis Industry Group

Photo by Tim Foster on Unsplash

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