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Santa Maria Sun / Cover Story

The following article was posted on December 20th, 2017, in the Santa Maria Sun - Volume 18, Issue 42 [ Submit a Story ]
The following articles were printed from Santa Maria Sun [santamariasun.com] - Volume 18, Issue 42

Seal the deal: Santa Barbara County government and cultivators work to hammer out recreational cannabis regulations for 2018

By SPENCER COLE

For the past two decades, California has regulated medicinal cannabis with a loose legal framework. On Jan. 1, 2018, all that goes up in smoke, and counties like Santa Barbara are scrambling to keep up as the state steadily releases its new set of rules for legalized adult-use recreational marijuana.

The day will mark the culmination of a year-plus process that began on Nov. 8, 2016, when voters approved Proposition 64, legalizing recreational marijuana use for adults. And despite the limited time frame, the state is more or less ready to rake in the green to the tune of hundreds of millions in tax dollars.

“There was some skepticism on whether we would be ready to issue licenses,” said Alex Traverso, assistant communications chief for the Bureau of Cannabis Control, one of the three state agencies in charge of regulating the industry. “We are up to the point where everything has gone well, the system is up and running, and there’s no question whether we are going to be issuing licenses by then.”


COVER DESIGN AND
ILLUSTRATION BY ALEX ZUNIGA

Just two days after speaking with the Sun, the Bureau of Cannabis Control awarded 27 marijuana business licenses on Dec. 14. They go into effect in January.

California’s state agencies’ speed in preparing for recreational legalization has placed pressure on municipalities and county governments over the past 13 months. While the state process initially stumbled through the gate, Traverso said it has rapidly gained steam in recent months.

Delays from the state are part of the reason why counties like Santa Barbara have yet to finalize their own sets of regulations and taxes for the industry.

On Dec. 14, the Santa Barbara County Board of Supervisors held the second of two day-long hearings specifically focused on shoring up medicinal and recreational cannabis regulations. Thus far, the governing body has avoided making any permanent decisions regarding the plant besides creating a draft letter that enables compliant cultivators and dispensary operators to apply for a state license.

“I think a lot of things have complicated the process,” Deputy County Executive Officer Dennis Bozanich said.

One of the toughest topics county officials have grappled with is how to tax cannabis at a rate that will generate revenue without strangling a burgeoning industry.

“It’s not every day a new revenue stream comes and bites you in the ass,” one cannabis advocate, who requested anonymity, told the Sun

By the numbers

California stands to rake in more than $684 million in excise tax revenue from recreational marijuana for 2018-19, according to the state’s 2017 Budget Act revenue forecast. The number is expected to increase to $912 million in 2019-20, followed by moderate gains in 2020-21 ($989 million), before the state finally breaks $1 billion in revenue.

Those figures were projected based on the assumption that 1.1 million pounds of taxable cannabis will be purchased for consumption in 2018-19. By 2021-22, the amount is expected to double. However, the price of marijuana is expected to drop with increased sales, which will limit any gains in revenue from collected taxes, Traverso said.

The revenue forecast assumes prices will average about $242 per ounce in 2018-19, dropping to $164 per ounce by 2021-22. Regardless, the state still says it should collect $4.2 billion from combined tax revenue in 2018-19, with the number growing to $5.3 billion by 2021-22.


ROOM TO GROW
A point of contention in Santa Barbara County’s cannabis talks has revolved around the size of cannabis grows, whether they should be allowed outdoors, and if so, how operators should mitigate things like overwhelming smells.
FILE PHOTO BY JAYSON MELLOM

State taxes for cannabis will include a 15 percent excise tax on all receipts, along with a cultivation tax that runs at $9.25 per ounce of harvested flower, and $2.75 per ounce of leaves.

Santa Barbara County, on the other hand, is considering a series of options. The first is an excise tax on gross receipts that would assess 2 percent on distributors and nurseries, 4 percent on cultivators, and 6 percent on retailers and manufacturers. The second option is a 10 percent total rate tax. The third would be similar to option one, but it leaves room for the supervisors to raise rates to a maximum of 8 percent.

The first option is projected to annually generate $8 million, $16 million, and $24 million, respectively. The tax would need to be approved by supervisors who would then place it on the November 2018 ballot.

Mark Lovelace with the county’s hired consulting firm, HdL, noted in an economic impact statement that research indicated combined state and local tax rates in excess of 30 percent will reduce the number of cannabis operators that participate in the licensing and permitting system or the legal market in general. He said a combination of taxes and the projected drop in cannabis prices per pound will most likely foster a cutthroat environment.

“The effect that we will have on this industry through regulations and taxes is nothing compared to the limits of the free market,” Lovelace said. “That is going to be the single biggest limiting factor for people that want to get involved with this—especially the cultivation sector—prices are going to plummet.”

Cannabis industry advocates argue that the baseline state taxes are already too high, and once those are coupled with local taxes, it will squeeze out smaller cannabis businesses.

During a special Board of Supervisors’ hearing on Dec. 14 in Santa Barbara, Erin Weber of the consulting firm California Strategies expressed concern that those taxes would hinder business and asked supervisors to take more time to understand the “market and economics of the industry.”

At the same meeting, one cultivator told the Board of Supervisors that even the lowest proposed county tax rate would force them to grow 6,000 pounds of marijuana in order to make a profit, effectively doubling their current crop.

Of the more than 50 speakers who participated in public comment across the two county cannabis hearings in November and December, the vast majority of cultivators and purveyors said if state and local taxes totaled more than 40 percent, they would have difficulty staying in business. Some said the county tax should be as low as 1 percent.

The line of around 40 percent in taxes is one that supervisors, county staff, and legal cannabis advocates have attempted to avoid crossing in crafting a marijuana ordinance.

“We are looking at low and sustainable taxation rates so we can benefit the county, provide monetary contributions to support our community, be good neighbors, and look at the long term and be sustainable,” said Mollie Culver with the Cannabis Business Council of Santa Barbara County. Whichever rate the county ultimately chooses, she added, supervisors should keep those points in mind. Thus far, Culver said, the board has handled the incredibly complicated issue as well as it could.

Lovelace with HdL said at the meeting that it was likely the people who saw the most success in the newly regulated industry would have financing that allowed them to lose money for years until competition thinned out significantly.

“Margins are going to have be razor thin,” he said, adding that the situation would favor operators with deeper pockets. “Those free market factors are going to be far more difficult to overcome than regulatory constraints they will find in their way.” 

Glut of green 

Ask anyone in California’s cannabis industry and they will tell you that the state has more than enough green to go around.

That already rich supply will only be bolstered in the coming years as more and more people attempt to join the billion-dollar industry.

HdL’s report to the county said California produced 13.5 million pounds of medicinal cannabis in just one year, around five to eight times more than the size of the legal market for both recreational and medicinal. Potential cannabis production is estimated to skyrocket to 30 million to 40 million pounds over the next few years.


BUDDING POTENTIAL
While Santa Barbara County has a fair amount of medical marijuana dispensaries, most of them are delivery only, with no storefronts for customers to visit. The county has considerably more cultivators, but both sides of the industry still face limits on where they can set up shop due to city and county ordinances.

Currently, California’s cannabis market’s potential size is projected to land somewhere between 1.6 million to 2.5 million pounds purchased annually.

Santa Barbara County, on the other hand, produced about 3.7 million pounds of marijuana, or twice the expected annual amount of purchases statewide.

“There are far more people that want to come into this than can be supported,” Lovelace said, adding the while consumption will moderately increase with about 65 percent of the state’s adult population using marijuana recreationally and medicinally, it will still pale in comparison to the vast amounts of the plant that is grown, cultivated, and produced.

Supervisor Peter Adam labeled the impending industry boom as a “gold rush” mentality.

“The first thing [farmers] are going to do is overproduce,” Adam said at the Dec. 14 hearing.

Lovelace explained that signs of a saturated market were already easy to see. He said a pound of marijuana that used to sell between $1,500 and $2,000 each struggles to fetch $500 currently.

“It’s going to be a buyer’s market, and that’s bad news for the cultivators,” Lovelace said.

One positive for cultivators, however, is that regulatory testing and labeling requirements are beginning to show an impact, according to Lovelace. Buyers know the quality of a product and thus can pay more if they want that higher quality. 

License to

Statewide interest in legal cultivation licenses in California exceeds the size of the legal market by 12 to 16 times, according to the Bureau of Cannabis Control and the county’s economic impact report.

In Santa Barbara County alone, interest in cultivation licenses exceeds the capacity of the entire state market.

The county’s self-reported registry indicates Santa Barbara County operators will apply for anywhere from 160 to 650 licenses. Lovelace said the county was in a unique position to be a “hub of innovation” for the growing industry.

“We believe most of the manufacturers are going to coalesce mostly around these hubs where there’s product, a cultural mood of acceptance for the industry, and a broader support network for these industries—anyone that has been in private industry knows no business exists by itself,” he added. “The places that have an abundance of this industry will likely be better places to locate. There are going to be hubs of innovation around the state, and we believe Santa Barbara has an opportunity to be one of those places.”


STIRRING THE POT
Supervisor Peter Adam listened to public comment at the Dec. 14 hearing regarding recreational marijuana. That day, supervisors drafted and approved a letter granting temporary authorization to cannabis business operators.
PHOTO BY SPENCER COLE

Leaving room for industry growth while also protecting existing businesses has appeared to be the priority for the county’s supervisors, who have taken a deliberate and cautious approach since voters approved Proposition 64 in November 2016.

On Dec. 14 supervisors and staff strained for hours during the hearing to approve a county letter that would grant state licensing for medical marijuana cultivation locations already in compliance with county code.

Peter L. Candy, an attorney with the law firm Hollister and Brace, represents the Cannabis Business Council of Santa Barbara County. In a letter to County Counsel Michael Ghizzoni and the supervisors, Candy highlighted the need for such a document.

“Cannabis operations that continue to operate but do not obtain a temporary license after Jan. 1, 2018, are subject to significant monetary penalties, not to mention the possible forfeiture of their legal right to obtain an annual license from the state,” he wrote. “Providing operators with a letter that state licensing authorities will accept avoids placing operators who wish to maintain their legal compliance in difficult and vulnerable positions. It is the only approach the board can take that gives operators a clear path forward to legal compliance under the new regulatory regime.”

The board eventually moved to approve the letter of authorization, a small victory at the end of a disappointing day for many cannabis advocates and critics who hoped to hear rulings on everything from taxes to land use. Supervisors are scheduled to discuss the marijuana tax measure again in January.

First District Supervisor Das Williams said people in the cannabis industry needed to be reasonable when considering how the county would assess its tax.

“My job is not to make sure all of these cannabis businesses survive,” he said during the meeting. “Some of you are going to go out of business. It’s not our fault that the market price is dropping like a stone. We cannot do something as laughable as a 1 percent tax.”

Supervisor Adam’s tone was a little more ominous.

“If you think it was hard to operate here illegally, wait until [the state] legalizes you,” he said.

Cannabis advocates, on the other hand, can only await their fate as the supervisors move toward a decision.

“We all wish we could have seen a final product earlier,” the Cannabis Business Council’s Culver said, before praising the state and county’s regulatory efforts. “There’s a lot of moving pieces. I think everybody is really taking the time to try to get this right.” 

Staff Writer Spencer Cole can be reached at scole@santamariasun.com.




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