Top 3 Challenges for California Cannabis Businesses
May 11, 2020
May 11, 2020
Contributing Writer: Alex Bibisi
California Cannabis Complexity
Succeeding in the cannabis industry has its challenges. This industry is heavily regulated and highly competitive, with many potential pitfalls awaiting unprepared businesses. In this blog series, we will look at some of the toughest states for cannabis operators, and what obstacles entrepreneurs must avoid to create a thriving and successful business. There’s nowhere better to begin than the place where state-legal cannabis in America got its start — California.
Lots of cannabis operators and entrepreneurs get starry-eyed at the mere mention of California, and for good reason. The state is currently the biggest adult-use cannabis market in the world, including an estimated nearly 30 million adults age 21 or older (read: potential customers). Succeeding in this competitive and highly-coveted market does come with difficulties, however.
Here, we’ll examine three of the biggest obstacles facing cannabis businesses in California:
The Golden State is well-known for its love of taxation, and cannabis is no exception. For retail cannabis sales, state and local taxes generally result in a total tax burden per sale of about 23%. Like dispensing, cultivation and manufacturing feature their own taxes, which are passed on to consumers. In aggregate, the total tax burden per purchase can add up to as high as 45%. Unfortunately, this tax burden has also led to the creation of a booming cannabis black market as consumers seek to purchase cannabis at lower prices.
The high state tax burden, combined with the federal 280E tax provision, makes creating and following a detailed financial plan crucial for the long-term success of any California cannabis business. Similarly, competing with unregulated black-market operators presents an equally formidable challenge. Successful licensed businesses will need to be able to compete in other ways than price — such as product quality, safety, and customer service. Accomplishing this requires a thorough and thoughtful business plan, which will help guide you to success in the crowded California cannabis marketplace.
Complex Licensing Processes
The second major issue is licensing. As license acquisition specialists, our team of cannabis consultants have helped businesses of all shapes and sizes navigate the licensing process in over 30 states. We’ve seen many states do licensing right — with understandable license types, well-written application prompts, and (relatively) fast submission evaluation timeframes. Unfortunately, California is not one of those states.
At the state level, California issues more than 25 license types. Want to cultivate 5,001 to 10,000 square feet of canopy in an indoor facility using ONLY artificial light? Make sure you’re applying for a Type 2A license. Want to use BOTH artificial and natural light? That’s a Type 2B license. Aspiring to open a statewide chain of dispensary storefronts? Get a Type 10 license, but not a Type 10A, because that one’s limited to only three retail stores! You can probably see where this is going. As if that isn’t complicated enough, California also allows local governments to operate their own licensing processes in addition to those at the state level. In fact, local approval is actually required before one can even apply for a state license.
State license applications are complicated but non-competitive. On the other hand, local licenses are often extremely competitive, with limited numbers of licenses available, tight timelines to assemble a qualified team and draft detailed application narratives, and quick deadlines for application acceptance. If you’re interested in applying for a local cannabis license in California, get in touch with us today — don’t risk missing out on these narrow application windows!
We have helped a number of clients in California obtain appropriate licensure. One of our recent clients applied for a license in a municipality that was only licensing 3 retail dispensary businesses. For those 3 licenses, the city received 18 total applications. Our client won a dispensary license by a wide margin, with their application scoring nearly 14% higher than the city’s average and beating out 16 other highly-qualified applicants.
Regulation & Enforcement
Finally, the third major challenge with California is the state’s regulation and enforcement activities. Along with high taxes and a licensing process that would leave Albert Einstein scratching his head in confusion, both the state and local governments also impose myriad legal requirements upon cannabis businesses. At the state level, there are over 300 pages of cannabis-specific regulations alone — plus hundreds, if not thousands, of pages of relevant statutes from the legislature. With that much legalese to translate, it’s no wonder that hundreds of cannabis businesses across the state have seen their licenses revoked or suspended due to compliance violations. To make things even more difficult, local governments often impose their own additional requirements through local ordinances, introducing even more legal hurdles.
This division of regulatory authority often creates problems. Throughout our licensing and compliance work in California, we have encountered many instances where local laws directly conflict with requirements in state law. Fortunately, our team includes several attorneys who have extensive experience navigating such ambiguities. Pulling from this extensive legal expertise, we have helped our clients to avoid compliance violations and license application denials that could have resulted from following a lay interpretation of these complex state and local laws.
Efficiently Navigate the Complex California Marketplace
Working in California’s cannabis industry can be challenging, but with the right help, you can operate a thriving cannabis business. The state’s market complexities must be countered with effective business and financial planning, well-drafted license application materials, rapid facility buildout, utmost legal compliance, and careful positioning for a market exit. Operators who are ultimately successful will be those who are insightful enough to realize that they need not face these challenges alone. At Canna Advisors, we have assisted all kinds of cannabis businesses — from startups led by a lone entrepreneur to multi-state companies with experienced teams.
Contact our expert consultants today to set your business up for long-term success in the California cannabis market.