Everyone is Watching the California Cannabis Industry: What Needs to Change Now for Us to Get it Right
In October 2017 Napa and Sonoma counties were devastated by the Tubbs fires, which left 42 people dead, and scorched more than 8,400 structures. The inferno has dealt the California cannabis industry a particularly savage blow, one which is being compounded by new state regulations ushering in an era of recreational cannabis use. Unanswered questions regarding finances and insurance mean that cannabis farmers and small business owners dealing with total loss, have few places to turn for help. Cannabis-specific taxes, licensing costs and fees, add to the pain.
Recreational cannabis sales are expected to generate $1 billion in tax and licensing revenue for California, on top of what it already receives from taxes on medicinal sales. This revenue could do SO much for our state, especially for cannabis producers rebuilding after a disaster. The cannabis industry is a boon for job creation and will provide a much-needed boost to the California economy. Before we can get there, however, the state absolutely must address fundamental business issues that uniquely affect entrepreneurs interested in becoming part of the legal cannabis industry, specifically around banking and insurance.
There is currently no banking infrastructure for cannabis, because it is still illegal on a federal level. That means that anyone profiting from the cannabis industry cannot just walk into a bank and deposit funds. This isn’t the fault of banks. The risks associated with “green money,” especially with the current administration’s position against legalization, has kept most institutional banks from working with cannabis companies. Via FinCEN, the Financial Crimes Enforcement Network of the US Department of the Treasury, banks are required to report any suspected illegal activity by their customers to federal authorities. When banks suspect deposits from cannabis activity, they’re obligated to notify the feds. To protect their hard-earned profits, California cannabis entrepreneurs are storing cash in vaults, burying it in the ground, or other non traditional methods that offer zero protection. Many cannabis farmers in Northern California lost all their cash when fires ravaged their property, making it almost impossible to recover from disaster In some cases it’s not even possible.
Comprehensive insurance coverage offsets the trauma of living through a natural disaster. Unfortunately this is not the case for cannabis businesses devastated by California’s recent wildfires. If a cannabis company manages to get insured at all, the quotes and premiums are astronomically higher compared to other businesses, and the coverage is often sub-par.
Crop insurance doesn’t cover natural disasters only covers pests, mold, or theft. Building insurance? That will cost you five times more for the same coverage. People are working hard to bring legitimate cannabis businesses to light, but the current hurdles are too high, making it nearly impossible for many.
There is no reason cannabis cultivators, manufacturers and retailers shouldn’t be given the same banking and insurance protections as every other business in the state.
What Can Be Done?
So what can be done? Ideas around a public bank, or bankers bank, get tossed around at industry conferences or even lobbying trips to the capitol. Little work has been done to advance these ideas. Times like these illustrate the need for prioritization in regulation for those issues that can devastate a business and its owners.
How to Fix Insurance for the Cannabis Industry
The answer here is simple — offer cannabis businesses the same insurance and protections as other businesses at the same premium costs. There is no reason this cannot be done. It is situations like a monstrous fire that highlight the absurdity in keeping these businesses from the protections offered to others.
Licensing, Fees, and Taxes
Getting licensed to sell, grow, or manufacture cannabis is daunting.. For example, you can’t just set up a basic outdoor cultivation anymore, it requires a license. So to start the crop might be $250,000, but then the permitting could cost another $250,000. That’s a lot of upfront cash to get off the ground and things are constantly changing, making it hard for businesses to plan ahead. Until recently our industry expected cannabis farms would have crop-size limitations imposed, but now those limitations are only imposed on medium-sized grower’s licenses, opening the door for small and large scale cultivators to set up mammoth-sized grow farms.
More importantly, large businesses are now seemingly allowed to obtain as many licenses as they can afford, giving an upper hand to those with deep pockets, while small businesses struggle to find banks to lend. According to a quote in the LA Times from Hezekiah Allen, executive director of the California Growers Association, “California could have just opened the door for well-capitalized interests to really jeopardize the success of the marketplace.”
While licensing and fees are changing, so are taxes. Beginning January 1 two new cannabis taxes will go into effect. A 15 percent excise tax imposed upon purchasers of cannabis and cannabis products. Retailers are required to collect the excise tax from the purchaser and pay it to the cannabis distributor. Also new, a tax on the cultivation of cannabis that enters the commercial market is imposed upon cultivators. Cultivators are required to pay the cultivation tax to either a distributor or a manufacturer depending upon the nature of the transaction. More on the specific cultivation tax rates and also information on applying for licenses is here.
What should the state do?
In terms of what the state can do, it may be too late. When California set off to regulate the cannabis market, immediate attention was paid to how the state would accept tax bills paid in cash, but not to where the rest of a cash businesses operating capital would live. Encouraging financial institutions and insurance brokers to dig deep and work with the industry to solve these problems could have gotten us a long way had the effort begun when we knew this was coming.
California is Writing the Playbook for Others
California has always been a progressive state that many others look to as an example of how to implement change. This is our chance to set the stage for the cannabis industry, both locally, and nationally. Let’s do it right.