Five years after Californians voted to legalize cannabis and create the world’s biggest regulated marijuana market, many owners of cannabis businesses say they’ve reached a breaking point.
On the one hand, California’s licensed cannabis industry is delivering more tax money to the state than forecasters projected in 2016. Normalization of the industry also continues, with the first state-sanctioned cannabis competition coming in 2022. And new laws will kick in that are intended to help some cannabis entrepreneurs and medical marijuana patients.
But even as the legal industry is growing, California’s illicit cannabis market remains at least twice as large as the regulated one. As a result, licensed cannabis operators — who are undercut by illicit operators — are threatening to withhold tax payments if regulators don’t come up with a fix. Corporations also continue to gobble up smaller marijuana businesses, as the window to change cannabis laws on a federal level while Democrats control Congress inches shut.
Here are five things to watch for in California’s cannabis industry in 2022.
New laws kick in
Of the 30 or so cannabis bills proposed in California in 2021, nearly a dozen were signed into law. Most take effect Jan. 1, including a bill that will allow cannabis drinks to be sold in glass bottles and another that lets the state fine people up to $30,000 for aiding and abetting illlicit marijuana businesses.
One bill approved in 2021 sets up a regulatory framework for products made from industrial hemp, a type of cannabis plant that’s bred to have essentially no THC, which is the main psychoactive compound in marijuana.
Products with hemp-derived compounds such as CBD — which doesn’t make consumers high but has shown promise in helping to ease inflammation, anxiety and other ailments — have been sold in gas stations and grocery stores for years. But the sector has remained a legal gray area, with uneven state and federal regulation sometimes posing problems for businesses that were, say, adding CBD to coffee drinks.
Under Assembly Bill 45, compounds such as CBD can be sold as dietary supplements or as ingredients in foods, drinks, cosmetics and pet foods outside licensed marijuana shops if they come from industrial hemp producers registered with the state. The Department of Cannabis Control also has a July 1 deadline to issue a report on how to allow for such products to be sold in licensed cannabis shops.
The same law also ends a ban on smokeable hemp, which can deliver doses of CBD and other non-intoxicating compounds found in cannabis. Gov. Gavin Newsom signed the bill in October, which meant California hemp farmers immediately were allowed to start selling to the more than 40 states that haven’t banned their products. And smokeable hemp sales will be legal for in California, for residents 21 and older, once regulators set up a tax in the coming year.
Newsom also signed a bill that will require some health care facilities to let terminally ill patients use medicinal cannabis. Senate Bill 311, which kicks in on Jan. 1, prohibits smoking or vaping cannabis, but does allow for the use of edibles and beverages, topicals, tinctures and capsules. It also requires that patients show a doctor’s recommendation.
The coming year also will see the state award a series of grants to help cities license more cannabis businesses, to help small farmers with environmental remediation and to assist with more support for the regulated sector.
Looming industry revolt
While some beneficial new laws will kick in, 2022 also will start with a coalition of California’s top cannabis business owners floating the idea of withholding tax payments that should total roughly $1.3 billion this year. The move is meant to force regulators to reform the state’s system so licensed businesses can better compete with illicit sellers, who currently sell products for much less because aren’t paying taxes or complying with regulations.
Many cannabis business owners want California to do away with cultivation taxes entirely. Those taxes are based on the product’s weight and the rate increases in step with inflation, no matter what is happening with the wholesale price of marijuana. That’s why cultivation taxes are set to rise by 4.5% on Jan. 1, even though the price of wholesale cannabis dropped sharply in 2021.
Industry leaders also asked Newsom in a Dec. 17 letter to suspend the state’s 15% excise tax for three years to let the regulated cannabis market mature.
“Tax reform is a must in California this year,” said Kenny Morrison, founder of Venice Cookie Company and head of the California Cannabis Manufacturers Association.
“There’s real momentum around the issue across all stakeholders. Even labor agrees.”
Any changes to voter-approved tax rates will require a two-thirds vote from the legislature, which so far hasn’t panned out. But when Newsom releases his proposed 2022-23 budget proposal next month, Dale Gieringer, state coordinator for the California chapter of the marijuana advocacy group NORML, said they hope to see him call for cannabis tax reform.
The industry is pushing for other changes in 2022 that would support the regulated market, including efforts to clear backlogs in license applications and to push back against a rule in the legalization bill that lets cities and counties block all cannabis businesses.
“We are at a tipping point,” Morrison said. “Do we support the expansion of the regulated market or the illicit market?”
Consolidations to continue
With so many licensed cannabis entrepreneurs struggling to make a profit, Gieringer said he expects to see more consolidation in the industry in 2022.
“Hardly anyone in the licensed industry is making money in California,” he said. “So they keep letting themselves get bought out and acquired by out-of-state and Canadian billion-dollar corporations.”
In 2021, the industry saw a number of massive mergers and acquisitions. And investment firm Viridian Capital Advisors predicts such activity will accelerate in the year to come — particularly in California.
So far, Viridian says multistate operators have largely avoided California, with stocks for public cannabis companies in the state underperforming due to the challenging environment. The firm says market conditions are likely to make smaller cannabis operators more willing to consider selling out to larger firms in the year to come, with Viridian identifying five major California cannabis businesses it believes are ripe for buyouts in 2022.
California’s cannabis industry could be jolted if federal law changes in a way that makes it easier for the product to be sold nationally.
While cannabis is now legal for all adults in 19 states, and for medical patients in 38 states, it’s still classified under federal law as a Schedule 1 narcotic, on par with heroin. That has implications even for businesses and consumers in states where cannabis is legal. For example, California cannabis businesses can’t access most banking services, and consumers still risk losing their jobs or facing child custody issues.
The House in late 2020 approved the MORE Act, which would decriminalize and tax cannabis across the country, but that bill so far hasn’t passed the Senate. Democrats are expected to make a final push for the bill next year while they still have a slim majority in Congress.
Some Congress members also are asking President Joe Biden to use his executive authority to fulfill promises he made on the campaign trail to decriminalize cannabis and expunge records for people convicted of nonviolent cannabis crimes.
Gieringer isn’t optimistic that such sweeping changes will get through this session. But he’s holding out some hope that Congress might at least pass a bill in 2022 that would allow banks to serve the cannabis industry without fear of running afoul of federal law.
The House has passed some form of that legislation five times, citing safety risks for businesses forced to operate in cash. All of those efforts failed in the Senate. Democrats inserted the language into the latest defense bill, but it was dropped before Congress approved the bill in mid-December.
Cannabis at the State Fair
A bright spot ahead for the licensed industry in California is the first state-sanctioned cannabis competition, to be held at the State Fair in Sacramento in July.
The 166-year-old fair “has always been a first mover,” said California Exposition & State Fair Board of Director
Jess Durfee as he announced the competition in September. So Durfee said judging cannabis cultivation alongside wine, cheese, craft beer and olive oil was a natural fit.
California had a booming, unregulated cannabis competition and festival scene for years. But that world has mellowed since voters opted to regulate the industry in 2016.
Unlike those private festivals, cannabis flower entered in the State Fair by March 30 won’t be judged based on how high it makes consumers or how it tastes. Instead, 77 medals will be awarded based on test results from SC Labs showing which products have the highest concentrations and best ratios of certain compounds that impact their quality and effects.
No cannabis sales or consumption will be allowed at the State Fair. But there will be a 21-and-over area that highlights the award winners and features educational displays.