The turmoil is mostly lost on consumers because weed is the rare commodity untouched by the pervasively high inflation blanketing most other goods and services. In fact, retail prices have fallen 10 percent this year in California, the nation’s largest market. It also compounds the challenges unique to this industry: Because marijuana remains illegal federally, businesses must navigate a labyrinth of overlapping regulations – creating confusion and occasionally chaos.
Washington and Colorado kindled the recreational trade in 2012 when they legalized marijuana use for adults 21 and older. Entrepreneurs quickly moved in – growers began converting farms, retailers began searching for investors – hoping to get in on the “green rush” certain to follow as legitamcy spread.
By 2019, pot had found legal homes in 11 states and the District of Columbia, generating a collective $1.7 billion in tax revenue, according to the Marijuana Policy Project, a cannabis policy advocacy group.
It was in this environment that Kislak saw her annual harvest of bulk flowers swell to upward of 500 pounds, and many businesses were able to find their footing. More states came online, and tax revenue surged to $3.7 billion in 2021, according to the advocacy group, then shot up to $11.2 billion in the first three months of 2022. By year’s end, legal use had grown to 21 states, two U.S. territories and D.C.
But as more businesses sprouted, society was returning to its pre-pandemic ways and facing a possible recession. Many Americans pulled back on nonessentials such as weed, and sales tumbled for some retailers. Marijuana saturated the market, forcing sellers to drop prices to unload inventory. (...)
While oversupply might be the sector’s most immediate challenge, it has other, more entrenched ones. Cannabis retailers are barred from many of the tax breaks and deductions commonly used in other industries. Other small businesses, for example, can write off as much as 20 percent of their qualified income.
“It’s incredibly difficult to make money if you cannot scale at a huge capacity to combat the inability to take those deductions,” said Hilary Bricken, a cannabis business lawyer at Harris Bricken in Los Angeles.
California imposes multiple taxes as product travels from farms into the hands of retail customers. Local cities or counties sometimes levy an additional tax on top of the state payments.
After harvesting, Kislak says her crop goes to a distributor for packaging and testing, as is required by California law. By the time it’s sold, as much as 40 percent of the retail price has gone to taxes, she said.
So of the $35 a customer might pay for an eighth of an ounce of marijuana, about $12 is left for Kislak’s business. Once you subtract packaging, labeling and testing costs, as well as distribution fees and a county tax, she said her profit is somewhere between $1 and $2.
