Growing Pains Part 1: Nipped in the Bud 

Small farmers had hoped to usher in California's new legal cannabis market, but the state's high taxes and fees and a loophole in its regulatory scheme are allowing Big Weed to take over.

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click to enlarge Oakland attorney James Anthony said Oakland’s equity program is hurting small- and medium-size cannabis businesses. - PHOTO BY LANCE YAMAMOTO
  • Photo by Lance Yamamoto
  • Oakland attorney James Anthony said Oakland’s equity program is hurting small- and medium-size cannabis businesses.

The program gives priority to applicants whose businesses are half owned by qualified equity applicants who can show their income is less than 80 percent of the median and that they have resided in certain Oakland neighborhoods that historically had high rates of marijuana arrests. The other option for a permit is to incubate an equity applicant by providing, rent-free, 1,000-square-feet of operating space.

The requirements are turning out to be relatively easy for large companies to accommodate and nearly impossible for small- and mid-size ones. One Oakland manufacturer, who asked not to be identified because his company is still seeking local permit approval, said offering 50 percent of the business to an equity applicant is not viable given high taxes and narrow profit margins. And he said that providing 1,000-square-foot space rent-free to incubate a small business is not realistic, because of the high cost of rental space in Oakland.

"We just couldn't do it. It's simply not an option for us," said the owner. "I see the good intent of the program, but because we didn't have an equity partner and couldn't afford to incubate a business, we were put on a back burner, which meant we had to shut down our business, which employs 17 people, most of whom are minorities."

Oakland's equity program is hurting small- and mid-size cannabis businesses, said James Anthony, an attorney who specializes in cannabis law. "I understand the noble intention of the equity program, but it's also hurting existing, minority-owned cannabis businesses that can't afford to incubate an equity applicant," Anthony said.

Despite the complications, there are still opportunities for the small cannabis businesses who are playing by the rules. Advocates are working to ease stringent regulations and attempting to reduce corporate influence on state regulators.

The CGA lawsuit is currently on hold, while the state finalizes cannabis industry regulations, but if the state does not close the "stacking" loophole and reestablish protections for smaller businesses, the suit will go forward. "The Department of Food and Agriculture's temporary regulations allow large business interests to corner the market, while tens of thousands of small- and mid-size businesses are still working to fight local bans, raise capital, or establish operations in compliance with new rules," Allen said. "We could not stand by while a single regulatory decision threatened the future of so many hardworking Californians."

Some lawmakers have come to the conclusion that the state's high tax rates on cannabis are keeping cultivators and others in the black market, which further hurts those who have spent thousands to be permitted and licensed. To take the pressure off, Assemblymembers Rob Bonta, D-Alameda, and Tom Lackey, R-Palmdale, have introduced legislation that would suspend all cultivation taxes until 2021 and cut the state tax rate in weed from 15 percent to 11 percent.

In the same spirit, the Berkeley City Council recently voted to lower the city's retail sales tax on adult-use cannabis from 10 percent to 5 percent. Oakland and other municipalities are considering similar reductions. There is also a movement to create a state cannabis bank, which would offer banking services and business loans, thereby taking a great deal of pressure off of small companies.

Numerous opportunities have also sprung up around the state to help small business people learn how to navigate the labyrinth of California's pot bureaucracy. In Oakland, Debby Goldsberry, executive director of the well-known dispensary Magnolia, offers businesses classes specifically geared to cannabis entrepreneurs.

click to enlarge Debbie Goldsberry, executive director of Magnolia dispensary in Oakland, offers business classes geared to cannabis entrepreneurs. - PHOTO BY LANCE YAMAMOTO
  • Photo by Lance Yamamoto
  • Debbie Goldsberry, executive director of Magnolia dispensary in Oakland, offers business classes geared to cannabis entrepreneurs.

"It's hard to run a small business, and a lot of people have been growing up on a mountaintop somewhere," Goldsberry said. "So, in our classes we go step by step: how to incorporate; how to write a business plan; how to find a location; how to get permits; and we bring in the best lawyers and accountants. We try to do our part in making information available."

Each day, Agatha Brooks continues to work on her small farm in the Emerald Triangle, and each night, she wades through reams of state-required paperwork. Legal cannabis farming is not what she expected, but she remains positive about the future. "I see ourselves as a startup — we put in long hours and hard work," she said. "It's important to continue and we're committed and excited."

Michael Hadley has been working on a spreadsheet that will give him an idea about his farm's profitability after expenses, fees, and taxes. He doesn't care about making a lot of money, but he wants to earn enough to stay on his property. He lives near the Klamath River in the rural hills of northeast Humboldt County. He's glad to be a legal cannabis cultivator after years of black-market farming, but he's still a bit wistful about the past.

"The black market was too stressful, and I wanted to do the right thing. But things are different. We used sell out completely by Halloween, and I'd have a harvest celebration with reggae bands. I'd buy 15 kegs of beer, and the people ... there were graffiti artists, poets, hobos, Hells Angels. I wish I'd kept a journal.

"That was why we did it. We were a little gem." 

This is the first of a two-part series on the many challenges facing small- and medium-size cannabis businesses in California's new highly regulated market.


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