California Squeeze: Cannabis Industry Faces Debt and Tax Woes
The California cannabis industry was once heralded as the state’s next potential gold rush. Once seen as a lucrative opportunity, the industry now faces an unparalleled financial crisis as it struggles with state induced insurmountable debt.
The cannabis sector has struggled with mounting debt for years, and recent changes in tax laws have intensified the industry’s financial woes to a breaking point with business closures looming. A San Francisco lawmaker introduced legislation targeting pot businesses that default on their debt payments, signaling the severity of the situation. Debt problems have plagued the cannabis industry for some time, with a 2022 report revealing an astounding collective debt surpassing $600 million.
A significant tipping point was reached this year with a shift in tax law, transferring the responsibility of cannabis excise tax payments from distributors to retailers. This shift became evident with the first tax payments due on May 1, exposing a significant hurdle for many cannabis retailers.
State tax data indicates that retailers are struggling to pay their state excise taxes, especially by the May 1 deadline. Shockingly, more than 13% of California’s retailers, equivalent to 265 pot shops, failed to make any tax payment by this deadline, putting them at risk of a 50% penalty on their unpaid taxes. The figure might rise further, as the state agency continues to process 581 tax returns, potentially revealing additional retailers in default.
Legal experts and insiders foresee dire consequences. Michelle Mabugat, a cannabis attorney at Greenberg Glusker firm, predicts the bursting of a debt bubble that has been growing for years, potentially leading to a considerable number of retailers shutting down.
Ali Jamalian, owner of Sunset Connect, a cannabis manufacturer in San Francisco, corroborates these concerns, stating that pot shops face a potentially catastrophic ‘extinction event’ due to the new tax structure.
The debt crisis extends throughout the entire cannabis supply chain, with farmers reporting unpaid bills, distributors blacklisting non-paying retailers, and even federal tax collections being neglected. An analysis by Green Market Report found that the ten largest pot companies in the U.S. collectively owed over $500 million in unpaid taxes.
The Future of the Debt Crisis
Lawmakers have sat up and taken notice of these alarming debt issues. Assemblymember Phil Ting introduced a bill requiring cannabis businesses to settle transactions worth $5,000 or more within 15 days to avoid penalties. Ting attributes this problem to federal prohibition, which denies cannabis entrepreneurs access to loans and normal tax deductions that other industries rely on for cash flow maintenance.
Despite some opposition, the proposed law has gained support from distributor and manufacturer associations, though some cannabis retailers in the state oppose it. The bill is set for discussion in the House Appropriations Committee’s upcoming meeting.
The absence of conventional bank loans has led cannabis companies to issue loans to each other by selling products on credit, often with delayed payment expectations. However, many retailers take months to pay or default altogether, leading to a mounting debt problem that remains unresolved.
As the cannabis industry teeters on the brink of a financial precipice, the future for many businesses hangs in the balance. The combined weight of the debt crisis and tax payment alterations has cast a shadow over an industry once celebrated as the next gold rush (once pegged as the ‘green rush of the Emerald Triangle’). The coming months will determine which businesses can navigate these treacherous waters and which will succumb to fall by the wayside as a lost dream.