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Friday, Mar 29, 2024

Marijuana Woes

Alittle more than a year after the legalization of marijuana, the cannabis industry – once seen as a major growth sector – has fallen short of expectations. Through the first three quarters of last year, state taxes on pot totaled $228 million, well behind the $630 million projected revenue. In the Valley, Jerred Kiloh, owner of the Higher Path dispensary in Sherman Oaks, has found that packaging regulations and high taxes have impacted his sales. “A lot of customers started leaving because many of the products they’d become accustomed to seeing inside our shop started to disappear,” Kiloh told the Business Journal. Behind the dispensaries, the growing and distribution organizations have collided with the established commercial real estate industry. “As brokers, we thought our local markets were forever changed and that cannabis businesses represented the new standard,” said Ron Kassan at Beitler Commercial Realty Services in Encino. “Reality couldn’t have been further from the truth.” After making the first legal sale of recreational marijuana in Los Angeles, Jerred Kiloh, owner of the Higher Path dispensary in Sherman Oaks, was bullish on the market for commercial pot. But now, a year since legalization, Kiloh says escalating regulations and competition from black-market dealers are undermining legal shops like his. Kiloh was one of three original cannabis retailers to get approval from the city last January. Immediately after receiving his permit, he tracked down a woman walking along Ventura Boulevard and offered to make her L.A.’s first cannabis customer. Moments later, she left the store with a hemp-infused balm and an assortment of edible gummies. The next day, the Higher Path was packed with shoppers, leading to a 50 percent increase in Kiloh’s customer-base. But the high was cut short when the state phased in new packaging and testing restrictions in July, forcing him to remove some of his most popular products from store shelves. “A lot of customers started leaving because many of the products they’d become accustomed to seeing inside our shop started to disappear,” Kiloh said. “I had close to 40 (marijuana) strains on July 1, but after that date, I only had seven.” Statewide downturn Cannabis retailers in the Valley say high excise taxes and shifting regulations are forcing sellers to raise prices, which is in turn pushing customers to black market shops that can offer better deals by flouting state and local laws. This rush to the black market appears to be hurting cannabis sales statewide. Through the first three quarters of last year, state cultivation, sales and excise taxes totaled $228 million, well behind $630 million in annual revenue projected in former Gov. Jerry Brown’s 2018 budget. The slow pace of licensing new shops may also to blame for the shortfall. As of Jan. 7, the Bureau of Cannabis Control had issued just 629 recreational permits. State officials have said they eventually hope to issue as many as 6,000. The city of Los Angeles, which has so far only given commercial licenses to legally operating medical dispensaries, has issued 170 approvals. Retailers must obtain licenses from both state and local agencies. Unlike medical marijuana, which is exempt from sales tax, recreational weed sold in L.A. is subject to a 15 percent state excise tax and a 10 percent special city tax. That’s on top of the normal 9.5 percent in state and county sales taxes — amounting to a total markup of more than 34 percent. Kiloh, who is also president of the L.A.-based United Cannabis Business Association, said the taxes have caused him to raise prices in the range of 50 to 60 percent above black-market rates. When his shop operated as a medical dispensary, the difference was around 15 percent. Higher Path customers typically pay between $30 and $60 dollars for an eighth of an ounce of marijuana. “We saw our medical patients leave our care because they couldn’t afford the price increase,” he said. In addition to the tax burden, retailers say strict regulations on packaging, labeling and product testing have raised wholesale prices from manufactures and growers and forced shops to stop selling items that don’t meet state standards. The rules, enforced by the state’s Bureau of Cannabis Control, are meant to ensure products are child-safe, contaminant-free and that customers know exactly what they are consuming. The restrictions have been updated multiple times this year, making it difficult to plan marketing and inventory operations, retailers say. Permanent regulations are set to be approved later this month, according to the Bureau, which provides fact sheets and summaries to help marijuana businesses stay complaint. “We answer every call, email and social media message we receive from licensees who need information,” said Bureau Communications Officer Alex Traverso. Better times ahead Josh Drayton, communications director with the California Cannabis Industry Association, said with the regulations nearly phased in, businesses should have an easier time remaining complaint. He added that it will also open an opportunity to advocate for legislative fixes, including lowering excise taxes. “There wasn’t a real appetite to reduce taxes for the industry while revenues were not meeting their goals,” Drayton said. “But more lawmakers have begun to realize this is a problem – that we’re are fueling the illicit market because licensed businesses can’t compete.” It’s unclear exactly how many illegal shops are currently operating in L.A. At a press conference last year, Deputy Police Chief John Sherman estimated there were between 200 and 300 marijuana businesses operating illegally in the city. Los Angeles City Controller Ron Galperin, meanwhile, told Curbed LA in 2017 there could be as many as 1,700 dispensaries operating in L.A. As part of a citywide crackdown on illegal marijuana shops and businesses, City Attorney Mike Feuer has brought 120 criminal cases against operators at 105 locations. In the San Fernando Valley, 35 commercial cannabis retailers, labs, grow sites or delivery services have been charged. “Los Angeles voters wanted common-sense rules to regulate recreational marijuana so public safety is protected in our neighborhoods,” said Feuer in a statement. “Our message is clear — if you are operating an illegal cannabis business you will be held accountable.” Legal retailers, however, feel the crackdown has done little to meaningfully address the issues. Kiloh said dozens of unlicensed stores and delivery services are still operating within a few miles of his shop. Many of them advertise freely online on sites such as the popular dispensary database Weedmaps.com. “I compete with the illegal businesses just for space on Weedmaps in my area,” he said. “It’s too easy to be a consumer and find the lower price.” A recent search on the site found 45 businesses listed in the Sherman Oaks and Studio City area south of the 101 freeway. According to the L.A. Department of Cannabis Regulation, only 12 retailers in that area have obtained permits. Kiloh believes that until customers are better educated about where to buy legally, the problem will persist. “There wasn’t really a big public service announcement that clearly stated what the difference is between a legal and illegal dispensary,” he said. “The consumer is kind of confused. Even close friends of mine are like, ‘Well, if they’re open in Los Angeles and LAPD allows them to be open, how could they be illegal?’”

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