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From Medical to Recreational

A changing cannabis industry buckles under weight of new taxes

By Shinae Lee, City on a Hill Press

Proposition 64 came into effect this January allowing recreational cannabis use, but with it came a slew of taxes and regulations that are financially disadvantaging small cannabis businesses and medical users. While they struggle to keep up with new regulations, low-income medical patients can no longer afford their cannabis medicine.

CannaCruz began about 10 years ago when CEO Grant Palmer and his brother Brad started making tincture and topical medicines out of cannabis for their father, Robert Palmer, who suffered from a stroke and a heart attack. These remedies soothed their father’s symptoms and drug side effects so effectively that the brothers wanted to make their remedies available to a wider demographic.

Soon, they started making products for dispensaries that they sold across the Bay Area. Eventually, business became successful enough that they opened their own dispensary in Santa Cruz. Since 2008, CannaCruz thrived selling a variety of cannabis products for medical patients under Proposition 215, which legalized medical cannabis in 1996.

But since recreational cannabis was legalized on Jan. 1, CannaCruz saw a 40 percent increase in sales yet a sharp decrease in profit.

“You don’t often see very profitable businesses all of a sudden, even though they’re still taking in a tremendous amount of revenue,” Grant Palmer said. “More than ever, [dispensaries are] just not doing very well.”

Now that recreational cannabis is legal under Proposition 64, the Adult Use of Marijuana Act, anyone over 21 can buy recreational cannabis at dispensaries in California. But behind that freedom lies a cannabis industry buckling under the regulatory financial burden of its legalization.

Small businesses are struggling, medical patients can’t afford their medicine and many believe large companies are in line to take over the industry, said Jason Matthys, cannabis activist and creator of Equilibrium Genetics, a cannabis seed company.

Californians voted 57 percent in favor of Proposition 64, which legalized and decriminalized cannabis for recreational sale and use, but also heavily regulates and taxes it.

CannaCruz, like many small dispensaries, is struggling to keep up with new business costs. CannaCruz now pays $72,000 twice yearly, once for medical and again for adult use retail permits, Palmer said. Distribution fees can be up to $240,000 every year for medical and adult use.

“I don’t know what they expect us to do or where they expect that money to come from,” Palmer said. “I just don’t have it.”

Cannabis sales taxes in the city of Santa Cruz increased from 16 to 32 percent, in addition to new 8 percent taxes on cannabis cultivation, distribution and manufacturing each. These vary by city and county, but all California regions are subject to the state’s new 15 percent excise tax. These taxes disadvantage medical patients who legalization was originally meant for.

“Oftentimes the most ill among us are the least able to pay hefty prices for a product and those people are why these laws were created in the first place,” Matthys said. “We’re leaving them in the dust by creating laws that are designed to allow businesses to make a profit.”

Legalization Came From Medicinal Cannabis

Cannabis legalization efforts began in 1970s San Francisco during the HIV/AIDS epidemic at a time when no pharmaceutical drugs had been developed to treat the virus and people were dying daily. At the time, cannabis was one of the only effective treatments to HIV/AIDS symptoms like pain, nausea, appetite loss and depression.

The tragedies of the AIDS epidemic led activists like San Francisco’s late Dennis Perone, and Santa Cruz’s Valerie Corral to fight for the legalization of medical cannabis.

“Even when people are dying they still want to do it as pain free and as consciously aware as possible,” Corral said. “[…] Everybody wants to heal, no matter what, no matter where we are on our path.”

Corral operated Santa Cruz-based Wo/men’s Alliance for Medical Marijuana (WAMM), one of the first dispensaries in the nation since 1993. She was on the forefront of legalizing medical cannabis both in Santa Cruz through Measure A, the Marijuana For Medical Use Initiative in 1992, and statewide through Proposition 215 in 1996. Both of these laws legalized medical use of cannabis through grassroots movements keeping low-income and severely ill patients in mind.

While Proposition 215 came from a socially minded movement, Proposition 64 did not. Recreational legalization came with many benefits like decriminalization, but also introduced regulations that disadvantage medical patients and producers. And, despite decriminalization, Black and brown bodies, who were almost four times more likely than white people to be arrested for possession, are still incarcerated from previous charges.

A large disadvantage of Proposition 64 is its prohibition of businesses from giving away cannabis. Compassion programs previously existed for low-income medical patients at places like WAMM and CannaCruz to give away medicine for free — now they’re illegal.

“There’s also no mechanism for helping people who’re seriously ill and financially marginalized,” said WAMM founder Valerie Corral. “That’s crazy because [Proposition 64] was built on the backs of sick people and now they can’t even afford it.”

Mistaya Wilks, a compassion patient with WAMM and CannaCruz said cannabis is the only thing that’s allowed her to live a productive life with her multitude of debilitating illnesses. She uses cannabis to treat heavy metal poisoning, seizures, PTSD, progressive fibromyalgia, multiple sclerosis and stage-four cancer — the combination of which contributed to her previous houselessness.

The compassion programs at WAMM and CannaCruz allowed Wilks to regain her health and become housing secure.

“I was introduced to cannabis and within about 10 months I got off of all of the pills and started walking out of a wheelchair again […],” Wilks said. “I found that if I took enough of the right kind, it squelched my seizures and basically allowed me to live and start my life over again.”

Now Proposition 64 does not allow compassion programs and she must now choose daily between her medicine, food and housing. Wilks’ cannabis intake is now a fraction of the large amount she previously used to function with her many illnesses because she must now pay for it. She said this has taken a great toll on her quality of life.

“Cutting the [compassion] program has made me resentful toward my state,” Wilks said. “[…] Now I can’t get the life-saving medicine I need because all of a sudden there’s not enough to go around for everybody and I think it’s a huge disservice.”

WAMM and CannaCruz are trying to continue compassion programs through other means. Valerie Corral at WAMM is giving away her own cannabis to those she knows need it most and CannaCruz will keep its 10 percent discount for medical patients for as long as possible while keeping up with other costs, but loses 8 percent on every medical sale.

“Our compassion patients, we once gave stuff away for free, all of a sudden are being charged money and a lot of them are on fixed incomes and they simply can’t afford it,” Grant Palmer said. “We’ve tried to absorb some of that ourselves, but it’s rough. That means we lose money on every medical sale we make.”

While small businesses that keep medical patients in mind are being pushed out of the industry by the high price of compliance, larger businesses with more capital are poised to fill the gap they’ll leave.

Small Farm or Big Business?

Proposition 64 has not been very productive for the well-being of those who have advocated for legalization the longest — but many are predicting it will be productive for big businesses.

The California cannabis industry saw $9 billion in sales in 2017 and this number is projected to grow to $11 billion in 2018 and $21 billion in 2021, according to CNN. Comparatively, Snapchat is worth almost $20 billion.

Proposition 64 created a cannabis market with less risk and the need for a large amount of capital to enter. This is the kind of market in which corporations and larger businesses thrive and smaller ones do not.

Small farmers and business owners are now being bought out by investors because they can’t afford to stay open, said Grant Palmer and Jason Matthys, cannabis activist and creator of Equilibrium Genetics. These trends have not yet been mapped in California because legalization is a recent occurrence.

Taxes come along with costs associated with miscellaneous regulations such as the need for costly child-proof packaging on certain products, or a requirement for how wide the road to a farm must be. Because of regulations like these, Blue Belly Farms, a local cannabis business, was forced to stop farming. Blue Belly Farms is now a cannabis business consulting firm.

“When you have a large recreational market that’s focused on the dollar, and you move away from the medical market that’s focused on the the healing power of the plant,” said Brian McCall, owner of Blue Belly Farms. “[…] The small farmers, for the most part being squeezed out means you’re taking out a lot of the heart and soul of what’s going on in the production of this thing.”

Jason Kinney, chief spokesperson for Yes on 64, had no background in cannabis advocacy previous to the campaign. He is also a communications strategist for Pharmaceutical Research and Manufacturers of America (PhRMA), Dignity Health, the NFL and AT&T, among others.

In contrast, people who advocated for legalization since the ‘70s — mostly for medicinal purposes — were generally against Proposition 64. It leans toward corporatization and original activists are being pushed out of their industry due to the high taxes and fees associated with the law.

“As a small operator [you] can’t do all the things you need to do. You can’t jump over all of these hurdles that have been created,” said Jason Matthys of Equilibrium Genetics. “If you’re a large business with a lot of capital, you can bank on most of the small operators not being able to cut it. So the void that they leave, you’re going to be able to fill that gap.”

Finding Solutions

Because Proposition 64 made it difficult and in some cases impossible to continue sustaining businesses, owner of Blue Belly Farms Brian McCall and cannabis activist Michael Jolson have come up with initiatives to help mitigate its strain on smaller businesses.

Jolson, upset with the corporatization of cannabis, decided to work on passing a new law that would help, rather than hurt small businesses. He is among those advocating for California Cannabis Hemp Initiative, which will be reignited for elections in 2020 ballot. It would decrease taxes, put an acreage limit on the amount of cannabis that can be grown, limit regulations on hemp and direct tax revenue toward medical cannabis and industrial hemp research.

“We’re going to try to reform [Proposition 64] with a new law,” Jolson said. “Since recreational cannabis in one way, shape or another got legalized, now it’s time for real legalization because legalization means ending the criminal penalties, which is not the case [with Proposition 64].”

Brian McCall is doing his part mitigating Proposition 64’s hardships by creating a cannabis co-working space in Santa Cruz near Costco that will open in July.

“We have tons and tons of problems in this industry,” McCall said. “What we’re trying to do with this co-working space is solve most of the problems in the same location that people are running into. […] So what we’re doing is creating a safe space for everybody in the industry to be able to come and work together.”

The co-op will not include retail sales to the public, but it will provide a space for small businesses involved in all aspects of cannabis production like distribution, warehousing, manufacturing and cultivation to operate in one space. McCall and Blue Belly Farms will use the space and their consultations to support businesses in complying with Proposition 64 in an affordable and collaborative way.

It intends to refocus cannabis production in Santa Cruz back toward supporting the small local businesses that thrived under Proposition 215, at a time when the state-wide industry trends toward large corporations.

“What made [Proposition 215] pass was those people’s stories of what [cannabis] was doing for patients and how it was helping people,” Matthys said. “What we have now is a whole different mindset. The government has decided and businesspeople have decided that there’s money to be made here.”

Source: City on a Hill Press. By Shinae Lee – May 31, 2018.