Cannabis In California – A Forecast For 2020

With cannabis now fully legal in 11 US states and a general election scheduled for 2020, many have speculated on what the next year will bring for the industry. Of those 11 states, the largest by far is California.  With a population roughly the size of Canada and a long history with the plant, California is the largest cannabis market in the world.  Earlier projections in 2019 showed industry sales for cannabis in California to be sitting at a whopping $3.1 billion. Some estimates even showed that the Califonia cannabis market may be worth more than the GDP of some countries.

While it may be the largest, it’s also one of the most complicated.  A heavy regulatory environment combined with a black market that just won’t die has left the legal industry frustrated. It has also created a whole host of issues and scandals for the Golden State.

2020 is already shaping up to be a critical year for cannabis. Here are a few things you should watch for if you’re keeping track of California.

The State Of Cannabis in California

With widespread layoffs plaguing the sector, 2019 was a rough year for the legal cannabis industry in California.

The state also has one of the largest illegal cannabis markets.  Snuffing it out has proven to be significantly more difficult than anyone expected. The illicit cannabis trade has been utterly persistent in the state since it went fully legal in 2016.

To put it in perspective, in 2019 authorities announced that they had seized $1.5 billion worth of illicit pot.  By some estimates, sales in the black market industry may be three times greater than those in the legitimate one.

The battle between the nascent, legal cannabis industry and its underground counterpart continues into 2020.

The Tax Hike

By far one of the most negative changes that will effect cannabis companies over the next year are the new tax hikes that took effect on January 1st.

The California Department of Tax and Fee Administration announced in November that it would be hiking the mark-up rate for cannabis from 60% to 80% at the start of 2020.  They also announced that they would be raising the cultivation tax rates to adjust for inflation.

The move represents a major blow to legal sellers.  California already has the some of the highest tax rates for cannabis in the country, and the industry hasn’t been quiet about it.  In a statement shortly after the announcement, the California Cannabis Industry Association blasted the move, saying that “the announcement by the California Department of Tax and Fee Administration to increase tax rates on the cannabis industry has left the membership of the California Cannabis Industry stunned and outraged”.

One of the major reasons that the black market still exists is the discrepancy between prices. Much of that is being driven by the heavy tax burden faced by legal operators. With the tax hike now in place, more tension between authorities and regulators in 2020 can be expected.

Tax hikes for cannabis in California
Image Courtesy of Steve Bussinne

Cracking Down On Illegal Cannabis

The fact that the illegal operators have not only been able to thrive, but to do so blatantly has no doubt been a major source of embarrassment for California.  Much of the blame can be pinned on the excessive rules, regulations and taxes placed on legal businesses. However, authorities have also been dropping the ball when it comes to enforcing the law.

The crackdown on illegal weed already began in 2019.  Over the summer, law enforcement tripled the number of raids on unlicenced cannabis vendors. These operations resulted in the seizure of millions of dollars worth of illegal goods.  2019 was also the year that the industry, frustrated by the lack of enforcement from the government, helped back the financial audit that revealed just how the massive the black market truly is.

There’s a good chance that this will continue in 2020.  The Bureau of Cannabis Control announced in November that they would start implementing more aggressive (and effective) tactics.

In addition to shutting down illegal shop operators, authorities will also be going after the landlords who rent their properties out to illegal businesses.  The strategy has already been used successfully by authorities in San Diego. This has lead to a huge reduction in unlicenced cannabis stores in the city.

Man smoking cannabis in California
Image Courtesy of Jeff Klugiewicz

The Weedmaps Scandal

One of the biggest headaches by far for authorities in California has been Weedmaps.  The online service that lists cannabis providers was caught up in a major scandal when it became apparent that the platform was listing both legal and illegal providers. This lumped underground shops in with legitimate businesses.

The platform is a huge thorn in the side of authorities, and an industry competing with less expensive, illegal weed.  Unfortunately, they’ve been unsuccessful so far in their attempts to crackdown on the company.

The Bureau of Cannabis Control tried in 2018, sending them a cease and desist letter for violating California advertising law.  In response, Weedmaps ignored the warning. They claimed protection under the same laws as platforms like Facebook and Twitter, in which the platform isn’t held liable for third party content.  However, in August of last year, Weedmaps announced that they would put a stop to the practice on their own, with spokesperson Alex Clark saying that “Weedmaps always has and will continue to advocate for a flourishing, legal cannabis market, and taking action to address social equity is integral to making that a reality. Our announcement reinforces that commitment and outlines the program we are implementing to support minority entrepreneurs in the cannabis industry”.

As of this week, the company has pulled thousands of ads from illegal vendors off their platform.  The cleanup, however, remains incomplete, and unlicensed businesses still have a “limited presence” on the site.  If this continues, it’s expected that authorities in California will start to crackdown, making use of new legislation signed by Gavin Newsom last year to do so.

The situation further outlines the tension between the cannabis industry and the black market, and 2020 may very well be the year that this tension finally comes to a head.