California Cannabis Taken to Tax — We’re Not Going to Take It Any More

On Wednesday, November 17, California made two significant announcements. The first was that state coffers are bursting with a $31 billion surplus. The second is that it is once again raising taxes on cannabis farmers.

We applaud recent reforms that resulted in a surplus. To the cannabis tax raise, we simply reply: we’re not going to pay.

When Flow Cannabis Co. (FCC) launched in 2015 with our flagship brand Flow Kana, we experienced what a well-functioning, healthy, growing industry could look like in California. On December 31, 2017 — just a day before our adult-use regulations began — FCC had more than 800 retail partners in a market of more than 5,000 retailers, all of whom paid their providers in full and on time. We had partnered with more than 200 Emerald Triangle legacy craft farmers and grew to become Mendocino’s second largest employer (after Costco). Our company blossomed, and with Flow Kana, we were able to bring sungrown sustainable cannabis — and the independent farmers who produced it — into the light, not only as its own category, but also as the state’s #1 selling flower.

Three and a half years later, California’s entire cannabis supply chain is quickly becoming an ICU of distressed assets… circled and surrounded by publicly traded MSOs, hungry to place their stake in the nation’s cannabis production epicenter. Our company is just one of many that has grown accustomed to operating in perpetual survival mode as we collectively wait for an injection of lifesaving regulatory and legislative changes to simply have a system that works.

Today, Flow Kana has around 350 unique retail partners in a shrinking market of roughly 800, only 150 of whom we service regularly. Every other retailer is in default or on a payment plan — not because these are bad actors, but because it’s almost impossible for any of us to operate profitably under California’s broken regulatory regime. Layoffs have become the norm as we all constantly adapt and right-size to a market that is contracting every month due to a surplus of illicit operators, a dearth of retailers, a surplus of flower and an unworkable tax structure.

Despite California’s current landscape, we remain hopeful.

How did this happen?

According to Politico, today’s California cannabis market is valued at ~$1 billion monthly, of which only one-third of which is going through the legal channels. The other two-thirds goes to the illegal market with no tax benefits at all to California. Some 68% of California’s cities still have no legal dispensaries. Additionally, according to industry watchdog BDSA, the last few months have seen a decline in California’s overall sales: by 2% from April to May; 5% from May to June; a 4.2% decline from July to August; and down 8% from August to September.

It doesn’t take a rocket scientist to follow where this is headed. The state’s licensing process is unworkable, and the regulatory framework has disincentivized operators to remain open. The regulatory system, which borrowed concepts from non-agricultural states, is set up to benefit vertically integrated operators in such a way that makes it almost impossible for the healthy and robust independent supply chain that California intended to create to flourish. Sungrown farmers, with only one cycle of a crop (like nature intended it to be) are bearing the brunt of the impact.

Our tax structure is excessive and completely broken and, instead of collecting more income for the state, it’s creating a thriving illicit market, putting people out of business and killing what could be one of the greatest industries of California — and frankly, our nation. If the government doesn’t fix this now, it will be remembered as an administration that had every reason to succeed but instead decided to just let it fail.

This situation touches a special nerve for us. We come from Venezuela, a country where the government destroyed national industries, where arbitrary laws and regulations failed citizens but enriched corrupt officials, and where honest hard-working people were punished for doing the right thing. That’s why we will be dedicating every ounce of our energy to fixing California’s broken system.

We want to see an industry that’s inclusive, that’s growing and flourishing, creating jobs and generating tax revenue. We see an industry undoing all the wrong of social and racial injustice. We see an industry reshaping our myopic approach to medicine and move pharma away from their single molecule approach. We see an industry that can redefine our old ways of agriculture where sungrown cannabis — California’s unique differentiator — becomes the gold standard of quality for the entire nation. This could be an industry that fuels our state’s economy, and an industry that champions its pioneers.

But we’re headed in the opposite direction. Here’s the solution: Less taxes and more retail.

Less Taxes

The current tax structure hits different parts of the supply chain, and compounds as it moves to retail, making our legal products about 50% more expensive than those in the illicit market.

By eliminating the cultivation tax, and allowing a three-year grace period for excise tax, we can give oxygen to the supply chain, which ultimately lowers the price point on the shelf and makes legal products more competitive with the illicit ones, which in turn grows the tax base. Lowering the price point on the shelf will also bring over consumers who still shop illegally and create a bigger market for everyone. This growth will spur more brands, more companies, more jobs and ultimately more tax revenue.

More Retail

The current “local control” measure that gives localities the freedom to develop their own oversight program has backfired in almost irreparable ways. Californians can’t buy cannabis in 68% of the state’s territory because there is no regulatory program in place. Cash-strapped and understaffed cities and counties all over the state have struggled to put forth their regulatory program, and as a result, legal operators have lost those markets and those consumers. The only way to fix this is overriding local control and trusting the majority of California citizens, who voted in favor of cannabis legalization, and wish to see this industry thrive.

The Legislative Process

In the next few weeks, Governor Gavin Newsom will be developing the framework for the 2022 California budget. In this budget proposal, he has the power to introduce all of these concepts, and through a series of hearings and committee discussions over the following months, and with the affirmative vote of two-thirds of the legislature, all of these changes could be implemented by July 1st of 2022. There’s a real path that can be followed and real change can be achieved. The solution to these issues and the possibility of saving this industry lies in Governor Newsom’s hands. We are calling on him to save California’s cannabis industry so that we can restore our California to its global cannabis leadership position.

We are 100% committed to working alongside Governor Newsom and the legislature; with that said, we are prepared for the unfortunate possibility of continued inaction. Thus, we are also making the recommendation to our board that we refrain from paying the cultivation tax after July 1st, 2022. Our recommendation will be to place our estimated tax in escrow in good faith, and to withhold payment until we see real, actionable change. We invite our fellow California operators to join us.

To our farmer friends in the community, and all other operators across the supply chain who wake up every day with enormous uncertainty and expenses that keep on piling up — DON’T GIVE UP. We, and everyone at FCC, never will.

This is our story. This is our demand. We hope you share yours, too.

Michael Steinmetz and Flavia Cassani
Founders, Flow Cannabis Co.
Redwood Valley, CA

By Michael Steinmetz

Dear President-Elect Biden and Vice President-Elect Harris:

As an American who was raised in Venezuela and who experienced firsthand the dangers of an undemocratic society, I have always taken hope and comfort in the American promise of life, liberty, and the pursuit of happiness — wise words from a declaration drafted by a hemp farmer.

Freedom and opportunity are at the heart of what it means to be an American, and these concepts are also foundational to the cannabis industry.

Legal cannabis has come a long way in the past four years — but not because of our presidential leadership. There is no doubt in my mind that you will be a better president for America, and I hope, better for cannabis. But being better than Trump is an extremely low bar to beat. To our industry, to be “better than Trump” means to open your mind and listen to us. Perspectives are changing and stigma is slowly falling. This is evidenced by the five states that adopted legal cannabis during the election. Don’t forget that all Americans support cannabis legalization more uniformly than supported either presidential candidate in the 2020 race.

And so, in solidarity with those who still remain incarcerated for nonviolent cannabis offenses, who still lack the right to vote because of past cannabis convictions, who can’t access cannabis as medicine because of local state laws, and those whose regulated cannabis businesses are still suffering due to lack of banking, unfair taxation, and an inability to compete with a thriving interstate illicit market — I ask: Will you stand with us?

The legal cannabis market’s biggest competitor is the illicit market. This is sustained by federal prohibition and the listing of cannabis under Schedule 1 of the Controlled Substances Act. Although some form of cannabis legalization is available in all but seven states, over 70 cents of every dollar spent on cannabis in the U.S. continues to benefit the illicit market. This is a serious problem — and an incredible opportunity.

You have indicated that your administration will focus efforts on four national crises facing Americans. You also have discussed your intended cannabis policy reforms using somewhat vague terminology like “decriminalization.” Cannabis legalization and an end to federal prohibition will alone contribute more toward progress on each of the major crises we face than any other single action you can take. Here’s how:

Economic Recovery

President Trump’s mismanagement of the coronavirus will reshape the American economy for the duration of this decade. Americans need new industries to put people back to work. Cannabis, like alcohol in 1933, can help America out of this recession with hundreds of thousands of new jobs created by simply moving the current volume of illicit activity into a legal marketplace. Encourage Congress to pass and sign the MORE Act to end federal prohibition of cannabis. If the Senate won’t pass it, use your administrative authority to remove cannabis from the Controlled Substances Act. Federal prohibition creates the illicit market, and legalization is needed to end it. Without adding any additional customers, the newly legal cannabis market will generate more revenue than the NBA ($8.7 billion) and NFL ($15 billion) combined.

Racial Inequality

We share your goal to eradicate institutionalized racism. Few federal initiatives enable institutionalized racism more than arresting Black men for cannabis at a 4:1 ratio over whites as a part of the War on Drugs. With over 700,000 arrests annually, such unequal criminal justice enforcement impacts entire communities. It is critical that legalization include record expungement to address our nation’s past policy mistakes. We can support opportunities for wealth creation by those harmed in the War on Drugs and we can foster a legal industry whose leadership resembles the diversity of America.

Climate Change

Cannabis is a plant that, when grown outside, contributes to carbon sequestration, builds soil, and boosts rural economic development. Today, the majority of legal cannabis is grown under lights indoors, consuming massive amounts of electricity and generating a vast and unnecessary carbon footprint. This waste is further exacerbated by the prohibition on interstate commerce. Sanctioning interstate trade of sun-grown cannabis will reduce carbon emissions and other pollutants from power plants while employing rural farmers to put carbon into the ground where it belongs. Direct your Justice Department to allow legal cannabis states to opt-in to interstate commerce.

Public Health

The COVID-19 pandemic has forced every American to consider our public health systems in a new light. Public health is benefited by legal, regulated cannabis as underscored during the Vape Crisis in late 2019. The legal market’s testing and standards ensure only quality products are consumed. The illicit market cannot be held accountable for negative health outcomes. Moreover, as Americans seek to cope during this pandemic, the use of cannabis as medicine for anxiety or sleeplessness is increasing and has been identified as a safe and effective alternative to our opiate crisis.

Mr. President-Elect, let’s be frank. If any other solution presented the credentials that legal cannabis does for job creation, criminal justice reform, climate solutions, and general public health it would be pursued without hesitation. Both Red and Blue states have legalized cannabis businesses — come learn from them. Dedicate time and staff resources for a listening tour to legal state markets to interview elected officials, regulators, law enforcement, and industry to learn more about the strengths of the market, and the areas that need improvement. All 185 employees here at the Flow Cannabis Co. would welcome your team to visit our state-of-the-art facility in Northern California, where we welcomed Vice President-Elect Harris’ Senate Office State Director Ms. Heather Hutt in 2019.

Change may not happen overnight, but change is required. We offer ourselves as a resource to your team and encourage serious consideration of the topics we’ve shared. Together we can demonstrate leadership here despite the bias and stigma that has misled us to think nothing positive can come from cannabis. Together let’s welcome the wealth of solutions that legalization creates and that America needs. The only direction to go is forward. Now is a time for great change.

With respect and confidence in a more just and free future,
Michael Steinmetz

Michael Steinmetz is the co-founder and CEO of Flow Cannabis Co., a Northern California processing, manufacturing, white-labeling, and distribution company devoted to the values and vision of a sustainable and inclusive legal cannabis industry.