The Green Grind: SF Cannabis Firms Call Out Taxes and Broken Promises


Today marks the fifth April 20 since legal adult-use cannabis sales began in California. But rather than celebrate and give thanks, many in the San Francisco cannabis industry are gravely concerned about the future of the legalization experiment.

Nine local cannabis business owners, entrepreneurs and workers shared common complaints about unreasonably high taxes, a booming illicit market, onerous bureaucratic hurdles and—worse—broken social justice promises. 

Some even offered ominous warnings that unless state elected officials can muster significant reform, both the cannabis industry and the marijuana legalization experiment writ large could be in serious trouble.

Legalization was pitched as a win-win policy that would shower treasure on state coffers while offering lucrative business opportunities to Black and Brown people who suffered most during the drug war. The promise of a multi-billion dollar legal market triggered a flood of entrepreneurship and investment that’s been compared to the Gold Rush and the tech boom.

But just a few years later, many are finding that the excitement and frenzy of the Green Rush have given way to something closer to a green grind.

“There’s no get-rich-quick in cannabis—this is a long game,” said Brendan Hallinan, a business attorney who’s worked with cannabis clients for more than a decade and who is a partner now in several local cannabis businesses. 

“I think a lot of people came into cannabis with the expectation, ‘Oh, we’re gonna make millions of dollars in a year.’ And it’s just not working out that way,” he added. “It’s a small business. It’s a startup in a challenging, highly regulated environment.”

If anything, it’s more like running a bar or a restaurant than launching a startup, with the same modest profit margins and the same sobering rate of failure, according to the businesspeople and additional observers interviewed for this story. 

“Nobody’s making any money in this business,” said Ben Bleiman, a partner in cannabis dispensaries in Lower Nob Hill and on Clement Street in the Richmond. 

Bleiman, a successful bar owner and booster for San Francisco’s nightlife scene, has earned a reputation for his outspoken advocacy for the city’s indulgences and his often hyperbolic rhetoric. But in this case, he insists, he’s merely being real—and saying what policymakers need to hear: That legalization has been “an utter catastrophe.”

Dank & Taxes

On the macro level, this can be hard to understand. California raked in nearly $1.4 billion in cannabis tax revenue last year, on taxable sales of more than $5.2 billion, according to Department of Tax and Fee Administration data.

The numbers don’t lie, but they may deceive. In San Francisco, licensed merchants sold $231 million worth of weed in 2021—$17 million less than in 2020, the agency reported. And there is more competition for that shrinking opportunity. 

The pandemic is one explanation for why legal sales have stagnated. So is the booming and thriving illicit market, which may be between three to five times as large as the state’s legal market, according to most estimates.

Though the state is struggling to shut down both illicit growers and unlicensed sellers, consumers have a strong incentive to buy from the “traditional” marketplace rather than legitimate merchants. It’s a lot cheaper.

For consumers, “prices are too high,” agreed David Goldman, a retired public-school teacher and prominent cannabis activist who co-founded the city’s Brownie Mary Democratic Club, a political organization dedicated to cannabis advocacy. 

As numerous reviews, including a National Conference of State Legislatures policy brief have found, California’s cannabis tax burden is one of the highest in the country. A $166.08 flat tax is due on every pound of cannabis flower, plus a 15% excise tax, and state sales tax, according to the state Legislative Analysts Office. Local taxes, like the gross receipts tax of up to 5% that San Francisco voters approved in 2018—but temperarily suspended—add to the burden. 

In addition to taxing cannabis more than other states, California also taxes cannabis “more” than other commodities, including so-called “vice” sectors like alcohol or tobacco. Tobacco growers, hops growers and vineyards are not hit with a flat tax rate at the production level. 

Detail of giant joints in the Sunset Connect workspace in San Francisco on April, 19th 2022. | Eloïse Kelsey

To compound the matter, there’s too much weed. The state produces as much as three times the cannabis it consumes, according to an estimate from the Humboldt County Growers Alliance. This oversupply has sent wholesale prices plummeting from several thousand dollars per pound in the medical-cannabis era to $500 or below. It’s a one-two punch that adds up to an effective tax rate for farmers of 50% or more before the crop even hits the production room, a tax burden not felt by any other agricultural sector.

“Nobody taxes hops or tobacco at the cultivator level,” said Pat Oglesby, a North Carolina-based attorney and founder of the tax policy nonprofit Center for New Revenue, who chaired the tax structure working group of Gov. Gavin Newsom’s Blue Ribbon Commission on Marijuana Legalization

These taxes, part of the “tax and regulate” sales pitch that convinced voters to legalize, “continue to strangle the legal cannabis industry, preventing it from more effectively competing” with the illicit market, said Supervisor Rafael Mandelman, who authored legislation suspending the local tax. 

Add in the ongoing federal cannabis prohibition, which prevents marijuana businesses from deducting normal business expenses thanks to a section of IRS code called 280E, and “your average cannabis business pays three to five times more taxes than a regular business,” Bleiman said. 

‘A Constant Fight’

Despite the high cost of doing business, nearly 100 new cannabis businesses are poised to enter the local market. That means there will soon be even more competition in a city many say is simply too crowded.

In 2015, San Francisco had 2.1 dispensaries per 100,000 people, according to a 2015 survey from the Humboldt Institute for Interdisciplinary Research

Now, with 50 licensed dispensaries as of December, according to a presentation from the city’s Office of Cannabis to the Board of Supervisors, the ratio is closer to 17 dispensaries per 100,000 people.

The 94 business applications with a retail component in the pipeline have all applied through the city’s “equity program,” which reserves licenses for people who can demonstrate the war on drugs harmed them.

“Last quarter was a bloodbath,” said Ali Jamalian, who chairs the city’s Cannabis Oversight Committee and is the founder and CEO of Sunset Connect Manufacturing and Distro, an equity brand found in many local dispensaries with a production facility in SoMa, “The little profit we made went to tax payments.”

Morris Kelly, the 37-year-old founder and CEO of SF Roots, an equity brand selling cannabis flower, pre-rolls and other products in dispensaries all over the state, sometimes pines for the pre-legalization days, when things were less complicated and far more lucrative. He would know: When he was 15, Kelly started his first “job”—sitting in an office chair at Haight and Masonic streets, selling dime bags to passersby.

According to Kelly, dodging the police was way easier than staying on the right side of cannabis tax laws. Respecting the turf of other plugs was a cakewalk compared to battling the competition of a booming illicit market and well-capitalized corporate cannabis outfits with burn rates sufficient to starve him out.

“It’s a constant fight,” he said. “If you don’t have the fight in you, if you’re not prepared for that fight, you’re going to get burn out really quick. You have to constantly reassure yourself that this is what you want to do.”

Jason Deming, director of manufacturing at Sunset Connect, walks through his San Francisco workspace on April, 19th 2022. | Eloïse Kelsey

Broken Promises

High taxes and other barriers to entry are also threatening to undo legalization’s key social justice promise of making progress in reversing the damage done by the war on drugs.

Kelly’s teenage hustle got him arrested. That makes him a prime example of the kind of person San Francisco’s equity program is intended to help.

But now, as a Black legitimate cannabis business owner, Kelly sometimes thinks that the entire premise of the initiative may have been patronizing and misguided to begin with, albeit well-intentioned.

“If you were harmed by the war on drugs, the answer shouldn’t be to go sell more drugs,” Kelly said. “If you want to go into tech or open a barbershop, you should get support to learn to code or open a barbershop. You shouldn’t force people into the thing that caused them trauma.”

According to DeAnn Robinson—a 54-year-old Black woman, Western Addition native and cannabis equity qualifier—applying to San Francisco’s program is a bureaucratic headache.

While Robinson works in the industry, she said she doesn’t think it’s worth the trouble to start a retail business. She makes $18 an hour as a delivery driver on the Eaze platform, a prominent cannabis delivery service. While that’s a fairly typical wage in the local cannabis industry, it’s still well below the city’s “living wage.”

Robinson and a few of her co-workers, all union organized, are currently locked in a contract battle over what she says are stagnating wages and exploitative conditions. But starting a legal business now could be even less lucrative than a driving gig.

And besides, Robinson said, she doesn’t have the capital to do anything meaningful with her status as an equity candidate. Unlike newer state equity programs, like the one in New York, San Francisco’s does not provide capital to qualified applicants.

If she did have that money, the last place she would invest it would be in a legal business, when she can walk outside her front door and get an eighth off the street “for $20, $25, all day.”

“That’s exactly why I’m not pursuing opening a dispensary, or partnering [with a moneyed partner], or doing any of that,” she said. “That would have me bankrupt, owing people money. It’s just too risky.”

Correction: A caption in a previous version of this story incorrectly identified the individual walking through the Sunset Connect workspace as founder Ali Jamalian. It is actually Jason Deming, director of manufacturing at the San Francisco cannabis company.

The post The Green Grind: SF Cannabis Firms Call Out Taxes and Broken Promises appeared first on The Paloalto Digest.



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