After more than a year since Long Beach opened its doors to legal recreational marijuana, the City has yet to see a single dollar in tax revenue from cannabis distribution and manufacturing businesses as owners seek more competitive tax jurisdictions. That means that the police, fire, health and human-resource departments have not seen a dime, and the citizens of the city are not benefiting from the booming cannabis industry.
Omer Saar and Sarah Evans, owners of Feel Good Distribution, with an unused Long Beach distribution license, stated that, “At 6 percent of gross revenues, it doesn’t pay to operate an extraction or distribution business in Long Beach when Los Angeles is 1 percent. Most distribution businesses work on slim margins, and the 5-percent difference means I can’t sustain my business here. Moreover, Long Beach does not allow deduction of Cost Of Goods Sold (COGS), which is crippling in and of itself. Unfortunately, after jumping through all the hoops and expenses to get our license in Long Beach, our facility is empty, and all our business and job creation has gone to Los Angeles.
“To be competitive, distribution businesses are charging 10 [to] 20 percent,” he said. “6 percent of gross revenue means 30 [to] 60 percent of our earnings before income tax, employee wages or expenses. Long Beach is not attractive until they fix the tax rates and cost of goods sold deduction.”
Currently, the cannabis retailers in Long Beach are carrying the entire cannabis-tax burden, which helps fund Long Beach’s health-and-human resources, law enforcement and other departments. By offering distributors and manufacturers an environment that is more competitive than neighboring cities, the City will benefit with additional tax revenue and create an opportunity to reduce the tax burden on cannabis retailers, who are also being over taxed, causing consumers to purchase from the black market.
“California market is forecasted to grow at a compounded annual rate of 18.5 percent to $5.6 billion by 2020,” according to financial consultant Cannabis Business Plans. Cannabis businesses are making long-term investment decisions now to locate in municipalities that give them a competitive edge. Once a cannabis business is established, it is highly unlikely they will relocate.
Federal legalization in the United States is imminent and, according to Forbes, “Spending on legal cannabis worldwide is expected to hit $57 billion by 2027.”
If Long Beach acts now to lower the tax rate on distribution and manufacturing to under 1 percent and include COGS in deductions, it would position the City to be a prime destination for local and international cannabis distribution and manufacturing businesses.
Many cities are acting to fix the problem. In November 2018, Oakland voters approved an amendment to “allow [a] marijuana business to deduct the cost of raw materials from their gross receipts and to pay taxes” and to “allow the city council to amend the law in any manner that does not increase the tax rate.”
Long Beach has the same opportunity as Oakland. Long Beach is bordered by the I-405, I-605, I-710 and CA-91. It has a large “green zone,” a mature cannabis department and processes and possesses the largest port in Southern California. A distributor with a home-base in Long Beach could conduct business anywhere in Southern California.
The City’s financial windfall as a consequence of low taxes on distribution and manufacturing are astounding.
Every brand, manufacturer and cultivator is required to use a distributor to sell their product to a retail or delivery dispensary. Therefore, a single distributor with a large list of dispensaries would, over time, transact hundreds of millions of dollars. Cultivators and manufacturers would seek out the competitive advantage of these distributors. Second, the cannabis flower market is being outpaced by the oils and edibles. Manufacturers would be able to pass on these saving to distributors, other manufacturers and dispensaries.
Distribution is a zero-sum game. As the industry matures, economies of scale will force consolidation. The simple conclusion is that distributors in higher tax burdens will not be able to compete with distributors in lower tax burdens. As a result, highly-taxed distributors will lose business to distributors with a lower tax burden.
What cities and municipalities do not understand is right now is not the time to tax; it is the time to nourish a fledgling industry and help foster an environment where the businesses within their borders thrive and survive the eventual maturation and consolidation of the industry.
The Oakland voters overwhelmingly knew this. Will Long Beach City Council figure it out before it is too late?
The issue has also received the attention of California Gov. Gavin Newsom, a principle supporter for legalized marijuana. He intends to look at the distribution pipeline and claims that local governments are gouging the industry. The facts support these claims. In addition, the State of California is looking to lower the state taxes after generating only 40 percent of projected revenue in 2018, due to over taxation and regulation crippling the legal market and empowering the black market.
