“We fought so hard to get us from the underground market and into the light,” said Montes, who is managing partner and owner of Delta IX THC in Los Angeles.
According to the United Cannabis Business Association, a Sherman Oaks trade group, there were an estimated 8,000 cannabis retail outlets in California in 2017, before the law took effect.
As part of the deal putting Proposition 64 on the November 2016 ballot, cannabis retailers had to agree to pay state excise taxes totaling 27.5% on top of sales taxes and whatever business taxes municipalities imposed on the industry.
“No other industry has to pay anything close to that amount.” Cannabis retailers have for the most part passed these taxes onto their customers but have run into a formidable obstacle: the black market.
With that kind of price spread, customers have been fleeing the licensed dispensaries and going to unlicensed shops or in some cases, buying marijuana on the street.
“My first quarter sales have dropped 15% over the past year, almost entirely due to the black market,” said Carlos De La Torre, owner and chief executive of Cornerstone Research Collective Inc., an Eagle Rock dispensary.
The excise taxes generally have to be paid up front, upon purchase of the inventory – unless the distributor makes an exception.
“You end up paying taxes for the product and then some of the product goes unsold because your customer volume is falling,” Kiloh said.
As a result of all these pressures, all of the dispensary operators reached for this article said they personally know of other dispensary owners who have decided to sell their businesses, often at distressed prices, though none said they were at the point of putting their own dispensaries up for sale.
But Kiloh and others say the end result is a consolidation in the industry.
Cannabis dispensary owners, distributors and cultivators have for months now been pushing state lawmakers for tax cuts and for stepped up enforcement actions against black market operators.
There’s also a push at the local level to put a measure on an upcoming Los Angeles city ballot to lower and restructure the 10% business license tax the city levies on cannabis businesses.
Contrary to popular belief, the black market is not just the stereotypical drug dealer on the street corner.
“People walk into these stores and can’t tell the difference between them and legitimate businesses, except that the price for the product is a whole lot cheaper,” Montes said.
Rivera, who previously was a cannabis industry consultant, said he has put in an application with the city of Los Angeles to open up a retail cannabis dispensary on the premises of his Studio City office.
But there’s a catch: Rivera is counting on some of the taxes the industry now faces being cut to make his businesses successful.