Five years after Californians voted to legalize cannabis and create the world’s largest regulated marijuana market, many cannabis business owners say they have reached a breaking point.

On the one hand, California’s licensed cannabis industry is paying more tax money to the state than forecasters expected in 2016. Standardization of the industry also continues, with the first competition. of state-sanctioned cannabis in 2022. And new laws will come into force. intended to help certain cannabis entrepreneurs and medical marijuana patients.

But even as the legal industry grows, the illicit cannabis market in California remains at least twice the size of the regulated one. As a result, licensed cannabis operators – who are underestimated by illicit operators – threaten withholding tax payments if regulators do not come up with a solution. Businesses also continue to gobble up small marijuana businesses as the window to change cannabis laws at the federal level while Democrats control Congress just inches away.

Here are five things to watch for in the California cannabis industry in 2022.

New laws come into force

Of the 30 or so cannabis bills proposed in California in 2021, nearly a dozen have been enacted. Most come into effect on January 1, including a bill that will allow cannabis drinks to be sold in glass bottles and another that leaves the state fines up to $ 30,000 for aiding and abetting illegal marijuana ventures.

A bill approved in 2021 sets up a regulatory framework for products made from industrial hemp, a type of cannabis plant that is selected not to contain primarily THC, which is the main psychoactive compound in marijuana.

Products containing hemp-derived compounds such as CBD – which don’t get consumers high but have shown promise in helping alleviate inflammation, anxiety, and other ailments – are sold at gas stations and grocery stores for years. But the industry has remained a legal gray area, with uneven state and federal regulations sometimes posing problems for companies that, for example, add CBD to coffee drinks.

Below Bill 45 of the Assembly, compounds such as CBD can be sold as dietary supplements or as ingredients in foods, beverages, cosmetics, and pet foods outside licensed marijuana stores if they are from industrial hemp growers registered with of State. The Department of Cannabis Control also has a July 1 deadline to publish a report on how to authorize the sale of these products in licensed cannabis stores.

The same law also ends the ban on smokable hemp, which can deliver doses of CBD and other non-intoxicating compounds found in cannabis. Governor Gavin Newsom signed the bill in October, meaning California hemp growers were immediately allowed to begin selling in more than 40 states that have not banned their products. And sales of smokable hemp will be legal in California, for residents 21 and older, once regulators put a tax in place in the coming year.

Newsom has also signed a bill that will require some healthcare facilities to allow terminally ill patients to use medicinal cannabis. Bill 311, which goes into effect January 1, bans smoking or vaping cannabis, but allows the use of edibles and beverages, topicals, tinctures and capsules. It also requires patients to show a doctor’s recommendation.

The coming year will also see the state award a series of grants to help cities license more cannabis businesses, to helping small farmers with environmental remediation and provide increased support to the regulated sector.

Imminent industry revolt

As beneficial new laws take effect, 2022 will also begin with a coalition of top California cannabis business owners proposing the idea of ​​withholding tax payments that are expected to total around $ 1.3 billion this year. . The move aims to force regulators to reform the state system so that licensed companies can better compete with illicit sellers, who currently sell products much cheaper because they don’t pay taxes or comply. to regulations.

Many cannabis business owners want California to eliminate taxes on cultivation altogether. These taxes are based on the weight of the product and the rate increases with inflation no matter what happens with the wholesale price of marijuana. This is why taxes on crops are expected to increase by 4.5% on January 1, even though the the price of wholesale cannabis fell sharply in 2021.

Industry leaders have also Newsom asked in a letter of December 17. suspend the state’s 15% excise tax for three years to allow the regulated cannabis market to mature.

“Tax reform is a must in California this year,” said Kenny Morrison, founder of Venice Cookie Company and director of the California Cannabis Manufacturers Association.

“There is real momentum around the issue among all stakeholders. Even the work is okay.

Any change to the tax rates approved by voters will require a two-thirds vote in the legislature, which has so far failed. But when Newsom releases its 2022-23 budget proposal next month, Dale Gieringer, state coordinator for the California branch of marijuana advocacy group NORML, said they hoped to see him call for cannabis tax reform.

The industry is pushing for other changes in 2022 that would support the regulated market, including efforts to eliminate backlogs in license applications and push back a rule in the legalization bill that allows cities and counties to block all cannabis companies.

“We are at a tipping point,” Morrison said. “Do we support the expansion of the regulated market or the illicit market? “

Consolidations to pursue

With so many licensed cannabis entrepreneurs strive for profit, Gieringer said he expects to see more consolidation in the industry in 2022.

“Hardly anyone in the licensed industry makes money in California,” he said. “So they keep theget bought out and acquired by foreign and Canadian companies for a billion dollars.

In 2021, the industry experienced a number of massive mergers and acquisitions. And investment company Viridian Capital Advisors predicts that this activity will accelerate in the coming year, particularly in California.

So far, Viridian says multi-state operators have largely avoided California, with shares of state-owned cannabis companies underperforming due to the harsh environment. The company says market conditions are likely to prompt small cannabis operators to consider selling to larger companies in the coming year, with Viridian identifying five major California cannabis companies that it says are ripe for buybacks in 2022.

Federal push

California’s cannabis industry could be shaken up if federal law were changed to make it easier to sell the product nationwide.

While cannabis is now legal for all adults in 19 states and for medical patients in 38 states, it is still classified under federal law as a Schedule 1 narcotic, just like heroin. This has implications even for businesses and consumers in states where cannabis is legal. For example, California cannabis companies cannot access most banking services, and consumers are still at risk of losing their jobs or facing childcare issues.

The House approved the MORE law at the end of 2020, which would decriminalize and tax cannabis across the country, but this bill has not yet been passed by the Senate. Democrats are expected to make one last push for the bill next year when they still have a slim majority in Congress.

Some members of Congress are also asking President Joe Biden to use executive authority to keep his campaign promises to decriminalize cannabis and clear the records of those convicted of non-violent cannabis-related crimes.

Gieringer is not optimistic that such drastic changes will pass through this session. But he remains hopeful that Congress could at least pass a bill in 2022 that would allow banks to serve the cannabis industry without fear of breaking federal law.

The House has passed some form of this legislation five times, citing security risks for businesses forced to operate in cash. All of these efforts failed in the Senate. Democrats inserted the language into the latest defense bill, but it was abandoned before Congress approves the bill in mid-December.

Cannabis at the state fair

A bright spot for the licensed industry in California is the first cannabis competition, to be held at the Sacramento State Fair in July.

The 166-year-old fair “has always been a trailblazer,” California Exposition & State Fair board of directors Jess Durfee said as he announced the competition in September. So Durfee said judging growing cannabis alongside wine, cheese, craft beer and olive oil is a natural choice.

California has experienced a boom, unregulated cannabis competition and festival stage for years. But this world softened since voters chose to regulate the industry in 2016.

Unlike these private festivals, the cannabis flower shown at the State Fair before March 30 will not be judged on the height it provides to consumers or its taste. Instead, 77 medals will be awarded based on test results from SC Labs showing which products have the highest concentrations and best ratios of certain compounds that impact their quality and effects.

No sale or consumption of cannabis will be permitted at the state fair. But there will be a 21+ area that will showcase the winners and feature educational exhibits.