After decades of prohibitionist politics, cannabis is finally being regulated in an increasing number of countries around the world. One of the reasons regulation was necessary, according to many legalization supporters, is the necessity to beat back the black market and to allow those in need access to medicinal cannabis without resorting to shady and uncertain suppliers. However, even though the cannabis industry is booming, the black market was not hit as hard as many were expecting. That is, regardless of the legal availability of cannabis flowers, the black market is still thriving. Kevin Haller, principal with Akene Consulting and member of the National Cannabis Industry Association, believes that this phenomenon is caused by the regulations that set almost insurmountable barriers to entering the legal industry, particularly with larger businesses dictating consumer needs. “Akene is a consulting company for cannabis operators,” Kevin explains. “We provide tax preparation/provision/planning, internal control, and assurance services. In performing those services, we noticed the pain points operators face while navigating operations, compliance, and financial reporting and created services lines to address those challenges. These services include, but are not limited to, technology solution assessments, process mapping, process optimization, and overall enterprise risk management. In other words, we help businesses navigate the troubled waters of regulatory environments.”
On the right, Kevin Haller
The hurdles of legalization
“In the US, even though the cannabis industry is booming, the black market is still thriving, and there are many reasons behind this,” Kevin says. “One above all is caused by the cash-intensive aspect of the industry. In other words, the capital requirement is too high.” Kevin further explains that operators need significant capital to reinvest in land, facilities, people, technology, branding/marketing, and other resources. "On top of that, growers, along with other operators, have tremendous tax burden – such as cannabis business tax, cultivation tax, excise and sales tax, and the dreaded 280E for income taxes. 208E only allows a business to deduct cost of goods sold for federal purposes because cannabis is a Class 1 illegal substance, resulting in all other operating expenses incurred to be counted as taxable income. Businesses have focused on ways to navigate this rule with complex structures instead of working on managing costs and growing the top line. As a result, many businesses will learn the hard way to accept the rule rather than creating complex structures to circumvent it. To mitigate this issue, cannabis must be removed from the Class 1 substance category. The problem on top of this is the limited number of licenses available in certain jurisdictions creating monopolies, while not meeting the demand of the market." To better explain the situation in the US, Kevin describes the situation in California. “Take California, for instance. The real estate market is extremely expensive. Additionally, only a few licenses are available in many jurisdictions, for example, in San Jose there are currently only 16 licenses, thus making the whole scene very elitist.”
The team with Akene during the NCIA's Cannabis Business Summit in San Jose, CA.
The California case study
According to him, since there are too few licenses available, legal cannabis is not being produced on a scale sufficient to keep up with the demand. "It is important to mention that the black market has established pricing expectation for the consumer over the years," he points out. "When legal operators are faced with significant tax burden, high real estate costs, and extreme regulatory compliance, it is hard for legal operators to compete on price, which in turn incentivizes consumers to seek out the old heritage operators to purchase cannabis illegally. In addition, the extreme regulatory compliance, current tax structure, and limited licensing in California does not incentivize or allow heritage operators to enter the legal market place." Kevin believes that California does not have to look far to find a solution. “I really like what the state of Oregon is doing,” he says. “They have issued so many licenses, which has done two great things. First, it allowed heritage operators the opportunity to enter the legal marketplace. Second, it created an overproduction of cannabis which allows the consumers many choices and helps regulate pricing. Over time, the businesses not supported by the consumers will be weeded out, and the last businesses standing will be determined by the consumer, and not by what is dictated to the consumer. Through achieving such overproduction the price of cannabis flowers can go down, thus representing a better alternative to the black market operators."
An inclusive solution
"So to put it bluntly, there is a solution to prevent the black market from thriving, or even potentially ending black market sales of cannabis within the US permanently: we need to decriminalize and remove cannabis from the class 1 substance schedule so that 280E is lifted." However, that is just one element, as another important factor is “Inclusion,” says Kevin. “This industry needs to be more inclusive, and acknowledge the role that heritage operators have played thus far. This industry has thrived for decades – yet, only recently it has come out into the light. States must be more open in distributing licenses, but above all, equity programs should be created to allow minorities and others disenfranchised by the war on drugs, to start cannabis businesses without amassing millions in capital. The green collar have the knowledge, understand the consumer, and have the experience to improve the industry as a whole. We need to make the industry more diverse and diversified where white collar supports the green collar. It should become like the brewery industry, where small craft growers and large scale commodity producers work together to fulfil the consumer demand – where connoisseurs have access to incredibly high quality small-batch cannabis. Social consumption needs to be part of regulatory change, so tourism and ancillary businesses are elevated causing the overall economy to thrive. The green renaissance has been in the making for decades, and it is time we embrace it.”
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