California's medical marijuana regulations may cause some growers pain

As California prepares to bring in the $1 billion medical marijuana industry from the legal shadows, growers and marketers on the pot-rich North Coast are waiting to see how much the massive regulatory structure will cost them and whether to stick instead with the prosperous but risky outlaw status they have lived with for nearly two decades.

The regulatory scheme, which will cost up to $50 million, must be funded entirely by license fees paid by the industry, while new taxes on the cannabis trade - which some advocates say is one of Sonoma County’s major industries - offer the prospect of millions of dollars to help pay for paving roads, hiring police and other public services.

Investors have taken note of the imminent regulation of California’s cannabis industry, which accounts for nearly half of the nation’s booming $2.7 billion market in legal cannabis, according to one report.

But the rosy financial forecasts - along with the prospects of enhanced public safety, cannabis consumer protection and reduced environmental damage seen as the benefits of regulation - may fall short if growers, manufacturers, dispensaries and others engaged in the business decide the costs are prohibitive.

“There will be resistance,” said Tawnie Logan of Santa Rosa, executive director of the 200-member Sonoma County Growers Alliance.

The vast majority of growers, distributors and cannabis manufacturers want to gain the safety and security of licensing, she said, but it’s a “painful transition” for those who’ve been operating by their own rules in an all-cash, bank- and tax-free business for nearly 20 years.

Logan, a cannabis and conventional crop farmer who has two daughters, likened the process to a child raised by permissive parents encountering the structures and demands of college life. “You would expect rebelliousness,” she said.

A $10,000-a-year local permit fee, which Logan said she has seen in proposals, would be reasonable for an established dispensary or a farmer cultivating 5,000 square feet of cannabis, she said. But that fee would be problematic for farmers of 500 to 1,000 square feet, whose revenues are far lower. The lowest-level state licenses cover operations up to 5,000 square feet, and Logan suggested that cities and counties might offer micro-permits for farms below 1,000 square feet.

A legislative analyst’s report, which pegged the state’s regulatory costs at $20 million to $50 million a year, estimated annual license fees of $4,000 to cover the more conservative cost, assuming 5,000 annual applications.

Hezekiah Allen, executive director of the 500-member California Growers Association, estimated the total cost of grower compliance with state and local regulations at $50,000 over three years, which he said was “pretty stiff” for many North Coast growers.

A survey of 200 growers conducted at last year’s Emerald Cup, a public marijuana competition in Santa Rosa, found that 85 percent of growers were cultivating less than 10,000 square feet. A typical 10,000-square-foot operation consists of four greenhouses measuring 30 feet by 80 feet.

Growers overall averaged a net household income of just over $100,000, about 30 percent of gross revenue in a high-cost industry, according to the survey.

“If we overtax this market, it will stimulate unregulated black market activity,” said Allen, an industry advocate who was actively engaged in crafting the new law, called the Medical Marijuana Regulation and Safety Act, signed by Gov. Jerry Brown last month.

State Sen Mike McGuire, D-Healdsburg, who authored one of three bills that were consolidated under the law, said it is “the most comprehensive regulation” on medical marijuana in the nation.

It was also long overdue, he said, noting that medical marijuana - authorized by voters as Proposition 215 in 1996 - had gone largely unregulated since then, while the use of cannabis to relieve illness “exploded across California and throughout the nation.”

Since much of the country’s marijuana is grown in his North Coast district, McGuire said the issue is personal, and he acknowledged the importance of not pricing cannabis businesses out of the regulated market.

“If it’s too expensive, people won’t bother,” he said. “For 20 years, no one has paid a dime for licensing.”

Based on the record of legalizing recreational pot in Colorado and Washington, McGuire said he determined that 35 percent is the “sweet spot” for sales taxes. He plans to introduce a bill next year establishing a 15 percent statewide retail sales tax on medical cannabis, which would yield up to $195 million and be assessed on top of current sales taxes that run about 8 percent.