SACRAMENTO, CA — California’s legal cannabis market just took a major hit. Sales in the first quarter of 2024 fell by 11% compared to the same period last year—the steepest year-over-year drop since legalization, according to SFGate.
The quarter ended with $1.088 billion in total legal sales, but the decline comes at a time when licensed cannabis businesses are already grappling with falling wholesale prices, rising operational costs, and an ongoing struggle against a thriving unregulated market.
Tamma Adamek, spokesperson for the California Department of Tax and Fee Administration, downplayed the immediate concern by noting that quarterly figures are fluid. “It’s like comparing apples to oranges,” she told SFGate, adding that numbers are often revised as more dispensaries file late or amended tax reports. “We know that gap will shrink,” she said.
Legal Market Shrinking Amid Growing Pressure
Despite some optimism from state tax officials, the bigger picture shows a legal industry under mounting pressure. A Department of Cannabis Control (DCC) report released earlier this year revealed that just 38% of cannabis sales in the state are happening within the licensed market. That means more than 60% of sales are still occurring through unregulated channels.
The report also highlighted a sharp collapse in wholesale cannabis prices:
- 57% drop in wholesale cannabis prices (adjusted for inflation) since Q4 2020
- 46% drop in indoor-cultivated cannabis
- 74% drop in outdoor-grown cannabis
- 60% drop in mixed-light cultivation prices
Retail prices have continued to fall throughout the first half of 2024, creating even more volatility in an already fragile marketplace.
Tax Increase Set for July 1
In a controversial move, California is set to increase its cannabis excise tax from 15% to 19% on July 1. The change, expected to further strain legal operators, has drawn criticism from industry stakeholders and state officials alike.
In a March report, the California Legislative Analyst’s Office warned that the tax hike would likely shrink the size of the legal market and generate less net revenue than expected. The office concluded that the increase would push more consumers back into the unregulated market, where prices are lower and taxes don’t exist.
A Glimmer of Hope?
There may still be a chance to halt the tax increase. A bill aimed at blocking the hike has passed the California State Assembly and is awaiting a vote in the State Senate. If approved, it would require the signature of Governor Gavin Newsom (D) to become law.
As California continues to navigate the complexities of cannabis regulation, industry leaders are calling for more supportive measures, including tax relief, stronger enforcement against unlicensed operators, and reforms to encourage participation in the legal marketplace.
Until then, legal operators must brace for more uncertainty as they head into the second half of 2024.
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