California Weed Retailers Buried in Debt

Stephen Andrews
21 Jul 2023

Hundreds of weed shops in California may go out of business by the end of 2023. Legal cannabis in the Golden State has been in a crisis for a long period of time, but things are now escalating to a new level as retailers face record high debts.

California recently made some significant advances in terms of justice. The state has managed to seal 90% of non-violent cannabis-related records, which is more than 200,000 cases in question. But the financial situation continues to worsen. 

A new “tax structure” introduced by lawmakers could result in an “extinction event” for hundreds of Californian cannabis retailers. Weed shops may have to close their doors as they miss tax payments and struggle with huge piles of debt.  

A report from 2022 suggests that the industry was collectively sitting on over $600 million in debt, and recent law changes are not making things any better. 

State law recently shifted the burden for paying marijuana excise taxes from distributors to retailers, and the first tax payments were due May 1. Looking back, retailers have had the most trouble paying their bills, and reports further reveal that many shops lack the finances to settle their state excise taxes

According to the California Department of Tax and Fee Administration, over 13% of state retailers, or 265 weed shops, failed to settle tax payments by the May 1 deadline. Those businesses are now facing a 50% penalty on the taxes they owe, which could spell the end to many of the shop owners. 

The number of retailers affected by the changed legislation could grow further. The state agency is reportedly still processing hundreds of tax returns, which may include retailers that have not managed to handle their taxes. 

“There’s a debt bubble that’s been building over the last few years that’s getting close to bursting,” Michelle Mabugat, a cannabis attorney at the Greenberg Glusker firm in Los Angeles, said in a statement for SFGATE.

“I do anticipate a lot of retailers going out of business this year, just like we saw a lot of cultivators go out of business last year,” Mabugat said. 

The debt problem is not unique only to retailers. It looks much like a vicious circle. Farmers report never getting paid for thousands of dollars in product. Distributors say retailers don’t pay them, thus are blacklisting some dispensaries. 

A huge issue in the whole case again is federal prohibition. Because of the prohibition, weed entrepreneurs do not have access to traditional bank loans that are typically used to maintain cash flow at other businesses. 

In absence of those loans, cannabis operators have turned to issuing loans to each other by selling products on credits. Farmers often give products to distributors and retailers with no money down but with the expectation that they would be paid within the month. And then they are not paid. 

A new bill may start to require businesses to compensate suppliers for any transactions worth $5,000 or more within 15 days or face a penalty. But that will only solve so much. 

Furthermore, it’s not only small and medium businesses that are being affected by mounting debt. An analysis done last year by Green Market Report found that 10 of the biggest cannabis companies in California owed more than $500 million combined in unsettled taxes. 

Cannabis businesses elsewhere in the United States are facing decrease in profits. A recent report from the Oregon-based economics data firm Whitney Economics revealed that less than 25% of cannabis operators reported that they are turning a profit. That represents a significant fall from last year, when 42% of operators said they are profitable. 

Any further postponement of the SAFE Banking Act may prove lethal to huge sections of legal cannabis. Nobody wants an “extinction event” (or a series of it) but California and other markets are standing at such point exactly because there is a delay in reform. 

Stephen Andrews