For a cannabis start-up, achieving success in California is like making it into the big leagues. The sheer size of California’s population, along with its consumer profile and spending potential make it the largest cannabis market in the world.

However, not everything shines in the Golden State. As regulators struggle to create a consistent legal framework around a once illegal industry, cannabis business owners have to deal with many constraints, which, together with their consequences, make building a cannabis brand in California a hard climb.

Some of the Highest Tax Rates in the Country

When California legalized adult-use cannabis in 2018, state officials estimated that in the first year alone, sales would bring $1 billion in tax revenue to the state. However, by the end of that year, state tax revenue only rose to $345 million.

Legal sales in California were handicaped by many factors that state officials had not taken into account, including a thriving black market, and regulatory loads that became prohibitive for many businesses.

However, the lack of success in tax revenue was not due to low taxes. In fact, the overpricing produced by high taxes was one of the strongest deterrents for legal sales.

Consumers in California have to face a 15% state sales tax, but that’s not all. Additional taxes are placed on to the final price. These are fees that growers and dispensaries have to pay to the state and to local governments, which vary between $2.75 and and $9.75 per ounce of cannabis. This makes California the second state with the highest tax rates in the country, with over 40% of taxes added on the final product price.

Tough Licensing Process and Local Restrictions

Although the production and sale of adult-use cannabis has been legalized in California, cities and municipalities still have the right to choose whether they want to allow it in their jurisdiction.

Depending on the industry sector, between 68% and 80% of municipalities choose not to grant cannabis licenses, which can vary between cultivation, distribution, manufacturing, testing and retail.

Proposition 64 brought a great deal of regulation to an underregulated medical marijuana industry. By the launch of legal cannabis sales in January 2018, of the 3,150 retailers and delivery services available before adult-use legalization, less than 500 were able to pass the licensing process. By now, that number has grown, but between storefront and delivery services it only adds up to 955.

Other types of licenses face very similar issues. Local restrictions, elevated license prices (that can go up to $120,000) and though paperwork account for some of the complications that cannabis businesses have to face in order to land a license in the Golden State.

Strong Competition

With a population of 42 million and 30 million people over the age of 21, the businesses that were able to obtain licenses have built very strong foundations.

On average, for every dispensary in California, there are over 35,147 potential legal customers. This number far exceeds Colorado and Oregon’s rato of between four and five thousand potential clients.

While the slow rollout of licenses is expected to improve during the following years, the businesses that were able to stay active during the transition to adult-use have been able to enjoy an olypololy-like situation. This utopia led to vast earnings and the establishing of strong connection between different members of the supply chain. For this reason, newcomers will have a tougher time earning their place among consumers and business partners.

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