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Ahead of Emerald Cup Harvest Ball, cannabis growers raise alarm over taxes, regulations

Up to 30,000 are expected to flock to the Sonoma County Fairgrounds this weekend for the revamped celebration of all things marijuana.|

About 30,000 cannabis enthusiasts are expected to trek through the Sonoma County Fairgrounds next weekend for the revamped Emerald Cup Harvest Ball, a celebration all about the plant that has been a social, regulatory and business fixture for decades in Northern California.

Those pot lovers will learn about new, innovative weed strains, while some of the old guard will stick with such standbys as Blue Dream and OG Kush. Admission for the event starts at $75 for a single-day ticket and members of the hip-hop group Wu-Tang Clan will perform.

“The response has been amazing for an event we are doing … with the aftereffects of the pandemic,” said Kenneth Loo, spokesman for the Harvest Ball. “I think it really does show the resilience of this community.”

The event comes as acceptance of marijuana continues to poll strongly. Legalization is favored by a record high 68% of U.S. residents, according to a Gallup poll taken last month. Passage at the federal level is closer than it has ever been with Senate Majority Leader Charles Schumer sponsoring legislation that would remove all federal prohibitions on marijuana.

Yet many in the business are having a hard time celebrating in a year where cannabis prices paid to growers have plummeted by as much as 50%, as illegal pot from states including Oregon and Oklahoma has flooded the market. And those same growers and others in the business contend they are hemorrhaging money under a tax and regulatory regime that makes it difficult to eke out a living.

“There’s going to be a great weekend for a lot of growers,” said Hezekiah Allen, the former head of the California Growers Association who now lobbies for the industry. The Harvest Ball will feature 27 small growers from across the state who will be able sell their crop to visitors through a special distributor established just for the event, as state law does not allow them to sell directly to consumers.

But, Allen conceded: “It will be a little too late for a lot of them.”

In response, local cannabis business leaders on Wednesday called on the Sonoma County Board of Supervisors to first suspend local cultivation taxes and adopt a resolution calling on the California Legislature to eliminate the cultivation tax at the state level.

“Our industry is in deep trouble,” said Erich Pearson, founder and chief executive officer of Sparc, which operates a biodynamic cannabis farm in Glen Ellen, a manufacturing facility in Santa Rosa well as dispensaries in San Francisco and Sonoma counties. The company is vertically integrated from the seed to the sale, like Apple is in the tech sector. He also serves as co-founder of the Cannabis Business Association of Sonoma County.

“We’re impacted on several important fronts. Our industry is taxed like no other, we have few retail outlets available to us, the illicit market continues to boom, and we face unparalleled regulatory hurdles. Frankly, what we’re experiencing is a market collapse,” Pearson added.

Unlike any other agricultural crop, cannabis is extensively taxed at every part of the process. At the state level, growers face a cultivation tax that will go up on Jan. 1. For example, cannabis flower will go from a $9.65 tax to a $10.08 tax per dry weight ounce; the tax on leaves will go from $2.87 per dry ounce to $3; and fresh cannabis plants will face an additional levy from $1.35 per ounce to $1.41. The state also imposes a 15% excise tax on cannabis.

Altogether, the state collected almost $817 million during the last fiscal year. In contrast, state excise taxes for beer and still wine are at only 20 cents per gallon. There also is a federal rate on wine at $1.07 per gallon and beer at $3.50 per barrel though Congress last year permanently lowered the rates due to lobbying from the alcohol beverage industry. Yet the hops and grapes that go into those drinks don’t face their own special tax as opposed to cannabis products from drinks to gummies on sale at licensed dispensaries.

Then there are levies imposed at the county level, where the Board of Supervisors is struggling to write an updated permitting system for cultivation amid some rural residents’ concerns about the effects of nearby marijuana farms.

“It’s gonna be a free-for-all,” Ron Evenich, a resident near Petaluma, told the Argus-Courier earlier this year.

Growers are again taxed at different rates on a per-square-foot basis for outdoor, indoor and mixed light crops. There also is a manufacturing tax of 3% of gross receipts and a 2% tax for dispensaries. The overall total brought in $3.5 million last year.

Cities can also tack on charges. For example, Santa Rosa imposes a 2% tax of gross receipts or $5 per square foot for growers; 1% of gross receipts for manufacturers; and 3% for retailers of their gross sales. That was almost $1.9 million from all the combined taxes on an annual basis.

“I don’t think anyone thought about the tax burden cumulatively,” Allen said.

State Sen. Mike McGuire, D-Healdsburg, said he intends to introduce legislation early next year that will eliminate the cultivation tax and have only one excise tax for growers. McGuire contends it is unfair for cannabis growers to have to pay a constant tax rate per ounce on their crop after suffering dramatic drops in pricing this year due to the illegal market, including those in California.

“The cultivation tax is crushing small family farmers. It's simply not sustainable,” McGuire said.

McGuire said he also is looking at ways to reduce the overall tax burden for growers on a temporary basis, though that is more difficult given the language of Proposition 64 that established the cannabis tax system. He said he ultimately believes the cannabis tax issue will have to go back to voters in another referendum to address the issue to make it more manageable for them to have the industry thrive.

And the result, sector leaders argue, is that the entrepreneurship that was supposed to be unleashed with the 2016 passage of Proposition 64 has turned more into a regulatory nightmare that still faces a lot of opposition from some local governments and rural landowners. The ballot measure legalized recreational use of marijuana and established a new state system intended to finally bring cannabis growers out of the shadows, yet one estimate from a state agency last year was that almost two-thirds of overall Golden State sales are still in the illicit market.

Part of the problem, industry leaders argue, is that the initial rates under Proposition 64 were set too high, especially as local governments tacked on their own levies. There is a big push to have the state Legislature revisit the issue in January, especially to help small farmers.

“It’s just so cost prohibitive to get legal,” noted Michael Coats, president of the Sonoma Valley Cannabis Enthusiasts, a group that promotes the local, legal industry with the aim of growing cannabis tourism similar to what the region has for wine.

Coats added that someone like Pearson should be admired for helping to diversify the local economy. An Indiana native who moved to California after graduating from Purdue University, Pearson has built up a company that now employs 150 people and will open a fifth Sparc dispensary in Sonoma early next year, which will be the town’s first.

Cannabis flower moves through a sorting machine at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)
Cannabis flower moves through a sorting machine at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)

“There’s a lot of farmers that want to be Eric,” Coats said. “They are not allowed to.”

Pearson, 44, noted that he has advanced far in the industry since co-founding in 2001 the San Francisco Cannabis Collective to assist with medical marijuana patients. There were setbacks such as being arrested twice for growing weed before decriminalization. In addition, the Nuns fire in 2017 destroyed the inaugural crop for the company’s 1-acre farm in Glen Ellen.

Employees Julie Ghilotti, right, and Kendall Cribbins, top, operate a machine filling jars with cannabis flower at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)
Employees Julie Ghilotti, right, and Kendall Cribbins, top, operate a machine filling jars with cannabis flower at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)

“We sleep a little bit better at night because we're not going to jail. But we now fret over cash flow,” he said though he did not reveal revenue figures for the privately held Sparc. “We went from cops to overregulation.”

Like Allen, Pearson worries that many small farmers around the area ― especially the counties of Mendocino, Humboldt and Trinity being part of the famed Emerald Triangle — will not make it and some dispensaries also could be at risk. The result will be larger companies such as The Parent Company and Glass House Brands, which are both publicly traded, to be able to sweep in and make many deals to grow their business, he said.

“This is a perfect storm for them to start buying,” Pearson said.

Jars of cannabis flower are weighed before being packaged into bags at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)
Jars of cannabis flower are weighed before being packaged into bags at the SPARC processing facility in Santa Rosa, Calif., on Wednesday, December 1, 2021.(Beth Schlanker/The Press Democrat)

But even larger companies are not immune. For example, Michael Steinmetz and Flavia Cassani, who founded Flow Cannabis Co. in Redwood Valley with the intention of making the Mendocino County spot into a prime tourist destination for visitors to explore cannabis, have signaled troubled ahead. The two wrote in a Medium post last month that they have suggested to their board that the company stop paying the state cultivation tax after July 1 in protest of high taxes and local governments that have thwarted the voters’ intentions with Proposition 64 for a more open marketplace.

“Our recommendation will be to place our estimated tax in escrow in good faith, and to withhold payment until we see real, actionable change. We invite our fellow California operators to join us,” the two wrote.

Sparc should be in good position to weather the storm as its investors understand the current challenges in the regulatory landscape, Pearson said. But he still worries.

“We want to be able to operate a business that's profitable enough to exist,” Pearson said. “We only live off investors’ money for so long before they give up.”

You can reach Staff Writer Bill Swindell at 707-521-5233 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.

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