California’s marijuana industry faces failure as $1.3 billion in taxes remain unpaid

San Francisco cannabis dispensary Vapor Room has faced plenty of enemies since it opened in 2003. brawl in federal courtrooms with the IRS and was hit for crackdown by the US Department of Justice. But now that weed is legal, it seems the only thing the famous dispensary can’t survive is California’s legal weed market.

The dispensary is at risk of going bankrupt due to a $250,000 tax debt to the state of California, according to founder Martin Olive. He blamed the pot shop’s dire financial situation on falling sales caused by street problems in his SoMa neighborhood, as well as high cannabis taxes and penalties imposed by the state.

“We are now at a tipping point where things seem more dire than they have ever been,” Olive wrote in an article on LinkedIn last week where he called for “lenders, lines of credit, investors, angel investors and/or a miracle to get us out of critical debt.”

The Vapor Room’s problems come as cannabis businesses across the state struggle to stay alive, with thousands of businesses going bankrupt and unpaid taxes. The industry owes the state nearly $1.3 billion in taxes and late fees, according to the California Department of Taxes and Fees Administration.

High cannabis taxes are often blamed for making the legal marijuana industry unsustainable, but state tax rates are expected to rise further. This July, the state plans to increase cannabis excise taxes by 25%, a prospect that is causing panic in the industry, with some warning it could be the “nail in the coffin» for many legal weed businesses.

“We are already on the brink. Raising taxes is going to kill us,” said Jerred Kiloh, owner of Higher Path Dispensary in Los Angeles.

Cannabis companies across California have been struggling for years to remain profitablein part thanks to an extremely difficult business environment. The costs of running a marijuana business are astronomically high compared to most businesses, with businesses facing costly regulations, bank fees, and security measures.

As costs continue to rise, revenues also take a hit, as wholesale pot prices fall and legal cannabis sales decline year over year. Legal Cannabis Sales in California have been declining for three yearsand this is particularly true in San Francisco, where cannabis sales per capita have declined more than 34% since 2021.

Companies like Vapor Room find themselves stuck between rising costs and falling revenues, with no profit to survive. Olive said he prioritized paying his employees and suppliers, which prevented him from paying his state tax bill in full.

This bill is even more important because California has a particularly punitive tax law for cannabis businesses. Most businesses face a 10% penalty if they don’t pay their taxes on time, but cannabis businesses face a 50% penalty if they are late. Olive said the principal he owes is about $125,000, a fraction of his total $250,000 bill to the state.

Olive said this penalty makes it almost impossible to get out of fiscal debt.

“Basically, you’re being charged more than you owe,” Olive said. “It’s getting worse, which makes catching up completely overwhelming.”

Olive also blamed local problems in her store’s SoMa neighborhood, which saw a decrease in foot traffic after tech workers left downtown San Francisco during the pandemic, and an increase in unrest on the streets filled the void.

“We are dealing with illegal drug sales outside of our neighborhood,” Olive said. “There is a real lack of support within the community. I understand what people go through with their addiction, but it makes it very difficult to function.

The Vapor Room is far from the only pot shop in California that has to pay taxes to the state.

Cannabis companies owe the state nearly $1.3 billion in unpaid taxes and penalties as of Oct. 31, according to data shared with SFGATE by the Department of Tax Administration. The agency said “a large portion” of that total is due to penalties and interest on unpaid taxes.

Industry observers have said for years that the industry couldn’t sustain California’s tax rates, especially after a 2023 law changed how taxes were calculated and collected. One observer told SFGATE at the time that the change would result in a “extinction event”, pot shops being unable to pay their taxes and then finding themselves hit with the mandatory 50% penalty imposed by the state.

This “extinction event” could occur, with widespread business bankruptcies in recent years, including the the largest pot distributor and the largest delivery company in the state and thousands of potted farms. It is unclear how many pot shops are at risk of closing. The Department of Tax Administration said it could not calculate how many cannabis retailers were behind on their taxes because “a single taxpayer may have multiple debts for one or more periods or for multiple taxes “.

However, unpaid tax bills continue to rise. Not including interest and penalties, marijuana companies owed the state $354 million in taxes as of Nov. 18, up from $287 million in back taxes as of February of this year.

Ironically, the tax rates themselves may be partly blamed on the taxman not being paid.

Taxes on legal cannabis, which can exceed 40% in some California jurisdictions, make legal cannabis more expensive than illicit market weed. California’s illegal market is thriving, and many observers say that’s because customers are reluctant to pay legal prices when they can find cheaper weed outside of licensed stores.

Kiloh, the Los Angeles pot shop owner, said this is especially true for young people who “will just go for the cheapest price.”

“You have a very agile demographic under 35 that is just one Instagram post away from leaving the legal industry,” Kiloh said.

That problem could get even worse this summer when the state plans to increase the cannabis tax rate from 15% to 19% in July, adding to a list of other local and state taxes. Kiloh estimates the increase will push cannabis taxes above 50% in Los Angeles, where there is an additional 10% sales tax. Kiloh said this would be the “tipping point” that would destroy even more legal businesses.

For Olive, it is unclear whether he will be able to keep his Vapor Room until the summer. He holds an auction to raise money to keep his shop alive while he negotiates with the state to try to get a tax payment plan.