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   broken regulatory system. It's not like we ran out of money and had no   
   choice; we decided that it was simply too painful to continue," Skibola   
   said. "I hear all the time, 'Next year! Next year will be better!' But   
   next year is never better. ... I personally think that it's only going to   
   get worse."   
      
   Weak cannabis sales   
   California has the largest legal market for weed in the world by total   
   retail sales - a fact Gov. Gavin Newsom likes to point out - but that's   
   not because California's pot stores are particularly busy or profitable.   
   California ranks 14th on annual retail sales per resident, behind every   
   other West Coast state, with only $129 in legal pot sold per resident.   
   That's less than half of the $271 sold per resident in Colorado,   
   according to an April report by LeafLink, a cannabis data company.   
      
   These meek retail sales numbers have resulted in California no longer   
   having the largest market in the world by individual products sold.   
   Michigan now sells more overall cannabis products than California,   
   despite having only a quarter of the population.   
      
   They've also created a devastating cascade of market failures.   
      
   First, cannabis farms started going out of business, as weak retail   
   sales and plummeting wholesale prices turned historic farms   
   unprofitable. Then, the cash crunch came for distributors, which are the   
   legally required middlemen between producers and retailers. With   
   retailers running out of money, they stopped paying their bills to   
   distributors. Producers and distributors kept sending legal pot to   
   stores in the hopes they'd get paid eventually, but that only created a   
   massive debt bubble. Now it's bursting, bringing companies down across   
   the state. Most famously, Herbl, once the largest pot distributor in   
   California, collapsed last June.   
      
   The economic crunch has now come for retailers, with hundreds of stores   
   across the state on the verge of failure. The bankruptcy declaration of   
   MedMen, a cannabis retail chain that was valued at more than a billion   
   dollars when California's legal market first launched, in April served   
   as a warning that things really are dire. The California Department of   
   Tax and Fee Administration said last month that 15% of retailers and   
   distributors are in default on their taxes, which analysts say is close   
   to a death sentence for those businesses as they face a 50% penalty if   
   they miss a single tax payment.   
      
   Finally, the problem has worked its way to the government: An April   
   report found the state was owed approximately $732 million in overdue   
   cannabis taxes, money that the government will likely never see because   
   72% of those companies have gone out of business. Turns out the   
   regulatory maze that led to sky-high licensing fees and tax burdens may   
   not have actually been the way for communities to make money. Local   
   governments from Sonoma County to Monterey County are finding that   
   cannabis tax revenue cannot cover the costs of regulating the industry.   
      
   Perhaps that is the most powerful sign that California's legal weed   
   economy is in trouble: Even the taxman is struggling to make money   
   selling legal cannabis.   
      
   Illicit market thrives   
   While California's legal market has struggled, a massive underground pot   
   economy has thrived. Billions of dollars of cannabis is being grown,   
   packaged and sold at illegal stores that often look like fully licensed   
   dispensaries. Estimates vary on how large the illicit market is, but the   
   head of enforcement for the state Department of Cannabis Control   
   recently told NPR that the illicit market is "definitely larger" than   
   the legal market.   
      
   California has created an almost perfect environment to push customers   
   toward the illicit market. It's extremely expensive to open a legal   
   business, thanks to high taxes and expensive regulations, and local bans   
   have meant that a majority of the state is still off-limits to legal   
   businesses even if an entrepreneur did want to pay to set up shop.   
   Meanwhile, penalties for running an illegal business were largely   
   reduced from criminal penalties to financial fines in an attempt to   
   reduce the racial harms of cannabis prohibition, which   
   disproportionately impacted people of color.   
      
   If a legal business does get up and running, it has to contend with a   
   significant tax burden. California has a 15% excise tax rate on pot, but   
   the effective tax rate can climb to as high as 34% when factoring in   
   state sales tax and local taxes. That's made California's legal pot   
   extremely expensive compared with other West Coast states - and made the   
   illicit products, which are sold tax free, a cheap alternative.   
      
   All together, it's created a situation where many entrepreneurs would   
   rather take their chances making money in the illicit market than   
   attempt to run a legal business. Jay Moss, a lieutenant at the Los   
   Angeles County Sheriff's Department, recently told the Los Angeles Times   
   that some illegal pot shops reopen within hours of being shut down and   
   look at the financial penalties as simply "the cost of doing business."   
      
   These illicit sales undercut the legal market from every corner,   
   depriving licensed businesses of customers they need to stay profitable   
   and governments of tax revenue.   
      
   Who's left in California's cannabis market?   
   Some of California's pot problems have little to do with the state   
   itself: Nearly all of the states that were first to legalize cannabis   
   have seen decreased sales with many legal businesses struggling. That's   
   because the efficiencies of capitalism have dropped the legal price of   
   pot precipitously, a dynamic predicted by economists, and made it harder   
   to turn a profit selling legal cannabis. Federal prohibition has also   
   been a thorn in the side of pot companies, as federal law makes it   
   significantly more expensive to run these businesses and forces the   
   companies to pay incredibly high tax rates.   
      
   There's also the reality that the majority of businesses fail five years   
   after they are founded. With legal sales six years old in California, it   
   isn't completely surprising that many of the businesses that first   
   launched are now underwater.   
      
   Still, pessimism is the default perspective inside California's legal   
   industry. The mounting business debts in California's legal market have   
   been compared to an "extinction event" and left some academics studying   
   California's market asking whether legal weed can ever win.   
      
   Some, however, are quietly wondering whether what's happened has been a   
   necessary if painful winnowing.   
      
   Wesley Hein, an executive at Mammoth Distribution and board member of   
   the California Distributors Association, compared the present pot crash   
   to the dot-com crash of 2001 and 2002, when the Nasdaq lost 78% of its   
   value in two years as exuberance in the Internet Age ended with   
   widespread business failures.   
      
   "It looked like anything associated with technology was going to go out   
   of business. And one after another they were going down," Hein told   
   SFGATE. "But out of those ashes the companies that had real business ...   
   were growing. Google, eBay, PayPal all came when it felt like the sky   
   was falling."   
      
   There are reasons to think that, even with its systemic problems and   
   nearly constant failures, California's market could produce the future   
   great pot companies. It has the size that would allow a company to scale   
   without crossing state lines, a necessity given that the federal ban on   
   marijuana prohibits weed-legal states from trading products between each   
      
   [continued in next message]   
      
   --- SoupGate-DOS v1.05   
    * Origin: you cannot sedate... all the things you hate (1:229/2)