A civil grand jury reported that some licensed L.A. dispensaries are so desperate for revenue that they've begun breaking the law by selling legal marijuana to unlicensed competitor shops.
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A new and scathing watchdog report released in late June blasted the Los Angeles Department of Cannabis Regulation and its oversight of the cannabis social equity program, concluding that the agency “is doing an inadequate job assisting those the program was intended to help.”
Instead, the report, which was issued by an investigative committee with the L.A. County Civil Grand Jury, found that “county governments are exacting more and more fees from the owners/operators of cannabis businesses,” which is making it hard for legal marijuana companies to “stay open and viable.”
The report is the result of a five-member group’s work between July 2023 and June of this year, in which the committee visited more than 60 cannabis business locations, interviewed more than 80 marijuana industry participants, and spoke at length with four social equity operators in L.A. proper. A 22-page summary of the investigation was included in the civil grand jury’s final 510-page report from the past year.
The problems with the L.A. social equity program are multifaceted, the committee found, and aren’t limited to flaws with the DCR, which the report said is also severely understaffed and should be given more resources by the City Council.
“The Committee found several glaring areas of concern,” the civil grand jury report read. “The DCR appears not to be helping (social equity program) applicants navigate the myriad of rules to follow in order to receive a license.”
Rather, the committee reported that social equity licensees in L.A. faced a series of systemic barriers that led many to simply abandon their permits instead of pursuing the promise of getting in on the ground floor of the California marijuana trade.
Those barriers include:
Long delays – often years – between when an applicant wins a license and when they’re approved to begin actual business operations.
High state and local business fees and tax rates.
The risks of engaging with “predatory business partners” due to “excessive” red tape and fees.
Failure by DCR to communicate effectively to applicants about the free resources available, including technical training and legal assistance.
Complex legal and regulatory issues that are hard to navigate without professional help.
“To date the program is still in flux and the DCR is struggling to keep up in creating equitable rules and regulations with the ever-changing circumstances encountered by (social equity program) applicants,” the report asserted.
A spokeswoman for DCR said the agency will respond in writing by Aug. 27, which is required under state law. She declined to comment further on the report.
A source familiar with both the report and the L.A. licensing rollout, however, said the grand jury report contained multiple factual errors and that the committee didn’t consult with the DCR on several points made by social equity sources who were interviewed. The result, the source said, was a one-sided and flawed assessment by the civil grand jury, instead of a fair and complete picture of the agency’s work on social equity.
Still, the report can be taken as a reflection of frustration by those on the ground in L.A.’s social equity program, some of whom previously told Green Market Report they believe the program has “failed” due to how few licensees have managed to open for business.
Hefty financial toll
The financial burdens cited by the new report include both city and state taxes – which includes a 4% city gross sales tax, a 15% state excise tax, and 10% more to the city for every $1,000 in sales – as well as business fees enacted by the DCR and other L.A. city agencies. The committee dubbed California’s entire cannabis taxation system and rates “excessive” and “exorbitant.”
According to the civil grand jury report, those fees add up to an estimated total of $131,000, which includes a roughly $16,000 bill for an environmental impact report, about $7,000 for an annual license application, and dozens of other fees. That doesn’t include the costs for licensees to obtain retail sites or manufacturing facilities for their companies.
“All of these charges come before one gram of cannabis can be sold by the dispensary store owner,” the report noted. “These mounting fee assessments are creating a cottage industry for illegal and unregulated stores to open.”
The financial toll is so hefty that some legal licensed social equity businesses have begun breaking the law just to keep their doors open, the committee found.
“The Committee members have been told by a number of (social equity business owners) that in order to keep up with payments to the DCR, some licensed dispensaries have resorted to selling legal cannabis to illegal dispensaries and buying unlicensed product from illegal cultivators and distributors in order to escape some of the 4% gross sales tax and the 15% excise tax,” the report stated.
“According to every (social equity licenseholder) interviewed, including those who lost their licenses by not being able to keep up with taxes and fees and those who are still operating a retail facility, these taxes are a great contributor to their failure and still pose serious threat to them,” the report asserted.
The civil grand jury offered a number of policy recommendations to the city council and DCR, including:
Increasing technical support and education opportunities from the city for social equity applicants.
Update the license review system to notify permit applicants when there are delays in the process.
Offer more “monetary assistance” from the city to social equity businesses so they don’t have to turn to “bad actors.”
Improve training for DCR staff in order to better assist applicants with navigating the overall permitting process.
Change the city cannabis business fee structure to “a comparable non-cannabis business” system, in the spirit of financial fairness.
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