Business

States struggle to balance revenue, risks around cannabis taxation

Published

2 months ago

October 15, 2024

As more states usher in recreational marijuana, they face a thorny challenge: how to tax it effectively.

That’s especially true when it comes to prepping for eventual federal legalization, according to a new report from Tax Foundation.

The study shows that 23 states now have taxes on recreational marijuana, with methods ranging from weight-based levies to percentage taxes on retail sales. Some states have adopted more novel approaches, like Connecticut’s tax based on THC content.

However, striking the right balance is proving difficult. Set taxes too high, and states risk pushing consumers back to the illicit market. Too low, and they miss out on potential revenue.

“Recreational marijuana taxation is one of the hottest policy issues in the U.S.,” said Adam Hoffer, co-author of the report. “Many states have elected to regulate and tax legal marijuana sales, despite the ongoing federal prohibition.”

Connecticut, for instance, chooses to tax marijuana products based on their potency, charging $0.00625 per milligram of THC in plant material and $0.0275 per milligram in edibles. But the tech behind measuring THC is expensive to administer, which cuts into the revenue.

In contrast, Arizona opts for simplicity with a flat 16% tax on retail sales, but that approach fails to consider variable product potency or changing market prices.

“The wide variety of marijuana products and potencies renders taxation complicated,” the report noted.

Arizona also preemptively addressed the possibility of a federal excise tax by capping the combined federal and state tax rates.

“If a federal excise tax is imposed, AZ caps combined rates to 30% and automatically reduces the state rate to combine to 30%,” according to the report.

Market evolution

The ongoing federal prohibition adds another layer of complexity. With interstate commerce banned, each state operates in isolation, creating what the report calls “a siloed market within each legalized state.”

“Significant differences in tax designs may create negative effects and opportunities for tax avoidance,” it said.

The authors suggest that states should find a way to create tax systems that complement each other before detangling it becomes too onerous.

“States should prepare to harmonize their tax designs once interstate marijuana business is allowed – and would be better advised to coalesce around best practices now, before systems become more difficult to reform,” the report advises.

Some states are already trying to adapt to new dynamics. California recently switched from a wholesale tax to one based on retail receipts, while New York abandoned its THC-based tax for a simpler wholesale model.

The Tax Foundation recommends taxing marijuana based on potency where possible, arguing the approach “most effectively targets the actual harm-causing element.” It suggests taxing by weight only when “THC content is too difficult to measure.”

At the same time, the government-sponsored study recommended that the Centers for Disease Control and Prevention develop best practices for protecting public health in states with legal cannabis, including guidance on taxation measures.

Recent data from the U.S. Census Bureau shows how these various tax structures perform in practice. East Coast markets generally saw tax receipts increase in the second quarter of 2024, with New York topping the list with a 40% increase from the first quarter, collecting $28 million in tax revenue. Massachusetts saw a 21% rise, collecting $50 million, while Connecticut reported a 10.9% uptick, with $4.7 million in tax revenue.

However, some Midwest and West Coast states saw declines. Missouri’s tax collection dropped by 10%, though still delivering $18 million. California, while remaining the biggest contributor with over $155 million, saw a 1.1% downtick.

With public support for legalization eclipsing 70%, according to a 2023 Gallup poll cited in the report, more states are likely to enter the fray. Indeed, five states have legalization measures on their November ballots this year.

A separate report from the National Academies of Sciences, Engineering, and Medicine called for urgent federal action on U.S. cannabis policy, warning that state-level legalization efforts often prioritize commercial interests over public health.

Source link

Author: mscannabiz.com

MScannaBIZ for all you Mississippi Cannabis News and Information.

Business

Cannabis companies, big and small, collapsed in 2024

Published

2 hours ago

December 23, 2024

mscannabiz.com

As 2024 winds to a close, the year may well be remembered as one in which the U.S. marijuana industry got a serious wakeup call, with several big-name companies flaming out in spectacular fashion, while plenty of smaller operators also quietly closed up shop.

Even as more state marijuana markets continued their new rollouts – from New York to Ohio to Missouri – the sun set for the last time on several big marijuana names, including MedMen Enterprises, High Times, StateHouse Holdings and Slang Worldwide, all of which just a few years ago seemed poised to become national cannabis brands with impressive portfolios.

Instead, this year the bill came due for a lot of the industry. A few big-name cannabis failures kicked off the reckoning in 2023, such as the major distributor Herbl in California, which had such a web of connections and so much outstanding debt that its ripple effects went on for months. And when those bills arrived, a number of cannabis companies found they were unable to pay.

However, the big players were far from the only casualties this past year; there were also plenty of smaller businesses that went bankrupt or into court-appointed receiverships for various reasons, including Unrivaled Brands, Irwin Naturals, Delta 9 Cannabis and Revolutionary Clinics.

But it wasn’t all bad news for the industry. It’s also worth highlighting the high-profile turnaround of California-based cannabis delivery operator Eaze, which took a wealthy patron to save the business from its troubles.

Eaze even told shareholders in the fall that it was prepping to lay off all employees and close down by the end of the year, before its new owner, billionaire James Henry Clark, resuscitated the company with $10 million of his own money in November after buying the business at auction in August.

Here’s a rundown of some of the high-profile cannabis collapses of 2024 and how they went bust.

MedMen Enterprises

MedMen was by far the highest-profile washout of the year. Originally a darling of the California medical marijuana boom prior to going public in 2018 (CSE: MMEN), the former unicorn formally filed for bankruptcy in Canada and a court-appointed receiver in the U.S. in April, after the company ran up nearly $600 million in debts during a multiyear expansion push that ultimately proved fatal.

Warning signs existed for years before MedMen’s collapse. Founding CEO Adam Bierman suddenly relinquished control of the struggling business in 2020, amid mass layoffs at the multistate operator and ongoing sale of assets in a desperate attempt to right the financial ship. Co-founder Andrew Modlin also resigned at the time.

Even so, four years of a revolving C-suite and new corporate strategies came to naught, and MedMen’s former national empire – which spanned seven states and more than two dozen retail dispensaries – has been resigned to the auction block.

High Times

High Times’ foray into the actual marijuana plant-touching business came to a ruinous conclusion this year when its assets went up for auction after it couldn’t repay a $29 million loan.

The original stoner magazine, which dates back to 1974, pivoted from cannabis media directly into selling marijuana in 2020 with the purchase of 10 California dispensaries from Harvest Health and Recreation for $80 million in a combination cash-and-stock deal.

The parent company, Hightimes Holding Corp., never truly found its footing in the tough California market and endured critical press for years as it struggled. Hightimes Holding Corp. tried to go public in 2023 via a complex intellectual property deal with Lucy Scientific (Nasdaq: LSDI), but that fell apart after a lawsuit from U.S. securities regulators alleged fraud and illegal stock promotion by CEO Adam Levin, which resulted in a settlement of more than $500,000.

High Times was ultimately forced to begin selling off dispensaries and assets this year to settle a $29 million debt to ExWorks, under the management of a court-appointed receiver.

StateHouse Holdings

Originally known as Harborside – a major part of cannabis activism in Northern California during the height of dispensary raids in the Bush and Obama years – StateHouse earlier this year was relegated to bankruptcy in Canada and a court-appointed receiver in the U.S., driven by a lawsuit over $116 million in debt owed to one of its creditors.

Harborside was rebranded as StateHouse in 2022, three years after it was taken public in 2019 by brothers Steve and Andrew DeAngelo, who said later they were forced out by what they described as a hostile takeover. After the DeAngelos were removed, new company leadership went on an acquisition spree, purchasing three companies in the span of a year and rebranding in a bid to become a more powerful overall California brand.

But the move backfired, and it proved too much too quick. StateHouse found itself unable to repay loans from creditor Pelorus Fund, and Pelorus filed suit in September to force StateHouse’s hand.

StateHouse has since been put up for sale, and the receiver in charge is taking bids for assets until Jan. 15, 2025.

Slang Worldwide

At its height, Toronto-based Slang Worldwide distributed cannabis goods to 2,600 dispensaries in 15 states. But in November, the company declared bankruptcy in Canada and entered a receivership in the U.S., after seven years in the marijuana trade, and reported pared-down operations in only Colorado and Vermont.

Slang drew far less media attention than MedMen and High Times, and its quiet path to insolvency arguably more reflects the broader troubles of the U.S. and Canadian cannabis industries in general. After ambitious expansion for several years, Slang was forced to pull out of several key markets, including California, Oklahoma and Oregon, in 2023 as conditions worsened for it and other operators.

More trouble appeared on the horizon as recently as fall 2023, when Slang essentially put itself up for sale when it retained PGP Capital Advisors to evaluate its options.

The bottom line was the company didn’t have $17 million with which to repay creditors when at least one loan comes due in 2025. Slang formally entered bankruptcy in Canada on Nov. 26, according to receiver B. Riley Farber’s website, and a meeting of creditors was scheduled for Monday this week.

In a trustee report, Farber wrote that Slang had just $107,325 in total assets, including $52,529 in cash, against $27.2 million in debts to various creditors.

Source link