Cannabis Company Takes California to Court Over Taxes

It’s no secret that the cannabis black market is booming in California despite the presence of a completely legal recreational market. 

The black market is also known as the “traditional market” because that’s how cannabis was traditionally sold until recently. The traditional market is funneling thousands of pounds of cannabis products to other traditional markets around the country. Catalyst Cannabis Co. is taking the Department of Cannabis Control (DCC) to court because they believe their regulations are propping up the illegal market and suppressing small business owners.

Why Is Catalyst Suing California?

Catalyst Cannabis Co. filed a lawsuit against the DCC to prove that their negligence and the state’s exuberant cannabis tax rates are directly influencing the burner distribution license schemes running rampant through California.

Catalyst Cannabis Co. operates seven retail locations in Southern California, including several in Long Beach, California, where founder Elliot Lewis grew up and now lives with his family. Lewis has been vocal about why he’s suing the DCC and how their negligence directly influences the illegal schemes that send thousands of pounds of cannabis products to the black market.

Cannabis For The People

Lewis believes that cannabis is for the people and his business follows that same mantra. Elliot told Forbes that Catalyst is a pro-labor and pro-union company that takes smaller margins so they can keep the prices affordable for their customers. Elliot believes the DCC’s regulations and tax rates force small business owners out of the legal cannabis industry which forces suppliers and consumers back into the traditional market to make and save money.

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How A Burner License Scheme Works

The distribution burner license schemes plaguing California are a symptom of the regulatory problems. The scheme involves an illicit broker propping up an individual who can pass a background check and get approved for a distribution license. Distribution licenses are much easier to get than cultivation or retail licenses. Once a license is issued, the broker can buy legal products wholesale from a licensed cultivator or processor and flip them into illegal markets around the country while blatantly cooking their legal books in California’s seed-to-sale tracking system, METRC. Once they’ve sold off all the product they mark it all as lost Rinse and repeat until the license expires and they move on to the next burner license. 

This scam revolves around the fact that the DCC doesn’t have the resources or know-how to monitor the state’s vast number of METRC reports. Elliot argues that it’s not just a lack of resources, but severe negligence on the DCC’s part that allows these illicit shenanigans to persist. Leafly’s reports about the Blue Tree LLC scandal prove that just simply checking numbers reported through METRC could greatly improve enforcement efforts. Blue Tree LLC was caught up in a burner distribution scandal and the scheme was easy to spot once somebody actually looked. 

Oppressive Taxes on the Cannabis Industry

The other major culprit contributing to these scams are the high tax rates California leverages over the cannabis industry. Lewis argues that the tax laws discriminate against the cannabis industry and don’t give incentives to legally grow and sell cannabis. Currently, California has a statewide excise tax of 15%, a state retail tax of 7.25%, and local municipalities can tax another 15% on top of that. That means that some businesses could be paying close to 40% of their total revenue back to the state in taxes. On top of that, the cannabis industry isn’t subject to the same tax breaks and write-offs as other businesses which means every taxed cent comes directly from their pocket. 

Lewis argues that high taxes and the severe lack of compliance continues propping up the war on drugs while simultaneously costing state taxpayers millions of dollars that could go back into their communities. 

Elliot works with the North Pine Neighborhood Alliance in Long Beach to help stimulate local business with the foot traffic from his dispensaries. He wants the DCC’s regulations to help more small business owners succeed rather than suppress. He hopes this litigation sparks a national conversation about how California should be a cautious tale of what not to do when creating and regulating a legal cannabis industry. 

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Written by
headshot of writer jonathan olsen-koziol
Jonathan Olsen-Koziol

Jon is a journalist and content creator that has been working in the cannabis industry for over four years. He got his start covering the cannabis beat in college for the CWU Observer. After graduation he visited dispensaries and weed farms along the entire West Coast writing blogs and features for Respect My Region. Jon loves telling stories about what makes the cannabis industry an amazing and vital entity in the world. Jon is an avid gamer, fantasy football fanatic, and also writes about comic books at CBR.com.

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