Will Atwater’s first cannabis retail store survive competition from the black market?
Facing competition from the black market, Atwater’s first retail cannabis store, Medallion Wellness, asked the City Council for a new contract to operate locally.
The council voted 4-1 last week to change the store’s monthly payments to the city from $15,000 to 5% of gross monthly sales.
“I want to make clear that our request is not to provide less dollars to the city of Atwater,” said Zach Drivon, an attorney for Medallion Wellness. “Our goal is to provide as much revenue to the city as we possibly can.”
Five percent of Medallion Wellness’s sales in its opening month were just short of $14,000.
Drivon said changing to a percentage system will ease the new business’s burden of competing with unlicensed cannabis delivery services while continuing to develop Medallion Wellness.
When business owners cut a deal two years ago with Atwater, Drivon said, they expected enforcement efforts would crack down harder on illegal sales.
“We’ve not yet seen that,” he said.
Drivon told city council that once the business becomes established, the 5% tax will hopefully exceed $15,000. Councilmember Cindy Vierra supported the change.
“I would rather take a little bit less than the $15,000,” Vierra said. “Fourteen-thousand is nice versus nothing at all, and if you fail, that’s what we get.”
The challenges in Atwater parallel a state trend of mounting hurdles inhibiting the legal cannabis industry from becoming the cash crop it was expected to be. The taxes and regulations that black market sellers operate outside of infringe on state-licensed sellers’ ability to compete.
“That was the great myth- that you can tax the industry and make a killing,” Atwater Police Chief Michael Salvador said.
At almost $8.7 billion, black market cannabis sales are projected to nearly triple the $3.1 billion of legal California sellers in 2019. A recent forecast by BDS Analytics and Arcview Market Research predicted legal sales in the state will not outrank illicit ones until 2024.
“When the state legalized cannabis, they assumed everybody would jump to the legal market and we could vanquish the black market,” Salvador said. “Unfortunately, that is not true.”
Former California Gov. Jerry Brown projected 2018 cannabis taxes would bring $643 million to the state. Actual revenue came to $345 million.
“The cannabis industry overestimated the profit margin of their product,” Salvador said.
In Atwater, it is legal to grow up to six marijuana plants indoors. While individuals can legally use the cannabis themselves, others illegally sell it tax-free. When an unlicensed dispenser is caught, the charges are often only misdemeanors. This makes it difficult for law enforcement to curb the cannabis black market.
Many unlicensed sellers get promoted on the cannabis business site Weedmaps without consumers knowing the difference.
Drivon cited the site’s policy of listing hundreds of nearby unlicensed delivery and distributors as a key obstacle for Medallion Wellness. Although Weedmaps said in a news release it would end promoting unlicensed dispensaries by requiring businesses to list a state license number, that has yet to change.
Consumers can check whether a cannabis business is state-licensed on the BCC’s website.
Statewide, licensed cannabis retailers are asking lawmakers for tax cuts and policy amendments. They say that without such, they will not be able to compete with unlicensed cannabis dispensers.
Atwater leaders say they are optimistic licensed sellers will survive initial challenges, making cannabis a consistent revenue source for the city. At least a dozen cannabis businesses are seeking to open in Atwater.
Councilmember John Cale voted against the motion to amend the development agreement. He said that although any public benefit amount the city gets will be advantageous, he is concerned the decision will affect Atwater’s relationship with future businesses.
“Now we’re in a pickle- are we going to have to step back and not do our plans as we originally thought?” Cale said. “They’re setting a precedent that anybody can come here and do that now.”
