As Smaller Marijuana Businesses Get Squeezed, State Revenue Takes a Hit

Tyler Kearns, owner of the cannabis cultivation company Seven Leaves, stood in one of his half-dozen temperature-controlled grow rooms on a recent day, surveying a crop derived from the same mother plant.“We have really tried to educate the general public through talks, tours, communication and presentations,” Kearns said, “to bring a better understanding of the legal California cannabis industry.”But winning public favor is only half the battle for operations such as Seven Leaves. The other challenge is trying to survive as a small business in the state’s increasingly crowded cannabis industry. At about 10,000 square feet of indoor marijuana canopy, Seven Leaves is small for a California cultivator — the kind of business the new law was supposed to help.The ballot measure legalizing recreational marijuana in California, which voters approved in 2016, promised that the recreational marijuana industry would “be built around small and medium-sized businesses.” Lawmakers placed size limits on cannabis cultivators and prohibited monopolies in the recreational market.The goal was to protect nascent businesses from being crushed by big farms or well-financed conglomerates. The protections also were supposed to give existing pot businesses — especially those in the black market — a chance to transition to the legal, taxable recreational marijuana industry. But many small businesses have struggled to gain a foothold in California’s cannabis industry. A loophole in the licensing scheme has allowed larger cultivators to stack dozens of licenses and expand virtually unfettered. Meanwhile, the costs and regulatory requirements of entering the legal cannabis industry have persuaded many smaller cultivators to stay in the shadows, causing state tax revenue to take a hit.