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California Cannabis Retail

Los Angeles Fights for its Legal Cannabis Market: A Battle Against High Taxes and Illicit Sales

Susan Ameel |
 

Los Angeles, home to what should be the nation's largest municipal cannabis market, is teetering on the brink of a crisis. Its legal cannabis industry is being crippled by a combination of exorbitant taxes and an uncontrolled illicit market, leading to urgent calls for significant policy changes to prevent a complete collapse. Stakeholders, including social equity advocates, licensed operators, and regulatory bodies, warn that without immediate and drastic action, the city stands to lose not only a burgeoning industry but also substantial tax revenue.

The Pervasive Threat of the Illicit Market

The scale of unlicensed cannabis activity in Los Angeles is staggering. Estimates suggest there are nearly 4,000 unlicensed cannabis businesses operating in the city, including smoke shops and tobacco retailers openly selling untaxed "cannabis" masquerading as "hemp". This rampant illicit market means that legal sales comprise less than 40% of cannabis consumption statewide, according to the California Department of Cannabis Control.

These illegal operators enjoy a massive financial advantage, as they are not burdened by city and state taxes or licensing fees, allowing them to sell products at significantly lower prices—up to 40% cheaper than legal alternatives. This unfair competition has brought financial devastation to tax-paying social equity small business owners who are trying to operate legally.

Beyond economic impact, the proliferation of unlicensed dispensaries in areas like South Los Angeles poses severe public safety and health risks. These unregulated businesses often sell untested and potentially harmful cannabis products, some of which have been linked to serious health issues, including deaths related to fentanyl-laced products and lung damage from unregulated vape cartridges. They also contribute to increased criminal activity, including violent crime, robberies, and illicit transactions, leading to a decreased quality of life in affected neighborhoods.

Despite the clear dangers, enforcement against these illegal storefronts has been criticized as ineffective, with many remaining operational with little intervention. The Department of Cannabis Regulation (DCR) has even indicated that it would be unable to review complaints on unlicensed businesses, restricting its activities to licensed businesses only, a stance that has been vehemently criticized by operators as "War on Drugs 2.0" against legal businesses.

The Dual Burden: High Taxes and Operational Inefficiencies

Licensed cannabis businesses in Los Angeles face a flat 10% city cannabis business tax and a state excise tax that increased from 15% to 19% of gross receipts on July 1, 2025. This combined tax burden, along with escalating licensing and compliance fees, has resulted in shrinking legal sales and the closure of many small businesses. For example, a single storefront retailer could face an additional $13,720 in annual fees, and a vertically integrated operation potentially over $40,000 annually, with no promised improvements in services.

Adding to the financial strain, the DCR recently completed a comprehensive fee study to achieve "full cost recovery" for its services, proposing significant fee increases across nearly all license types. This comes despite criticisms of the DCR's own operational inefficiencies, including a near doubling of staff since 2020 (from 37 to 64 positions) and a 137% increase in costs for supporting city departments, all funded by DCR fees.

Furthermore, a significant portion of the DCR's projected financial shortfall is attributed to a $10 million repayment of disallowed Local Jurisdiction Assistance Grant (LJAG) costs to the State, a grant originally intended to help social equity operators. Critics argue that imposing new fees on license-holders to cover this grant mismanagement error punishes the very social equity operators the LJAG was meant to support.

Los Angeles' Strategy to Save its Cannabis Market

In response to this urgent crisis, the City of Los Angeles is considering several measures to stabilize and save its legal cannabis industry.

1. Cannabis Tax Reform

Councilmember Padilla initiated Council File 25-0720 to evaluate reforms to the City’s cannabis tax policy. Both Social Equity LA and the Cannabis Regulation Commission have submitted recommendations for a more sustainable tax structure:

  • Social Equity LA's Tiered Tax Structure: This proposal advocates for tax rates based on business type and size to prioritize equity applicants and small operators.
    • Tier 1 – Social Equity Operators: 2%
    • Tier 2 – Small Independent Operators: 4%
    • Tier 3 – Standard Non-Equity Retailers: 6%
    • Tier 4 – Large Vertically Integrated: 8% Social Equity LA believes this could generate $100M–$120M annually for the City with a 25–50% increase in legal sales.
  • Cannabis Regulation Commission's Tiered Tax Structure: For a two-year period, the Commission recommends rates ranging from 0.25% to a maximum of 6% based on annual gross revenue.
    • Small businesses earning less than $500,000 in gross annual revenue would see rates of 0.5% for adult-use sales and 0.25% for medical sales.
    • Licensed businesses with the highest revenue would pay 6% for adult-use and 3% for medical sales.
  • Tax Forgiveness and Payment Plans: The Commission also recommends a tax forgiveness program for Phase 3 Social Equity Applicants, which would forgive up to 40% of the principal owed by Retail Round 1 Applicants and up to 20% for Retail Round 2 Applicants, along with waiving interest and penalties. Additionally, it suggests amending the Los Angeles Municipal Code to allow all licensees to enter into multi-year payment plans for backtaxes, extending up to five years, instead of the current 12-month limit.

2. Enhanced Enforcement Against Unlicensed Operators

Both the Commission and various public comments underscore the critical need to curb the illegal cannabis market. Proposed strategies include:

  • Immediate Prioritization: Implement citywide prioritization of cannabis enforcement to shut down as many unlicensed operators as possible within six months, focusing on those near licensed retail businesses.
  • Consolidation of Powers: On a long-term basis, permanently consolidate enforcement powers into a single agency, potentially the DCR or the Mayor's Office, replacing the current task force model.
  • External Agency Assistance: Request assistance from the California Department of Tax and Fee Administration (CDTFA) and the Los Angeles County District Attorney’s Office to leverage their enforcement authority and tools, including the ability to pursue tax evasion.
  • Dedicated Funding: Earmark a portion of cannabis tax revenue specifically for illegal cannabis enforcement.
  • Landlord Accountability: Dramatically increase the number of successful prosecutions against landlords who lease to unlicensed cannabis operators, with potential civil penalties up to $20,000 per day per violation, and file liens against properties involved in illegal activity.
  • Strategic Studies: Conduct studies on the scope and size of the illegal market, cost-benefit analyses of enforcement, and effective strategies used in other cities (e.g., Pasadena, which reportedly closes illegal operators at a cost of only $8,000 per operator).

These recommendations highlight a growing consensus that Los Angeles must fundamentally change its approach to cannabis regulation. Without a significant reduction in the financial burden on legal businesses and a dramatic increase in effective enforcement against the illicit market, the city risks undermining its own regulatory framework, jeopardizing public safety, and losing a valuable source of tax revenue.

Los Angeles, home to what should be the nation's largest municipal cannabis market, is teetering on the brink of a crisis. Its legal cannabis industry is being crippled by a combination of exorbitant taxes and an uncontrolled illicit market, leading to urgent calls for significant policy changes to prevent a complete collapse. Stakeholders, including social equity advocates, licensed operators, and regulatory bodies, warn that without immediate and drastic action, the city stands to lose not only a burgeoning industry but also substantial tax revenue.

The Pervasive Threat of the Illicit Market

The scale of unlicensed cannabis activity in Los Angeles is staggering. Estimates suggest there are nearly 4,000 unlicensed cannabis businesses operating in the city, including smoke shops and tobacco retailers openly selling untaxed "cannabis" masquerading as "hemp". This rampant illicit market means that legal sales comprise less than 40% of cannabis consumption statewide, according to the California Department of Cannabis Control.

These illegal operators enjoy a massive financial advantage, as they are not burdened by city and state taxes or licensing fees, allowing them to sell products at significantly lower prices—up to 40% cheaper than legal alternatives. This unfair competition has brought financial devastation to tax-paying social equity small business owners who are trying to operate legally.

Beyond economic impact, the proliferation of unlicensed dispensaries in areas like South Los Angeles poses severe public safety and health risks. These unregulated businesses often sell untested and potentially harmful cannabis products, some of which have been linked to serious health issues, including deaths related to fentanyl-laced products and lung damage from unregulated vape cartridges. They also contribute to increased criminal activity, including violent crime, robberies, and illicit transactions, leading to a decreased quality of life in affected neighborhoods.

Despite the clear dangers, enforcement against these illegal storefronts has been criticized as ineffective, with many remaining operational with little intervention. The Department of Cannabis Regulation (DCR) has even indicated that it would be unable to review complaints on unlicensed businesses, restricting its activities to licensed businesses only, a stance that has been vehemently criticized by operators as "War on Drugs 2.0" against legal businesses.

The Dual Burden: High Taxes and Operational Inefficiencies

Licensed cannabis businesses in Los Angeles face a flat 10% city cannabis business tax and a state excise tax that increased from 15% to 19% of gross receipts on July 1, 2025. This combined tax burden, along with escalating licensing and compliance fees, has resulted in shrinking legal sales and the closure of many small businesses. For example, a single storefront retailer could face an additional $13,720 in annual fees, and a vertically integrated operation potentially over $40,000 annually, with no promised improvements in services.

Adding to the financial strain, the DCR recently completed a comprehensive fee study to achieve "full cost recovery" for its services, proposing significant fee increases across nearly all license types. This comes despite criticisms of the DCR's own operational inefficiencies, including a near doubling of staff since 2020 (from 37 to 64 positions) and a 137% increase in costs for supporting city departments, all funded by DCR fees.

Furthermore, a significant portion of the DCR's projected financial shortfall is attributed to a $10 million repayment of disallowed Local Jurisdiction Assistance Grant (LJAG) costs to the State, a grant originally intended to help social equity operators. Critics argue that imposing new fees on license-holders to cover this grant mismanagement error punishes the very social equity operators the LJAG was meant to support.

Los Angeles' Strategy to Save its Cannabis Market

In response to this urgent crisis, the City of Los Angeles is considering several measures to stabilize and save its legal cannabis industry.

1. Cannabis Tax Reform

Councilmember Padilla initiated Council File 25-0720 to evaluate reforms to the City’s cannabis tax policy. Both Social Equity LA and the Cannabis Regulation Commission have submitted recommendations for a more sustainable tax structure:

  • Social Equity LA's Tiered Tax Structure: This proposal advocates for tax rates based on business type and size to prioritize equity applicants and small operators.
    • Tier 1 – Social Equity Operators: 2%
    • Tier 2 – Small Independent Operators: 4%
    • Tier 3 – Standard Non-Equity Retailers: 6%
    • Tier 4 – Large Vertically Integrated: 8% Social Equity LA believes this could generate $100M–$120M annually for the City with a 25–50% increase in legal sales.
  • Cannabis Regulation Commission's Tiered Tax Structure: For a two-year period, the Commission recommends rates ranging from 0.25% to a maximum of 6% based on annual gross revenue.
    • Small businesses earning less than $500,000 in gross annual revenue would see rates of 0.5% for adult-use sales and 0.25% for medical sales.
    • Licensed businesses with the highest revenue would pay 6% for adult-use and 3% for medical sales.
  • Tax Forgiveness and Payment Plans: The Commission also recommends a tax forgiveness program for Phase 3 Social Equity Applicants, which would forgive up to 40% of the principal owed by Retail Round 1 Applicants and up to 20% for Retail Round 2 Applicants, along with waiving interest and penalties. Additionally, it suggests amending the Los Angeles Municipal Code to allow all licensees to enter into multi-year payment plans for backtaxes, extending up to five years, instead of the current 12-month limit.

2. Enhanced Enforcement Against Unlicensed Operators

Both the Commission and various public comments underscore the critical need to curb the illegal cannabis market. Proposed strategies include:

  • Immediate Prioritization: Implement citywide prioritization of cannabis enforcement to shut down as many unlicensed operators as possible within six months, focusing on those near licensed retail businesses.
  • Consolidation of Powers: On a long-term basis, permanently consolidate enforcement powers into a single agency, potentially the DCR or the Mayor's Office, replacing the current task force model.
  • External Agency Assistance: Request assistance from the California Department of Tax and Fee Administration (CDTFA) and the Los Angeles County District Attorney’s Office to leverage their enforcement authority and tools, including the ability to pursue tax evasion.
  • Dedicated Funding: Earmark a portion of cannabis tax revenue specifically for illegal cannabis enforcement.
  • Landlord Accountability: Dramatically increase the number of successful prosecutions against landlords who lease to unlicensed cannabis operators, with potential civil penalties up to $20,000 per day per violation, and file liens against properties involved in illegal activity.
  • Strategic Studies: Conduct studies on the scope and size of the illegal market, cost-benefit analyses of enforcement, and effective strategies used in other cities (e.g., Pasadena, which reportedly closes illegal operators at a cost of only $8,000 per operator).

These recommendations highlight a growing consensus that Los Angeles must fundamentally change its approach to cannabis regulation. Without a significant reduction in the financial burden on legal businesses and a dramatic increase in effective enforcement against the illicit market, the city risks undermining its own regulatory framework, jeopardizing public safety, and losing a valuable source of tax revenue.

Los Angeles, home to what should be the nation's largest municipal cannabis market, is teetering on the brink of a crisis. Its legal cannabis industry is being crippled by a combination of exorbitant taxes and an uncontrolled illicit market, leading to urgent calls for significant policy changes to prevent a complete collapse. Stakeholders, including social equity advocates, licensed operators, and regulatory bodies, warn that without immediate and drastic action, the city stands to lose not only a burgeoning industry but also substantial tax revenue.

The Pervasive Threat of the Illicit Market

The scale of unlicensed cannabis activity in Los Angeles is staggering. Estimates suggest there are nearly 4,000 unlicensed cannabis businesses operating in the city, including smoke shops and tobacco retailers openly selling untaxed "cannabis" masquerading as "hemp". This rampant illicit market means that legal sales comprise less than 40% of cannabis consumption statewide, according to the California Department of Cannabis Control.

These illegal operators enjoy a massive financial advantage, as they are not burdened by city and state taxes or licensing fees, allowing them to sell products at significantly lower prices—up to 40% cheaper than legal alternatives. This unfair competition has brought financial devastation to tax-paying social equity small business owners who are trying to operate legally.

Beyond economic impact, the proliferation of unlicensed dispensaries in areas like South Los Angeles poses severe public safety and health risks. These unregulated businesses often sell untested and potentially harmful cannabis products, some of which have been linked to serious health issues, including deaths related to fentanyl-laced products and lung damage from unregulated vape cartridges. They also contribute to increased criminal activity, including violent crime, robberies, and illicit transactions, leading to a decreased quality of life in affected neighborhoods.

Despite the clear dangers, enforcement against these illegal storefronts has been criticized as ineffective, with many remaining operational with little intervention. The Department of Cannabis Regulation (DCR) has even indicated that it would be unable to review complaints on unlicensed businesses, restricting its activities to licensed businesses only, a stance that has been vehemently criticized by operators as "War on Drugs 2.0" against legal businesses.

The Dual Burden: High Taxes and Operational Inefficiencies

Licensed cannabis businesses in Los Angeles face a flat 10% city cannabis business tax and a state excise tax that increased from 15% to 19% of gross receipts on July 1, 2025. This combined tax burden, along with escalating licensing and compliance fees, has resulted in shrinking legal sales and the closure of many small businesses. For example, a single storefront retailer could face an additional $13,720 in annual fees, and a vertically integrated operation potentially over $40,000 annually, with no promised improvements in services.

Adding to the financial strain, the DCR recently completed a comprehensive fee study to achieve "full cost recovery" for its services, proposing significant fee increases across nearly all license types. This comes despite criticisms of the DCR's own operational inefficiencies, including a near doubling of staff since 2020 (from 37 to 64 positions) and a 137% increase in costs for supporting city departments, all funded by DCR fees.

Furthermore, a significant portion of the DCR's projected financial shortfall is attributed to a $10 million repayment of disallowed Local Jurisdiction Assistance Grant (LJAG) costs to the State, a grant originally intended to help social equity operators. Critics argue that imposing new fees on license-holders to cover this grant mismanagement error punishes the very social equity operators the LJAG was meant to support.

Los Angeles' Strategy to Save its Cannabis Market

In response to this urgent crisis, the City of Los Angeles is considering several measures to stabilize and save its legal cannabis industry.

1. Cannabis Tax Reform

Councilmember Padilla initiated Council File 25-0720 to evaluate reforms to the City’s cannabis tax policy. Both Social Equity LA and the Cannabis Regulation Commission have submitted recommendations for a more sustainable tax structure:

  • Social Equity LA's Tiered Tax Structure: This proposal advocates for tax rates based on business type and size to prioritize equity applicants and small operators.
    • Tier 1 – Social Equity Operators: 2%
    • Tier 2 – Small Independent Operators: 4%
    • Tier 3 – Standard Non-Equity Retailers: 6%
    • Tier 4 – Large Vertically Integrated: 8% Social Equity LA believes this could generate $100M–$120M annually for the City with a 25–50% increase in legal sales.
  • Cannabis Regulation Commission's Tiered Tax Structure: For a two-year period, the Commission recommends rates ranging from 0.25% to a maximum of 6% based on annual gross revenue.
    • Small businesses earning less than $500,000 in gross annual revenue would see rates of 0.5% for adult-use sales and 0.25% for medical sales.
    • Licensed businesses with the highest revenue would pay 6% for adult-use and 3% for medical sales.
  • Tax Forgiveness and Payment Plans: The Commission also recommends a tax forgiveness program for Phase 3 Social Equity Applicants, which would forgive up to 40% of the principal owed by Retail Round 1 Applicants and up to 20% for Retail Round 2 Applicants, along with waiving interest and penalties. Additionally, it suggests amending the Los Angeles Municipal Code to allow all licensees to enter into multi-year payment plans for backtaxes, extending up to five years, instead of the current 12-month limit.

2. Enhanced Enforcement Against Unlicensed Operators

Both the Commission and various public comments underscore the critical need to curb the illegal cannabis market. Proposed strategies include:

  • Immediate Prioritization: Implement citywide prioritization of cannabis enforcement to shut down as many unlicensed operators as possible within six months, focusing on those near licensed retail businesses.
  • Consolidation of Powers: On a long-term basis, permanently consolidate enforcement powers into a single agency, potentially the DCR or the Mayor's Office, replacing the current task force model.
  • External Agency Assistance: Request assistance from the California Department of Tax and Fee Administration (CDTFA) and the Los Angeles County District Attorney’s Office to leverage their enforcement authority and tools, including the ability to pursue tax evasion.
  • Dedicated Funding: Earmark a portion of cannabis tax revenue specifically for illegal cannabis enforcement.
  • Landlord Accountability: Dramatically increase the number of successful prosecutions against landlords who lease to unlicensed cannabis operators, with potential civil penalties up to $20,000 per day per violation, and file liens against properties involved in illegal activity.
  • Strategic Studies: Conduct studies on the scope and size of the illegal market, cost-benefit analyses of enforcement, and effective strategies used in other cities (e.g., Pasadena, which reportedly closes illegal operators at a cost of only $8,000 per operator).

These recommendations highlight a growing consensus that Los Angeles must fundamentally change its approach to cannabis regulation. Without a significant reduction in the financial burden on legal businesses and a dramatic increase in effective enforcement against the illicit market, the city risks undermining its own regulatory framework, jeopardizing public safety, and losing a valuable source of tax revenue.

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