Hundreds of Humboldt marijuana farmers expected to lose licenses over tax debt

Hundreds of marijuana farmers in California’s Humboldt County are in jeopardy of losing their business licenses as a deadline looms to pay county cultivation taxes levied years ago.

County growers in the state’s famed Emerald Triangle face a March 31 deadline to eliminate all tax debts associated with Measure S, a ballot referendum approved by voters in 2016 when the industry outlook was far better than it is today.

According to a Public Records Act request from the Humboldt County Growers Alliance (HCGA) obtained by MJBizDaily, more than 75% of the county’s 1,000 or so cultivation permit holders carry some tax debt.

The average outstanding tax debt is roughly $12,000, according to county data and officials, although some owe more than $150,000.

In all, cultivation permit holders owe the county more than $17 million in taxes, primarily from 2017 to 2021.

The overhang is indicative of a larger statewide predicament: Operators owe more than $1.3 billion in unpaid taxes and related penalties, SFGate reported, citing Department of Tax and Fee Administration data.

Tax delinquents’ fates ‘sealed’

Of the 765 listed account holders with cultivation licenses in Humboldt County, public records show 415 agreed to a payment plan.

Nearly as many, 350, did not.

For the segment of operators who have failed to work with county officials or ignored their warnings, their fate is likely sealed, according to 5th District Supervisor Steve Madrone.

He told MJBizDaily that most have dropped off the map completely, abandoning grows and other commercial requirements, including property taxes and various application and processing fees.

“We cannot locate them,” Madrone said.

“They’ve walked away from disasters on their property, and it’s a nightmare and a mess.

“There’s not going to be any forgiveness there.”

The county’s five-member board is slated to discuss the issue at a March 25 meeting, where they could approve enforcement measures, such as license suspensions and revocations, and/or provide more industry relief by extending the deadline.

Referendum returns to haunt growers

More than eight years ago, Humboldt County voters approved Measure S, which created the following three-tiered cannabis cultivation tax structure:

• $1 per square foot for outdoor grows.
• $2 per square foot for mixed-light grows.
• $3 per square foot for indoor grows.

During that same election cycle, state voters legalized adult-use sales.

At the time, California’s medical marijuana program under Proposition 215 was viewed largely as a commercial success, though the market transacted in the gray zone without a regulatory framework or enforcement mechanisms.

Meanwhile, the prospects of federal legalization, reliable banking services and market expansion fueled the national conversation – and the green rush.

Responding to new challenges

Of course, many of these expectations fizzled, and, in recent years, so has the California market, showing wear across several metrics, including active licenses, total sales, price contraction and retail access.

Active retailers, a key sales outlet for growers, now number 800-900 statewide, down from 1,200 just a few years ago, according to industry sources and media reports.

Nearly 60% of California’s 539 municipalities still prohibit retail business, according to state data.

In response to those challenges and others that hindered small farm competitiveness, Humboldt County supervisors in November 2022 suspended the Measure S excise tax for two years and deferred related payments and penalties two years prior.

For the past year, the excise tax was set at 10 cents per square foot for outdoor, 20 cents per square foot for mixed-light and 30 cents per square foot for indoor cultivation.

“We’ve done a lot to try to consider the market crash,” Madrone said.

“In many cases, farmers are burdened with state costs, sales and crop costs, labor costs, you name it.”

Meanwhile Humboldt County, like several other jurisdictions across the state, is facing a budget shortfall and cuts in federal resources and grants.

“That means we’re looking at layoffs and other kinds of really drastic cuts in our budget,” Madrone said.

“Not only farmers, but all of our economies – personal and countywide – are in the tank, and people are hurting.”

Payment plans sought

Talking Trees Farm, located in Willow Creek, was among the first 50 licensed cultivators in Humboldt County and the state.

The farm, which has struggled to balance cash flow, transitioned from indoor to outdoor cultivation because of high costs.

Its branded and bulk products, including packaged flower, pre-rolls and top-selling Bubble Hash, are carried in about 100 stores today, down from 300 a few years ago.

Founder and CEO Craig Nejedly told MJBizDaily that dozens of retailers and distributors owe the brand hundreds of thousands of dollars in unpaid invoices, a growing nationwide challenge that has wrecked the world’s largest regulated market.

“I’m never going to get that money, which circles back to why I can’t pay my Measure S taxes,” he said.

Nejedly said he was caught off-guard late last year when he received a nearly $30,000 bill from the county for 2020 and 2021 cultivation taxes.

“It was a total shock and surprise, and I know we had never received those bills before,” he said.

Nejedly paid the $100 county requirement to remain in good standing.

Ideally, he wants some debt forgiveness but is willing to enter a payment plan, interest-free preferred.

He said the business can allocate $300-$500 per month to decrease its tax debt.

“I’m wondering what’s going to happen at the end of this month because it’s going to be really impossible to come up with the $27,000 they say I owe,” Nejedly added.

Friends and neighbors

In a Jan. 31 letter urging the Board of Supervisors to address the crises, Humboldt County Growers Alliance Executive Director Natalynne DeLapp outlined the financial strain on small farmers fueled by “distributor defaults, natural disasters, the market crash, and burdensome regulatory costs.”

She told MJBizDaily the county collected more than $55 million in Measure S taxes from 2017 to 2021, a period when the vast majority of farmers were paid up.

The county has benefited from those proceeds, and the industry has put Humboldt County on the global map for weed.

“Having a sizable concentration of cannabis businesses and farms in our area is good for the industry,” DeLapp added.

“We don’t want to lose our friends and neighbors.”

Incentives in play?

Mattole Valley Sungrown is one of a few dozen marijuana cultivators in Humboldt County without a Measure S tax debt.

“I definitely prioritize those taxes above everything else out of fear of losing my permit,” said owner Dylan Mattole, who sympathizes with struggling farmers in the region.

Thousands have left the industry, lost their licenses or moved to the unlicensed market since his company secured a cultivation permit in 2018, the same year California transitioned to an adult use.

His 1-acre outdoor farm in Honeydew focuses on supplying premium niche products, such as resin and rosin, and partnering with reputable manufacturers.

Mattole told MJBizDaily he opposed Measure S but would like to see the county offer some incentives for those in compliance.

Madrone agreed.

“However it worked out, they prioritized getting those paid,” he said.

“And they should receive some sort of an incentive for that.”

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.