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My company's next cannabis product launch will be in California, but the state still risks losing its new marijuana entrepreneurs

Courtney Dorne, president of the brands division at Vertical Companies
Key Points
  • Slick advertising for black market cannabis sales is rampant in California.
  • Cannabis taxes are higher in California than other state, making legal retail sales harder.
  • California needs a plan to combat illegal operators and a sustainable tax structure.
New Year's Day 2018 was the first day of the legalization of recreational marijuana sales in California. Cathedral City Collective Care in Riverside County got permission to begin selling pot at midnight on New Year's Eve starting at 12:01am, the first in the state to sell recreationally.
Maria Alejandra Cardona | Los Angeles Times | Getty Images

It's not an accident that our company decided to pilot Inhayl, a cannabis and CBD product line, in California in the third quarter of 2019, before we do a national rollout. It's a niche product, made with organic herbs from India, aimed at a specific demographic — wellness-oriented women ages 35 to 65. As a consumer packaged-goods company, it is our job to directly market in the correct form factor to the appropriate demographic.

California is the perfect testing ground. For one thing, consumers are very friendly to the industry — for the most part. California was the first state to legalize medical marijuana back in 1996, and it legalized recreational marijuana use in 2018. Our products are not a hard sell here. Beyond that, California's large size gives us a real-world laboratory to work out any unexpected issues with our recipe production, distribution and supply chain. It's the ideal market to perfect the user experience at scale before we bring the brand to a wider market.

As a result of benefits like these, we've been able to create more than 230 jobs at Vertical Companies since we opened in Agoura Hills in 2014. As a group of seasoned entrepreneurs from the cannabis and hemp industries, as well as food manufacturing, health care and the military, to name a few, we saw the state's potential.

We're not alone in profiting from our presence in California. Statewide, legal sales of recreational cannabis are expected to hit $5 billion this year. Bullish as we are on the state, we might have to do our product rollouts elsewhere in the future if California doesn't do more to keep its edge in the cannabis industry.

Bullish as we are on the state, we might have to do our product rollouts elsewhere in the future if California doesn't do more to keep its edge in the cannabis industry.

Legal operators like my company face constant, intensifying competition from unregistered cannabis businesses in California. Authorities need to do far more to crack down on illegal players, who now advertise online as freely as a restaurant or hair salon might, using the same websites and apps.

The state needs to stop these black market operators from advertising at all. A good place to start would be following the recommendation of the state's Cannabis Advisory Committee. In a report issued earlier this year, the committee suggested that the state's Bureau of Cannabis Control require that all advertisements include information on the license holder who placed the ad. That would slow down many unlicensed companies.

New Frontier Data, a firm that tracks the cannabis market, has found that as much as 80% of the marijuana sold in California comes from the black market, which it valued at an estimated $3.7 billion in 2018, more than four times the size of the legal market. Meanwhile, less than one-fifth of the estimated 14 million pounds of marijuana grown in California annually is consumed in California. Illicit cannabis exports appear to be increasing in the state's second year of legalization, according to New Frontier.

Taxes are too steep

The state also needs to lower taxes paid by both consumers and cannabis companies. Currently, there is a 15% excise tax on the purchase of cannabis products in California, imposed on top of any city and county taxes. Meanwhile, there is a state cultivation tax applied to all harvested cannabis that enters the commercial market, which ultimately gets passed along to consumers.

Many consumers turn to illegal operators to avoid taxes. Some among them are people with cancer or other life-threatening diseases, who couldn't otherwise afford to use cannabis. Consumers' demand for savings is perpetuating the market for illegally sold, untested and unsafe cannabis, and that won't change until taxes are more reasonable. The total tax bill has been estimated at 45%.

VIDEO5:0605:06
Colorado Gov. Jared Polis on his state's $1 billion in marijuana revenue

California can't solve these problems alone. It needs to work closely with actual license holders to come up with solutions. If we all work together to create both a plan of attack on illegal operators and a sustainable tax structure, the industry will thrive. Other states are already paving the way. Colorado, for instance, has legislated a tax on retail products of 15% across the board; 90% goes to the state and another 10% goes to the local government. Colorado recently reached $1 billion in state revenue from cannabis sales.

California has gotten a lot of things right when it comes to supporting the cannabis industry. Now it's time to take the next critical steps, so it can remain a top state for the cannabis industry. Companies like mine are ready to help. Our future depends on it.

—By Courtney Dorne, president of the brands division at vertically integrated seed-to-sale cannabis company Vertical Companies, a multistate operator based in Agoura Hills, California. She also is a member of the CNBC-YPO Chief Executive Network.

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Key Points
  • 25% of people who traveled to Colorado between 2013 and 2018 listed cannabis as a reason.
  • Marijuana legalization revenue now accounts for roughly 3% of the state's $30 billion budget.
  • Other states, including California and Oregon, have struggled to grow the market.