California's cannabis industry may be on the brink of a catastrophic collapse, with marijuana dispensaries facing closure due to unpaid taxes and mounting debt amounting to millions of dollars.

The industry has struggled with debt for years, and a 2022 report estimated a collective debt of over $600 million. However, recent changes in tax laws have raised concerns among stakeholders that the growing debt problem could prove disastrous. A San Francisco lawmaker introduced legislation this year targeting cannabis businesses that fail to settle their debts.

A recent change in state law shifted the responsibility of paying cannabis excise taxes from distributors to retailers, with the initial tax payments due on May 1. Historically, retailers have faced the most challenges in paying their bills, and new state tax data obtained by SFGATE indicates that many dispensaries lack the funds to pay their excise taxes.

According to the California Department of Tax and Fee Administration, more than 13% of the state's retailers, or 265 marijuana dispensaries, missed the May 1 tax payment deadline. These businesses now face a 50% penalty on the taxes owed, which could force many to close their doors.

Furthermore, the number of affected dispensaries could increase as the state agency is still processing 581 tax returns, which may include retailers who failed to pay.

Michelle Mabugat, a cannabis lawyer at Greenberg Glusker in Los Angeles, told SFGATE that she expects the debt crisis to lead to the closure of numerous dispensaries across the state.

Mabugat said, "A debt bubble has been growing over the past few years and is nearing its breaking point. I predict a significant number of retailers will go out of business this year, similar to the numerous cultivators that closed last year."

Ali Jamalian, owner of Sunset Connect, a cannabis manufacturer in San Francisco, revealed witnessing marijuana dispensaries with over $500,000 in outstanding bills. He anticipates the new tax structure will trigger a massive "extinction event" for pot shops in California.

"I have been involved in the cannabis industry for a while and have witnessed numerous cycles. However, this situation will undoubtedly have a significant impact. The 'extinction event' will occur when the government demands its taxes, and nobody can afford to pay them," said Jamalian.

The entire cannabis supply chain has been grappling with a persistent debt issue: Farmers claim they have not been paid for thousands of dollars' worth of products, distributors report that retailers do not pay them and have begun blacklisting certain shops, and even the federal government is being shortchanged. A Green Market Report analysis conducted last fall revealed that the country's ten largest cannabis companies collectively owed over $500 million in unpaid taxes.

This debt crisis has caught the attention of lawmakers. Assemblymember Phil Ting, a San Francisco Democrat, introduced a bill this year mandating that cannabis businesses pay their suppliers within 15 days for transactions valued at $5,000 or more, or face penalties. Ting attributed the issue to federal prohibition, which prevents cannabis entrepreneurs from accessing loans typically used to maintain cash flow in other businesses.

"For years, federal restrictions have left our state's legal cannabis operators with limited financing and capital options, resulting in a significant debt bubble throughout the supply chain, from cultivators to retailers," Ting stated in a news release.

The proposed legislation has the backing of associations representing distributors and manufacturers but has faced opposition from some cannabis retailers in the state. The bill is scheduled for discussion at the House Appropriations Committee's May 18 meeting.

In the absence of conventional bank loans, cannabis companies have resorted to extending loans to one another by selling products on credit. Cannabis farms often provide products to distributors and retailers without any upfront payment, but with the understanding that they will be paid later, typically within 30 or 60 days.

However, retailers often take several months to pay their dues, if they pay them at all. According to Brett Gelfand, the managing partner of CannaBiz Collects, a cannabis-focused debt collection agency, some California retailers owe over a million dollars to other marijuana businesses.

Gelfand observed that the same debtors repeatedly surface, with as many as 20 different clients filing claims against the same debtor, causing the debtor to be overwhelmed by debt.

Ting's proposed bill aims to address these habitual offenders by establishing a system that monitors and penalizes companies failing to pay their cannabis suppliers on time.

These indebted retailers now face the threat of going out of business due to the recent tax payment shift in the state. By transferring tax payments from distributors to retailers, the state not only eliminated a financing option—retailers were using excise tax collections to fund their businesses—but also imposed a significant penalty on financially struggling retailers.

Mabugat revealed that retailers had been "hoping and praying" to secure more funds before the excise tax payment deadline. However, with the May 1 deadline having passed, hundreds of marijuana stores could not gather the necessary funds and may be on the brink of collapse.

Mabugat commented on this precarious situation, stating, "Such a financing model, if it can even be called that, is a surefire way to spiral into financial turmoil quickly."