Price-Gouged Pot Operators Seek Relief

By Willis Jacobson
Nov 13, 2020

Although Ryan Jennemann runs a licensed California cannabis cultivation business, he acknowledges still sometimes hiding what his company does.

Jennemann, the founder and CEO of THC Design, is careful when contacting contractors and other service providers to ensure he receives a price quote before they learn that his business deals in cannabis. If not, he said, it is almost a certainty he will be charged well above the normal market rate.

“It used to be that you’d hide that you were in cannabis because it was illegal,” Jennemann said Friday. “Now it’s because once they find out you’re in cannabis, you get a target on your back.”

Some refer to it as a “cannabis tax” while others call it a “cannabis bump.” Regardless of the name, the result is the same: Cannabis operators routinely find that they are charged more than traditional businesses for a wide range of services – simply because they work with cannabis.

Industry operators, many of whom view the practice as unfettered price-gouging in an already over-taxed market, have complained amongst themselves for years. A Los Angeles-based trade organization is now looking to bring those discussions out in the open to gauge the magnitude of the situation, and perhaps to change it.

The Southern California Coalition (SCC), which has members in every sector of the industry, sent a message to its membership this week seeking personal accounts of cannabis operators being overcharged. Price gouged pot operators have become an “epidemic” in Southern California, according to the organization, which plans to prepare a white paper on the subject. The practice is rooted in a time when working with cannabis companies was considered risky, but many licensed operators say that time has long passed.

Adam Spiker, the SCC’s co-founder and executive director, said he isn’t sure exactly what can be done to solve the problem, but he suggested that highlighting it could be an important first step toward change.

“I want to try to document it and maybe that holds these service providers accountable,” said Spiker, who is also a senior partner at Spiker Rendon Consulting. “As the federal government figures out how to regulate this, maybe there’s aspects that can help. For us, we’re looking to find as many ways as possible to try and lessen the price gap between illicit cannabis and legal cannabis.”

Widespread issue

Jennemann, with THC Design, said the overcharging is widespread.

He pointed to landlords and security-camera providers as particularly predatory. Often, operators have no recourse because regulations stipulate that they have certain property types or particular security camera specifications.

In California, for example, the state mandates that cannabis operators have a set amount of cameras and that the recordings are stored for 90 days.

“Once the security-camera companies found out that was required by the state, video security pricing for cannabis facilities skyrocketed,” Jennemann said. “It’s across the board, to such a point that cannabis operators, when they reach out to buy just standard office supplies or whatever it may be, they try to hide that it’s for cannabis.”

Jennemann found his own workaround for dealing with landlords, but even that isn’t worry-free.

Because he also owns a property management company, he said he usually leases real estate through that entity and makes sure his contract includes an option to sublease. He then subleases to his cannabis operation – essentially the only way to ensure he receives a fair rate.

But even in those cases, he said, the landlords aren’t pleased once they learn from the state that a cannabis business is located in their building.

“So then it gets contentious between me and my landlord,” he said.

Industry consultant Adrian Holguin, the owner of CannaShark Consulting, said the problem extends across the nation.

Holguin, who advises cannabis clients throughout the U.S., said he’s seen the gouging in various markets from pretty much every level of service provider, including attorneys, architects and engineers. He advises clients to get bids from several companies to ensure they aren’t getting hit with a “cannabis tax.”

“We see it all the time,” he said. “It was more prevalent in the beginning, years ago, and now it’s kind of gone down. Anybody that still operates with that sort of modus operandi, they think that the industry is where it was years ago and it’s not there anymore, so we just don’t work with them.”

‘Sound the alarms’

Although everyone agrees the problem exists, there is no consensus on how to solve it.

Spiker said it’s unclear if or how governments can oversee what typically amounts to transactions between private companies, but he suggested that more attention on the issue couldn’t make it worse.

“Maybe it makes sense to include the labor unions that are involved in this industry – maybe they can help,” he said. “We’re just kinda putting it all against the wall to see what sticks, to be honest.”

Jennemann, with THC Design, noted that a lot of considerations will need to be taken into account, as regulators can exacerbate the problem just as much as they can suppress it.

Over-regulation – such as with the security-camera mandates in California, or rules that limit the amount of eligible properties – can “make it so there’s only a handful of companies that can do the job,” he said.

“Your back is against the wall – there’s not much you can do,” he said.

Holguin, with CannaShark Consulting, suggested that businesses pay close attention to service bids and look to consulting services for help if they feel they’re being taken advantage of. While he acknowledged that advisers aren’t necessarily cheap, he said they can end up saving massive amounts of money by preventing practices like overcharging.

In addition to any potential cost-savings, ridding the industry of the “cannabis bump” is also a way to stifle the underground market, said Jennemann, with THC Design. Illegal operators typically aren’t subject to the added costs because they, by nature, don’t follow rules and regulations. Cutting into the illegal industry is one of the goals of the SCC with its white paper, which Spiker said may not be published until 2021.

“As we’re trying to get the industry regulated and normalized to where everyone gets out of the illicit market and into the legal market, every company exploiting a cannabis operator is only keeping people hidden and keeping things in the illicit market,” Jennemann said. “For those reasons, I think it’s good to sound the alarms, so to speak, so the general public and consumers are aware that the companies they’re buying from are being exploited and taken advantage of, which indirectly impacts the consumer because it either increases costs, lowers quality or some combination thereof.”

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