Once a booming industry, San Jose cannabis shops face closure

Two San Jose cannabis dispensaries have temporarily closed — and the city stands to lose millions in revenue if they go out of business.

MedMen and Herbs both closed their doors in the last few weeks, raising alarm across Silicon Valley’s cannabis industry. While they closed for different reasons, local cannabis lobbyists and retailers say the closures epitomize the effect of San Jose’s high taxes and fees. It also will drive customers to the black market for cheaper cannabis products, they said.

Pot retailer MedMen, once valued at $1.6 billion, temporarily closed its San Jose storefront after its stock price dropped to zero. Its Yelp page says it will reopen by the end of the year, which means the city could miss out on $100,000 in monthly tax revenue, said Sean Kali-rai, founder of Silicon Valley Cannabis Alliance.

Herbs, a small local mom and pop dispensary, was forced to close after the city rejected its licensing renewal because the company owes hundreds of thousands of tax dollars to San Jose. Sharmi Shah, the shop’s attorney, said that could be a loss of at least $1 million for San Jose’s budget, but the company is working on reopening.

San Jose had 16 dispensaries last year which brought in $16.6 million, according to data provided by the city manager’s office. This year’s revenue is set to generate about $15.8 million in taxes, a nearly 13% decrease from the 2022-23 fiscal year, according to projections in the city’s budget.

Kali-rai said revenues could drop by at least $2 million if the two shops permanently close. Cannabis revenues have been shrinking since 2020, when the 16 dispensaries brought in $18.7 million in revenue.

Kali-rai said closures and shrinking revenues are because the taxes and fees force retailers to drive up their prices — which results in customers leaving the legal market to find cheaper alternatives. Customers can get weed delivered from other cities that are cheaper or buy illegal or unregulated cannabis products sold openly at vape and smoke shops.

“State and local taxes, coupled with regulatory fees add about 40% additional cost to cannabis. Anytime something’s 40% cheaper, as in the illegal market, there’s more than enough incentive for people to just bypass the legal market,” Kali-rai told San José Spotlight.

In San Jose, each dispensary pays 10% city tax on sales, in addition to the 15% cannabis tax from the state and California’s roughly 7.25% general sales tax.

Dispensaries are also drowning in annual licensing fees — and San Jose has the highest of any city at roughly $140,000, according to city documents. Wildomar in southern California has the second highest rate at roughly $71,000.

California imposes its own licensing fees on dispensaries based on how much revenue each shop generates. Fees could cost anywhere from $2,500 to $96,000.

Regulating cannabis

San Jose’s sales tax is part of the general fund, and local fees fund the city’s cannabis division. The division is under the police department and regulates the city’s dispensaries.

Shah said the division is funded by the dispensaries it regulates so if two shops closed, fees would be split between the remaining 14 dispensaries, increasing costs.

In October, several dispensary owners along with members of the San Jose City Council, shared concerns about an increase in illegal pot sales. Councilmember Sergio Jimenez asked the division to ease fees and fines, along with other measures to make it easier for legal dispensaries to stay in business.

Kali-rai said the cannabis division duplicates enforcement at the state level, so the division needs to either expand operations to regulate the illegal weed industry or cease to exist all together.

“The division made sense in 2015, prior to state regulatory framework. Now there is just no need. It doesn’t keep cannabis away from children, or out of schools, or away from citizens in general,” Kali-rai said. “The division has got these fat salaries and these cushy jobs, and all they do is basically push paperwork.”

Shah agreed the division’s creation in 2015 was prudent at the time, but not any longer. Her clients want to see the division tackle the sale of illegal products by unlicensed and unregulated businesses.

“(My clients) get that they have to be under this microscope and they happily have been under the microscope for almost 10 years — and they’ve complied with every rule and every regulation that they’ve been told to do,” Shah told San José Spotlight. “What they’re frustrated by is that now these illegal products are in the hands of children and residents and it’s impacting public safety.”

Changes to the rules

City spokesperson Carolina Camarena — speaking on behalf of Wendy Sollazzi, division of cannabis regulation manager for the San Jose Police Department — said the city has already taken several steps to ease the burden, including reducing the fine schedule for dispensaries.

She pointed to a vote on Jan. 9, where councilmembers approved new rules that allow cannabis businesses to participate in a payment plan and continue to be a registered business if they fall behind on taxes or fees. The city has approved two initiatives to expand the cannabis business tax revenues: allowing registered cannabis businesses to open a second storefront and the creation of the San Jose Cannabis Equity Assistance Program.

“(This program) offers an opportunity to residents who may have been harmed by years of cannabis prohibition and the war on drugs, (and) is aimed at helping qualified applicants to become business owners or start careers in the cannabis industry,” Camarena told San José Spotlight. “The city of San Jose will reserve up to 10 registrations for retail cannabis businesses to qualified cannabis equity owners.”

Camarena also said the cannabis division is giving a report on its work and scope at the Public Safety, Finance and Strategic Support Committee on Feb. 15. The committee is scheduled to review and discuss the possibility of expanding the cannabis division’s responsibilities to include regulating licensed tobacco retailers on April 18.

Contact Jana at [email protected] or follow @Jana_Kadah on X, formerly known as Twitter.