It’s the No. 1 question in the FAQ section at the bottom of The Artist Tree’s homepage: How much are the taxes for weed in Southern California?
Adult-use customers in Los Angeles can expect to pay a 15% cannabis excise tax, a 9.5% state sales tax and a 10% city sales tax, while those in West Hollywood—where The Artist Tree got its start as a dual dispensary and art gallery in 2019—can expect the 15% excise tax, a 10.25% state sales tax and a 7.5% city sales tax.
“It’s contributing to the continued proliferation of the illicit market because prices are really high in licensed dispensaries when you add on all the taxes,” The Artist Tree co-founder and Chief Compliance Officer Lauren Fontein tells Cannabis Business Times. “It ends up being over 30% in taxes added on, which is crazy. You don’t pay that with any other type of good.”
Cannabis taxes are a hot debate in most any state where the plant is regulated, but it’s become an even hotter issue as of late in the Golden State, where the excise tax rate is set to automatically increase to 19% on July 1 unless one lawmaker can step in. Amid a tax default crisis for the state’s industry, this pending hike has many planning their next moves.
But it’s not the only factor impacting business decisions.
The Artist Tree now has nine dispensaries and two co-located consumption lounges—in West Hollywood and Hawthorne—where those 21 and older can order their favorite cannabis products and cannabis cocktails tableside.
Cannabis cocktails at The Artist Tree's consumption lounge in Hawthorne, Calif.Photo courtesy of The Artist Tree
From cannabis to art to smoking lounges, the licensed retailer is always on the search for opportunities in California, and that includes forthcoming dispensaries in Riverside and Fresno in 2025. These new facilities would be in addition to the ones The Artist Tree already operates in those two cities, Fontein says.
But with limited opportunities to expand, the company’s search is now headed east—perhaps to New York, possibly to Minnesota, or really anywhere that makes sense beyond the narrowing scope in California.
“We’ve really been focused on California up until now—just really streamlining operations here and getting a good foothold—but there are becoming fewer and fewer places in California where we can open new stores,” Fontein says. “So, now seems like a really great time to make that push out of state.”
Fontein paints a picture of cities that have either maxed out the number of licenses they’re willing to issue or those that continue to opt out of issuing licenses altogether, leaving few options for in-state expansion.
Keeping that in mind, cannabis business valuations have rapidly declined in California since a 2021 market peak, leaving some struggling operators with their hands tied behind their backs.
“The other thing we’re looking at is potentially acquiring distressed retailers because there are a lot for sale right now in California,” Fontein says. “A lot of companies are winding down, going into receiverships, or maybe just looking for operational partners because they’re struggling.”
From 2025 aspirations to market dynamics, business opportunities and the pending tax hike, Fontein offers her take on the pulse of the Golden State’s cannabis industry in this interview with CBT.
Editor’s note: This interview has been edited for style, length and clarity.
Tony Lange: What are the outlooks for The Artist Tree in 2025?
Lauren Fontein, co-founder and CCO, at The Artist Tree in Fresno.Photo courtesy of The Artist Tree
Lange: Do you feel like one of the biggest challenges in California right now is the limited opportunities to expand amid the long list of cities and counties that prohibit cannabis businesses?
Fontein: Yes, it’s still a hurdle, although most large metropolitan areas have stores, and many could be considered oversaturated with dispensaries at this one point. And so, it’s hard because if you want to open a store in LA, for instance, you would quickly realize it wouldn’t be worth the investment to try and to open a new location or maybe even to take over an existing one because things are very saturated in the LA market. The taxation at the city level is at the highest rate of any city in the state, and the city has a very big continuing issue with illicit dispensaries operating and has not been very active in getting them shut down.
Then there are places like, Orange County is a great example, where most of the region doesn’t allow cannabis, and there are a lot of populated cities within Orange County where there are still opportunities. One strategy is to try and change the laws. And people are doing that, and it is slowly changing. So, we were able to open an Orange County location in Laguna Woods in July. That’s the first one anywhere in Southern Orange County because that whole region has been so averse to cannabis. Now that we’re there and they see that things are going smoothly and there aren’t these security issues or vandalism or whatever everyone’s afraid of, I think that will encourage other communities to allow it. It’s still a slow, continuing-to-develop process.
Lange: What about cannabis lounges?
Fontein: The same thing could be said about lounges. Even in all the places where dispensaries are allowed, there’s only really a handful of cities that allow consumption spaces, which doesn’t really make sense at this point. But for whatever reason, cities don’t feel comfortable allowing them, or they want to have stores first for a few years and make sure everything’s OK. I think slowly we’re going to see a lot more cities also allowing consumption.
The Artist Tree's cannabis consumption lounge and patio at its West Hollywood location.Photo courtesy of The Artist Tree
Lange: The Artist Tree was the first dispensary in Fresno when you opened your doors there in July 2022. With more than half a million residents, that area was a cannabis desert for quite some time, correct?
Fontein: Yes, which is part of the reason why it became a great market; they didn’t have medical dispensaries, or if they did, they had very few and maybe unlicensed, versus a city like LA, where we had a very long history of having these medical dispensaries. When adult use was legalized, there were already hundreds of dispensaries in the city operating. Some had licenses, but more than half did not. And so, it was really hard for the city to wrangle all those people in, get them to get licensed, figure everything out. It became this huge mess. And ultimately, they weren’t able to get all of the unlicensed ones to close.
In Fresno, they didn’t have that. If anything, there were maybe just a few people on the down-low operating or doing delivery services. When we opened our legal dispensary there in 2022, I believe it was one of the only places in the whole region where you could buy weed, legally or illegally. It was a totally different experience than opening a new store in LA, where we will see people coming through the doors and it can still be successful, but in Fresno, it was like people were breaking the doors down, lined up down the block. Our opening day was insane, and it continued to be really busy because of that.
The Artist Tree's West Hollywood and Fresno dispensaries have interactive clone rooms, where visitors can view and interact with plants in various stages of growth. The company sells teenagers, heartlets, seedlings and feminized seeds from various nurseries.Photo courtesy of The Artist Tree
Lange: Do you think more single-state operators in California are going to look out of state if more opportunities don’t arise soon?
Fontein: A lot are already. A lot of people that I know with other retail companies are doing the same thing we are and maybe already have opened. Many already opened places out of state. So definitely people are seeing California as not necessarily the stronghold, and a lot of brands also that we’ve worked with, several have just pulled out of state completely and decided to focus on other markets. I think everybody sees that and is willing to try something new. Maybe there’s more excitement and fewer regulatory hurdles and better conditions to be an early business in those other new markets versus our very saturated and mature market.
Lange: What’s your whole take on the pending excise tax increase on retail from 15% to 19% starting in July?
Fontein: Yeah, I mean, it’s almost mind-blowing that the state is doing this at this point because they’re well aware of the issues with overtaxation in cannabis causing problems with companies not able to afford to remit the excise tax. I’ve heard statistics that 30-some percent of retailers are delinquent in paying their excise tax to the state. So, they already have that issue, and it’s causing a lot of problems.
That’s part of the reason why I believe, and many others believe, that California has been so unsuccessful at getting rid of the illicit market because consumers don’t want to pay taxes and are price sensitive. And these other businesses, if they’re operating illegally, can charge much less and have a better profit margin than a legal business that has to pay all those taxes. So, the fact that they’re increasing it another 4%, when they made that change to retailers having to remit the tax a couple of years ago.
Editor’s note: Beginning Jan. 1, 2023, cannabis excise tax reporting shifted from the distributor to the retailer in California.
That change alone caused a lot of hardship for companies, which is why so many are in arrears right now. But this change is just going to further harm the companies that are struggling, of which there are many, and it makes it harder for consumers. So, they’re going to either spend less on the actual products they buy because they only have so much disposable income, which means total revenue will just go down, or go off to shop in other places.
Ideally, they would eventually lower the tax, but unfortunately, what we’ve seen is cities and states rarely ever lower taxes no matter what. It just seems like they find a way to convince people, “Oh, we’ll just raise it a little bit and the money will go towards this thing.” And it sounds great to the voters, but it’s not really thinking about the ramifications.
RELATED: California Bill Aims to Repeal Cannabis Excise Tax Increase
Lange: When businesses are in tax default, it would seem they also can’t afford to pay their business partners within the industry. How has The Artist Tree navigated this scenario of financial integrity within the supply chain?
Fontein: A major issue that led up to a lot of these closings and receiverships is unrealistic financial projections and investing a lot of startup capital into the build-out, and even the whole period leading up to licensing because often it gets dragged out by cities for years and you’re paying rent or other costs. So, a lot of times you’ll be in the hole $1 million to $2 million by the time you open your doors because you’ve had to spend so much on all those things. I don’t think people realistically projected what it would take to recoup that and then become profitable.
We’ve seen that with some of our businesses too. It can take years before you’re even repaying the initial investment or before anyone’s making money off of the business. Luckily in some markets, it works out well; you can pay that back quicker. But it’s really important to manage all your expenses at the beginning and think about is this rent really realistic and if I can pay this on an ongoing basis. Do I want to spend this much on designing the space? All of these things.
I think people had all these very optimistic notions a few years ago about what the industry was like and that dispensaries are just cash cows and they’re going to churn out money and not think about all of the potential pitfalls that could happen in things like taxes getting raised. There’s so much competition too. So, it came back to bite a lot of companies that couldn’t pay their bills and ultimately had to sell or were forced to sell.
Lange: Does The Artist Tree keep a constant pulse on business evaluations for potential M&A opportunities?
Fontein: Yeah, definitely. We’ve seen a lot of businesses for sale or businesses in receivership, and we do a lot of analysis on that particular market, their rent costs, what their customer accounts and revenue have been up to this date, what we think we can do differently if maybe we come in and if we think there are ways that we can save money and increase profitability and all of that. So, we’ve made some offers on different assets that have been out there. We’re really only focused on retail and we’re looking actively all the time. We have a couple of people on our team in charge of that process, but it’s always a very detailed analysis of is this price right now equivalent to whatever their EBITDA is for the past three years or whatever history the store has. And it’s an educated guess, but we put a lot of thought into what that valuation should be.
The Artist Tree's cannabis consumption lounge in Hawthorne, Calif.Photo courtesy of The Artist Tree
Lange: The Artist Tree was expecting roughly $80 million in revenue in 2024: Was that an accurate projection?
Fontein: Yeah, it was. And we were lucky to come close to that. It ended up being a good projection. Fortunately, we opened those two stores in Hawthorne and Laguna Woods, which ended up doing really well and exceeded our expectations in some ways. And so, we have other stores where they have been declining in revenue in some markets, but then others are growing. We were just lucky with location. We do a lot of research and try and predict what will happen, but sometimes you just don’t know. Sometimes you think a particular city will be really busy because maybe there aren’t a lot of stores there, but even still for various reasons, you still don’t get this huge influx of traffic. Maybe the people were already going to the town next door and just didn’t want to change, or maybe they just didn’t have as much disposable income in that area as other areas. There are all sorts of things.
Lange: And 30% of $80 million is $24 million. Is that a fair neighborhood for taxes The Artist Tree owed to state and local jurisdictions in 2024?
Fontein: In the state specifically. We also have federal income tax and payroll tax and all of those things, but the city and state combined tax rate of just cannabis-specific tax can be close to 30%. And especially the way it’s computed—sometimes one is compounded on the other.
Lange: One of the biggest storylines in late 2024 was Gov. Gavin Newsom’s ban on hemp-derived THC products. Will this ban fix the cannabis industry’s problems, specifically in oversaturated areas like Los Angeles?
Fontein: The idea and the intent of the ban are great, and it is necessary to have a ban or create some other regulatory system for those products only because the rest of us are subject to so many regulations and burdens and fees. I’m totally pro the state lessening the regulations on cannabis in general, and I truly think that would be the best for everybody. But, in the absence of that, which doesn’t seem to be happening, they can’t do that to all of us selling cannabis THC products and make us pay annual licensing fees of a hundred grand a year plus all those taxes and everything else and then just let the smoke shop down the corner sell essentially the same items, you know, hemp-derived products that have the same effects as the gummies that we sell, for instance. And they’re not paying cannabis tax. They’re not having to submit security plans and go through inspections and all of that, and they’re not even necessarily requiring people to be 21 to purchase the items or IDing them.
We have a whole track-and-trace system where every single transaction we make the state has access to. So, at least the state has acknowledged this is an issue and has technically made a ban on the products. But then the issue, just like with what I was talking about before about illicit dispensaries, is there actually enforcement? And I don’t think that they’re doing much at all at this point. So even though there’s a ban, there’s still smoke shops everywhere selling these products today. …They’re cheaper, they’re easier to get. They’re not just in LA, but everywhere in the state.
Lange: Do you find that towns and cities without dispensaries remain hesitant to opt in because of recent reports on testing issues with pesticides along with an increase in state product recalls?
Fontein: It certainly doesn’t help. You definitely get people showing up at city council hearings mentioning the pesticide contamination. Another big concern is always cannabis getting into the hands of youth. That’s a big argument always for, “We don’t want dispensaries here because more of our youth are going to have access to cannabis,” which isn’t the case, because it’s harder to get cannabis from a dispensary than a smoke shop per se. And we’re IDing everyone that comes in, and we’re flagging people—they can’t buy over a certain amount. There are protections in place, but people still just have that fear.
And the testing, too, unfortunately. Some people were kind of cheating the system, and some testing labs were doing things not really compliantly. And so, it’s good that the [Department of Cannabis Control] DCC is cracking down and penalizing these people and checking all the testing and stuff. Unfortunately, it can give us a bad name because then people say, “Oh, is this stuff actually safe?” But I think as a whole, most of the brands are responsibly getting their items tested, and it’s still as a whole much safer to buy a product from a licensed shop than anywhere else.
