On January 1, 2018, hundreds of California residents lined up outside just licensed cannabis retail dispensaries to purchase newly legal recreational marijuana. The founder of Buddy’s dispensary in San Jose, which holds one of California’s first recreational marijuana licenses, described it as the busiest day in the dispensary’s history. The California cannabis industry is projected to reach profits of $3.7 billion dollars in 2018 alone. Projections indicate there could be up to 4 million consumers of recreational marijuana in California. This huge opportunity has many new entrepreneurs, including celebrities like Mike Tyson, pursuing the cannabis business.

Under the new law, Californians over the age of 21 can now possess up to an ounce of marijuana, eight grams of marijuana concentrate, and grow up to six plants at home for their personal use. While public consumption is still banned, the new framework gives recreational users new flexibility. Those on the business side of recreational cannabis, however, still have a lot of to consider before diving into this new market.

This is especially true given the news today that Attorney General Jeff Sessions is rescinding an Obama-era directive discouraging enforcement of federal marijuana laws in states where cannabis is legal. We will know more about how this decision will impact the California market after the announcement is officially made by AG Sessions later today. For now, we will provide an update on the first week of recreational cannabis sales in California.

Licensing

Recreational retailers need a license issued by the Bureau of Cannabis Control, in addition to authority from applicable city authorities, in order to operate. Less than 100 businesses received licenses to open retail locations by New Year’s Day, and were primarily concentrated in Santa Ana, San Diego, San Jose and Sacramento. Both Los Angeles and San Francisco did not clear the local regulations in time for recreational cannabis to be available right away, delaying the issuance of city licenses needed to get the licenses from the Bureau of Cannabis Control.

Location continues to be one of the biggest considerations for recreational marijuana operators. As of September 2017, only 19 of California’s 58 counties have adopted ordinances to allow for legal cannabis companies. Several counties, including Fresno, Riverside and Bakersfield, have forbidden the recreational sale of cannabis altogether. The areas with the strongest projected cannabis retail performance in California include the Los Angeles Metro Area, Humboldt and Mendocino Counties, San Diego, the Central Valley, the San Francisco Bay Area, Sacramento, and desert towns in Southern California.

Regulation

California’s regulation of recreational marijuana will take place in stages. In the beginning, recreational cannabis facilities will be allowed to sell marijuana without full regulatory controls. However, in the next six months, the state is implementing testing requirements for potency, pesticides and contaminants, which has led to concerns among growers about a lack of marijuana that will be up to the new state regulatory standards. These concerns are well-founded. California is the largest cannabis producer in the country. In 2016, it was estimated that the state produced over 13 million pounds of marijuana. However, 80 percent was shipped out of the state illegally, and of the remaining 20 percent, only one quarter was sold legally for medicinal purposes. The challenge will be whether a sufficient amount of compliant recreational marijuana can be grown in a short enough period of time to keep up with the increasing consumer demand now that it is legal.

Taxation

Another concern for both recreational marijuana retailers and consumers is how it will be taxed. The new taxes and fees are estimated to raise the cost of retail marijuana by up to 70 percent in California. The cost of recreational marijuana is also estimated to be 50 percent higher than medical marijuana. In Los Angeles, for example, recreational cannabis users will be paying a 9.5 percent county sales tax and a 15 percent state excise tax. At Harborside recreational dispensary in Oakland, the total taxation cost is over 34 percent, including the 15 percent state tax, 10 percent tax by the city of Oakland, and other regular sales taxes. Economists estimate these taxes will bring up to 1 billion dollars in revenue to the state; however, the huge increase in cost could increase the potential of a burgeoning black market for recreational marijuana.