The latest warnings on legal pot in California: indoor grows and taxes

Police arrested two occupants and seized nearly 500 marijuana plants at an illegal grow house in the Meadowview neighborhood of Sacramento on Oct. 16.
Police arrested two occupants and seized nearly 500 marijuana plants at an illegal grow house in the Meadowview neighborhood of Sacramento on Oct. 16. City of Sacramento

It is becoming clearer and clearer that California’s move into legal marijuana is not going to be smooth or easy.

One sales pitch made to voters who approved Proposition 64 last November is that legalization of recreational pot would lessen the grip of drug gangs. For years, the concern was about the involvement of Mexican cartels in large marijuana farms in Northern California.

Now Chinese operations are popping up in illegal grow houses. Several recent raids in Sacramento, Placer, Yolo and Yuba counties resulted in arrests of Chinese citizens, The Bee’s Brad Branan and the McClatchy D.C. bureau’s Stuart Leavenworth reported this week. One indictment alleged that money sent from a bank in southern China was used to make down payments on houses.

This raises all sorts of troubling questions about who is financing and running these grows – and whether they will multiply once commercial grows become legal next year. Law enforcement officials say that illicit growers and smugglers are targeting California because they believe they can hide in the shadows of legal operations.

Already, illegal indoor grows are a major problem across the state. Last year, federal authorities seized 313,000 indoor plants in California, 75 percent of the national total.

There are between 800 and 1,000 illegal grow houses just in Sacramento, so City Hall sent an alert this week that it is cracking down. On Monday, police executed a search warrant at a house in Meadowview, arrested two occupants and seized nearly 500 plants. The city imposed a $239,000 fine.

Since Sept. 28, it has been illegal to grow more than six plants in a residence in Sacramento. A search at another house resulted in 1,100 plants being destroyed and $560,000 in fines. The city has also sent out 800 warning letters to property owners.

While Sacramento is ahead of many other cities in preparing for commercial pot, there are warning signs as well.

A new audit concludes that some of the 30 authorized medical marijuana dispensaries may be underreporting their income. Some refused to turn over financial and membership documents, and one wouldn’t let auditors inside.

That suggests that while the city collected about $4.5 million in business operation taxes from dispensaries in 2016, it may be losing out on revenue. The auditor calls on the city’s revenue division to improve its monitoring and collection and to consider issuing fines when it doesn’t get financial documents.

That is essential, both to ensure medical pot businesses are paying up and to send a clear signal to commercial operations that they must follow the rules.

City Hall is counting on taxes from commercial pot to pay for enforcement and neighborhood protection and possibly to help balance the city budget. The market is apparently there.

By July, more than 100 businesses applied for special permits to run legal indoor growing operations. And demand from legal growers is increasing rents and sales prices for warehouses and light-industrial buildings in the city. According to early estimates, the city could reap about $8 million more a year from cultivation and delivery-only dispensaries, not including manufacturing.

That number is a pipe dream if the city doesn’t run a tighter ship.