San Jose is trying to make sure its pot shops don’t go up in smoke

Northern California’s largest city is trying to protect its pot shops from falling through the cracks — a move that comes as the state’s marijuana industry faces a rash of financial uncertainty amid pressure from illicit sellers and a whirlwind of other economic factors.

San Jose City Council on Tuesday unanimously approved new rules that allow marijuana stores to participate in a payment plan and continue to be a registered business if they fall behind on taxes or fees. It’s the latest change by the city’s elected officials to help ease the financial burden on San Jose’s 15 weed shops, which provide a lucrative stream of tax revenue in a metropolis that has historically managed a tight budget for its population of nearly a million residents.

But those marijuana tax dollars have been trending downwards in recent years: City officials expect pot to bring in about $15 million this year, a decrease from 2023 when the businesses brought in $15.8 million and $17.7 million the year before.

Some cannabis shops in the city also appear to be facing financial difficulties. City officials said Herbs, a store on Parrot Street, recently fell behind on paying its taxes and fees. The business did not renew its license to operate in the city, according to Wendy Sollazzi of the police department’s cannabis division. The store is marked as “temporarily closed” on Google and a phone number for the business was disconnected.

In November, the city lowered the amount that weed businesses could be fined for violations, dropping the penalties for a first offense from $1,200 to $250, though more egregious rule-breaking still carries hefty fees.

Jay Michaels, who has worked in the industry for decades mainly focused on cannabis genomics, said running a profitable marijuana dispensary in California has become increasingly difficult.

“It comes down to rubbing nickels together to make it work,” he said. “Even if you have everything working in your favor.”

In addition to illegal dealers that can offer lower prices for consumers, cannabis shop operators have blamed ongoing restraints at the federal level, exorbitant taxes and wholesale prices declining as major challenges to the industry. Purchasing pot in San Jose carries a 10 percent city tax, a 15 percent state excise tax and a local sales tax that amounts to 9.375 percent.

“The biggest problem is that the industry is over-taxed,” said Richard De La Rosa, compliance officer for Canna Culture and a city-registered lobbyist. “It’s been horrible on business.” De La Rosa said his dispensary on Charter Park Drive paid nearly $140,000 in annual fees to the city.

Sollazzi of the police department’s cannabis division said the city is reviewing the annual operating fee and changes could come before the city’s public safety and finance committee by February.