Case Study: Navigating Cannabis Tax Hikes in California & New Mexico

LOS ANGELES- In July 2025, cannabis operators in California and New Mexico woke up to another line item tightening their margins: higher excise taxes.California’s excise tax jumped from 15% to 19% — a 25% increase. This was not a surprise move; Assembly Bill 195 (2022) had already eliminated cultivation taxes and empowered the state to adjust excise rates to recover lost revenue. Still, when efforts to freeze the rate at 15% failed in the state legislature, the higher tax went into effect.

New Mexico, meanwhile, was on a different track: the state raised its excise tax from 12% to 13% in July 2025 and implemented an automatic annual increase of 1% until the rate hits 18% in 2030. Unlike California’s sudden hike, New Mexico’s “step-up model” created a slow squeeze, with operators forced to plan around predictable, incremental cost increases.

For both states, the math was simple: more money to the state, less to the operators. For cannabis businesses already squeezed by high compliance costs, razor-thin margins, and competition from the illicit market, the implications were anything but simple.

Market Reactions

The immediate reactions fell into four camps:

1. Absorption: Some retailers simply absorbed the tax, cutting into their already slim margins.

2. Consumer Pass-Through: Others raised shelf prices, risking consumer backlash and illicit market flight.

3. Upstream Pressure: Certain retailers requested credits or markdowns from brands, straining supplier relationships.

4. Operational Efficiency: A smaller, more forward-looking group prepared by identifying efficiencies, streamlining operations, and mitigating costs before the tax hit.
   
   

The fourth approach — operational efficiency — required the most foresight and discipline. It also required something often overlooked in cannabis: people who could execute consistently on the small but critical details of retail operations.

The Focal Company: BayGrow Retail Collective

BayGrow, a mid-sized cannabis retail operator in the San Francisco Bay Area, illustrates the challenges and choices facing operators. With three dispensaries and approximately $25 million in annual sales, BayGrow had achieved a measure of scale but remained vulnerable to external shocks.

BayGrow’s CFO calculated that the new excise tax would erase several hundred thousand dollars of annual profit if not addressed. Raising prices was risky: the Bay Area’s illicit market remained active, and consumers were already complaining about the high cost of legal cannabis. Pressuring brands for concessions was possible, but many of BayGrow’s suppliers were already stretched thin.

That left efficiency. BayGrow’s leadership decided that protecting margins would require a surgical approach to operations. But they didn’t have the bandwidth to do it alone. That’s when they turned to Headquarters (HQ), a back-office services team known for embedding real people inside cannabis businesses to deliver operational support.

Headquarters at Work: Human Execution, Every Day

HQ’s model was simple but powerful: instead of selling another complicated software to add to your tech stack, they provided human operators who showed up every day to do the unglamorous but essential work that determines whether a cannabis retailer sinks or swims.

At BayGrow, the HQ team quickly identified three problem areas:

• Product expiration and destruction: Too many SKUs were aging out, leading to waste and write-offs.

• Delayed discounting: Price markdowns weren’t happening soon enough to move slow-moving products.

• Slow turnover: Capital was tied up in inventory that wasn’t selling, reducing liquidity.
  
  

The HQ team rolled up their sleeves and got to work. They:

• Conducted pricing audits across categories, identifying where prices needed to shift.

• Designed and executed clearance campaigns to move products before expiration.

• Oversaw inventory analysis and purchasing adjustments, coaching managers to buy smarter and reduce tied-up capital.

• Coordinated with store managers to ensure staff understood and implemented changes in real time.

This was not a one-time intervention. HQ’s team partnered closely with BayGrow staff day after day, ensuring follow-through and building new habits.

As one HQ manager put it: “Software can tell you when something’s wrong. But someone still has to aggregate the data, pull the reports, make data-driven decisions, and get the discounts live. That’s what we do — every day.”

Results

Within two months, BayGrow was seeing results that went far beyond theory:

• $170,000 in prevented losses: Nearly 6,000 products nearing expiration were cleared before they had to be destroyed.

• Faster turnover: Inventory moved more quickly, freeing up working capital.

• Happier customers: Discounts on slow-moving products increased value perception without undermining brand equity.

• Less waste: Fewer products ended up in the trash, protecting margins and sustainability efforts.
  
  

By July 2025, when California’s excise tax officially rose to 19%, BayGrow was not scrambling. They had already “found” the margin needed to cushion the impact — thanks to HQ’s people doing the work.

Lessons Learned

The BayGrow experience highlighted several broader lessons for the cannabis industry:

• Efficiency is human, not just digital. Software tools are useful, but they don’t get rid of the admin work necessary to keep a business running. HQ’s success came from delivering consistent and quality results–handling the small, but time consuming, tasks that operators often lack time to manage.

• Proactive beats reactive. By addressing inefficiencies months before the tax increase, BayGrow turned what could have been a crisis into a manageable transition.

• Partnerships amplify bandwidth. Many cannabis operators run lean teams. Partnering with an external, specialized service like HQ allows them to focus on strategy and customer experience while still executing the nuts and bolts of operations.

• Customer relationships matter. Passing the tax directly to consumers might have triggered backlash. Instead, BayGrow preserved goodwill by offsetting costs through efficiencies.

• Margins live in the details. Product expiration, delayed discounting, and inventory mismanagement might seem minor, but together they represented hundreds of thousands of dollars — enough to make the difference between profit and loss.

Broader Industry Implications

The case also raises important questions for the industry at large. In California, sudden policy shifts can devastate operators who are unprepared. In New Mexico, the step-up tax model means operators must plan for steadily rising costs over time.

In both cases, the operators who will survive are not necessarily the biggest or loudest — but the smartest and most disciplined. As tax burdens rise, success depends less on raw growth and more on operational excellence.

This dynamic mirrors other heavily regulated industries. In alcohol, tobacco, and pharmaceuticals, companies that thrive under heavy tax and compliance structures do so by mastering efficiency and execution. Cannabis is proving to be no different.

Epilogue

By late 2025, BayGrow remained profitable, while several local competitors had either downsized or shuttered. HQ continued to work with BayGrow and other operators across the state, repeating the same kind of day-to-day execution that had preserved BayGrow’s margins.

For HQ, the case was not unusual. As one team member noted: “We save operators this kind of money all the time. The numbers look impressive, but this is just Tuesday for us.”

The excise tax increase served as a wake-up call for many in the industry. For BayGrow, it was proof that with the right team — and relentless attention to detail — even the toughest external shocks can be managed.