Cannabis Compliance: Operating Legally in California in 2018

Posted by Margolin & Lawrence on April 10, 2018

California’s transition into a regulated market has many operators wondering what the universe of compliance looks like and where they fit into the process. In order to operate legally in California after January 1, 2018, you need both a local authorization and a state license. Temporary licenses from the state of California are sufficient to continue operating, though you will eventually need to obtain an Annual License. To date, 954 cannabis businesses in California have received Cease and Desist letters from the Bureau of Cannabis Control. While some were in error, others were operating without the required licenses for California.

It’s important to understand that licensure is not the end-all-be-all of compliance -- in fact, it is the minimum requirement for your business to operate legally. In addition to having a state license (which requires local authorization), you will need to begin thinking about how to set up your business with compliance processes that facilitate and enable adherence to state regulations for your activities: cannabis microbusiness, retail, manufacturing, cultivation or testing. The below infographic is an overview of the entire licensing/compliance process.


Where does your business fit in?


I Have My Temporary Distribution License. Now What?

Posted by Margolin & Lawrence on March 13, 2018

The state of California has officially begun to grant temporary licenses for cannabis distribution, pending applications and processing of full state licenses. Temporary licenses are “a conditional license that allows a business to engage in commercial cannabis activity for a period of 120 days.” They can only be granted to businesses which have already received their local licenses, and are intended to allow locally-licensed businesses to operate while waiting for their full state license to be reviewed.

When it comes to record-keeping, in particular, the requirements of temporarily-licensed cannabis distributors are different from those of annually-licensed ones. The reason for this difference is that the track-and-trace system which California will use to record the movements of cannabis products has yet to be fully implemented. While annual license holders will be required to use this system, based on the Franwell METRC software, to keep track of their inventory, CalCannabis states that temporary license holders must manually document their sales using “paper sales invoices or shipping manifests”.

For the temporary distribution licensee, then, keeping in compliance with state regulations is not only about following the operating requirements, but also about keeping track of a relatively complicated set of information for the sake of record-keeping. Distributors need:

  • Local cannabis recordkeeping requirements (usually keeping business, inventory, & patient records for a several-year period)
  • State cannabis record retention requirements (listed in California Code of Regulations, Title 16, Division 42, §5037) – financial, personnel, training, security, etc.
  • The California Board of Equalization’s general record-keeping requirements for businesses (keeping track of the sales & use taxes, receipts, deductions, and purchase prices for 4 years).
  • Paper sales invoices or shipping manifests for all sales
  • A resale certificate for all sales intended for resale

If a distributor plans on reselling cannabis rather than just distributing it, they’ll need to make sure their seller’s permit is in order as well. For more information on resale certificates, check our recent post on the subject.

While all this paperwork may seem daunting at first, a licensed distribution operation should be more than qualified to handle it – and, once the California METRC system is implemented, keeping records of sales and inventory should be streamlined considerably.

What happens after the temporary cannabis license?

Posted by Margolin & Lawrence on March 2, 2018

On January 1, 2018 the state of California began issuing temporary licenses for cannabis operators. We are about halfway through the 120-day period allotted for temporary licenses and the state has allowed an additional 90 day extension so long as businesses submit a complete application for the annual license. Our Los Angeles cannabis attorneys are facing many questions about what happens when the temporary license expires. The answer is that you need to submit for an annual cannabis license from the state. 

L.A. Cannabis Licensing: A Waiting Game

Posted by Margolin & Lawrence on February 8, 2018

It’s been over a month since the state of California began issuing licenses for commercial cannabis businesses. The epicenter of this emerging legal market is right here in Los Angeles. While the City passed their final ordinance in December, the licensing process has been off to a slow start.

The agency that regulates cannabis in Los Angeles, the Department of Cannabis Regulations (DCR) has begun to issue licenses for Phase 1 existing dispensaries. These applicants can apply through a streamlined process for a temporary license which allows them to then apply for a temporary state license and operate legally in the City. At this moment, there are 98 eligible businesses operating in Los Angeles with Temporary Approval from the DCR for Local Operation – in other words, a temporary license for legal cannabis activity.

Los Angeles’ Department of Cannabis Regulations has divided cannabis applications into three distinct phases, each with their own set of criteria to qualify. Phase 1 will remain open through March 4, 2018. This is the most exclusive phase with likely only 200 or so stores qualifying. The current phase is reserved for applicants who are candidates for “Proposition M Priority Processing”, which comes with a strict set of requirements that effectively limit eligibility to preexisting medical marijuana dispensaries. For this reason, existing operators working in cultivation and manufacturing and entrepreneurs looking to launch new businesses are eagerly awaiting Phase 2. Under the Los Angeles Ordinance, Phase 2 is supposed to end in early April 2018. For this reason, we expected applications to open for Phase 2 in early February. We have contacted the DCR almost daily, and as of yesterday, there was still no time estimate on when Phase 2 licensing applications will open.

When it does begin, Phase 2 will require that applicants have a preexisting cannabis business – it’s reserved for “Non-Retailer Commercial Cannabis Activity Prior to January 1, 2016 Processing.” To qualify, a business must meet the following standards, as imposed by the LA Municipal Code:

1) the Applicant was engaged prior to January 1,2016, in the same Non-Retailer Commercial Cannabis Activity that it now seeks a License for; 2) the Applicant provides evidence and attests under penalty of perjury that it was a supplier to an EMMD prior to January 1, 2017; 3) the Business Premises meets all of the land use and sensitive use requirements of Article 5 of Chapter X of this Code; 4) the Applicant passes a prelicense inspection; 5) there are no fire or life safety violations on the Business Premises: 6) the Applicant paid all outstanding City business tax obligations; 7) the Applicant 13 indemnifies the City from any potential liability on a form approved by DCR; 8) the Applicant provides a written agreement with a testing laboratory for testing of all Cannabis and Cannabis products and attests to testing all of its Cannabis and Cannabis products in accordance with state standards; 9) the Applicant is not engaged in Retailer Commercial Cannabis Activity at the Business Premises; 10) the Applicant attests that it will cease all operations if denied a State license or City License; 11) the Applicant qualifies under the Social Equity Program; and 12) the Applicant attests that it will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the Temporary Approval if the Applicant fails to abide by any City operating requirement.

Of these criteria, an essential component is the Social Equity Program; not only is it still in development by the city, but it also divides candidates into separate tiers within the program itself, which could add further complications to the application process.

All About California Cannabis Taxes

Posted by Margolin & Lawrence on February 1, 2018

Many are excited about California’s new era of legalized marijuana. For the first time, state and local governments are allowing marijuana sales to all adults. There is also a new licensing system for all sectors of the industry. The new system creates many new opportunities for businesses and consumers.   But is also comes with new taxes that have caused sticker shock for many California cannabis operators and customers visiting dispensaries this month. Governments are eager for the new tax revenues, although some predict that if taxes are too high, a black market will persist as people opt out of the licensed system. One of the questions our Los Angeles cannabis attorneys are most frequently asked is about the new cannabis taxes and how they will affect California cannabis businesses.

To sum it up, effective tax rates for marijuana operators are high. Not only do cannabis businesses have to pay corporate taxes like any other business (except that they can't take deductions on their federal taxes due to 280E), but there are also additional city and state taxes specifically for cannabis operators that need to be factored in as well.  Just as Federal, State and Local law apply to cannabis operators, those governments all also apply their own taxes to cannabis.

Here is a chart that gives you an overview of the effective tax rates for different cannabis businesses, using Los Angeles as an example for factoring in local taxes as well:

NOTE that the Excise Tax (15%) and Sales Tax (8.5%) imposed on retailers is passed directly on to the consumer. So the effective tax rate is similar to the other activities when you factor that in, but overall the tax rates are very high for operators. 

One of the reasons cannabis operators must pay so much in taxes is that cannabis is still a Schedule I controlled substance under Federal Law. Section 162 of the U.S. Tax Code allows for businesses to deduct Ordinary and Necessary expenses from their taxes. An exception to this section is 280E, which prevents deductions from Federal Taxes for businesses involved in selling Schedule I controlled substances. You can read the text of 280E here and check out a seminal 2007 Tax Court decision -- CHAMPS v. Commissioner (2007) which allowed an operating dispensary to separate out product-touching deductions and deductions for a separate ancillary business. A related 2015 ruling in U.S. Tax Court held that unlike CHAMPS, an operator running an activism business and selling cannabis could not separate the two businesses and take deductions under 280. These two cases apply to retailers. Other cases have found that cultivators and manufacturers can take certain deductions for costs of production. We will cover this in a future post. 

Here are the individual maximum tax rates that apply:

  Federal Corporate Tax Rate*** California Cannabis Taxes California Business Taxes 8.84% Los Angeles Cannabis Taxes Los Angeles Business Taxes (.425%) Payroll Taxes (Estimated effective rate) Estimated Effective Tax Rate
Retail 21% 23.5% -- 15% excise tax + 8.5% sales tax 8.84% 10% in LA for adult use; 5% in LA for medical 0.43% 3%**** 57%
Cultivation* 21% 12% estimated ($9.25/ounce tax on flower = $148 per pound) + $0 sales tax 8.84% 2% 0.43% 3% 45%
Manufacturing 21% Collect Cultivator Tax + $0 sales for resale 8.84% 2% 0.43% 3% 35%
Distribution 21% Pay CDTFA Cultivator Tax + $0 sales for resale 8.84% 1% 0.43% 3% 35%
Testing 21% + Deductions = Estimated 15% - 8.84% 1% 0.43% 3% 34%
Microbusiness 21% per activity 8.84% per activity 0.43% 3% Varies per microbusiness activity
               
               
*(flower - different tax rates for stems and fresh plants; clones are not taxed by state)          
**280E likely does not apply to testing labs          
***280E prevents deductions for businesses trafficking cannabis          
****Social Security, Medicare, Calif & Fed. Unemployment - this is a percentage of employees' salaries, for purposes of the chart it is converted to be tied to revenue consistent with the other percentages          

 

These are the required California state cannabis taxes by activity: 

Cultivators must pay a $9.25/ounce tax on all dried cannabis flowers (and a lower rate per ounce for cannabis leaves or fresh cannabis plant).

Retailers must pay both a 15% excise tax on all their purchases of cannabis, as well as a sales tax on all their taxable retail sales, which varies by locality but can be close to 10%.

Manufacturers must collect cannabis cultivation taxes from cultivators from which they receive unprocessed cannabis, and pay these cultivation taxes to the distributors.

Distributors must collect cultivation taxes from cultivators and manufacturers from which they receive cannabis, and collect cannabis excise taxes from retailers they supply with cannabis.

In addition to these taxes, localities are free to impose their own cannabis business taxes, and many impose substantial taxes on both cultivation and all business proceeds.

It is important to note that the cannabis specific taxes are in addition to standard taxes like Federal and State corporate tax, and local business taxes for businesses operating in cities like Los Angeles.

While distributors, testing facilities and manufacturers appear to pay less taxes than cultivators or retailers, they will no doubt share the costs of taxation as cultivators increase their prices to account for the cultivation tax.

If these taxes are passed directly on to consumers, that could mean a retail outlet previously charging $60 per 1/8 of an ounce of marijuana would increase their price to $90. On the other hand, many have predicted that the pre-tax prices of cannabis will drop over time, as more large-scale cultivation, distribution, and retail operations reduce their overhead costs and margins, would could counteract some of the higher taxes.

For operators, these effective tax rates are extremely high and it is important to consult with a tax attorney and a qualified accountant who can help you with tax planning and preparation to set up your business for success. For more information and worksheets to calculate your California cannabis taxes, refer to the CDTFA’s website

 

L.A. Cannabis Update: Who Can Apply for a License Right now?

Posted by Margolin & Lawrence on January 11, 2018

While Jeff Sessions made his announcement last week that he was repealing the Cole Memo, Los Angeles opened their online portal for recreational cannabis applications. The conflict of law continues, but many operators in Los Angeles just want to know - “when can I get my license!?”

Currently, only cannabis retailers who qualify for Measure M Priority Processing are eligible to apply for licensure. Measure M Priority is limited to those operators who have a Business Tax Registration Certificate (BTRC) from 2015, 2016, or 2017 that is categorized as L050. This group is more expansive than just “Pre-ICOs” and will allow for newer businesses that have not been operating in Los Angeles for over a decade, in fact, you could have even opened a store a little over a year ago and qualify (you can read more in our previous post).

If you qualify for Measure M priority, you are considered an EMMD (existing medical marijuana dispensary) by the City. EMMDs numbers will not count towards the neighborhood caps that will be established for undue concentration or the limit on the number of licenses that will be issued for dispensaries in the City (around 390). They will receive licenses before anyone else in the City of Los Angeles, and will also be able to obtain their state licenses once they receive local authorization from the City.


Los Angeles will be issuing the first temporary licenses for Measure M Priority Dispensaries within the next couple of weeks. The temporary license is free to apply and you will need your BTRC number, a site plan, a lease, and identifying information for the owners of the operation. The Los Angeles Department of Cannabis Regulation has not given guidance as to when the annual license applications will be open for EMMD cannabis retailers in the City.


The next wave of applications will be Phase 2, when the City will be rolling out its Social Equity Program. Many of the details for the program are still being ironed out and we expect to hear more from the LA DCR in the coming weeks.

Ask A Cannabis Trademark Lawyer: How Do I Apply For A State Trademark?

Posted by Margolin & Lawrence on January 9, 2018

 As of January 1st, 2018, the long wait is over: cannabis business owners can apply for California state trademarks. The application form can be obtained here: http://bpd.cdn.sos.ca.gov/ts/forms/tm-100.pdf. Because cannabis is still federally illegal and cannabis products themselves cannot be trademarked, this is a viable avenue for many California cannabis brands that will protect your business marks within the state. You can read our prior post about USPTO Trademarks here.

According to the website for the Office of the California Secretary of State:

“Beginning January 1, 2018, customers may register their cannabis-related Trademark or Service Mark with the California Secretary of State's office so long as:

1.The mark is lawfully in use in commerce within California; and 

2.Matches the classification of goods and services adopted by the United States Patent and Trademark Office.  

If the application submitted to register a Trademark or Service Mark is found deficient, the application will be returned to the registrant for correction.

Note: Not all cannabis-related products can be registered under current law due to the inability to meet federal classifications.”

This means that in order to obtain your state marks, you must be lawfully using the marks in commerce at the time of the application. Therefore, you will need to be licensed in compliance with SB 94,  both at the local and state level, before you’re eligible for trademark approval. Otherwise, if you claim an unlicensed use, you may run into issues with the Secretary of State. Further, once your license is obtained, you must also show that you’re making actual, bona fide use of the trademarks on your products in the stream of commerce. That means that customers are identifying you by your brand when they purchase your goods or services in the marketplace.

Ask an LA Cannabis Attorney: Can Existing LA Dispensaries Stay Open?

Posted by Margolin & Lawrence on January 2, 2018

2018 is here, and there is a lot of confusion in Los Angeles about the new cannabis laws. The question causing the most confusion is whether existing operators can stay open. Under Measure M, existing dispensaries with BTRCs who comply with Proposition D still have limited immunity until they are licensed. Under state law, a retailer needs a state and local license in order to conduct commercial cannabis activity. The City is currently holding a press conference on the issue and we will update our blog as this issue develops. Our LA cannabis attorneys give their opinion on the matter below. 

Update: At 1pm today, the City confirmed via a press conference that EMMD cannabis retailers in Los Angeles can remain open through the licensing process. 

For years under California state law, commercial marijuana activity has been limited to medical dispensaries and cultivation sites organized as non-profit collectives or cooperatives.  The City of Los Angeles has allowed medical marijuana dispensaries to operate in the City under various sets of rules, most recently under Proposition D, which passed in 2013 and provided immunity from a general ban on commercial cannabis activity to a specific group of medical marijuana dispensaries that have been in operation since 2007 and met various other requirements.

Under California’s Proposition 64, which passed in 2016, starting January 1, 2018, Californians are allowed to commercially grow, distribute, and sell both medical and non-medical marijuana, but only to the extent allowed by local governments (cities, or for those in unincorporated areas, counties).   The City of Los Angeles has a new system for regulating commercial cannabis activity, Measure M and portions of the Los Angeles Municipal Code implementing Measure M, which will allow for both medical and non-medical commercial cannabis.  It is expected that Los Angeles will begin open up its applications on January 3, and begin issuing licenses within a few weeks after that.  Under the terms of Measure M, the provisions of Proposition D were repealed beginning January 1, 2018.

Many have asked whether existing commercial cannabis businesses are allowed to continue operating under the old system of rules, until they are able to secure licenses in the new system.  Existing commercial marijuana dispensaries will retain their legal protection under state and local law, so long as they submit their applications for the new system within the time window provided by the City.  Los Angeles has announced that, for the first 60 days after opening its applications, only existing commercial cannabis businesses will be able to apply for licenses, in a “priority” round, and after this 60-day period, new commercial cannabis businesses will be eligible to apply for licenses.  Measure M makes clear that  existing medical dispensaries can continue operation after January 1, 2018, and need not shut down before applying for licenses, as long as they operate as non-profit collectives, follow all the rules set forth in Proposition D, and submit their applications for licenses within the 60-day priority period.

 Measure M describes this protection as follows: “An existing medical marijuana dispensary (“EMMD”) that is operating in compliance with the limited immunity provisions (Los Angeles Municipal Code Section 45.19.6.3) and tax provisions (Los Angeles Municipal Code Section 21.50) of Proposition D, may continue to operate within the City at the one location identified in its original or amended business tax registration certificate until such time that the EMMD applies for and receives a final response to its application for a City permit or license for commercial cannabis activity being conducted at that location. The City's designated licensing or permitting agency shall give priority in processing applications of EMMDs that can demonstrate to the City’s designated licensing or permitting agency that the EMMD has operated in compliance with the limited immunity and tax provisions of Proposition D. To avail itself of the terms of this Section, including the priority processing, an EMMD must apply for a City permit or license within sixty calendar days of the first date that applications are made available for commercial cannabis activity. If the City issues the EMMD a license or permit for commercial cannabis activity, the EMMD shall continue to operate at its location within the City in accordance with the rules and regulations set forth by the City."

California state law also provides that the provision giving legal protection to medical marijuana patient collectives and cooperatives, Health & Safety Code section 11362.775, will sunset one year after the State begins issuing cannabis licenses.  Until this law goes away, patients will still receive protection under state law for non-profit, collective cannabis activity.

 Accordingly, existing medical marijuana dispensaries in Los Angeles may continue operating  under California’s medical marijuana non-profit collective laws, and Los Angeles’s Proposition D, as long as they submit their applications for licenses during the 60-day priority period.

 For medical marijuana cultivators, manufacturers, and distributors not located at one of the Proposition D dispensaries, there is no explicit protection under Los Angeles law for continued operation pending licensing.  Los Angeles has, however, provided a priority licensing system for these existing  non-retail businesses that have been around since before 2016 and supplying a Proposition D dispensary since before 2017.  This suggests that the City does not intend to prosecute such businesses in current operation, but until these businesses retain licenses from Los Angeles, they face some risk of being prosecuted. 

If you are confused Contact usto speak with one of our cannabis attorneys who can provide clarity on these issues and the cannabis licensing process. 

CA Cannabis Licensing Explained in 2 Minutes - Video

Posted by Margolin & Lawrence on December 31, 2017

As we prepare for January 1 and recreational cannabis in California, many legal questions remain for cannabis businesses. In this video, Los Angeles Cannabis Attorneys Margolin & Lawrence explain the local and state licensing process for cannabis businesses in California. If you are looking for a high level overview of what you will need to do to start a cannabis business, or get your existing cannabis business into compliance, this is the place to start.

Breaking News: LA County Releases Proposed Cannabis Regulations

Posted by Margolin & Lawrence on December 19, 2017

L.A. County released long-awaited draft cannabis regulations yesterday. The Board of Supervisors, which creates laws that govern all of the unincorporated areas of the county (any area that is not part of an incorporated city) has been listening to the findings of the Cannabis Advisory Group over many months and has released the zoning requirements that will apply to commercial cannabis in the county, as well as the activities that will be licensed.The County will be issuing for Adult-Use (recreational) and Medical cannabis uses. Our LA cannabis attorneys have reviewed the proposed cannabis regulations and our findings are below. 

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.