Only a week is left until Culver City starts accepting applications for cannabis business
permits - except storefront retail, which is scheduled to open by May. With delays in the City of LA's application process, the City's original slogan,"All Roads Lead to Culver City" is beginning to ring true for many cannabis businesses.
Legalization has been a bumpy road for California cannabis operators, and since January 1, owners are learning that it also comes at a price. The state’s steep taxes on cannabis businesses – with effective tax rates as high as 57% for some cannabis activities – have many operators bracing, and calling for a reduction in these so-called sin taxes. Consumers are also encountering price increases -- prices are up about 15% compared to last year.
As of this year, cannabis business is legal in Los Angeles, but the process of drafting and refining the laws and regulations that will actually govern the legal cannabis industry is still in its early stages.
To that end, over the past month, the LA city council met to adopt the following items:
- Item #21: Cannabis Advertisement
- Item #22: Prop D Dispensaries, MMD's, AUMA
- Item #23: MAUCRSA, Prop D, Land Use, Preparation of Ordinance, AUMA
- Item #24: New hires at the DCR, Cannabis Business Fees, Interim Position Authority
- Item #25: Medicinal and Adult-Use Cannabis Regulation and Safety Act / State-Chartered Bank / Cannabis Banking Activities
While none of these items are extremely surprising in their own right, they may have significant consequences for the nature of Los Angeles’ cannabis industry.
For instance, Item #23 lays out a path to adjust the LA municipal code, adding “provisions to allow for the Cannabis Regulation Commission to make exceptions to the 600-foot school restriction for non-retail cannabis activities subject to a California Environmental Quality Act of 1970 analysis of environmental impacts and conditions to address public health, safety and welfare considerations, as well as a public hearing.” This means that buildings that were not in the correct zoning could be, if the City finds after the environmental analysis that there are not negative effects from having a cannabis cultivation or manufacturing operation near a school. A change to this rule would potentially mean that, as long as they were in keeping with public health and safety, cannabis businesses could be located in far more locations across LA. Note that under state law, local jurisdictions can allow for closer than 600 feet.
Other ideas in these items may also have major impacts on the LA cannabis industry. For instance, Item #23 also provides for mixed-light cultivation and social consumption lounges, two activities that the city’s cannabis ordinances haven’t allowed in the past, while Item #25 expresses the city’s support for a State-chartered bank that would allow cannabis businesses to bank their money in California. Each of these changes would be a major step toward full legal legitimacy for marijuana in the Los Angeles area.
While these items are significant in their own right, they also reflect a trend of increasing acceptance of the cannabis industry in LA. Establishing regulations however, is an ongoing process. For more information, check our guide to California cannabis business law or contact us at email@example.com to speak with one of our Los Angeles cannabis lawyers.
Since mid-December, California has been issuing temporary state licenses to cultivators, manufacturers, retailers, distributors, microbusinesses, testing laboratories, and event organizers operating in the commercial cannabis market. These temporary licenses became effective as of January 1, 2018, and are currently being reviewed and approved by the Bureau of Cannabis Control (BCC) and the California Department of Food and Agriculture (CDFA) per the Business and Professions Code, section 26050.1. As of today, over 2,500 temporary state licenses have been issued.
So what is this license and why do you need it? The temporary license is a conditional license that allows cannabusinesses to engage in commercial cannabis operations in the state of California for 120 days (about 4 months). The license is only available to applicants that have first obtained a local license, and allows cannabusinesses to operate before receiving their full state license. Within this 120 day period, the temporary licensee must apply for the state license. However, if the state license isn’t received by the end of that four-month period, California may grant extensions of 90-days to the temporary license as necessary. According to Lori Ajax, Chief of the BCC, California will routinely extend the licenses if the failure to obtain a state license is no fault of the licensee. “If it’s on us,” she says, “we will continue to give extensions so you can keep operating.”
What is required for the temporary license? Besides obtaining a local license, the temporary license application requires a number of additional pieces of information from the applicant, including:
- Applicant & Business Information: Physical address of the premises and name of the applicant(s) or business entity requesting the license, including the primary contact information of the applicant(s)
- Owner information: The name, mailing address, and contact information for each “owner” of the business, as defined in Business and Professions Code §26001
- License information: Specification of the license types applied for (such as distribution, or microbusiness, for example)
- Operational Activities: product type and activity information
- Local Jurisdiction: Local jurisdiction contact information
- Local Authorization: Documentation of authorization to operate from the city/county in which the business premises are located, consisting of a copy of the valid license, permit or other authorization
- Property Authorization: Either documentation of title or deed to the property or a lease agreement (or other such authorization) from the landlord demonstrating a right to occupy the premises and engage in the applied-for commercial cannabis use
- Property Site Plan: A diagram of the physical layout of the property and business premises
The required information varies depending on the type of license a business is applying for. For example, the Manufactured Cannabis Safety Branch of the Department of Public Health processes temporary license applications for manufacturing, while the BCC processes the applications for distributors, microbusinesses, testing laboratories, and event organizers. For more information on the licensing process, check our guide to California cannabis laws.
If you have obtained your local license, or are close to receiving it and looking to obtain your temporary state license, contact our cannabis attorneys today!
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.
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.
As cannabis entrepreneurs and investors learn about the legal requirements to operate a compliant cannabis business, the next question many arrive at is - so how do I find a compliant property?
The complex cannabis regulations that have been rolled out by local and state governments across California means that as a cannabis operator you will be working with a number of different regulatory agencies. The rules for many of the cannabis activities are promulgated by different agencies - for example, the Bureau of Cannabis Control regulates retail, distribution and delivery in the state of California, while CalCannabis (a division of the CDFA) regulates cannabis cultivation in the state. One area of great confusion for many cannabis cultivators that our Los Angeles cannabis attorneys have been fielding questions on is the issue of obtaining a state water license. The regulations for water were passed in October, and the application portal is currently open to apply for a water permit. The water policy aims to protect California's natural streams and bodies of water from pollution and prevent diversion of water for cannabis cultivation.
On October 17, 2017, the State Water Board adopted a state-wide policy establishing strict environmental standards for cannabis cultivation. The state-wide policy is designed to protect water flows and water quality in the state of California. All cannabis cultivators will need to comply with this state-wide policy. In addition to complying with the Water Board’s state-wide policy, cultivators will need to comply with all other state, federal and local laws.
The state-wide policy will be implemented through a water quality permit known as the Cannabis General Order and through conditions for cannabis-related water rights known as Cannabis Small Irrigation Use Registration.
All cultivators will need to register their water right and water discharge using the Water Board’s online portal. The Water Board’s online portal can be found here. Depending on the cultivator’s water source, the state-wide policy may or may not apply to them.
To see the cannabis cultivation policy, click here. If you are a cannabis cultivator and have questions relating to the state-wide policy, to speak with one of our cannabis attorneys.
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 126.96.36.199) 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.