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?
Last week, despite controversy, criticism from both sides of the aisle, and talk of a veto, President Trump agreed to sign the federal government’s omnibus spending bill for 2018. To the relief of many in the legal cannabis industry, the spending bill retains a provision known as the Rohrabacher-Blumenauer (or Rohrabacher-Farr) amendment, which provides limited protection from federal prosecution for state-level legal cannabis activity.
Given both Trump’s and Attorney General Jeff Sessions’ tough talk on drugs and threats to crack down on the cannabis industry, the continued presence of this amendment is a silver lining for those anxious about the future of legal cannabis. While this won’t mean a change in the federal treatment of marijuana – the amendment has been included in every spending bill since 2014 – it does indicate that the government intends to keep on its current course with regard to cannabis, as the provision has to be renewed every year to remain in effect.
Likewise, though the actual protections afforded by the Rohrabacher-Blumenauer amendment are limited, its being signed into law was, and remains, an important indication of the federal government’s shift in attitude regarding cannabis: as the LA Times reported following the provision’s first inclusion in the spending bill, “Congress for years had resisted calls to allow states to chart their own path on pot. The marijuana measure, which forbids the federal government from using any of its resources to impede state medical marijuana laws, was previously rejected half a dozen times.” In this light, the amendment was a notable pivot from a top-down to a state-level approach to cannabis regulation.
California cannabis consumers and business owners shouldn’t get too comfortable, though: not only does the amendment not change anything about the federal government’s cannabis policy in and of itself, its terms only apply to medical marijuana, not recreational cannabis. So far, the government has rejected proposed amendments that would grant recreational cannabis operations the same protection from federal intervention. For the time being, California cannabis business owners’ best bet is to stay in full compliance with state and local law as the federal situation develops.
As recreational “adult-use” cannabis is officially legalized across California, cannabis taxation is more important than ever for legal cannabis operators. Our Los Angeles Cannabis attorneys are often asked about the new state tax system and what is new since January 1, 2018. As of a few months ago, the BOE became the CDTFA. For California, there are three different state-level taxes on cannabis business: the Cultivation Tax, the Cannabis Excise Tax, and the Sales and Use Tax. The new state tax agency has released an educational series to explain the new tax regime. Cannabis manufacturers and distributors need to become familiar with the resale certificate. As its name implies, a resale certificate relates to the Sales and Use tax.
The Sales and Use Tax applies to sales of cannabis or cannabis products (flowers, plants, hash, bud, vape pens, edibles, oils, etc.) to consumers – in other words, the “final sale” of cannabis before the product is used/consumed. However, there are circumstances in the cannabis supply chain where these products are sold to a cannabis business for resale, rather than to a consumer. For instance, if a licensed distributor sells cannabis to a licensed retailer, they’re making a sale, but the purchaser doesn’t intend to use or consume the product themselves. In order to prevent the distributor from being liable for taxation on this type of sale, the retailer can give the distributor a resale certificate. If timely and valid, this certifies that the purchaser intends to resell the product and therefore exempts the distributor from the tax.
Without a resale certificate, both the seller and the purchaser are liable for Sales and Use Tax. In the example above, the distributor would need to pay it for their sale to the retailer, while the retailer would need to pay it for the sale they make to the final consumer. The same goes for other sales of cannabis between licensed cannabis businesses. For instance, when a cultivator sells cannabis flower to a manufacturer, the cultivator is liable for a Sales and Use Tax unless the manufacturer gives them a resale certificate for the purchase.
One important thing for distributors to keep in mind is the distinction between “transport” and “sale”. If one licensed cannabis business purchases cannabis products directly from another, e.g. a retailer buying flowers from a cultivator, the distributor who is contracted to transport the products from the cultivator’s operation to the retailer’s isn’t making a sale, and therefore doesn’t need to pay a Sales and Use Tax, regardless of whether they’re given a resale certificate.
Even if all their business’ sales are for resale and exempt from Sales and Use Tax, all cannabis operators are still responsible for filing a tax return and reporting their activities to the California Department of Tax and Fee Administration. Remember, a resale certificate only applies to the Sales and Use Tax, not the Cultivation or Excise taxes.
As explained in our previous blog post, “compliance” will be a major factor in the distribution of marijuana licenses in Los Angeles – and cannabis lawyers around the city are fielding a number of questions about what, exactly, LA’s priority licensing process will entail.
The draft regulations the City has released extend a certain amount of privilege to existing marijuana sellers when it comes to licensing. Businesses and dispensaries that have operated “in substantial compliance” with prior iterations of marijuana law will be given priority, allowing them to continue operating while their license approvals are pending. Clearly, this confers a major business advantage, which has raised concerns about whether a compliance-based approach to awarding priority is equitable.
Disqualifying potential cannabis business owners for past violations, but opening the door to “compliant” newcomers, threatens to reinforce inequality. As Drug Policy Alliance policy director Cat Packer, slated to head the City of LA’s Cannabis Commission, explained in an interview with Merry Jane, “The impact of marijuana prohibition and the drug wars was heaviest in black and brown latino communities. If you say people with prior arrests and convictions can’t participate, it automatically has a disproportionate effect on communities that were punished by the War on Drugs.” In other words, privileging “compliance” could compound the negative effects of marijuana prohibition, blocking communities which have historically been more likely to be punished for cannabis use from gaining access to the benefits of the new, legal marijuana industry. As attorneys who have practiced in cannabis law for many years, we have seen the damage prohibition has done to these communities, and are fully supportive of a restorative approach to justice through the licensing process.
The LA City Council recently moved to create a Social Equity Program for marijuana licensing, intending to serve “those individuals and communities that were disproportionately harmed by cannabis prohibition.” This follows in the path of a similar program in Oakland, which reserved half of new dispensary permits for residents who lived in certain neighborhoods, had below-average annual incomes, or had previously faced cannabis convictions. Given how much larger Los Angeles' marijuana industry is than Oakland's, however, the mechanics of the LA program may need to be worked out, and it may not be able to mirror the Oakland model in every way.
Whatever the exact parameters of LA's Social Equity Program end up being, (and however they'll be affected by recent changes to state and city licensing regulations,) the priority-based system will continue to play a major role in deciding which marijuana businesses are allowed to operate. At present, the city plans to reserve a special round of applications for organizations that fit a profile similar to the requirements Oakland used. For more on priority and marijuana laws to the new state law (MAUCRSA), check our previous blog posts or guide to Prop 64, or email us at firstname.lastname@example.org.
Update: The MAUCRSA, which passed June 22, repealed the provisions of the MCRSA that placed restrictions on vertical integration. As of June 30, the state has confirmed in §26053(c) of the California Business and Professions Code that a business may hold more than one license. However, it's still unclear whether there will be a limit on the total number of licenses allowed.
As many of you are well aware, California is in the process of implementing two parallel regulatory regimes that will govern cannabis production, distribution, and sales: the MCRSA, which pertains to medical marijuana, and the AUMA (a.k.a. Prop 64), which pertains to “adult use” or recreational marijuana. Originally, the MCRSA and AUMA had very different treatments of how many activities a business could be licensed for. The MCRSA favored small producers by placing restrictions on the combinations of licenses a single business could hold. The AUMA, on the other hand, allowed for total vertical integration, so one license holder could be licensed for almost the full supply chain of activities.
In California, marijuana licenses are divided into six activities, covering the entire industry: Cultivation, Manufacturing, Testing, Dispensary, Distribution, and Transportation. To ensure that testing facilities remain disinterested, both the MCRSA and the AUMA don't allow a business with a Testing license to hold a license in any other category. On top of that, the MCRSA places a similar restriction on businesses with a Distribution license, and prevents any business from holding licenses in more than two categories. The AUMA forgoes these additional restrictions, making it much more lenient on licensing.
To reduce the confusion caused by the differences between the two acts, a draft trailer bill released on April 3, 2017 by Gov. Jerry Brown’s office proposes that the AUMA's licensing structure be used for both recreational and medical marijuana. Under this proposal, the MCRSA’s restrictions on which types of licenses one licensee can hold would be loosened, potentially allowing for vertical integration not only under the AUMA but also under the MCRSA. However, opinions are divided on whether this change would help or harm California's marijuana businesses.
Under the AUMA's licensing structure, a single business could operate in almost every section of the cannabis supply chain. The MCRSA's licensing structure was explicitly designed to prevent this kind of vertical integration, out of concern that lighter restrictions would allow large corporate interests to dominate the industry. However, the draft bill argues that, since the AUMA includes other anti-monopoly measures, small independent businesses would also benefit from access to vertical integration. Whatever the outcome, this change in licensing structure would present a major turning point for California's marijuana regulations.
Under California’s Administrative Procedure Act (APA), regulatory bureaus must present draft regulations and receive comments on those regulations from the public (a requirement called Notice & Comment). The California APA allows the public to participate in the adoption of state regulations in order to ensure that the regulations are clear, necessary, and legally valid. The MCRSA is no exception, and you have a few more days to make your voice heard. If you have an opinion about Vertical Integration, you can email California’s Bureau of Medical Cannabis Regulation at email@example.com. For more information on the AUMA and Prop 64, consult our guide to California's marijuana laws or email us at firstname.lastname@example.org.