California Cannabis Regulatory Nightmare

The dawn of California’s recreational pot era is accompanied by regulations to match the state suburban sprawl. Three different new state agencies are responsible for issuing and enforcing more than 20 different types of licenses. Each agency has a team of enforcement officers with the overarching police authority residing with the California Highway Patrol.

The agencies do not end there. Cannabis businesses must deal with the California Department of Tax and Fee Administration, the Franchise Tax Board, the Secretary of State, and every rule of the vast bureaucracy. Businesses must follow different rules specific to each county and municipality. The City of Los Angeles has a more than 50-page long document delineating regulations for dispensaries.

Are you starting to get a headache yet?

Maybe the cure is sticking with the three state agencies regulating commercial cannabis activity. Commercial cannabis activity includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products.

The Bureau of Cannabis Control

The Bureau of Cannabis Control is responsible for regulating commercial cannabis for retailers, distributors, microbusinesses, testing laboratories, and temporary cannabis events. The BCC issues licenses for these activities.

Licensees must hold an A-license to engage in adult-use commercial cannabis activity and an M-license to engage in medicinal, commercial cannabis activity. A-licensees may only do business with A-licensees, and M-licensees may just do business with M-licensees. The exception is testing laboratories, which may test cannabis for both types.

Every licensee must have premises. Premises refers to a designated structure or structure and land under control of the licensee where the commercial cannabis activity takes place. Each premises must be licensed. Only one licensee may occupy premises. However, a licensee that carries both an A-license and an M-license for the same commercial activity may use the same premises for both types.

The premises rules keep going on in greater detail. The premises rule take away is that, considering the state and local rules restricting the location of cannabis businesses, the prime real estate is a precious commodity.

If you are considering investing in a cannabis company, ownership of the property by the company or the duration of the lease and lease extensions are critical factors. A cannabis company whose contract expires might face steep increases in rent or difficulty finding a similar location.

Another set of BCC rules involves distributors.

There are Transport Distributors who move cannabis goods between licensed cultivators, manufacturers, and distributors. They may not deliver cannabis goods to a licensed retailer and may not engage in any other distributor activities.

Distributors, not to be confused with Transport Distributors, are responsible for transporting cannabis goods, arranging for testing of cannabis goods, and ensuring that cannabis goods comply with all packaging and labeling requirements. Distributors also get the privilege of collecting the state’s 15% excise tax from retailers.

Packaging regulations are now essential as retailers are now required to sell only prepackaged goods. Gone are the days of examining buds in a glass jar and choosing your favorites. Now you get a sealed container of whatever the packager says it is without having any choice.

Microbusinesses can participate in four different activities: Cultivation under 10,000 square feet, certain types of manufacturing including packaging, distribution, and retail. A microbusiness must engage in at least three of the four activities. Choosing to be a microbusiness is a request to be micromanaged as the licensee comes under the jurisdiction of two other departments.

CalCannabis

CalCannabis is a division of the California Department of Food and Agriculture.

CalCannabis issues 17 different licenses for the cultivation of marijuana. Cannabis cultivators are sorted by size of business: specialty cottage, specialty, small, medium, and large. Each group is divided into outdoor, indoor, or mixed-light. Licenses for large marijuana grows larger than one acre outdoors, or 22,000 feet indoors will not be issued before 1/1/2023.

There is a license for nurseries that supply seedlings. The final category is for processors which only engage in trimming, drying, curing, grading or packaging of cannabis and nonmanufactured cannabis products.

CalCannabis is currently issuing 120-day temporary licenses. It takes almost twice that long to grow an outdoor crop.

The text of CalCannabis’s Emergency Regulations for Cannabis Cultivation is 63 pages long. It includes a tax of $9.25 per ounce on flowers and $2.75 per ounce for leaves. Leaves currently sell by the trash bag full for about $50. The tax on a garbage bag of leaves is at least $250 or 5 times the market price of the product.

CalCannabis oversees the California Cannabis Track-and-Trace (CCTT) System. The CCTT is a statewide system to record the inventory and movement of cannabis and cannabis products through the commercial cannabis supply chain from cultivation to sale. All cannabis licensees, including those with licenses for cannabis cultivation, manufacturing, retail, distribution, testing labs, and microbusinesses.

Manufactured Cannabis Safety Branch

The Manufactured Cannabis Safety Branch is a division of the California Department of Public Health. MCSB is responsible for regulation of all commercial cannabis manufacturing in California.

Its mission is to ensure commercial cannabis manufacturers operate safe, sanitary workplaces and follow good manufacturing practices to produce products that are free of contaminants, meet product guidelines and are correctly packaged and labeled.

The MCSB issues individual A or M licenses in four different types: Type 7 covers extraction using volatile solvents such as butane, hexane, and pentane. Type 6 is for extraction using a non-volatile solvent such as food-grade butter, oil, water, ethanol, and carbon dioxide or by mechanical method. Type N involves infusions using pre-extracted oils to create edibles, beverages, capsules, vape cartridges, tinctures or topicals. Type P is for a business specializing in packaging and labeling.

The MCSB is developing a Type S license that will allow companies to share facility space.

The annual application processing fee is $1,000 per license with a yearly license fee scaled based on gross revenue.

Local Taxes

Every county and city wants to collect taxes from cannabis businesses within their jurisdictions. There are local taxes based on gross receipts and square footage of cultivation space. The square footage taxes top out at $50 per square foot. The combined local and state tax burden averages approximately 45% of the final retail sale, not including any income taxes.

Final Thoughts

The state is attempting to create a viable regulatory system. They are not there yet.

If you are thinking of opening a licensed cannabis business and do not have a detail-oriented person who can comprehend government regulations, you are a team member short.

If you are an investor, you need to make sure that a business has that detail oriented person onboard. Grill any company on their ability to handle the paperwork and on their real estate plans. If they will not give you precise answers or you do not like the answers, find another investment. There are plenty of companies willing to mine the California cannabis market for gold.

 

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