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California's unlicensed medical cannabis collectives now illegal as deadline passes

By Rick Schettino
Jan 10, 2019

Back in early 2016, long before California voters approved Proposition 64 and legalized the recreational use of marijuana, many industry veterans in the state who had been operating under the state’s medical program predicted disaster for many of nearly two thousand non-profit medical marijuana collectives and cooperatives. They claimed it would be too difficult for these small organizations to convert to licensed operations — and that was before the 160-pages of proposed rules were unveiled. As of exactly today, it’s looking like they were right.

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Deadline for licensing passed for legacy co-ops

The Medicinal and Adult-Use Cannabis Regulation and Safety Act amended Health and Safety Code section 11362.775, the provision in SB 420. Under the new rules, cannabis collectives and cooperatives in the state were given one year to get properly licensed. That year began on January 9, 2018. That means that beginning today, January 10, 2019, time is up.

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Medical marijuana collectives and cooperatives which are not properly licensed are now running the risk of being charged hefty fines and potentially being charged with felonies. As the deadline expires, estimates as to how many of these operations are still unlicensed number in the hundreds.

A little over a year ago, before recreational sales launched in California, authorities were expecting to hand out thousands of licenses. Back in 2017, before licensing was even a thing, there were more than 1700 of these non-profit collectives and co-ops in operation. The BCC expected the bulk of those to comply with the new rules. However, at this point, California’s Bureau of Cannabis Control has reportedly issued fewer than 600 licenses.

Unfortunately, as predicted, the brunt of the problem has fallen on hundreds of smaller co-ops, many of which have either opted to shutter their shops or head underground rather than try to play by the complex rules. Some have opted to continue to operate unlicensed.

There are a number of reasons that many of the smaller operations have been throwing in the towel. Most operators who have closed their doors cite two massive hurdles, overregulation and the sheer level of difficulty in getting through all the red tape necessary to get properly licensed. Licensing up requires jumping through hoops at numerous government agencies at both state and local levels.

Furthermore, greater than four-fifths of California municipalities have opted out of the program altogether and banned retail sales within their borders. And in Los Angeles County, the supposed “largest marijuana market in the world,” only 6 of 88 municipalities allow retail sales.

How it happened

Way back in 1996, California voters passed Proposition 215 creating the first medical marijuana program in the country. The measure allowed the cultivation and personal use of medical marijuana for patients or their primary caregivers. Then in 2004, the California legislature passed SB420 which allowed patients to form nonprofit medical cannabis collectives or cooperatives. Hundreds of medical cannabis dispensaries and cooperative gardens have since sprung up under these measures.

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Then in 2015, three bills collectively referred to as the Medical Cannabis Regulation and Safety Act, established the Bureau of Cannabis Control to regulate cannabis commerce. Under the new regulations, all commercial operations were required to procure a local license. Proposition 64, which passed in 2016, combined the state’s medical marijuana program with its new recreational program. The locally licensed SB420 collectives were grandfathered in for one year following the commencement of state licensing.

The Bureau of Cannabis Control published its licensing notice on January 9, 2018. That means, beginning January 10, 2019, all cannabis collectives must be licensed by both their local municipality and the state and must remain in compliance with all local and state regulations regarding the cultivation, testing, marketing and retailing of cannabis within the state. But they can’t open a bank account or deduct expenses on their federal taxes. That’s another story altogether.

A cost of around $150 million

One of the main goals for Proposition 64 was to squelch black market operations by bringing cannabis sales above board. However, as a result of overregulation and over-taxation, the opposite seems to have happened. Much of the business that was expected to be above ground as a result of making things more convenient for consumers simply isn’t there.

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According to a report in the New York Times, total cannabis sales in the state of California came in around $2.5 billion in 2018. That’s about half a billion below 2017 figures. Also, according to the report, tax revenue from pot sales is expected to come in under $500 million, $150 million or so short of projections.

To make matters worse, those tax rates are based on one of the highest taxed marijuana markets in the country. California has the second highest cannabis tax in the nation with combined state and local rates as high as 47 percent in some places. This makes it very difficult for local merchants to compete with black market operators who are spared the expense of being subject to state and local rules and regulations.

Much of this shortfall can be attributed to the fact that, as a result of overregulation, it has become less convenient and more expensive for consumers to purchase cannabis legally than to continue to purchase it from their local dealer.

Unfortunately, there are no quick fixes for the problems in California. They’re going to take many years to sort out.

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