Over the past week, the Democrat vs. Republican divide on cannabis appeared to weaken as a prominent Republican made an announcement signaling a level of support for medical and legal adult-use of cannabis.
Last Wednesday, former House Speaker John Boehner announced that he had joined the board of a national cannabis business, and shared that his views on cannabis have evolved over the years to support legal use of medical marijuana. The announcement by was 180 degree turn from a few years ago when Boehner took a hardline stance against legalization. While some say Boehner’s change of heart is merely a reflection of his opportunity to cash-in on a growing industry, others believe that his evolved stance reflects the changing attitudes of Americans and marijuana.
Aside from the various and significant medical benefits of cannabis, one of the direct benefits of legalizing marijuana use is the opportunity to create good paying jobs for people, especially in rural areas.
In a review of Colorado’s legal cannabis industry by New Frontier Data, a cannabis research firm, over 18,000 new jobs were created in the first three years of legalized use. Of those, nearly 13,000 were full-time positions directly involved in the cannabis sector, and the remaining were created in auxiliary services such accountants, construction, legal, real estate, and other business services.
In California, two studies from the University of Pacific found that the potential for strong economic output and job creation in Sacramento and rural Calaveras County are significant. In their analysis, both Sacramento and Calaveras County were expected to create several thousand new jobs for two regions that have seen relatively stagnant job growth over the last decade. While these reports focused on two specific areas in California, their general assumptions could be applied to many of the rural counties and cities across the state.
Moving forward, as city councils and boards of supervisors debate whether or not to allow cannabis businesses in their jurisdiction, the positive economic impact and job creation potential has to be a part of the discussion.
On Tuesday, the Sacramento Bee reported that in the first few months of legalized adult-use, gross retail sales of cannabis is about 13% or $44 million lower than original state estimates. While this may seem disconcerting to some, there are several key caveats to the data.
First, licensing agencies are currently in the process of reviewing and approving temporary and annual licenses for businesses across the supply chain. In the 2017-18 California State Budget, the Legislature approved several million dollars and hundreds of positions to staff the three main licensing agencies and various support departments. Despite this influx of resources, the state is currently in the process of hiring the necessary staff to process the thousands of applications received since January 1. As the state hires additional staff, the industry can expect to see more licenses approved and a potential increase in overall amount of retail sales.
Second, many in the industry cite the high regulatory fees and tax rates as a serious impediment for businesses that seek to enter into the legal market. As we covered here, several California legislators have called for an immediate and temporary reduction in the cultivation and excise tax rate with the intent of leveling the playing field for business in the legal market. The California Growers Association estimates that with tax rates averaging between 40% – 60%, legal retailers find it extremely difficult to compete with the illicit market. AB 3157, which attempts to provide some relief by suspending the cultivation tax and lowering the excise tax from 15% to 11% for three years, is up for its first committee hearing April 23, in the Assembly Revenue and Taxation Committee.
Finally, the refusal of local governments in many parts of the state to allow cannabis businesses to operate has created what some have called a “pot desert.” On Tuesday, the OC Register unveiled a database that showed that nearly one in seven California cities had approved the retail sale of cannabis within their boundaries. The data also showed that in certain parts of the state, consumers are required to travel fifty miles or more to purchase from a licensed or recreational retailer. This inability for consumers to purchase cannabis products from licensed retailers close to home frustrates efforts to create a truly statewide legal adult-use system.
Despite the seemingly lower than expected economic activity in the newly legal cannabis market, there is reason to be optimistic for the foreseeable future. Stayed tuned for future updates on the status of the California’s cannabis industry.
Is your temporary cannabis business license about to expire? Today, California’s Bureau of Cannabis Control (BCC) and the Department of Public Health (DPH) sent a reminder that temporary licenses for cannabis event organizers, distributors, manufacturers, microbusinesses, retailers, and testing laboratories that were issued effective January 1, 2018, are set to expire at the end of April.
The law does allow for a temporary license to be extended for 90 days, but only if an application for an annual license has been submitted before the temporary license expires.
If your temporary license is about to expire, take the necessary steps now to ensure that you do not lose your ability to operate. A business that does not receive an extension or an annual license before their temporary license expires is not allowed to operate in the legal market.
One difference between the temporary and annual license application process is the requirement that a Live Scan fingerprinting be conducted for each person who qualifies as an “owner” of the business. An owner is defined as a person with an aggregate interest of 20% or more in a cannabis business and must have their fingerprints scanned an included in the application process.
This also serves as a great reminder to ensure those businesses in your supply chain are also fully licensed. One of the major threats to the long-term stability and success of your business is to have links in the supply chain that are not properly licensed, as the product supplied by these entities is considered “illegal” and subject to forfeiture by local and state authorities.
As the California Legislature returns from Spring Recess, policy committees will begin hearing bills to meet the April 27, deadline to report all bills with a fiscal impact to the Appropriations Committee. Here’s a list of bills that have been scheduled for a hearing over the next few weeks.
AB 1741 (Bonta) Cannabis: taxation: electronic funds transfer. This bill, until January 1, 2022, would allow cannabis businesses to pay their taxes with cash. Currently, the Department of Tax and Fee Administration (CDTFA) requires all tax amounts owed over $10,000 to be remitted electronically, or the taxpayer can request a hardship exemption. Without a current solution to provide stable bank services to the industry, taxes will mostly likely continue to be paid primarily in cash. This bill requires a two-thirds vote by the Legislature.
This bill is scheduled to be heard in the Assembly Revenue and Taxation Committee on April 16, at 2:30p.m.
AB 2058 (Chau) Vehicles: driving under the influence: statistics. This bill requires law enforcement agencies to submit annual reports with the number of cannabis-related DUI arrests to the Department of Motor Vehicles. One of the key concerns by public safety groups in all states that have legalized recreational adult-use is that DUI incidents go up after legalization. AB 2058 appears to be an effort to gather the data to really see if that’s the case.
This bill is scheduled to be heard in the Assembly Transportation Committee on April 9, at 2:30p.m.
AB 2641 (Wood) Temporary Events. This bill would authorize the Bureau of Cannabis Control (BCC) to issue a temporary event license, and would allow cultivators and manufacturers to directly market and sell their products at special events. This bill has industry support and requires a two-thirds vote of the Legislature.
This bill is scheduled to be heard in the Assembly Business and Professions Committee on April 10, at 9:30a.m.
AB 2810 (Levine) Sun-Grown Cannabis Commission. This bill creates the Sun-Grown Cannabis Commission that will be comprised of six outdoor cannabis cultivators, two cannabis cultivators that have an “Outdoor” or “Mixed-light Tier 1” license, and one public member that is appointed by the Secretary of Food and Ag. The Commission would have powers to conduct research, assess and address the impact of local and state regulations on cannabis products.
This bill is scheduled to be heard in the Assembly Agriculture Committee on April 11, at 1:30p.m.
SB 930 (Hertzberg) Financial institutions: cannabis. This bill creates the Cannabis Limited Charter Banking Law, that would allow banks to offer basic financial services to the cannabis industry. Click here to read our initial analysis of the bill.
This bill is scheduled to be heard in the Senate Banking and Financial Institutions Committee on April 18, at 1:30p.m.
SB 1409 (Wilk) Industrial hemp. This bill would delete the requirement that industrial hemp seed cultivars be certified on or before January 1, 2013, in order to be included on the list of approved hemp seed cultivars. The bill would also remove the definition “industrial hemp” from the California Uniform Controlled Substances Act as a fiber or oilseed crop, and delete the requirement that industrial hemp be grown as a fiber or oilseed crop, or both. This update of hemp seed cultivation law could help spur the use of hemp for CBD products.
This bill is scheduled to be heard in the Senate Agriculture Committee on April 3, at 9:30a.m.
California’s tax collector issues a reminder on how to collect excise tax for retailers.
California’s three licensing agencies release an online search tool to find licensed cannabis business across the state.
Former NFL player partners with a Southern California lab to develop and distribute cannabis products.
Canadian cannabis company acquires California heavyweight distributor, RVR to expand it’s presence in the state.
On Monday, the California Department of Tax and Fee Administration (CDTFA) issued a reminder for retailers on how to collect the cannabis excise tax from their customers. With the first quarter of the fiscal year closing March 31, quarterly return must be filed by April 30. Click here to view the Department’s prepayment and quarterly reporting due dates.
The Administration is eagerly waiting to see how much the state collects in taxes generated from legal cannabis sales. In January, Governor Brown released his constitutionally-mandated budget proposal, and estimates the state will generate approximately $600 million in new cannabis taxes in FY 2018-19. When the Legislative Analyst Office (LAO) analyzed the fiscal impacts of Proposition 64, they conservatively estimated that state and local governments would collection in the high hundreds of millions of dollars to over a $1 billion in annual tax revenue. The state will have a clearer picture when the Governor’s May Revision is released in mid-April. Stay tuned.
Where are all the licensed cannabis businesses in California?
On Wednesday, California’s Bureau of Cannabis Control (BCC) announced an online tool to find state licensed cannabis businesses. According to the Bureau, California’s three licensing agencies (BCC, Department of Food and Agriculture, and Department of Public Health) have issued a combined 5,300+ licenses to date. One of the major complaints among many in the industry is that the state has been slow to grant licenses for major parts of the supply chain creating a major bottle neck. It now appears that the state is making progress on that front. The Bureau also released a list of licensed event organizer entities. Below are the links to the search tools for the three agencies and the list of event organizers:
Former NFL superstar launches cannabis business in Southern California
Former NFL star and Heisman Trophy winner, Ricky Williams has teamed up with a laboratory in El Cajon, California to develop herbal-based wellness products to be distributed throughout Southern California. Williams spent over a decade of his life as a professional football player, and knows the constant stream of aches, pains, and injuries that come from battering his opponents on Sunday. Williams was also a controversial figure in the NFL for his early embrace of cannabis as alternative pain relieving method to traditional pain killers.
Williams’ business, Real Wellness offers a unique line of products that combines CBD and THC with herbal extracts such as arnica, lavender, and turmeric. The news of Williams’ entry into the cannabis market follows recent news that fellow NFL player and Hall of Famer, Joe Montana has also benefitted from the pain relieving properties in cannabis. In is post-professional football life, Montana has been a vocal advocate in support of the pain reducing properties of cannabis, and has invested in cannabis technology company, Herb, to educate the public and athletes on cannabis.
Studies have shown that professional football players are four times more likely to abuse painkiller medication as average Americans. Recently, the NFL Commission, Roger Goodell made comments that while the league does not support recreational use, the league is open to allowing players to use cannabis for pain management. The league is currently studying the issue. More to be seen.
Canadian cannabis company expands in California
On Tuesday, the Canadian cannabis company, CannaRoyalty announced that they had acquired West Sacramento based distributor, River Distribution (RVR). The move consolidates RVR with Alta Supply, an Oakland based distributor creating what is poised to be the leading distribution company in Northern California, if not the state. According to CannaRoyalty, Alta Supply and River Distribution generated a combined ~$30 million in revenues in fiscal year 2017. The acquisition of both companies by a Canadian firm is part of a larger investment by Canadian-based companies investing in California’s legal market. What can we expect next from the Canadians? We will see.
The deal included increased spending for the military, space exploration, and opioid addiction and research programs. The spending plan also included a provision, commonly known as the Rohrabacher-Blumenauer Amendment (RBA) that prohibits the U.S. Department of Justice from using federal funds to prosecute medical marijuana businesses in states that have medical cannabis laws.
With the repeal of the “Cole Memo” by Attorney Jeff Sessions in January, the RBA stands as one of the last protections state’s have against federal interference in their medical marijuana markets. Unfortunately, the RBA is only temporary and does not address states that have legalized recreational adult-use.
Several attempts to settle the issue once and for all have been introduced with bi-partisan support, but have failed each time in the House of Representatives. Rep. Pete Sessions (R-TX), Chairman of the House Rules Committee, has killed a number of bills that would bring the federal policy in line with states that have adopted marijuana policies.
Under the current Administration and with Republican control of Congress, it seems unlikely that a permanent federal solution is near. However, the industry can breathe a slight breath of relief between now and September.
Recently, SB 930 (Hertzberg), was amended to created a state-chartered banking system in California that would allow banks to offer basic services to cannabis businesses.
Under the bill, banks that are not a part of the federal banking network would be allowed to apply for a license through the Department of Business Oversight. This license would allow a bank to 1) create accounts; 2) accept deposits; 3) issue “special purpose” checks; and 4) join in a network with other state licensed banks. Account holders could use the special purpose checks to pay taxes, rent, and vendors, and invest in state and municipal bonds.
For many in the industry, SB 930, comes as a welcomed solution to the cash-crisis that plagues the industry. However, despite it’s promise, the largest obstacle to a long-term functional banking solution remains: the federal government.
In 2013, U.S. Deputy Attorney General James Cole issued guidance, commonly referred to as the “Cole Memo” that said the federal government would not prosecute marijuana businesses where state’s had created a strong regulatory system, and kept the drug away from children, other states, and profits away from drug cartels.
In 2014, the U.S. Treasury issued guidance that said it would not charge banks with a federal crime for offering services to the industry as long as they ensured the businesses were following all state rules and the directives laid out in the Cole Memo.
Colorado and Washington, both early adopters of legal adult-use, used the guidance provided by the Cole Memo to encourage banks to engage with the industry. In doing so, the banks in these states adopted stringent requirements and invested heavily in compliance staff. The result of these actions was twofold: 1) banks turning down more accounts than opened because the businesses were not fully compliant with state law, thus violating the directives of the state law and the Cole Memo; and 2) higher banking costs for the account holder to cover compliance overhead and longer delays in processing basic banking transactions.
With the recent repeal of the Cole Memo and the Trump Administration’s lawsuit against California’s “Sanctuary State” laws, it’s not impossible to assume that the federal government would use every leverage point, including heavy enforcement and large penalties to serve as a strong deterrent for any bank, state-chartered or not from servicing the industry.
For businesses in the industry, it’s almost impossible to predict how a banking system such as the one created by SB 930, would work, and that’s assuming the bill passes the Legislature and is signed by the Governor. However, the experience from many businesses in Colorado and Washington is a timely reminder that if this bill does become law, banks will require that each account holder is in 100% compliance with all laws and regulations for all the businesses in the supply chain. Remember, one unlicensed link in the chain could place your business license in jeopardy.
Now is the perfect time to review your business plan, licenses, and compliance with California’s rules to ensure your business is eligible to participate in the state-chartered banking system should it become law.
Happy Friday! Welcome to the Weekly Roundup. Here I highlight some of the key pieces of legislation, regulatory changes, industry updates, and anything else I find interesting from the past week. Enjoy!
A temporary solution to the banking crisis?
One of the more important and interesting pieces of legislation to emerge this year is SB 930 (Hertzberg), which would create a state-chartered banking system for banks to offer basic services to the cannabis industry. Unlike the state-owned bank proposal considered in the State Treasure’s Cannabis Banking Working Group paper released last November, Senator Hertzberg’s proposal is seen by some in the industry as a potentially workable fix in lieu of a federal solution. The Cannabis File will publish a more in depth analysis of SB 930, on Monday, March 26. Stay tuned and subscribe to receive the update.
Will lower taxes stimulate the legal market?
On Monday, I wrote about AB 3157 (Lackey), that would temporarily suspend the cultivation tax and lower the excise tax from 15% to 11%. The idea behind the temporary tax reduction is modeled after tax adjustments in Colorado and Oregon to stimulate their adult-use market early in its formation. The critical question that remains is whether a local tax cap or sometime of prohibition is needed to ensure the tax burden isn’t merely shifted from the state to local level. The bill has yet to be set for its first policy committee hearing.
Dear Feds: Stay out of California!
On Tuesday, the Assembly Business and Professions Committee passed AJR 27 (Low), which urges the federal government to use their limited enforcement resources on other public health and safety priorities, and not California’s growing cannabis industry. Since President Trump took office, the tension between state and federal rights has been high and seems to be rising. We’ll see if the federal government takes notice and stays out of California’s cannabis business. Based on previous statements and actions, it seems unlikely.
Does the future of work in cultivation equal automation?
On Tuesday, the Assembly and Senate Labor Committees held a joint hearing on the impact of technology and automation on workers rights and job quality. Two academic experts provided a broad overview of the challenges facing the workforce in the age of technology, and also heard direct testimony from workers that have felt the impact of an increasingly automated workplace.
The concept of using technology, namely automation and artificial intelligence to improve productivity and quality of products in not new in the cannabis industry. What will be interesting to see is what impact automation and AI has on the type and quality of jobs that are produced in the industry. Remember, a part of the argument for approving adult-use in California and in other states across the nation was that the industry would create thousands of new jobs. This is an area of interest for The Cannabis File, and will be explored in detail in future posts.
Regulatory changes are a comin’
On March 15, the Bureau of Cannabis Control’s Cannabis Advisory Committee held an all-day meeting in Los Angeles to discuss and review several recommended regulatory and statutory changes related to everything from clarifying the outdoor cultivation definition online advertising. The final recommendations from the Advisory Committee will be used to inform the Bureau’s proposed changes during permanent rule making process that is expected to begin within the next few months.
Is California a Pot Desert?
On Thursday, the Sacramento Bee released a map that showed the distribution of dispensaries across California. According to statistics used by the SacBee from the Bureau of Cannabis Control, about 30% of people are within 30 miles of at least one dispensary; 29% within 30-60 miles and; 38% is within 60-120 miles. What the map and the data highlight is that California is still far away from a statewide adult-use market.
Compliance with California’s stringent rules and regulations can literally make or break your cannabis business and as the state ramps up enforcement, the top priority for cannabis businesses should be to protect your state and local license!
As we near the completion of the first quarter of legal adult-use, now is a good time to review a compliance basic: packaging requirements.
Prior to distributing or selling the cannabis or cannabis related products, California requires all products must be packaged within certain guidelines. Here are a few of the basic rules businesses must follow in order to legally distribute or sell cannabis in California:
Child-resistant. All packages must be child-resistant, re-sealable, and tamper-evident. Child resistant, as defined by Prop. 64 (2016), is a package that is “designed or constructed to be significantly difficult for children under five years of age to open, and not difficult for normal adults to use properly.”
Resemblance. Packages cannot resemble traditionally available food packages, and cannot be attractive to children, or easily confused with candy or foods that do not contain cannabis.
Edibles. Packages must be opaque.
Information Labels. Packaging must include space for product information labels that includes:
Date of manufacturing and packaging.
Source and date of cultivation
Type of cannabis or cannabis product
Number of servings per package
Active ingredients (THC, CBD, etc.) and amount (mg per serving)
The universal symbol for cannabis
Unique ID number that will be used in the State’s track and trace system.
Packages that do not meet these requirements are subject to seizure, and the business could face penalties, fines, or a could potentially lose the license to operate. Take a moment to review your packaging procedures to ensure they meet these basic requirements, otherwise you could run into a host of problems.
It has been about ten weeks since the recreational use of marijuana became legal in California, and a group of key lawmakers think it’s time to lower the tax rates imposed by Proposition 64.
AB 3157, which was recently amended, would temporarily halt the $150 per pound cultivation tax, and reduce the state’s excise tax from 15% to 11% for three years.
This temporary reduction, it is believed, will help level the playing field for legal cannabis businesses that are being undercut by cut-rate black market prices.
The sticker shock that many consumers felt purchasing cannabis products after January 1, 2018, was well documented by the media. To add some perspective on what customers faced, one estimate places California’s cumulative cannabis tax rate as high as 45%. This cumulative rate includes the cultivation, excise, and state and local sales tax, but does not including local cannabis taxes that vary by jurisdiction. When local taxes are added, another study puts this number as high as 60%.
Although studies show that other states with legal adult-use, such as Washington and Oregon experienced significant growth in their legal cannabis industry following a reduction in the state’s tax rate, how will the California’s Legislature and regulators deal with two additional issues: enforcement and local taxes.
On the enforcement side, California has the largest cannabis market in the world that is primarily fueled by a deeply entrenched, mature and sophisticated black market. Both state and local regulators understand that a leveling of the playing field between legal and illicit operations will eventually require a strong enforcement mechanism. It will be interesting to see if the Legislature appropriates additional funds in this year’s state budget to enhance statewide enforcement.
Second, the reduction in state taxes in Colorado and Oregon, two states that are highlighted as successful examples of the growth that occurred after tax rate relief, also combined the state level reduction with lower or capped local sales taxes. It could be tempting for local cities and counties to view the state tax reduction as proposed by AB 3157, as a way to increase their taxes to fund enforcement or other local priorities. If this happens, the benefit of leveling the playing field through tax reduction would simply create a new status quo.
Finally, there maybe a question to whether or not changing the tax rate would require another vote of the people. It will be interesting to watch if any of the proponents challenge the legality of AB 3157.
This is an interesting and welcomed effort by many in the industry that are unable to compete with the black market due to the disadvantage high taxes place on their business. This bill that has yet to be heard in its first policy committee as amended. As the bill moves forward in the legislative process, I will keep you updated on any developments.