Cannabis Licensing in California

The road to legal cannabis in California has been a long and circuitous one. In 1996, California voters approved Proposition 215, the first legislation in the nation legalizing marijuana for medical purposes at the state level. Next up was 2003’s aptly titled Senate Bill 420 which set up a nonprofit business entity model for patients to provide patients with cannabis. In the fall 2015, Jerry Brown signed a trio of bills (Medical Cannabis Regulation and Safety Act (MCRSA)) that mandated the first set of comprehensive regulations on medical marijuana in California by the start of 2018 – AB 266 established a dual licensing structure mandating a state license and a local permit; AB 243 established a regulatory and licensing structure for cannabis cultivation sites under the Department of Food and Agriculture; and SB 643 established criteria for licensing of medical cannabis businesses, regulating physicians, and providing local authority to levy taxes and fees.

No sooner had the dust settled on MCRSA, two more key cannabis regulations sprang quickly into place. On November 8, 2016, California voters approved Proposition 64, the “Control, Regulate and Tax Adult Use of Marijuana Act,” which decriminalized the adult use of cannabis for non-medical purposes and established a regulatory scheme at the state level. On June 27, 2017, Senate Bill 94, the “Medicinal and Adult-Use Cannabis Regulation and Safety Act” (MAUCRSA) repealed and replaced MCRSA. MAUCRSA consolidates the medical (MCRSA) and non-medical (Proposition 64) cannabis statutes. MAUCRSA established a state licensing scheme for both medicinal and adult use cannabis while preserving local authority to regulate cannabis businesses within the jurisdiction. MAUCRSA “shall not be interpreted to supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate businesses licensed under this division, including, but not limited to, local zoning and land use requirements, business license requirements, and requirements related to reducing exposure to secondhand smoke, or to completely prohibit the establishment or operation of one or more types of businesses licensed under this division within the local jurisdiction” and “shall not be interpreted to supersede or limit existing local authority for law enforcement activity, enforcement of local zoning requirements or local ordinances, or enforcement of local license permit, or other authorization requirements.” Bus. & Prof. Code 26200(a) (1), (2).

In other words, to operate a cannabis company in California you will need permission from both (1) the city or county that your company operates in; and (2) the state of California. The fall of 2017 saw a mad scramble by cannabis companies to obtain the local authorization that is a prerequisite for obtaining a state cannabis license. On January 1, 2018, California approved its first ever state licenses for the production, distribution, and sale of cannabis, capping years of intensive deliberation on the rules for the newly-regulated cannabis marketplace. These cannabis licenses are further broken down between medicinal (M) and adult use (A). With minor exceptions, a single person or business entity may hold more than one type of license and multiples of the same type of license. The administrative structure of MAUCRSA is operated by a trio of state agencies that issue licenses as follows:

BUREAU OF CANNABIS CONTROL (Lead Agency)

• Distributors – Cannabis companies that act as the intermediary between cultivators, manufacturers, and retailers. Distributors are also responsible for remitting the hefty cultivation tax ($9.25 per dry-weight ounce of cannabis flowers, $2.75 per dry-weight ounce of cannabis leaves) and excise tax (15% of average retail market price) to the California Department of Tax and Fee Administration.
• Retailers – Cannabis companies that sell cannabis goods to consumers, either store front dispensaries or home delivery services. Companies with retail licenses may also deliver cannabis goods to their consumers. Deliveries may be made only by employees of the retailer and must be made to a physical address.
• Microbusiness – Small self-contained cannabis companies that engage in three of the four activities: Cultivation up to 10,000 square feet; Manufacturing (non-volatile extraction, infusion, packaging, and/or labeling); Distribution; and Retail
• Testing Laboratories – All cannabis products must now undergo rigorous safety testing at labs to ensure consumer safety. In addition to quantifying levels of cannabinoids and terpenoids, laboratories will also screen cannabis for the presence of solvents, micro-organisms, pesticides, heavy metals, mycotoxins, and other foreign material.

MANUFACTURED CANNABIS SAFETY BRANCH

•  Manufacturers – The Manufactured Cannabis Safety Branch, a division of the California Department of Public Health (CDPH), is responsible for regulating the manufacturers of cannabis-infused edibles for both medical and nonmedical use. “Manufacturing” encompasses a wide variety of cannabis products such as edibles, concentrates, topicals, capsules, vape cartridges, tinctures, and other processed cannabis products. The Office of Manufactured Cannabis Safety will also regulate the packaging and labeling of cannabis products.

 CalCannabis Cultivation Licensing

• Cultivators – CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture (CDFA), is responsible for licensing cannabis cultivators and implementing a robust track-and-trace system to record the movement of cannabis through the distribution chain. Cultivation licenses are broken down by size and location (indoor, outdoor, mixed). CalCannabis also issues cannabis nursery licenses.

Existing, non-licensed medical marijuana collectives, which are currently authorized by Senate Bill 420, will cease to be lawful starting one year after the Bureau of Cannabis Control posts a notice that it has begun licensing (Health and Safety Code 11362.775(d-e)). The Bureau posted the notice on its website on January 9, 2018 and thus the protection against state criminal sanctions for cannabis collectives and cooperatives ends January 9, 2019. Nevertheless, a combination of extremely high taxes (in addition to the cultivation tax and excise tax, municipalities that license cannabis companies are imposing their own local taxes, often raising the effective tax rate for the consumer to over 40%), and the substantial aforementioned regulations have caused many cannabis companies to be slow to embrace this new licensing system. According to a recent report produced by the California Growers Association, a small-farmers advocacy group, fewer than one percent of California’s estimated 68,150 cannabis growers have secured state licenses to continue their businesses legally. Time will tell whether California will accede to the cannabis industry’s claims that the barrier to entry into the legitimate market is too high and modify the regulatory regime accordingly.