By: Justin A. Santarosa and Jennifer Briggs Fisher
Gavin Newsom, Governor of California, released his proposal for the State’s budget today, outlining a number of items of importance for the California cannabis industry.
The most noteworthy proposal is regulatory consolidation. In an effort to improve and simplify regulatory oversight of commercial cannabis activity, the Governor’s office is proposing to consolidate the three licensing entities that are currently within the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health, into a single “Department of Cannabis Control” by July 2021.
Such a change would be welcomed by many operators in the State, especially vertically integrated operators who must now contend with multiple state agencies that have different regulatory requirements and interpretations. This may also boost M&A activity in the state, given that it could lead to more consistent regulations regarding ownership changes and a more efficient regulatory approval process. A single regulatory agency would also streamline fee collections and enforcement. More details on this proposal are expected in the Spring of 2020 and we will be watching closely for those updates.
Additionally, the budget looks to “fix” what many consider to be a broken cannabis taxation regime. The Governor states that the goal of the proposal is to reduce the tax collection burden on the cannabis industry and simplify the tax collection process. The proposed changes move the responsibility for the cultivation excise tax from the final distributor to the first, and for the retail excise tax from the distributor to the retailer.
While no changes to the tax rates are specified, the proposed budget does state that the Governor will consider other changes to the existing cannabis tax structure, including the number of taxes and tax rates. The California tax burden is viewed as one of the major inhibitors of the growth and success of the cannabis market in the state.
We will continue to monitor these developments as they unfold, so please check back for further updates and analysis.
Tracy A. Gallegos has joined Duane Morris LLP as a partner in the firm’s Corporate Practice Group. She will be resident in the Las Vegas office and also practice in San Francisco. Gallegos further enhances the firm’s corporate, real estate and cannabis law capabilities. Prior to joining Duane Morris, Gallegos was a partner at Fox Rothschild LLP.
“Tracy brings a big-picture understanding of the issues affecting businesses in the real estate, sports, cannabis and entertainment industries,” said Matthew A. Taylor, CEO and Chairman of Duane Morris. “Her collaborative, client-focused approach is a perfect fit with our culture at Duane Morris.”
To read the full press release about Duane Morris partner Tracy A. Gallegos, please visit the Duane Morris website.
The CA Senate voted 35-1 to allow banks and credit unions to accept cash deposits from marijuana retailers.
Per reporting from the Star Tribune, those banks would be permitted to issue special checks to the retailers that could only be used for certain purposes, including paying taxes and California-based vendors.
State lawmakers are of the view that such banks would make it easier for licensed cannabis retailers to pay their taxes, which fell far short of expectations in the first year after legalization.
“This is as close as we can get until the federal government changes its policy,” said Sen. Bob Hertzberg, a Van Nuys Democrat and the author of the bill that now goes to the Assembly.
Per the Marijuana Law Reporter, Marijuana has been legal in California since January 2018, but it’s still illegal under federal law under the Controlled Substances Act.
-Brad A. Molotsky, Esquire
On April 30, 2019, the California Department of Food and Agriculture (CDFA) made available registration applications to cultivate industrial hemp. The CDFA’s approved regulations require, among other things, a prospective cultivator to register with the county agricultural commissioner where the cultivator is located and pay a $900 registration fee.
However, even though applications are now live, several counties throughout California still restrict or prohibit the cultivation of hemp. The CDFA has identified the following counties as restricting hemp cultivation: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbara, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba.
It remains unclear how these current regulations will be affected by the Agricultural Improvement Act of 2018 (2018 Farm Bill). Under the 2018 Farm Bill, the CDFA is required to submit its hemp-production plan to the United States Department of Agriculture (USDA) for approval but as of the date of this post the USDA has not issued regulations relating to that review. Additionally, it is unclear how this program will operate in the interim under the 2014 Farm Bill. We will continue to watch as this program develops alongside the USDA’s 2018 Farm Bill program.
On January 16, 2019 the California Office of Administrative Law (OAL) approved the final regulations that were submitted by California’s three licensing agencies, the Bureau of Cannabis Control (BCC), the Department of Food and Agriculture (CDFA) and the Department of Public Health (CDPH), in December. These new, approved regulations went into effect immediately, meaning the previous emergency regulations (under which the industry has been operating for the past year) are no longer in effect. The regulations can be viewed here.
In a joint press release issued by the three agencies, BCC Chief Lori Ajax stated: ““These approved regulations are the culmination of more than two years of hard work by California’s cannabis licensing authorities. Public feedback was invaluable in helping us develop clear regulations for cannabis businesses and ensuring public safety.”
On December 27, 2018, the Northern District of California dismissed a civil RICO claim brought against the owners and operators of a Sonoma County cannabis growing operation and the operation’s landlord. See Bokaie v. Green Earth Coffee LLC, 3:18-cv-05244-JST, 2018 WL 6813212 (N.D. Calif. Dec. 27, 2018). The lawsuit was filed by neighbors who alleged that the operation’s “skunk-like stench” interfered with the enjoyment of their property and drove down their property values. The Bokaie court found that such alleged harms did not constitute a “RICO injury,” and thus dismissed plaintiffs’ claim (albeit without prejudice, allowing 30 days to amend).
The Bokaie case is part of a growing trend of RICO lawsuits filed in legalized states—to date, roughly a dozen have been filed in California, Colorado, Massachusetts and Oregon—that seek to exploit the tension between state law and the federal Controlled Substances Act (CSA). RICO defines “racketeering activity” to include CSA violations, and a civil lawsuit can proceed upon allegations that an enterprise’s pattern of racketeering activity caused damage to the plaintiffs’ business or property. 18 U.S.C. §§ 1961(1), 1962(c), 1964(c). RICO’s civil remedy provision awards prevailing plaintiffs triple damages and attorneys’ fees, id. § 1964(c), thus giving “not in my backyard” plaintiffs and their attorneys a powerful tool against their neighbors. By alleging that the smell of cannabis interferes with the enjoyment of their property and drives down their property value, plaintiffs in these cases are effectively elevating common law nuisance claims into federal RICO lawsuits.
The three agencies that regulate the cannabis market in California, the Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health, submitted a final version of regulations to the Office of Administrative Law (“OAL”) in California this month. The OAL reviews regulations for compliance with procedural requirements and substantive standards under California law. The OAL has 30 working days — until January 16, 2019 — to review the regulations.
This blog post will highlight some of the important changes to the regulations made by the Bureau of Cannabis Control (“BCC”). Continue reading California’s Bureau of Cannabis Control Submits Final Regulations for Administrative Review
The Bureau of Cannabis Control is the state agency designated under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) as responsible for issuing licenses to and regulating distributors, retailers, delivery-only retailers, microbusinesses, and testing labs.
The BCC issued emergency regulations in November 2017, and has now proposed readopting those regulations for another 180 days. Based on feedback from the public and stakeholders in the industry, the BCC has proposed some changes to these regulations.
This blog post will highlight the changes to the BCC emergency regulations and identify key issues for distributors, retailers, delivery-only retailers, microbusinesses, and testing labs. In separate posts, we will be describing the changes made by the California Department of Food and Agriculture and the California Department of Public Health. Those posts can be found here and here.
Changes to Emergency Regulations:
- The BCC has removed the distinction of A and M Licenses and now only requires one application and applicants will only have to pay one licensing fee. Additionally, license fees have been reduced. Previously you had to submit two applications and pay two separate licensing fees if you wanted to operate in the medicinal and adult-use market.
- A delivery employee may now complete multiple deliveries of cannabis goods if they are prepared by the retailer prior to the delivery employee leaving the licensed premises. The total amount of cannabis goods in the delivery vehicle may be up to $10,000, the previous limit was set at $3,000.
- The definition of owner has been amended to specify that the chief executive officer and/or the members of the board of directors of any entity that own 20% or more of a commercial cannabis business will be considered “owners.”
- The definition of financial interests has been amended to include “an agreement to receive a portion of the profits of a commercial cannabis business.” Commercial cannabis business and service providers will have to review their agreements and applications to determine if certain amendments will need to be made to include other people or businesses as having a “financial interest” in a commercial cannabis business. Interestingly, this change was not made in the definition of “financial interest” under the CDFA and CDPH regulations.
- Retail stores may not sell or deliver cannabis goods through a drive-through or pass-out window and sales cannot be made to people within motor vehicles.
- License applications must now include:
- Cannabis waste procedures; and
- Delivery procedures, if applicable.
These changes show that the BCC and the other regulatory agencies are being responsive to their stakeholders and while not all changes are positive, we believe this is a step in the right direction for cannabis businesses in California.If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.
I have previously written about the public safety concerns resulting from the lack of banking in the cannabis industry. As I noted in that article, the elimination of the Cole Priorities in January 2018 has left federally-regulated banks wondering how they can follow FinCen’s guidance for banking cannabis issued in February 2014, which was explicitly dependent on the Cole Priorities.
While the Cole Priorities were in place, that guidance provided a clear path for banking cannabis industry participants adhering to the Cole Priorities. FinCen’s guidance is still in place, and banking cannabis is still possible, but confusion about how to do so without the Cole Priorities as guideposts has caused greater reluctance on the part of banks.
Enter proposed legislation in California, SB-930, which passed in the California Senate yesterday. Not a complete solution to the banking problem by a long shot, but progress nonetheless. If it becomes law SB-930, would result in the establishment of a California-chartered bank that would permit California cannabis industry participants to deposit the proceeds of their state-lawful cannabis activities, and would provide to them limited banking services that would allow for payment of taxes and vendors by check.
As reported in the Sacramento Business Journal, the Bill’s sponsor, Sen. Bob Hertzberg (D-Van Nuys), characterized SB-930 as an attempt alleviate the public safety concerns resulting from the federal government’s current hands off approach to banking cannabis. As Herzog stated, “It’s not only impractical from an accounting perspective, but it also presents a tremendous public safety problem. This bill takes a limited approach to provide all parties with a safe and reliable way to move forward on this urgent issue.”