In 2015, nearly 20 years after California voters approved the groundbreaking Proposition 215 ballot measure known as the California Compassionate Use Act, the California legislature undertook the task of regulating a now robust and diffusive medical cannabis market at the state level. The Medical Cannabis Regulation and Safety Act (“MCRSA”) establishes eighteen license types in six categories – cultivation, manufacturing, testing, dispensary, distribution, and transporter. MCRSA includes prohibitions against vertical integration, for example generally prohibiting distributors, transporters and testing labs – license types serving quality control and compliance needs – from holding other license types. With some notable exceptions, MCRSA also keeps producers (cultivation and manufacturing) separate from retail by prohibiting license holders in the production categories from owning licenses in the retail category. Although MCRSA will not be fully implemented at the state level until 2018, the Act authorizes local governments to adopt regulations and issue licenses in the interim. Many California communities have chosen to regulate and license, leading to concentrated cannabis investment and real estate activity in discrete portions of the state.
In its 2015-2016 legislative session, the California State Legislature adopted significant revisions to MCRSA. Governor Brown also sent strong messages to industry watchers in his vetoes of two medical cannabis bills involving, respectively, regulation of LA dispensaries and medical cannabis tax amnesty. Among the various amendments and clarifications, the following amendments may be of note to cannabis entrepreneurs:
Assembly Bill 821 – Dispensary Tax Payments
Amends Section 6479.3 of the Revenue and Taxation Code by allowing dispensaries to pay taxes in cash rather than by electronic fund transfer. Previously dispensaries could be assessed a 10% penalty for failure to pay monthly tax bills of $10,000 or more by means other than electronic fund transfers.
Assembly Bill 2516 – Cottage Cultivation
Creates a new Type 1C, or “specialty cottage” license type for “micro farmers” to be issued by the Department of Food and Agriculture. The license permits the cultivation of 2,500 square feet or less of total canopy size for mixed-light cultivation, up to 25 mature plants for outdoor cultivation, or 500 square feet or less of total canopy size for indoor cultivation, on one premises.
Assembly Bill 2679 – Manufacturing
Provides important protections to collectives or cooperatives that manufacture medical cannabis products from criminal sanctions if the collective or cooperative utilizes manufacturing processes that: (i) are solventless or employ non flammable, nontoxic solvents that are generally recognized as safe pursuant to the Federal Food, Drug, and Cosmetic Act; or (ii) use solvents exclusively within a closed loop system that meets rigorous requirements under the Federal Food, Drug, and Cosmetic Act including use of specified solvents, prevention of off-gassing, and certification by a licensed engineer. The collective or cooperative must also receive local approval for all aspects of the facility and meet required fire, safety, and building code requirements. Finally, the bill requires the collective or cooperative to hold a valid seller’s permit issued by the Board of Equalization and to hold a valid local license, permit or other authorization specific to the manufacturing of medical cannabis products.
Senate Bill 837 – 2016 Budget Act Omnibus Bill
- Requires cultivator applicants to identify their water source and, in the case of water diversion, the point of diversion and the maximum amount to be diverted from the source for cannabis cultivation in any year. On the strength of SB 837, the California Department of Food and Agriculture is preparing landmark water use regulations, to be adopted in 2017, that will integrate irrigation permits and water storage into cannabis cultivation for the first time.
- Allows licensed cultivators holding a valid Type 12 transporter license to move product directly to a manufacturer for further manufacturing, rather than through a distributor at this level.
- Establishes standards by which medical cannabis businesses operating in compliance with local laws on or before January 1, 2018 may continue to operate until their state license application is either approved or denied. The state licensing agencies will prioritize issuing licenses for applicants demonstrating that their premises or person was in operation and in good standing with the local jurisdiction as of January 1, 2016.
With the election and the critical 2017 MCRSA agency rule-making looming on the horizon, additional changes to California’s regulatory landscape will be forthcoming. In addition to Proposition 64, the Adult Use of Marijuana Act (AUMA), dozens of local medical cannabis initiatives will appear on the November ballot. If AUMA is successful, we anticipate that the major push of the 2017 legislative session will be to significantly conform the MCRSA and AUMA regulatory structures. At the same time, cities and counties across the state will be empowered to adopt local licensing and regulations around both medical and, prospectively, adult use cannabis. Monitoring this fast and furious action is no small task, but the opportunities of the California market make it a compelling undertaking for cannabis entrepreneurs.