California has rolled out state licensing for cannabis businesses, and legal advisers have absorbed over 300 pages of regulations released in late November.
Los Angeles cannabis attorney Kellsi Booth got her start in the cannabis industry with the Maryland Department of Health, where she helped the Natalie M. LaPrade Medical Cannabis Commission create regulations for their medical cannabis program.
We asked Booth – who has read the rules three times over – what California cannabis businesses need to know about the detailed and comprehensive state licensing rules.
1. Local authorization is a priority
“The number one thing at this point is you need local authorization,” Booth said. There are few jurisdictions in California right now that are permitting cannabis businesses, but step one in state licensing is getting local approval.
There are two types of state licenses: A license for recreational, and an M license for medical. “Sometimes that decision is made for you. Many jurisdictions are allowing only medical commercial cannabis activity at this time. It’s possible to hold both an A and M license for the same activity at the same licensed premise – there are conditions that need to be met.”
In general, businesses will need a license for each premises where cannabis activity is conducted.
“One of the great things they’ve done is create more nuanced categories,” she said. For example, there are manufacturing license types “N” and “P” for infusing cannabis products and for packaging and labeling of manufactured products, respectively.
There’s also a Type S license for shared manufacturing facilities on the way. “Being able to collaborate will be helpful for small-scale manufacturers. Those regulations are expected from the California Department of Public Health in early 2018.”
Licenses are not transferable in the state model. “This means you want to be set up as a for-profit entity, rather than a non-profit collective or cooperative, and some will have trouble making that switch depending on their operating rules,” Booth said.
2. Some jurisdictions are tough
Major cities – Los Angeles, San Diego, and San Francisco – are leading the way for recreational cannabis, but smaller jurisdictions are mostly sticking to medical-only.
“I believe more and more jurisdictions will open up now that the state has put forth a regulatory framework. Northern California counties like Sonoma and Humboldt are also setting the standard for cultivation,” Booth said.
“Being in a jurisdiction that has granted or will soon be granting local licenses or permits is valuable,” Booth said. One of the most cannabis-friendly jurisdictions is Long Beach, where processing is faster because it follows the standard business license application process and there’s no set limit on the number of cultivation, manufacturing, distribution, and testing businesses allowed, she said.
3. Fees and taxes are shocking
For a 5,000 to 10,000 square foot indoor cultivation facility, the licensing fee is $34,910 annually – and the next level up is $77,905, plus application fees.
For retail, fees depend on estimated operational volume. For estimated volume of up to half a million, the fee is $40,000, and it increases incrementally from there. These are high barriers to entry.
Tax rates are another concern. “Because of tax code 280E, cannabis businesses can only deduct cost of goods sold from their income – there’s no built in cushion for tax purposes,” Booth said. “In other states with a similar situation, we’re seeing high state and local tax rates resulting in businesses staying in the black market instead of moving over to the legal market.”
The application and licensing fees, state tax rates, and local tax rates will add up quickly, and may prove overly burdensome.
4. Excessive concentration rules can be a deal-breaker
“At the state level, if you meet all requirements, they can still deny you if there is an excessive concentration of retail or microbusiness licenses in the area.”
“That means the ratio of licensees to population within the census tract or division exceeds the ratio of licensees to the population within the county in the area where the premises is located. This definition may be problematic in some parts of the state,” Booth said.
5. Volatile/Non-volatile extraction rules are more lenient
When it comes to extractions, the regulations have been expanded, she said. “You can do extractions with ethanol and not be considered volatile. Volatile licensing is a more difficult process – you need a closed loop extraction system with the stamp of approval from a certified engineer, and fire department permits.”
In common practices using ethanol or carbon dioxide in extraction, businesses are able to be considered non-volatile, she said. “Jurisdictions are much more accepting of non-volatile licenses due to horror stories of people blowing themselves up during volatile extraction.”
6. Seed-to-sale requirements are specific
A key change involves seed-to-sale tracking rules. All cannabis activity must be entered into the state’s track-and-trace compliance system, and activities must occur in a particular order. “Manufactured cannabis products have to be packaged and labeled to state standards before they leave the hands of a manufacturer. Retail outlets cannot do any packaging or labeling,” Booth said.
This is a different from the practice of allowing customers to open, smell and handle cannabis products prior to purchase. “That won’t be happening.”
The retailer can have “samples” of cannabis goods that are removed from their packaging and placed in containers to allow for customer inspection. However, cannabis goods removed from their packaging for display cannot then be sold or consumed, she said.
7. Delivery services rules remain murky
“The original legislation did not cater to delivery services. Now, it’s okay to do deliveries if you have a retail license, but it’s really hard to get a retail license.”
In San Diego, there are 200 delivery services and only around 11 retail licensees currently in operation, Booth said. “Not many jurisdictions have the framework for non-storefront retail licenses for deliveries and it’s very hard to get retail,” she said. “Businesses are allowed to use apps for deliveries, but all deliveries have to be carried out from your premises by your employees. So there’s no Uber delivery scenario.”
8. Small business barrier to entry concerns remain
Cannabis industry members voiced concerns that the new licensing fees will create a barrier of entry that gives big business an advantage.
“I can’t disagree,” Booth said. “Licensing fees are very burdensome, but they have contemplated this with the scaled fees. You’re also not going to see one entity monopolizing the market. For example, an entity can hold one medium cultivation license, not five. The fee-less temporary licensing process will incentivize small operators who know cannabis to stay in the legal market.”
In Los Angeles, the social equity program is designed to ensure equal access to the market to minorities, who have traditionally been targeted for cannabis-related prosecution. “It gives priority in processing of licenses – their applications will get through the process first,” Booth said.
Don’t worry – The transition period is allowed through July 1
The regulators have created a transition period with more lax rules, so existing businesses will have until July 1, 2018 to meet the new regulations in full. “To support the transition of the market, you’ll be allowed to adjust by repackaging or labeling items currently held in inventory or conducting business with either M or A licensees, for example.”
To jumpstart the licensing, temporary licensing are available. “If you can show that you have local authorization and are meeting all business formalities, the temporary license should be granted. It’s good for 120 days, and can be renewed for 90 days thereafter if you’ve submitted an application for annual licensing.” All forms are available here. https://aca5.accela.com/bcc/Welcome.aspx
In Los Angeles, existing businesses allowed by Proposition D will be first in line for licenses, Booth said. “You’ll be in good condition if you’re in compliance with the local law.”
Get an adviser to sidestep challenges
Booth said it’s in the best interest of every business to retain legal counsel or a compliance adviser to navigate the extensive regulations.
Make sure to vet them, too – “Be wary of people saying they’re experts in cannabis and check their background, especially criminal defense lawyers branding themselves as cannabis attorneys. I can tell you criminal defense is very different,” she said.