California Cannabis laws: Yuba CountyCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Marin County, and before that, Nevada County, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Yuba County has a very strict cannabis ordinance and a very active Sheriff’s department. Though at one point the County allowed up to 99 cannabis plants, after an influx of large-scale grows and complaints from locals about the “negative” impacts of cultivation on the community, their current regulations allow a maximum plant count of 12, regardless of acreage, and cultivation is limited to indoor, accessory structures. Attempts to change the ordinance through lawsuits and ballot measures have all failed so far.

LocationYuba County is located in California’s Central Valley along the Feather River. It was one of the original counties of California formed when California became a state. It borders Nevada, Placer, and Butte Counties, which are all popular cannabis cultivation areas. The County lies along the western slope of the Sierra Nevada and a lot of agriculture businesses are located west of the mountains and include fruit orchards, rice fields, and cattle grazing.

History with CannabisOn May 1, 2012, Yuba County adopted its first marijuana regulations under Ordinance No. 1518, which was later amended on December 18, 2012 by Ordinance No. 1522. The County’s first Marijuana Cultivation Ordinance allowed for both indoor and outdoor cultivation with maximum a plant count based on parcel size. No more than 18 plants were allowed on parcels less than one acre with up to 99 plants allowed on parcels 20 acres or more.

In 2014, following concerns from local citizens regarding the effects of marijuana cultivation and other factors, the Yuba County Board of Supervisors initiated a full review of its Marijuana Cultivation Ordinance.

On April 28, 2015, the Board passed Urgency Ordinance No. 1542, which repealed and reenacted the County’s Marijuana Cultivation Ordinance, establishing a complete ban on outdoor cultivation and allowing only limited indoor cultivation.

On June 7, 2016, voters in Yuba County voted to defeat two marijuana ballot measures. Measure A would have increased the number of medical marijuana plants that could be cultivated on parcels of land greater than one acre and allowed for cultivation of medical marijuana outdoors and within residences. Measure B would have established regulations for medical marijuana dispensaries and authorized the licensing of at least one dispensary per 20,000 residents to operate within the County, allowing four or five dispensaries based on the County’s 2015 population.

On November 8, 2016, voters in Yuba County voted to defeat Measure E, which would have allowed for commercial medical cannabis activity and established regulations for cultivation, manufacturing, distribution, and transportation of medical cannabis within the County.

Current Cannabis Laws.

 Under Section 7.40.300 of the Yuba County Ordinance Code:

  1. Outdoor cultivation on any parcel is prohibited.
  2. Cultivation within a dwelling or any other structure used or intended for human habitation is prohibited.
  3. Cultivation of more than twelve (12) marijuana plants on any parcel is prohibited. This plant limitation applies regardless of the number of qualified patients or primary caregivers residing on the parcel or participating directly or indirectly in the cultivation. Further, this limitation applies notwithstanding any assertion that the person(s) cultivating marijuana are the primary caregiver(s) for qualified patients or that such person(s) are collectively or cooperatively cultivating marijuana.

Section 7.40.310 of the Code states that cannabis cultivation in unincorporated areas of the County may only occur on parcels with an occupied, legally established dwelling and shall be contained within the defined area of cultivation in one, single residential accessory structure affixed to the real property that: (1) meets the definition of “indoor;” (2) is located on the same parcel as the dwelling of a qualified patient or primary caregiver; and (3) complies with all provisions of the County code relating to accessory structures.

An “accessory structure” is defined under the County code as a separate and permitted building located on the same parcel as the residence and must meet several criteria listed under Section 7.40.320. Certain accessory structures may also be required to be surrounded by a solid fence that complies with Section 7.40.330 of the County code.

Marijuana cultivators in Yuba County must also register with the County. The cultivation of marijuana in any quantity upon any premises in unincorporated areas of Yuba County without first registering the cultivation and paying the required fee is declared unlawful and a public nuisance under Section 7.40.340.

In addition, under Section 7.40.140, it is the duty of every real property owner, whether or not he or she is in actual possession of the property, to prevent a public nuisance from arising on, or existing upon, his or her real property.

Proposed Cannabis Laws.

There are currently no proposed laws to change the cannabis ordinance in Yuba County. Attempts last year to repeal the County’s Marijuana Cultivation Ordinance through ballot measures were all defeated by the voters.

Current Cannabis Enforcement.

Efforts to fight against the Marijuana Cultivation Ordinance in Yuba County have so far been unsuccessful. In 2016, the Yuba Patient Coalition filed a lawsuit against the County arguing the County’s ordinance is unconstitutional and discriminatory, however the judge ruled in favor the County.

Though there is a ban on all outdoor cultivation and a 12 plant cap for indoor cultivation in accessory structures, cannabis cultivation still occurs in unincorporated areas of the County in violation of current laws. In response, the County has taken enforcement actions against marijuana cultivators and their landlords. On March 16, 2017, the Yuba County Sheriff’s Department raided several indoor marijuana grows seizing over 3,600 marijuana plants. Property owners who lease property to marijuana growers in Yuba County also face penalties of $100 per plant per day until the plant is removed, which in some cases has resulted in fines of over $200,000, as well as the risk of felony convictions.

Unless and until Yuba County changes its cannabis regulations, it is not a good place for a cannabis business.

Marin County CannabisCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Nevada County, and before that, the City of Lynwood, the City of Coachella, Los Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

I’d bet most Californians would be surprised that Marin County, known for its affluence and laid back lifestyle, does not have a single licensed medical marijuana dispensary collective (though there are some delivery services). It’s been twenty years since the enactment of the Compassionate Use Act – which 73% of Marin residents approved – and Marin is still figuring out how to convert the will of its voters into practice. This resistance by Marin County elected officials to move forward on cannabis is even harder to grasp after the more recent results of the Adult Use of Marijuana Act (AUMA) vote where nearly 70% of Marin residents voted for marijuana legalization. Prior to the AUMA, the California State legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA). The MCRSA covers the comprehensive licensing and regulatory framework for medical cannabis while also granting local jurisdictions the authority to enact their own licensing requirements. Under the MCRSA, a license applicant must demonstrate local approval to secure state licensure. And under the AUMA — though licensees do not need local approval to receive a California state cannabis license, they must be in compliance with all local laws to be able to open the doors of their cannabis business. In turn, the MCRSA and the AUMA are motivating jurisdictions to act, and with the intent of its voters so clear, Marin is slowly taking steps towards local marijuana business licensing.

Medical marijuana is still banned in Marin County’s cities but some, like San Rafael and Larkspur, are gradually adopting local marijuana regulations. The Marin County Board of Supervisors – which has jurisdiction over the unincorporated areas of Marin County – has taken the lead in licensing medical marijuana entities, but not recreational marijuana businesses yet. Under its current medical marijuana ordinance, the Board has authority to issue up to four medical cannabis licenses in Marin County’s unincorporated areas. Over the past couple of months, the County held three public hearings for ten applicants vying for those four licenses.

I attended those hearings and it was clear to me that many of the applicants had not done their homework and therefore had essentially disqualified themselves from getting one of the four medical cannabis licenses. Many disqualified themselves by submitting incomplete or misleading forms. Worse yet, some disqualified themselves by having questionable business partners, which in turn incited the community’s ire — which is not something you want to do in Marin County!

These hearings also call to mind something our cannabis business lawyers are always telling our clients: be careful what you share on social media because your posts can come back to haunt you. At one of the hearings I attended, one license application faced a barrage of attacks because the applicant had partnered with someone whose social media posts glorified essentially the worst stereotypes of marijuana. This individual had Facebook and Instagram accounts glorifying guns, drugs and money, perfectly feeding into the sort of cannabis fears pot prohibitionists love to peddle. Printouts of this person’s social media posts were passed out to everyone at the hearing, both attendees like me and representatives of the Marin County Board.

As California cities and counties continue to put local regulations in place for medical and recreational marijuana operators, marijuana business applicants must start now in developing the first (and second) impressions they will be conveying on their communities, especially if you are looking to open a cannabis business in an county like Marin that is really just getting started with legal cannabis businesses.

What I saw at these Marin County hearings reinforced how critical it is for potential cannabis licensees to do their due diligence regarding the pressure points of the community in which the cannabis business will be located. For example, are you seeking to enter a community where you are likely to run into aggressive NIMBYs or one with such restrictive cannabis business regulations that it is nearly impossible to operate? See High Dive: How To Fail In The Marijuana Industry. With California’s “new” legalization comes new opportunities to find the best possible and permissible location for your new or renewed cannabis business and new opportunities to engage and educate the relevant community to alleviate concerns and misbeliefs.

Editor’s Note: Habib recently joined our firm as an attorney in our San Francisco office, where he will be focusing on mostly California cannabis regulatory and dispute resolution issues.

Los Angeles Cannabis LawsCity of Los Angeles Voters Approve Measure M. The City of Los Angeles is making moves to change its current marijuana policies, which have so far made it impossible to start and operate a new cannabis business in the City. Yesterday, voters in the City were asked to decide between two ballot measures to repeal and replace Proposition D with one of two new cannabis ordinances that both regulate and permit marijuana businesses. Both ballot measures also opened up the opportunity for the City to permit activities besides retail sales by dispensaries, including cultivation, manufacturing, transportation, testing, as well as distribution. As of last night, Measure M was officially passed by voters, making the City of Los Angeles the largest municipal cannabis market to regulate cannabis businesses. The City Council hopes to have comprehensive regulation set up by September 30, 2017, and the existing 135 dispensaries operating in compliance under Prop D will be be first in line to receive city approval under the new regime. These 135 dispensaries just became even more valuable, and the “buying and selling” of those dispensaries will no doubt continue apace. For more on that, see How to “Sell” Your California Medical Marijuana Collective.

Los Angeles County May Lift Its Cannabis Ban Today. Today the Los Angeles County Board of Supervisors will hold a regular meeting to consider a plan for closing all unlicensed medical marijuana dispensaries within unincorporated areas of the County. The details of the proposed plan have not yet been ironed out, but the Board will be reviewing a yet to be submitted report from the Sheriff, District Attorney and County Counsel. If this plan is passed, the Los Angeles County Sheriff will be tasked with shutting down about 70 medical marijuana dispensaries currently operating in the County without a license. Since passage of Proposition 64, the Los Angeles County Sheriff’s Department’s Narcotics Bureau been cracking down on illegal marijuana dispensaries popping up throughout the County.

Los Angeles County currently has a ban on almost all marijuana activities. Since 2011, the County has banned marijuana dispensaries, and in 2016, the County extended the ban to include cultivation, manufacturing, testing, and distribution activities. For more on Los Angeles County’s cannabis laws and enforcement measures, check out The California Cannabis Countdown: Los Angeles County.

On February 7, 2017, the County Board voted ahead of time to extend its current ban on medical marijuana activities as well as implement a new ban on all recreational marijuana activities. During this meeting, the Board also requested the plan to close all unlicensed dispensaries that is being considered today and requested $25 million to fund the shut-down plan.

However, during this same meeting, the Board also voted unanimously to consider allowing marijuana businesses within the County, stating they “support moving from a ban to permitting and regulating the use.” The apparent softening of marijuana policies followed by the proposed plan to shut down all unlicensed businesses has left marijuana advocates in the County confused and concerned. They recommend that instead of punishing the unlicensed businesses, the County provide clear regulations and create a pathway for current operators to obtain a license and establish legitimacy.

Based on comments made by the Board, it is unlikely Los Angeles County will keep its ban in place, though they raised concerns about the state’s ability to meet the January 1, 2018 deadline to issue recreational licenses, the concentration of dispensaries in low-income communities, and increased access to marijuana by young people.

The shift in policies in both Los Angeles County and the City of Los Angeles is a welcome change in an area where there is a great demand from cannabis patients and consumers but a long history of unfriendly cannabis laws and enforcement. Though the County may ultimately shut down its current unlicensed businesses, it does at least look as though it will at the same time begin paving the way towards a regulated and legitimate local market.

What are your thoughts?

Washington Cannabis LawyerThe Washington State Liquor and Cannabis Board (LCB) enforces a wide range of rules and laws on cannabis. Because of this, our cannabis attorneys constantly stress to our clients the need for them to set up and rigorously maintain comprehensive regulatory compliance protocols to avoid violations of LCB rules and regulations and to mitigate penalties should such violations occur.

When the LCB believes a licensed cannabis business has committed a rule violation, it will issue the licensee an Administrative Violation Notice (AVN), describing the alleged violation and a recommended penalty. The LCB has broad discretion in assessing penalties for cannabis rule violations, based on Washington Administrative Code instructions that it consider mitigating and aggravating factors in making that penalty assessment. Penalties generally increase if the cannabis licensee has had repeat offenses within a two-year window.

The Washington Administrative Code separates cannabis violations into five categories:

  • Group One—Public safety violations. These violations are considered the most serious and they have the harshest penalties. For example, a cannabis licensee caught buying or selling marijuana to or from an unauthorized source faces cancellation of its license with even a first offense.
  • Group Two—Regulatory violations. These violations include failing to keep proper records, failing to submit required monthly reports, and improper advertising.
  • Group Three—License violations. These violations include failing to abide by licensing requirements and license classifications. Some Group Three violations can result in cancellation of the cannabis license even on the first offense. For example, a licensee’s failure to disclose everyone who owns, operates, or loans money to a licensed cannabis business is a violation of Washington’s true party of interest rules and it can lead to a cancellation of the cannabis license. Other Group Three violations can result in monetary penalties and/or a suspension of license.
  • Group Four—Nonretail violations. These violations involve the manufacture, supply, processing, and/or distribution of marijuana by nonretail licensees and prohibited practices between nonretail licensees and retail licensees. Generally, a first offense of a Group Four violation will result in a fine, but the LCB may cancel a license after the third Group Four offense.
  • Group Five—Violations involving the transportation freight of marijuana. These violations can result in cancellation of a license for a first offense if marijuana is transported from or diverted to an unauthorized source. This includes marijuana transported outside the state of Washington.

The LCB generally doesn’t temporarily suspend producer or processor licenses; it instead employs monetary fines, destruction of inventory, and/or license cancellations to penalize non-retail cannabis licensees. On the other hand, Cannabis retail license holders generally see temporary license suspensions, monetary fines, or license cancellation.

A cannabis licensee has 20 days after receiving a Violation Notice to accept the penalty, request a settlement conference, or request an administrative hearing before an administrative law judge. At these settlement conferences, the cannabis licensee and the LCB discuss the circumstances surrounding the LCB allegations, the recommended penalty, and any aggravating or mitigating factors. You are allowed to bring an attorney to these settlement conferences and you should. The hearing officer’s settlement authority is often limited, but the primary goal of the hearing is to explain why the incident occurred, to identify what failures there were in the licensee’s internal compliance program, and for the licensee to detail a plan to prevent future violations. If a licensee successfully explains all of that, the penalty is generally mitigated. In mitigation, fines and suspension periods are generally cut by 40%-50%.

The administrative hearings on LCB rule violations are similar to court proceedings but a bit less formal. For example, these proceedings do not use the strict evidentiary rules of courts. At these hearings, the cannabis licensee and the LCB may question witnesses and submit and challenge documents regarding the alleged violation. The administrative law judge typically reviews the circumstances surrounding the alleged violation, including any mitigating and aggravating factors and determines guilt or innocence and then hands down a penalty pursuant to the penalty guidelines in the Washington Administrative Code. If the cannabis licensee is not satisfied with any aspect of the administrative judges’ decision, it can appeal to the LCB to have the decision overturned.

Bottom Line: Cannabis licensees should have company-wide policies and procedures in place to avoid rule violations and as a mitigation factor should any rule violation occur. They should also know their various options for dealing with any alleged violations.

California marijuana license
California marijuana licenses: start now, but stay flexible

California lawmakers have been tasked with the difficult challenge of reconciling the Medical Cannabis Regulation and Safety Act (MCRSA), which legalized commercial medical marijuana activities, with Proposition 64, which legalized recreational marijuana use for all adults and is set to begin licensing commercial recreational businesses by January 1, 2018. We’ve previously blogged about this challenge and the state’s efforts to meet the 2018 deadline here, here and here.

The many conflicts between the MCRSA and Prop 64 include different timelines, license categories, rules on ownership, residency requirements, and tracking systems. Another key difference is that the MCRSA places limits on vertical integration, generally allowing cannabis licensees to hold state licenses in up to two separate categories and only in certain combinations. The MCRSA also does not allow licensed cannabis cultivators and manufacturers to hold a marijuana distribution license. Licensed cannabis cultivators and manufacturers in the State of California instead must work with an independent distributor to transport cannabis products to labs for testing and quality assurance before they enter the consumer market.

The California cannabis industry is divided on both vertical integration and distribution issues, and the side you take most likely depends on your views on allowing big business to operate under the new regulated cannabis regime. Growers and dispensaries in California are also divided on the issues. California dispensaries generally believe that the use of independent distributors is unnecessary and will ultimately increase costs for the consumers, small mom-and-pop operations worry that without limits on vertical integration they will be squeezed out by bigger, well-funded investments groups.

In contrast, Prop 64 places no limits on vertical integration, except that all testing labs must be independent and large Type 5 grows will not be able act as their own distributors (but these licenses won’t even kick in until 2023). For those hoping to create a vertically integrated cannabis business in California in 2018, Prop 64 offers a nice alternative to avoid the MCRSA’s limits and independent distribution requirements altogether.

However, this option could be gone by the time state licenses are issued. As California legislators work to develop regulations for both the MCRSA and Prop 64 that can operate simultaneously and in congruence, special interests are sending their lobbyists to the Capitol to try and influence the upcoming laws. Labor unions, investors, and entrepreneurs are all seeking to shape the laws that will most favor their members and bottom lines for when the California cannabis gold rush starts in earnest.

The coalition of Teamsters, local government, police chiefs, a Sacramento distribution company called RVR, and the California Growers Association (CGA) that helped draft the MCRSA bills wants to see the same limits on vertical integration and independent distribution requirements extended to recreational businesses under Prop 64. On the other side, cannabis manufacturers, the United Food and Commercial Workers (UFCW), and the California Cannabis Industry Association (CCIA) want to see a more free-market approach under the current Prop 64 model. They argue this is the model California voters supported when they passed Prop 64 last November.

To make changes to Prop 64, California legislators will need to pass any amendments by a two thirds vote. We advise cannabis license hopefuls to start NOW to prepare for California cannabis licensing, but remain ever mindful that much can change between now and January 1.

Producer_of_marihuanaIndividuals and companies looking to join the Oregon cannabis market often ask us lawyers whether we know of any licenses for sale. Some of these requests come from states like Washington, where licenses are no longer being issued and are frequently bought and sold. Others come from outside the regulated marijuana space altogether, from people who believe it advantageous to “purchase” a license, rather than start from scratch. Typically, however, Oregon licenses are not bought and sold.

As a preliminary matter, it is important to note that Oregon is a wide-open recreational cannabis market. State licensing fees are relatively cheap, and neither residency requirements nor other challenging barriers to entry exist. Most importantly, there is no cap on the number of licenses issued by the Oregon Liquor Control Commission (OLCC) — a fact that should drive the resale value of licenses down to zero as a basic economic proposition. So, Oregon is an open market where everyone is allowed to compete, and where entrepreneurs, not the state, will determine who succeeds.

During the Oregon cannabis license application process, everyone with a “financial interest” in a cannabis enterprise must be disclosed to OLCC. Having pushed through licenses for a while now, and lots of them, it is our experience that OLCC is flexible with ownership changes mid-stream (before a license is actually issued). After a license is out there in the world, however, the analysis is different: for a proposed change in ownership or business structure, OLCC requires submission of a form for its review, and payment of up to $1,000. If the proposed change of ownership is 51% or greater, a new application must be filed. OAR 845-025-1160(4)(d).

Because of the “new application” rule, licenses are never truly sold in Oregon. Instead, when Party A purchases the going concern of Party B, OLCC attempts to coordinate with both buyer and seller so that the old license is surrendered on the day the new license is issued. Note that Party A cannot take its license to a new locale; licenses are fixed to locations. The surrender/issue protocol is a theoretically simple process, although review is never expedited per se. This is because OLCC will want to vet Party B to ensure that nothing has changed regarding the physical space before it issues a new cannabis business license.

Often, it is attractive for new players to enter the Oregon market via acquisition, and our Portland office has vetted and handled pot business sales on behalf of everyone from publicly traded companies to single-member LLCs. The reason for the acquisition approach is because for certain lines of business, namely retail, locations that work with OLCC distance requirements and local zoning rules are scarcer than before. Thus, anyone interested in entering the Oregon pot market as a retailer may be better served to buy an existing operation, than to try to find an unclaimed space.

Altogether, the Oregon pot licensing system means that what is bought and sold in the state is almost always the cannabis business itself (whether that’s an asset sale or a stock sale) and never the license. Sometimes a premium is paid for a desirable location or other intangible item, but not for OLCC paper. So, if you are vetting a pot deal in Oregon and thinking of paying for the license, think again. Licenses are different here.

California marijuanaWe previously wrote about possible delays to California’s cannabis state licensing program due to conflicts between the state’s new medical and recreational laws under the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA), respectively. The AUMA, aka Proposition 64, was passed by California voters last November and required state agencies begin issuing licenses by January 1, 2018 (hereinafter “the 2018 deadline”).

Last week, we provided an update on the work California legislators have been doing to get the state ready to issue licenses. Lori Ajax, the Chief of the Bureau of Medical Cannabis Regulation (soon to be the Bureau of Marijuana Control), promised audiences at a recent cannabis event that licenses would be issued by the 2018 deadline set under Prop 64.

However, California lawmakers are not so sure. On Monday, January 30, 2017, state Senate committees held an oversight hearing to discuss whether California agencies are on track to meet the 2018 deadline. During the hearing, Sen. Jerry Hill voiced “a considerable amount of skepticism” that the state would meet the deadline. Though lawmakers believe some agencies will be able to start processing applications by 2018, they doubt they will be able to issue all of the “tens of thousands” of licenses applied for by that time. Once the cannabis license applications are received, they could take months to process and complete the necessary background checks.

As Sen. Mike McGuire so aptly put it, the state is “building the airplane while it’s being flown,” and thus “it’s not realistic that all of the Proposition 64 rules and regulations will be in place by the new year.” The state’s process for rule-making includes the potential for further delays as public feedback could require a major reworking of regulations (followed by further feedback and more reworking) while new legislation could rewrite rules or change the process entirely (we covered proposed pot legislation here, here, and here).

Ajax admitted not everyone will receive their California cannabis license on January 1, 2018, but instead some could receive temporary licenses while the rest of the applications are being processed. She also stated that California’s state marijuana regulations will be in place by the 2018 deadline through a streamlined, “emergency regulation” process.

Ajax and her 11-person staff (six positions remain unfilled) are working hard to meet the deadline, but there is still a lot left to do. They have yet to convene the advisory committee required under Prop 64 to advise the Bureau and state agencies on drafting standards and regulations for marijuana businesses. Prop 64 also requires implementing a marijuana track and trace system the state has yet to develop. Besides creating the computer program behind the system, the government process will also involve long timelines for drafting proposals, selecting vendors, and completing a statewide rollout. Ajax has stated that applicants may not be included in the track and trace system by the 2018 deadline.

It’s currently unclear what would happen if California is unable to meet the January 1, 2018 deadline. Some argue it is better to have a well-crafted system later, than risk an ineffective system and a thriving illegal market. Since medical cannabis businesses can continue operating until state licenses are issued, the effect of any delay will fall mostly on prospective recreational cannabis businesses.

California CannabisOn January 18, 2017, California state regulators attended a cannabis event in Sacramento to discuss cannabis policy and what lies ahead for California. Though previous reports indicated that California cannabis licensing could be delayed for an additional year, state regulators at the event promised a licensing program would be operational by January 1, 2018.

Lori Ajax, the Chief of the California Bureau of Medical Cannabis Regulation (soon to be renamed again to the Bureau of Marijuana Control under Proposition 64), told the audience:

We will not fail. We will make this happen by Jan. 1, 2018, because we have to […] It may not be pretty. But we will get there.”

Since Prop 64 passed last November, California regulators are now in charge of crafting comprehensive regulations and issuing state licenses to not only medical marijuana businesses but to recreational cannabis businesses as well. This includes 17 license types for medical businesses and 19 licenses types for recreational businesses, covering cultivation, manufacturing, retail dispensaries, distribution, testing, and transportation. The authority to regulate and license these cannabis businesses is divided among ten California state agencies.

The California Department of Food and Agricultural will oversee cannabis cultivation activities, and it created a new division, the CalCannabis Cultivation Licensing program, to issue permits and develop regulations for cultivators, including setting up a track and trace system for all cannabis plants that enter the California market. Amber Morris, a branch chief for CalCannabis Cultivation Licensing, was also in attendance at the event in Sacramento and she said that California state departments are working with economists to create a tiered permit fee program that will assign fees to cannabis cultivators based on the size and scale of their businesses.

A big challenge faced by state regulators is the lack of banking available to cannabis businesses and affiliated companies. Ajax expressed her hope that there would be some clarity on the matter by the time state licenses are issued, stating that banking is “a challenge for us, too. As we set up our online permitting system, we would like to accept credit cards. We don’t want to have to accept wads of cash.”

The banking issue has been high on the mind of California lawmakers, as we get closer to statewide regulation. In December, California Treasurer John Chiang wrote a letter to President Donald Trump seeking guidance ahead of California’s licensing program. In his letter, Chiang wrote that the new program could “exacerbate” the banking problem because California’s cannabis economy will be so large.

Due to federal prohibition on marijuana and anti-money laundering regulations issued by the Financial Crimes Enforcement Network (FinCEN), banks are reluctant to work with cannabis businesses. The banking challenge is not unique to California and it affects businesses in legal marijuana states across the United States. Several U.S. senators sent a letter to FinCEN in December asking for more guidance and explaining how the dearth of cannabis banking promotes tax fraud and creates a public safety issue because cannabis businesses are forced to deal in large amounts of cash.

Under the new California cannabis licensing program, state agencies will need to collect fees from licensed cannabis businesses. Yet most of these agencies have only one office — in Sacramento — which means anyone paying their fees in cash will need to carry that cash with them all the way to the capitol. To address this issue, California legislators recently introduced new legislation to increase the number of government offices that can accept payments from cannabis businesses for state fees and taxes. The legislation, known as the Cannabis Safe Payment Act, is sponsored by the Board of Equalization (BOE), which has been collecting sales tax from California medical marijuana businesses since 1996.

The BOE currently accepts payments in cash from cannabis businesses at its 22 offices across the state. However, to reach these offices, many California cannabis cultivators have to travel great distances with “bags of cash” in their cars, which BOE Chairwoman Fiona Ma agrees “is not the safest method of paying your taxes.” Thus, Ma states that the BOE’s “priority has to be increasing safety—for the business owner, the public, law enforcement, and state employees by enabling cannabis businesses to pay their taxes and fees in as many a safe and secure locations as possible.” Under the Cannabis Safe Payment Act, California counties that receive approval by board of supervisors and tax collectors will be able to accept cash payments from local cannabis businesses on behalf of the BOE and other state agencies.

With promises from the Marijuana Bureau to begin issuing state licenses by January 1, 2018, collaboration from state agencies to develop regulations and set permit fees, and efforts from state lawmakers to alleviate banking challenge, California legislators are showing they are hard at work creating a viable state licensing program for cannabis businesses. For cannabis businesses planning to take advantage of California’s new cannabis program, a lot of work lies ahead and you should start preparing now.

California Cannabis lawsSince Proposition 64 passed last November, there has been a spike in reports of California dispensaries advertising their willingness to sell recreational cannabis to anyone 21 years and older “with only a valid ID” (i.e. physician’s recommendation not required). However, Prop 64 requires dispensaries apply for and obtain a state retailer license to sell recreational cannabis or face criminal and civil penalties for each day of illegal operations. Since the State of California has yet to issue such a license, any dispensary currently selling recreational cannabis in California is doing so illegally.

For marijuana consumers, your options are simple: (1) obtain a valid physician’s recommendation and purchase medical marijuana from a dispensary; (2) grow your own recreational marijuana at home by following local regulations; or (3) get home grown marijuana from other adults in California through a free, sharing economy.

For dispensaries, your options are even simpler: (1) sell medical marijuana legally by following local laws and securing any necessary permits or licenses; or (2) operate illegally and face severe penalties, raids, and criminal prosecution.

Dispensaries in California have been making illegal sales long before Prop 64 passed. But local law enforcement believe dispensaries have become “more emboldened” now that recreational cannabis is legal in the state. Some dispensaries might wrongly believe that any and all sales are allowed under a Prop 64 regime, but others clearly choose to operate outside of the law. This angers legal dispensary owners who pay the high costs of operating a legal business (including taxes, licensing fees, and security costs) while also waiting to profit on recreational sales after state licenses are issued.

Though Prop 64 makes clear that anyone making retail sales or deliveries of recreational cannabis must have a California state license, the challenge faced by local (and soon state) prosecutors is how to go about shutting down illegal businesses. Often when a city or county attempts to shut down an illegal dispensary, the dispensary owner just relocates the business and changes the name, resulting in an endless game of “whack-a-mole” for local authorities. But now that cannabis businesses are beginning to set their sights on state licenses, is it more important than ever to play nice with your local city and county officials as local authorization is a requirement for state licensing. Businesses caught operating illegally can be disqualified from receiving a local permit, and even if state and local authorities cannot prohibit these business from applying for a California cannabis license, past troubles with following the law will likely be a negative mark on your cannabis license application.

We also expect state and federal enforcement to pick up over the next few years. California state agencies do not currently have jurisdiction over illegal cannabis businesses, but once state licenses are issued they plan to work with local authorities to enforce the cannabis laws. Even worse, If illegal businesses continue to thrive in California, the federal government could challenge California’s entire regulatory system under the guidance of the Cole Memo. With a new federal administration coming in, and the possibility of an anti-marijuana Jeff Sessions as Attorney General, California could face even greater scrutiny. So by operating an illegal business not only do you risk your own chances at the legal market, you also risk undermining the legalization effort California strived so long to achieve.

As California transitions into a regulated legal market, the grey areas we have long been dealing with will soon shrink. In a post-Prop 64 world you can either follow the laws and obtain a license to make legal recreational sales or you can risk fines, jail time, and the loss of the chance to ever operate again.

California cannabis lawsA new California bill, Assembly Bill 64, is currently being considered by California legislators. AB 64 would amend the marijuana advertising rules under Proposition 64 (aka the Adult Use of Marijuana Act, or AUMA) to create stricter regulations for advertising on highway billboards. Though Prop 64 already bans marijuana ads on any billboards on California interstate highways or state highways that cross the border of any other state, AB 64 would extend that prohibition to exclude advertising on billboards on any highways within the state.

The sponsors of AB 64 state that the stricter regulations are meant to further enforce prohibitions against advertising cannabis to minors under the age of 21, who would be able to see ads on highway billboards even if the ads are targeted specifically at legal adult consumers and medical marijuana patients. In addition, the bill’s sponsors are concerned that cannabis businesses that have not yet received a state license to sell medical or recreational cannabis are already advertising on highway billboards across California.

AB 64 would prohibit not only licensed businesses, but any entities operating in California from placing marijuana ads on interstate and state highways. The bill would also extend all other restrictions under Prop 64 on marijuana advertising and marketing from licensees to all entities operating within the state; thus closing a loophole that currently exempts unlicensed cannabis businesses from new state advertising laws. What’s more, the bill would extend the prohibition on billboard ads to the marketing of medical cannabis and medical cannabis products.

Though the new advertising restrictions are already receiving pushback from the cannabis community, AB 64 is not all bad news for California cannabis businesses and license hopefuls. If passed, the bill will also provide clarification on major issues concerning many California cannabis businesses, specifically whether for profit businesses and delivery-only businesses will be allowed under new statewide regulation.

Under AB 64, the Medical Cannabis Regulation and Safety Act (MCRSA) would be amended to explicitly allow medical cannabis collectives and cooperatives to operate for profit. In order to operate for profit, these businesses will be required to obtain a valid California seller’s permit from the State Board of Equalization and a valid local license, permit, or other authorization from the city or county where the business operates.

AB 64 would also amend California law to specify that Type 10 dispensaries and Type 10A producing dispensaries under the MCRSA, as well as retailers (and by association microbusinesses) under the AUMA, may be either:

  1. a “storefront dispensary” for locations that have direct physical access for the public, or
  2. a “nonstorefront dispensary” for locations that do not have direct physical access for the pubic.

For the amendments under AB 64 to pass, two thirds of California legislators will need to vote in favor of the bill. This is California’s first attempt to consolidate the provisions of the MCRSA and the AUMA, which contain several conflicting provisions due to differing approaches on key issues under the two state initiatives. However, this will most likely not be the last attempt as the state prepares to license both medical and recreational cannabis businesses beginning as early as January 1, 2018. We will be closely following any changes to California cannabis laws throughout 2017 and those interested in securing a state license should be following along.