Everybody knows that because marijuana is a Schedule 1 drug under the Controlled Substances Act, it is illegal to sell under federal law. Last year, the FDA again reviewed the published scientific literature on medical cannabis and recommended that marijuana stay in Schedule 1. The DEA relied upon this finding in its August 2016 ruling upholding the cannabis ban.

What everybody doesn’t know is that the FDA’s website says that it “actively supports the development of drugs from marijuana.”

Some statements are even more emphatic: “FDA needs to do all it can to support the needed scientific research with marijuana to characterize its therapeutic promise.”  What? Is the FDA suffering from cannabis cognitive dissonance? Not at all. Under the Food, Drug & Cosmetic Act (FDCA), the FDA has the power to approve drugs, based on scientific evidence.

The reason cannabis hasn’t been rescheduled is because, according to the FDA, there is not sufficient evidence to show a currently accepted medical use.

Where does the FDA get off saying there is no medical use? A look at the FDA’s history is instructive. Modern drug regulation started in the beginning of the last century, when the market was filled with unregulated patent medicines claiming to cure everything from constipation to cancer. Many of these medicines, e.g., Johnson’s Mild Combination Treatment for Cancer, were merely worthless.

But some were poison. Elixir Sulfanimide was marketed in the 1930s as a raspberry antibiotic syrup. Unfortunately, this elixir contained diethylene glycol, a known toxin, and killed over 100 people, mostly children. The manufacturer performed no safety testing–because none was required. This and other tragedies in the 1930s led Congress to pass the Food, Drug & Cosmetic Act, the first comprehensive law requiring that medicines be proven safe and effective. This history shows the importance that the FDA places on its core mission of making sure that drugs are safe and effective, relying on scientific evidence including human and animal trials.

As previous readers of this blog might recall, the FDA will usually treat any substance that is “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease,” or that will “affect the structure or any function of the body of man or other animals,” as a drug. The FDA’s key decision in approving new drugs is whether the drug is safe and effective for its proposed uses.

So how do you perform scientific research on an illegal Schedule 1 drug to prove safety and effectiveness?

On its website, the FDA tells you how: “The FDA believes that scientifically valid research conducted under an [Investigational New Drug] application [INDA] is the best way to determine what patients could benefit from the use of drugs derived from marijuana.” The INDA is the method that most proposed new drugs begin the approval process. Once the proposed new drug has undergone the (extensive) testing required by the INDA, the test data can be used to file a New Drug Application (NDA). Virtually all prescription drugs sold in the U.S. are approved under an NDA.

The FDA has already approved three products based on cannabis compounds.

Marinol was approved in 1985 to treat nausea caused by cancer chemotherapy, and Sydros, a liquid form of dronabinol, the active ingredient in Marinol, was approved earlier this year. Cesamet (nabilone) was approved in 1985 and 2006 for nausea and neuropathic pain. The active ingredients in all of these drugs are synthetic forms of THC. So we know that cannabis can be approved as medicine.

Why there aren’t more FDA-approved cannabis drugs?

To find out, be sure to read our next installment, in which we will examine what you need to get an INDA and an NDA. Bring lots of paper or its equivalent; you will need to take notes.

For more on the FDA and cannabis, check out the following:

Los Angeles Cannabis Lawyers
The City of Los Angeles Passes Revised Cannabis Licensing and Zoning Ordinances

Today, the L.A. City Council finally adopted three ordinances (totaling over 70 pages) to regulate and zone the city of Los Angeles’s cannabis businesses pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). The ordinances are: Cannabis Procedures (adding Article 4 to Chapter X of the municipal code), Rules and Regulations for Cannabis Procedures (supplementing Article 4), and zoning for Commercial Cannabis Activity (adding Article 5 to Chapter X of the municipal code). Though these ordinances went through a huge number of tweaks and changes (see here and here), we finally know what L.A.’s regulated cannabis businesses will look like in 2018. This post focuses mainly on the licensing process and operational requirements for would-be licensees in L.A.

Proposition D-compliant dispensaries still get first dibs on the licensing process in L.A. under Prop. M, but the definition of an “existing medical marijuana dispensary” (“EMMD”) has changed somewhat under the revised ordinances. EMMD now means:

. . . an existing medical marijuana dispensary that is in compliance with all restrictions of Proposition D, notwithstanding those restrictions are or would have been repealed, including, but not limited to, either possessing a 2017 L050 BTRC and current with all City-owed business taxes, or received a BTRC in 2007, registered with the City Clerk by November 13, 2007 (in accordance with the requirements under Interim Control Ordinance 179027), received a L050 BTRC in 2015 or 2016 and submits payment for all City-owed business taxes before the License application is deemed complete.

L.A. will still have a local licensing system made up of the following licenses for both medical and adult use cannabis commercial activity: Type 10 (brick and mortar retail); Type 9 (delivery only, non-storefront retailer); Type 12 (microbusiness); Type 1A, 2A, 3A, 4, 5A, and 1C (indoor only cultivation licenses (Type 5s aren’t available from the state right now)); Processor license; Type 6 (non-volatile manufacturing license); Type 7 (volatile manufacturing license); Type P (infusion license); Type N (packaging license); Type 8 (testing); and Type 11 (distributor license). All license applicants in L.A. now need to pay attention to “Undue Concentration”. Undue Concentration means:

. . . the Applicant’s Business Premises is located within a higher cannabis license/population ratio within the community plan based on the 2016 American Community Survey, updated by each decennial census, than the following: ratio of one license per 10,000 residents for Retailer (Type 10); ratio of one license per 7,500 residents for Microbusiness (Type 12); ratio of 1 square foot of cultivated area for every 350 square feet of land zoned M1, M2, M3, MR1, and MR2 with a maximum aggregate of 100,000 square feet of cultivated area and a maximum aggregate number of 15 Licenses at a ratio of one License for every 2,500 square feet of allowable cultivated area for Cultivation (Types 1A, 1C, 2A, 3A, 4 and 5A); and ratio of one license per 7,500 residents for Manufacture (Type 7).

Importantly, an EMMD won’t be subject to the Undue Concentration analysis. A microbusiness involved in on­ site retail counts towards the Undue Concentration License limits applied to Type 10 Retailer licenses, and a microbusiness involved in cultivation counts towards the undue concentration limits applied to the cultivation licenses types. If you’re in a geographical area of Undue Concentration, you have to file with the City Clerk, on a form provided by DCR, “a request that the City Council find that approval of the License application would serve public convenience or necessity, supported by evidence in the record.” If the City Council does not act on your request within 90 days, it will be deemed to support “public convenience”. See here for the City’s calculations around Undue Concentration.

Outside of priority licensing processing for EMMDs, the basic gist of the general licensing process is as follows.

The City of L.A. Department of Cannabis Regulation (“DCR”) is your first stop for submitting your license application once the application window opens (we don’t know when that will be outside of EMMDs). Whether or not you ultimately get your license though is decided by the City of L.A. Cannabis Regulation Commission (“Commission”). Within 10 days of determining that your license application is complete, the DCR will instruct you to provide mailed notice of your application to the owner or owners of business premises, and to the owners and occupants of all property, within 500 feet of your proposed premises property line. Written notice must also be given to the closest neighborhood council, the closest business improvement district and the City Council office within which your proposed business is situated. And for any public hearings regarding your license application, you have to provide written notice of that hearing to all of the foregoing no less than 45 days prior to the date of the hearings.

For retail commercial cannabis activity (which is defined to include sales and distribution of cannabis to the public) and for non-retail commercial cannabis activity taking place in a space that’s more than 30,000 square feet, once your license application is complete and you undergo a mandatory pre-license inspection, the DCR must tell you within 60 days whether they will deny your license application or recommend you to the Commission for a license. DCR can deny your license application with no hearing and based only on written findings for several grounds as laid out in the Cannabis Procedures ordinance, including for being non-responsive, because of Undue Concentration (unless the public convenience exception is met), or because you made material misrepresentations in your application. If DCR recommends the Commission grant you a license, a public hearing must then be held “within the geographic area of the Area Planning Commission”. At this point, the Commission basically has all authority to consider the entire record, Undue Concentration, all public testimony, any public safety issues, and the recommendation of the DCR in deciding whether to issue a license.

For non-retail commercial cannabis activity taking place in a space that’s less than 30,000 square feet, the licensing process is simpler where the DCR can just deny or issue the license without a hearing within 60 days of receiving a complete application and completing a pre-license inspection.

Even though Prop. D. is repealed as of January 1, 2018, for Prop. M priority processing, an EMMD that, as of January 1, 2018, meets all Proposition D requirements will receive limited immunity up until the time it gets Temporary Approval (i.e., DCR-issued temporary approval of your license). This limited immunity terminates if the EMMD fails to seek or obtain a Temporary Approval. Once DCR deems a Proposition M priority processing application is complete and eligible for priority processing, DCR has to issue a Temporary Approval to the EMMD, which then allows the EMMD to maintain its Prop. D immunity (even after that immunity is repealed until it receives a license from the City). Before getting a Temporary Approval (or a license), EMMDs have to submit to a financial audit by the City’s Office of Finance and clear all City tax obligations.

An EMMD issued a license pursuant to Proposition M priority processing is not required to adhere to the zoning, distance and sensitive use restrictions posed by the new zoning laws on the condition that the EMMD operates and continues to operate in compliance with the distance and sensitive use restrictions of Proposition D and so long as it limits on ­site cultivation, if any, not to exceed the size of its existing square footage of building space as of March 7, 2017, “as documented by dated photographs, building lease entered into on or before March 7, 2017, or other comparable evidence”. This limited grandfathering stops on December 31, 2022, after which all EMMDs must comply with applicable zoning laws.

Of course, there’s way more detail to the licensing process than the foregoing. If you haven’t had a chance to read the ordinances in full, don’t worry–here are the highlights:

  1. EMMDs can only apply for priority processing during the first 60 days after DCR opens license applications.
  2. Limitations on licenses are as follows: an applicant can only have up to THREE Type 10 or Type 9 retailer licenses, and cultivators aren’t limited in the number of cultivation licenses they can have but they will have a plant canopy cap citywide of no more than 1.5 acres per applicant (recall, the state no longer has any statewide plant canopy cap limitations). In addition, EMMDs may apply for a maximum of ONE Type 12 microbusiness OR a maximum combination of ONE Type 10 retail license, ONE “Delivery for Retailer License”, ONE Distributor License (Type 11 for self-distribution transport only), ONE manufacturer license (Type 6 only) and ONE cultivation license (Type 1A, 1C, 2A or 3A) identified in its original or amended Business Tax Registration Certificate (“BTRC”) and as “demonstrated in previous Commercial Cannabis Activity as of March 7, 2017.”
  3. There’s a list of folks who will be ineligible for certain periods of time (or completely ineligible) to receive a local license in L.A. which includes (but is not limited to) persons convicted of “illegal volatile cannabis manufacturing” in violation of the Health and Safety Code, anyone who’s violated state or local hour or labor laws, companies formed outside the U.S., and anyone convicted of violating any law involving distribution of cannabis to minors. And any non-cannabis drug felonies may also be grounds to reject a license application.
  4. A License is not transferable–there can only be a change of ownership for the licensee. And that change has to be submitted to and approved by DCR.
  5. A change from non-profit to for-profit status is allowed by an EMMD and it’s exempt from clearance by DCR if “no other ownership change is made in accordance with Proposition D’s ownership rules and notice is provided to DCR within five business days.” This exemption isn’t available after the license issues.
  6. Temporary approval is also available for those existing non-retail operators who qualify presumably to ensure that L.A. has a smooth transition period from gray market to fully regulated.  An applicant who applies for a license for non-retail commercial cannabis activity and who meets the following criteria as determined by DCR will receive Temporary Approval, which gives the applicant limited immunity to operate pending the review of its license application (through essentially April 1, 2018):
    1. the Business Premises meets all of the land use and sensitive use requirements of the zoning laws;
    2. there are no fire or life safety violations on the Business Premises; and
    3. the Applicant:
      1. was engaged prior to January 1,2016, in the same non-retailer commercial cannabis activity for which it now seeks a license;
      2. provides evidence and attests under penalty of perjury that it was a supplier to an EMMD prior to January 1, 2017;
      3. passes a pre-license inspection;
      4. paid all outstanding City business tax obligations;
      5. indemnifies the City from any potential liability on a form approved by DCR;
      6. provides a written agreement with a testing laboratory for testing of all cannabis and cannabis products and attests to testing all of its cannabis and cannabis products in accordance with state standards;
      7.  is not engaged in retailer commercial cannabis activity at the business premises;
      8. attests that it will cease all operations if denied a state license or city license;
      9. qualifies under the social equity program;
      10. attests that it will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the Temporary Approval if the Aaplicant fails to abide by any City operating requirement.
  7. We finally have the social equity program codified in law. There are three tiers of social equity applicants based on an applicants’ low-income, previous California cannabis convictions, and cumulative residency in a “Disproportionately Impacted Area.” Tier 1 social equity applicants get priority processing for Type 9 and 10 and for Type 12 (that includes retail) licenses on a 2 to 1 ratio with all non-social equity applicants, and for all non-retail license types, Tier 1-3 social equity applicants get priority processing on a 1 to 1 ratio with all non-social equity applicants. There are multiple ownership and financier restrictions for social equity applicants so that the City can safeguard these applicants from hawkish and predatory business behavior and activities.
  8. The operational requirements for licensees in L.A. (found in the Rules and Regulations for Cannabis Procedures ordinance) pretty much track the emergency MAUCRSA rules, with a few notable exceptions (and this is not an exhaustive list) — no on-site consumption will be allowed in L.A., and no parties or special events (or even entertainment) of any kind may be held at any licensed cannabis business. And if any company wants to deliver within the City of L.A., it must also get a license from the DCR and/or Commission.

With this kind of comprehensive regulation, it’s not going to be easy to get through the gauntlet of DCR and/or the Commission to receive a local license, so license applicants should prepare themselves accordingly ahead of January 1.

 

Marijuana business valuations
Finally!

In April of 2016, we covered the basics of marijuana business valuation. At that time, we were aware of just one accounting firm — or, more accurately, one accountant at one accounting firm — who claimed to have any interest in marijuana business appraisals. This was likely due to a couple of factors: 1) CPA firms were slower than attorneys to offer services to cannabis businesses, due mostly to complications with CPA ethics rules (there were no CPA firms in Oregon or Washington with cannabis clients when we started in  this  industry seven years ago), and 2) business valuation is a uniquely specialized and accredited field, even among accountants.

But things are changing fast. Recently, we were excited to see Cogence Group PC, one of Oregon’s best financial forensics and valuation firms, publish a no-paywall series of excellent articles on cannabis business valuation. The first article, “How to Perform a Business Valuation of a Marijuana Business,” gives a high-level overview of the three approaches appraisers commonly take: the asset approach, the market approach, and the income approach. Each of those approaches, in turn, comes with a dedicated article of its own. Those links are here, here and here.

In our 2016 blog post, we briefly described each of the three valuation approaches as follows:

  • The asset approach looks at the business as a sum of assets and liabilities used to determine its value. This approach asks, “what would the cost be to create another business that would produce similar economic output?”
  • The market approach looks at similar businesses, and asks “what are other, similar businesses worth?”
  • The income approach considers the expectations of someone participating in the business. This approach asks, “what economic benefit will an investor of time or money receive?

The Cogence series expands on these descriptions with valuable insights and considerations for cannabis industry entrepreneurs and investors, who may take interest in this topic for any number of reasons, including: a pot business is making an allocation of intangible assets; the business is creating an employee stock ownership plan; the business is the subject of an ownership dispute, etc. Throughout the life cycle of a pot venture, as with any business, questions of value are common.

As cannabis business lawyers and litigators, we often work closely with CPAs, alongside our in-house tax attorney. Over the past year or two, we have been encouraged to see an influx of high-level professionals and blue-chip vendors beginning to serve the cannabis industry. These service providers include not just accountants and business appraisers, but also qualified lawyers, realtors, and others. The Cogence valuation series is a good example of the expanding pool of legitimate resources available to the cannabis industry. And it doesn’t hurt that it’s free.

 

Washington Cannabis
Washington homegrown cannabis

The Washington State Liquor and Cannabis Board recently issued a report on recreational cannabis home grows to the Washington State Legislature without making a specific recommendation as to whether the state should legalize recreational home cultivation. Instead, the LCB analyzed the following  three proposed option (which options we discussed here):

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security and to prevent youth access and diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the homegrown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The Board weighed the benefits and drawbacks of each measure. A tightly regulated system provided in the first option would address concerns over traceability and public safety but would require allocating significant resources to monitor home grows. The second option would allow local governments to control home cultivation but could result in inconsistent and confusing rules and regulations across the state. The third option would mean the state would not need to implement a new system but would continue allocating resources to prohibit home cultivation.

The LCB contacted cannabis regulators from Colorado, Oregon, and Rhode Island. Colorado and Oregon allow for recreational home cultivation (along with all other states that have legalized recreational marijuana) and Rhode Island permits medical home cultivation with tight regulations. Colorado’s constitution provides a right to home cultivation. The Colorado State Legislature expressed concerns about large home grows as the law originally allowed for up to 99 plants in a home and in 2017, Colorado limited that number to 12 plants per home. Oregon citizens can grow up to four plants generally but can grow more after obtaining a permit or a doctor authorization. Oregon recommended a low number of plants if recreational grows are allowed. Rhode Island expressed concerns over diversion and created a strictly regulated home grow system where all grows must be permitted and plants traced in the traceability system.

The Washington Board also spoke to the Association of Washington Cities, Washington State Association of Counties, the Washington Association of Sheriffs and Police Chiefs, the Department of Social and Health Services, Department of Health, Washington Healthy Youth Coalition, and received public comment through a public hearing and written comments. The LCB reports that law enforcement generally opposed implementing a home cultivation program as it could create public health and safety concerns, including diversion of legally grown product to the illicit market. Law enforcement officials also expressed concern over whether the state could regulate home grows as individuals are afforded privacy protections in their homes that can prevent law enforcement officers from inspections. Other state agencies expressed concerns about children accessing cannabis grown in their homes.

The report emphasizes Washington’s compliance with the Cole Memo through a tightly regulated system, stating that recent changes made by the legislature continue “to add public safety measures to the system rather than making it more lax.” It summarized the viability of home grows as follows:

If the maximum plant number is kept very low, the less of an overall impact there may be to a regulated system and diversion to feed the illicit market and marijuana being exported to other states. While the majority of people may likely follow the rules, there may be those who will intentionally not stay within legal requirements with the goal of engaging in the illicit market.

The Board also emphasized the need for clear regulation if the State allows recreational home cultivation:

The more clearly and simply the parameters are drawn – how many plants a person may have, definitions of a plant and the level of maturity of plants a person may have, restrictions on when a person is illegally growing vs. legally growing – the less overall impact to the regulated system and the greater the enforceability of home grows, thus supporting the tenets of the Cole Memo. This greater enforceability does not completely abate enforcement concerns.

The LCB’s analysis will now be used by the Washington State legislature to implement a program to legalize home cultivation or to uphold the status quo. Washington’s legislative session starts in January and we’ll continue to write about the status of homegrown cannabis in the Evergreen State.

Right now the jury is definitely still out.

Upcoming Cannabis Events
Upcoming Cannabis Events

Over the next month or so, Harris Bricken will be putting on three lunch-time webinars relevant to starting and operating a cannabis business. All three will be from 12 to 1:15 pm Pacific Time.

The first of our webinars will be with Botec Analysis, a leading drug and crime policy research and consulting firm. This webinar, “Rights, Opportunities, and Responsibilities of California Municipalities Regulating Cannabis,” will be on Thursday, December 14. BOTEC’s Brad Rowe and Harris Bricken’s Hilary Bricken will discuss the legal and policy and regulatory issues California’s local governments need to know about MAUCRSA. To learn more about this webinar and to register for it, please go here.

Our second webinar, “What You Need to Know Now to Get Your California Cannabis License on January 1,” will be on Monday, December 18. Featuring two of Harris Bricken’s Los Angeles-based attorneys, Hilary Bricken and Julie Hamill, and two of our San Francisco-based attorneys, Alison Malsbury and Habib Bentaleb, this webinar will give listeners an overview of the recently issued emergency MAUCRSA rules governing medicinal and adult use cannabis licensing and operations in California. It will cover the licensing process for each license type, operational standards for all license types (including renewable energy requirements for cultivators), the 6-month “transitional” period for product and operations, major changes between the MCRSA and MAUCRSA rules, and key unknowns posed by the rules. You can register for this free webinar here.

On January 11, four of our cannabis lawyers from California, Oregon, and Washington will discuss both how to avoid cannabis disputes and how to prevail should you be involved in such a dispute. Will Patterson, John Mansfield, Hilary Bricken, and Vince Sliwoski will lead this webinar and they will cover the following topics:

  • The present state of cannabis litigation
  • Emerging trends in cannabis litigation
  • Disputes involving cannabis partnerships and other business entities
  • Intellectual property disputes involving cannabis
  • Cannabis product liability disputes
  • Federal law issues inherent in every cannabis case
  • Nuisance cases against cannabis businesses
  • Arbitrating and mediating your cannabis disputes
  • How disputes involving cannabis businesses differ from other disputes

To register for this free webinar, please go here.

All webinars will accept audience questions before, during, and after the presentation. For logistical questions or to send questions to presenters in advance of the webinars, please email firm@harrisbricken.com.

We look forward to having these discussions with you.

 

 

 

Licensees in the Portland area will have a chance to meet with the OLCC in person to renew applications and perhaps discuss other issues.

Any Portland, Oregon cannabis licensees that have recently received an email from the OLCC about license renewal have a unique opportunity to expedite the renewal process in the next two weeks. The OLCC will be holding renewal clinics at their headquarters on McLoughlin Blvd on December 6-7 and December 14-15. You will have an opportunity to meet with an OLCC representative in person and renew your license and presumably to discuss any other issues facing your business. The OLCC is using the Eventbrite website to manage appointments and you will need to register in advance here.

To renew in person you will need the following, quoting the OLCC’s Eventbrite site:

“What’s Required:

  • A Business Entity Questionnaire and completed and signed Individual Histories for all members and their spouses in the entity to be licensed
  • Current Boundary Sketch
  • Renewal Application Packet
  • Current Premises Floor Plan (with cameras labeled and numbered)

What Might Be Required:

  • Premises access documents (lease, deed) only if there has been a change to it since the previous licensing (examples: change to the lease terms; listed individuals no longer involved with the business)
  • New Land Use Compatibility Statement (LUCS) only if requesting a larger canopy (example: from Tier 1 to Tier 2) or a change in canopy designation (example: currently approved for indoor but want to switch to mixed)”

You should also bring a credit card or cash to pay your renewal fee and any late fees. If you pay by check, or fail to pay on site, then your renewal will be delayed.

The OLCC has already held renewal clinics in southern and eastern Oregon in an effort to mitigate the application backlog we discussed previously. The idea appears to be that once the OLCC clears out the pending renewals, it can turn its focus back to addressing the current applications. This seems like a smart move by an agency that simply hasn’t been provided with the funding necessary to meet demand.

We recommend you take advantage of these clinics if you can get your paperwork in order in time. And if you have any pending changes to push through, such as ownership changes, floor plan changes, or canopy changes, it is likely worth contacting the OLCC to see if it is something you can resolve through the clinic process. But move fast, the clinic spots are likely to go quickly.

California cannabis taxes
The rules of the California cannabis taxation road

On November 30, 2018, The California Department of Tax and Fee Administration (“CDTFA”) adopted Emergency Regulation 3700, Cannabis Excise and Cultivation Taxes. Shortly before issuing these emergency regulations, the CDTFA released a Formal Issue Paper with an analysis critical to understanding the regulations. This post provides a high-level overview of these emergency tax regulations and what you need to know now about California’s cannabis tax regime.

Cannabis Cultivation Tax. The cannabis cultivation tax applies to all cannabis that enters California’s commercial market as follows:

  • $9.25 per dry-weight ounce of cannabis flower;
  • $2.75 per dry-weight ounce of cannabis leaves; and
  • $1.29 per ounce of fresh cannabis plant.

Fresh cannabis plant is defined as flowers, leaves, and whole plants, that have been weighed within two hours of harvest without further processing. The emergency regulations address measurement issues in computing the cultivation tax. The CDTFA rejected the current industry standard that an ounce equals to 28.00 grams and instead calculates an ounce at 28.35 grams.

Cannabis distributors are to collect the cultivation tax when the cannabis enters the commercial market, which is when all testing and quality assurance has been performed. Beginning on January 1, 2018, the California Bureau of Cannabis Control will allow the sale of untested cannabis or cannabis product for a limited time. During this transition, the emergency regulations clarify that the distributor collects the cultivation tax when the cultivator sells or transfers cannabis or cannabis product to the distributor. With but a few exceptions, cannabis removed from a cultivator’s site is presumed to have been sold and is taxable.

Plant waste is not subject to the cultivation tax. The emergency regulations define the term “Plant Waste” by referencing  Sections 40141 and 40191 of the California Public Resource Code. In general, plant waste is unusable cannabis mixed with other ground material such that the total mixture is at least fifty percent non-cannabis material by volume.Cannabis Excise Tax

The Cannabis Excise Tax is imposed on the retail purchase of all cannabis and cannabis products at 15% of the Average Market Price, which price is determined by first identifying whether the transaction was at arm’s length or not. An arm’s length transaction is a sale that reflects a fair market price between two informed and willing parties. For arm’s length transactions, the Average Market Price is the wholesale cost plus a markup determined by the CDTFA. The emergency regulations define wholesale cost as the amount paid by a retailer for cannabis and cannabis products including transportation costs. Discounts and trade allowances do not reduce the amount included in the wholesale cost.

Every six months, the CDTFA must determine the markup.  Recently, the CDFTA has determined that the markup from January 1, 2018, to June 30, 2018, is 60%. The computation of the cannabis excise tax is illustrated in the following example:

Assume a retailer purchases cannabis from a Distributor at $200.00 per ounce and incurs $20 of transportation costs. In this case, the Average Market Price of an ounce of cannabis is $352.00 ($220.00 x 1.60) and a consumer who purchases a 1/4 ounce of cannabis will pay $13.20 ($352.00 x 1.15 x 1/4) in cannabis excise tax. The Average Market Price is used to compute the cannabis excise tax and may not be the ultimate retail sales price.

California allows a single business to engage in multiple commercial cannabis activities and a business that engages two or more licensed cannabis activities (e.g., as a distributor and a retailer), will not be deemed to have transferred cannabis at an Average Market Price. Instead, these transfers will be considered not to have been at arm’s length and the Average Market Price will be the retail sales price at which the retailer sells the cannabis. For example, if the retail sales price of cannabis is $200 per ounce a consumer who purchases a quarter ounce of cannabis at  $200 will pay $7.50 in cannabis excise taxes ($200.00 x 15% x 1/4).

The emergency regulations clarify that a distributor must report and remit its tax payments to the CDTFA during the quarterly period in which the cannabis was sold or transferred to a retailer, not during the quarterly period when the retailer pays its taxes to the distributor. This may lead to accounting and cash flow issues since distributors must pay their taxes to the CDTFA before they receive cash reimbursement from their retailer buyers.

The emergency regulations also clarify that the penalty for nonpayment of tax is 50%. Take note that this 50% penalty takes effect if the tax payment is only one day late. The emergency regulations allow for a waiver of this penalty for “reasonable cause,” but never define what constitutes reasonable cause. According to CDTFA commentary, examples of reasonable cause include late payment of tax due to a lack of banking services, a limited number of facilities to accept cash payments, evolving industry regulations and the remoteness of some commercial cannabis operators.

California is clearly very serious about collecting tax revenues from cannabis businesses and the complexity of California’s new cannabis tax laws is going to make tax compliance a challenge for every participant in the California cannabis market.

 

 

Representative Cohen raises a good point about the value of state-level cannabis. Justice Brandeis is right about the benefit of using states as laboratories for trying out new ideas. These state experiments allow us to test what works and what doesn’t before pushing things out nationwide. They also allow each state to tailor its programs to what works for their own citizens and to what their own citizens want.

All this holds true for cannabis too where we see so many of the state-level experimentations working. The states that have legalized cannabis have built up their economies, provided their citizens with access to useful medicine, and offered patients a route out of opioid addiction.

The cannabis “experiment” is working and that bodes well for it to continue rolling out state by state until such time as the whole country wants it.

Cannabis, bitcoin and blockchain
Blockchain is coming to cannabis

IBM is getting into the cannabis business. On November 1, the US computer manufacturer submitted a proposal to the Government of British Columbia touting the benefits of its blockchain technology for supply chain management in Canada’s nascent cannabis industry. According to IBM, blockchain will allow B.C. to “transparently capture the history of cannabis through the entire supply chain, ultimately ensuring consumer safety while exerting regulatory control from seed to sale.”

What is blockchain, you ask?

Blockchain mania is taking over Silicon Valley — it’s the latest tech buzzword, described as world-changing technology. Essentially, blockchain is a shared, tamper-free public ledger that can be used for pretty much any kind of data organization that everyone can inspect, but which no single user controls. The participants in a blockchain system collectively update the ledger, and it can be amended only according to strict rules and by general agreement between the parties to the ledger.

The most famous applications of blockchain are bitcoin and Ethereum, cryptocurrencies built on blockchain technology. But blockchain is not limited to cryptocurrency — there are innumerable potential applications of this technology that industry leaders believe will revolutionize the way we do business. Namely, blockchain technology can help assure data integrity, maintain auditable records, render contracts into programmable software, and create self-executing agreements like “smart contracts.” Smart contracts and supply chain management are among the revolutionary applications of blockchain technology. For example, in the context of a supply chain, the secure records in a blockchain system help prevent fraud and provide a simple interface that enables businesses and regulators to inspect data regarding the flow of goods within a matter of seconds.

Blockchain technology can also minimize the sometimes nightmarish logistics of inventory management and tracking. IBM has been testing blockchain technology with various major corporations, including Walmart. Utilizing blockchain technology to manage the supply chain of mangoes, Walmart was able to reduce the time required to trace a mango’s journey from tree to consumer from six days to two seconds.

With the banking epidemic and the need for transparency in the robustly regulated (but mostly volatile) cannabis industry, blockchain can serve a number of functions; from assisting with track and trace systems for inventory, to mechanizing quality assurance reviews and data, to assisting licensees with their day-to-day sales and money transactions and transmissions.

Indeed, in its pitch to the B.C. government on integrating commercial cannabis activity with blockchain technology, IBM contends that the use of blockchain technology will enhance visibility of activities and identification of where an asset or product is at any point in time, who owns it, and what condition or state it’s in. According to IBM, this will bring “a new level of visibility and control to regulators and provides assurance to the multitude of cautious stakeholders regarding the way the management of a cannabis supply chain is rolled out.”

Specifically, IBM claims blockchain can help governments take control of sourcing, selling and pricing of cannabis products, thereby reducing or eliminating illegal sales, assist cannabis producers with real-time inventory management, improve projections of supply and demand, and elicit trends of consumption through data analytics. And that, for retailers of cannabis, an interconnected blockchain network can assist them to identify supply and demand gaps and ways to mitigate those gaps, provide feedback mechanisms to cannabis producers, and use data to create predictive insights.

So far, proposals to implement blockchain in the US cannabis market all appear intertwined with cryptocurrency, which resides in a questionable legal space and has attracted the scrutiny of federal regulators (see here). As demonstrated by IBM, cryptocurrency is not necessary to harness the underlying blockchain technology; one does not need to transact in cryptocurrency or purchase tokens to utilize blockchain. See also The Hazy Future of BitCoin and Marijuana.

We predict that blockchain systems untethered to cryptocurrency will begin to emerge in regulated cannabis markets in the US, especially if the benefits described by IBM come to fruition. For now, we will wait and see whether B.C. takes IBM’s advice.

Los Angeles Cannabis Event
IT’S TONIGHT

Our Southern California Cannabis Investment Forum is tonight (Thursday) so get your tickets now!

Our Los Angeles office will host this event, connecting top investors and leading companies in Southern California’s cannabis and ancillary industries for learning and networking. We are expecting a full house — 250+ people.

The Forum will begin tonight at 6:30 p.m. with a keynote from Hilary Bricken on the many recent changes to California’s medical and adult use cannabis laws under MAUCRSA. From 6:45 to 8 p.m., Hilary will moderate a panel comprised of Alex Fang, Founder of Sublime CO2; Paul Henderson, CEO of Grupo Flor; Stephen Kaye, COO of Big Rock; Kenneth Berke, President of PayQwick; and Carlton Willey, our San Francisco-based securities and equity financing attorney.

The panel will delve into the following:

Audience questions will be taken throughout the presentation and a cocktail networking session will follow the panel discussion and last until 9:30 pm. Food and drink will be provided.

The Southern California Cannabis Investment Forum will be held at Wanderlust Hollywood. Doors open at 5:30 p.m. We have held back a few tickets to sell at the door, but if you want to skip the line and be sure to get in, you should register in advance now!