2019 Best Best & Krieger LLP

Best Best & Krieger

Company/BestBestKrieger

@BBKlaw

Clearing the Smoke3 Years of Legal Cannabis in California

Lauren LangerHenry Castillo

Clearing the Smoke

• A brief background on legal cannabis in California

• An overview of state law and regulations• Licensing• Revenue and Taxation• What’s new after the end of this legislative

session• What to do about CBD, Delivery, etc.• What future regulations or rule changes can we

expect in the near future

1996 – Compassionate Use Act (CUA)• Proposition 215: Passed by

voters in 1996

• To ensure that seriously ill Californians have the right to obtain and use marijuana for medical purposes

• Must have a physician’s recommendation

• The CUA exempts patients and their primary caregivers form criminal liability under state law for possession and cultivation for marijuana for personal medical use

2003 – Medical Marijuana Program• Senate Bill 420 – Codified a Health and Safety

Section 11362.7, et seq.

• To clarify the scope of the Compassionate Use Actand to allow cities and other governing bodies to adopt and enforce rules and regulations consistent with SB420. The MMPA created a state-approved voluntary medical marijuana identification card program and provided for certain additional immunities from state marijuana laws.

CUA and MMPA

• The CUA and MMPAdo no “legalize” marijuana, but provided limited defenses to certain categories of individuals with respect to certain conduct and certain state criminal offenses

2008-Attorney general guidelines for Medical Marijuana Collectives• Limit lawful distribution activities to true agricultural co-ops and

collectives that provide crops to their members. • Prohibit collectives and cooperatives from profiting from the

sale of marijuana • Allow reimbursement for certain services (including cultivation),

provided it is limited to the amount to cover costs and expenses

• Allow members to reimburse the collective for marijuana that has been allocated to them, or it may be provided for free to members, provided in exchange for services, allocated based on fees for reimbursement only, or any combination

• Distribution of medical marijuana is subject to sales tax and requires a seller’s permit from the State Board of Equalization

• “Storefront dispensaries that deviate from these guidelines are likely outside the scope of state law”

Land Use Regulation

• For many years the BIG issue was the scope of the City’s ability to regulate or ban medical marijuana collectives and cultivation

• The CUA and MMPA do not preempt or limit local regulation of medical marijuana cultivation and distribution through land use authority. City of Riverside v. Inland Empire Patient’s Health & Wellness Ctr. (2013) 56 C4th 729; Maral v. City of Live Oak (2013) 221 Cal.App.4th 975.

2015 – Medical Cannabis Regulation and Safety Act (MCRSA)• In 2015, the California legislature adopted AB 243,

AB 266, and SB 643, identified collectively as the Medical Cannabis Regulation and Safety Act (MCRSA), to comprehensively regulate medical marijuana.

• Addresses issues such as cultivation, processing, manufacture of medical cannabis products, quality control, testing, inspection, transportation, distribution, and dispensing of medical cannabis.

• The MCRSA recognizes and preserves local control to regulate or ban medical cannabis cultivation, delivery, dispensing, and distribution.

• State starts drafting licensing regulations…

2016 – Proposition 64 (AUMA)

• On November 8, 2016, voters passed Proposition 64 the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA).

• Beginning on January 1, 2018, AUMA makes it legal to sell and distribute cannabis through a regulated business.

• The AUMA also contains provisions allowing for local regulation and taxation of commercial marijuana activities and outdoor cultivation.

AUMA- Adult Use

• As of November 9, 2016, adults 21 years of age or older are allowed to:

• Smoke or ingest marijuana or marijuana products (subject to location restrictions- where smoking is allowed, away from schools and day cares, etc.);

• Possess, process, transport, purchase, obtain, or give away to persons 21 years of age or older up to 28.5 grams of un-concentrated recreational marijuana and up to 8 grams of concentrated marijuana; and

• Possess, plant, cultivate, harvest, dry, or process up to six (6) living marijuana plants per residence for personal use.

AUMA-Personal Cultivation

• Private individuals can now cultivate at home, indoors (includes a greenhouse)- up to six living marijuana plants• Cities can adopt reasonable regulations –

to make sure the cultivation is within these parameters

• Cities cannot prohibit • No state license required

AUMA-Outdoor cultivation and Marijuana Businesses

• Under AUMA, cities retain the authority to regulate and ban all other cultivation and all recreational marijuana businesses.

• Cannot prevent the transport of marijuana through their jurisdiction using public roads if the transport originates from and ends in a location outside the jurisdiction. More later on this…

• Subject to taxation… more later as well• Requires a state, and in some cases, a local license

MAUCRSA

• Intended to create one regulatory structure for medical and non-medical cannabis use and commercial cannabis activities

• Licenses under MAUCRSA are to be issued according to regulations promulgated by the Bureau of Cannabis Control and its affiliated agencies, the Department of Food and Agriculture (for cultivation) and the Department of Public Health(for manufacturing, packaging and labeling).

• Changes references to “marijuana” to “cannabis” throughout California law and renames the chief regulatory agency the Bureau of Cannabis Control.

• Authorizes the Bureau to issue 12-month temporary licenses during the transition time when licensing began in 2018.

Where to find all of the rules and regulations? • Business and Professions Code- § 26000 et. seq.

• Establishes a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis.

• Licensing (20 types)

• Enforcement

• Track and Trace Program

• Retail, Distribution, Microbusiness

• Delivery

• QA and Testing

• Manufacturing and Cannabis products

• Advertising (26151)

• Any advertising or marketing placed in broadcast, cable, radio, print, and digital communications shall only be displayed where at least 71.6 percent of the audience is reasonably expected to be 21 years of age or older, as determined by reliable, up-to-date audience composition data

• Local Control

Where to find all of the rules and regulations?

• Health and Safety Code

• Uniform Controlled Substances Act

• Offenses and Penalties

• Compassionate Use Act

• Scope of allowable possession

• Etc.

Overview of State Law and Regulations• Cannabis.ca.gov

• In January 2019, the Office of Administrative Law (OAL) officially approved state regulations for cannabis businesses across the supply chain.

• These new regulations immediately took effect, meaning the previous emergency regulations are no longer in effect. Licensees are required to comply with all rules and regulations pertaining to their license type, as well as follow all other applicable state laws.

Bureau of Cannabis Control –Cannabis Regulations • (16 CCR 5000 et seq.) BCC.CA.GOV

• Temporary licenses through 12/31/18• Application requirements and standards

• Grounds for license denial• Determination of who is an owner

• CEQA requirements• License fees• What to do with cannabis after license term• Location/Premises requirements• Security• Track and Trace

Bureau of Cannabis Control –Cannabis Regulations

• Distribution and transportation• Packaging and testing• Hours of operation 6:00am- 10:00 pm• Sale of only cannabis goods, cannabis

accessories and branded merchandise• Daily limits• No free samples• Delivery• Cannabis Events• Testing• Enforcement

Bureau of Cannabis Control –Cannabis Regulations • #weedwise

• Extensive outreach educating consumers about the risks associated with cannabis purchased from unlicensed businesses

• CAPotCheck.com

• Consumers can verify the legal status of a cannabis business by visiting the Bureau’s Online License Search

California Dept. of Public Health – Cannabis Regulations • https://www.cdph.ca.gov/Programs/CEH/DFDCS/MCSB/Pages/Re

gulations.aspx

• Cannabis manufacturing and packaging and labeling of both cannabis and cannabis products.

• Similar License requirements

• Safety and Security

• Extractions and best practices for processing

• Juice and Dried meat processing

• Waste Management

• Concentration limits

• Labeling and packaging requirements

• No cartoons, images or candy terms that attract children

• Must be released as final, tested product

California Dept. of Public Health – Cannabis Regulations • Prohibited Products

• No alcohol, nicotine or caffeine mix

• No product that must be below 41degrees

• No milk products or cream filled pies/pastries

• Juice that is not shelf stable

• No dairy products (except infused butter OK)

• No meat or seafood products

California Dept. of Food & Agriculture – Cannabis Cultivation

• Calcannabis.cdfa.ca.gov

• Application Process

• Cultivation Site requirements

• Carbon offsets and generator requirements

• Track and Trace

• Enforcement

2019 CA Attorney General Medical Guidelines• A good summary of applicable laws;

• Guidelines regarding individual qualified patients and primary caregivers;

• Best practices for the recommendation of cannabis for medical purposes;

• Enforcement guidelines for state and local law enforcement agencies; and

• Medical cannabis need not be accommodated in the workplace

• Medical cannabis defense may file motion for return of seized cannabis

• Guidance regarding collectives and cooperatives.

• Collectively cultivate and distribute to members

• Must have a state cultivation license as of January 2019

Governor’s 2019 Budget Trailer Bill• Under the Medicinal and Adult-Use Cannabis

Regulation and Safety Act (MAUCRSA), until July 1, 2019, California’s hallmark environmental protection law, the California Environmental Quality Act (CEQA), “does not apply to the adoption of an ordinance, rule, or regulation by a local jurisdiction that requires discretionary review and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity.”

• Governor’s Budget Trailer Bill extended to July 1, 2022

Temporary and Provisional Licenses• Assembly Bill 97, a trailer bill passed by the California State Legislature and signed

into law earlier this month, contains provisions that modify the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Key provisions affecting cannabis cultivators and potential applicants are highlighted below.

Provisional Licenses• Applicants are no longer required to hold or have held a temporary license to be

eligible for a provisional license, and the sunset date for provisional licenses has been extended to January 1, 2022.

• Provisional licensees must adhere to all statutory and regulatory requirements, including use of the California Cannabis Track-and-Trace system. To be eligible for a provisional license, the applicant must submit a complete annual license application and be in the process of complying with local ordinances and completing requirements for the California Environmental Quality Act (CEQA).

Recent Legislation

• AB 404 - This bill authorizes a testing laboratory to amend a certificate of analysis under these provisions to correct minor errors, as defined by the Bureau of Cannabis Control.

Recent Legislation

• AB 420 - Requires a manufacturer of food that includes industrial hemp to be able to demonstrate that all parts of the plant used in their food come from a state or country that has an established and approved industrial hemp program

Recent Legislation

• AB 858 - The Department of Food and Agriculture may issue cannabis cultivation licenses to commercial cannabis businesses that differ depending on the size of the cultivation site and whether the site is indoor, outdoor, or mixed-light, which includes a Type 1C, or “specialty cottage,” that authorizes a licensee to engage in cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold, to be determined by the licensing authority, of 2,500 square feet or less of total canopy size for mixed-light cultivation, up to 25 mature plants for outdoor cultivation, or 500 square feet or less of total canopy size for indoor cultivation, on one premises. This bill would instead, for outdoor cultivation authorized by a Type 1C license, require the licensing authority to determine a maximum threshold of 2,500 square feet or less of total canopy size, with the option to meet an alternative maximum threshold to be determined by the licensing authority of up to 25 mature plants.

Recent Legislation

• AB 1291 - This bill requires an applicant with 20 or more employees to provide a notarized statement that the applicant will enter into, or demonstrate that it has already entered into, and abide by the terms of a labor peace agreement. This bill also requires an applicant for a state license under MAUCRSA, if the applicant has less than 20 employees and has not yet entered into a labor peace agreement, to provide a notarized statement as a part of its application indicating that the applicant will enter into and abide by the terms of a labor peace agreement within 60 days of employing its 20th employee.

Recent Legislation

• SB 34 - This bill, the Dennis Peron and Brownie Mary Act, authorizes, on and after a specified date, licensees that are authorized to make retail sales to provide free cannabis or cannabis products to a medicinal cannabis patient or the patient’s primary caregiver if specified requirements are met, including that the cannabis or cannabis products otherwise meet specified requirements of MAUCRSA

Recent Legislation

• SB 223 - Jojo’s Act, which authorizes the governing board of a school district, a county board of education, or the governing body of a charter school maintaining kindergarten or any of grades 1 to 12, inclusive, to adopt, at a regularly scheduled meeting of the governing board or body, a policy, as provided, that allows a parent or guardian of a pupil to possess and administer medicinal cannabis, as defined, at a schoolsite to the pupil who is a qualified patient entitled to the protections of the Compassionate Use Act of 1996, excluding cannabis, as defined, in a smokeable or vapeable form.

Recent Legislation

• SB 595 - Requires a state cannabis licensing authority, on or before Janurary 1, 2021, to develop and implement a program to provide a deferral or waiver for an application fee, a licensing fee, or a renewal fee for a needs-based applicant or needs-based licensee. The bill would require at least 60% of the total dollar amount of deferrals of fees pursuant to the program to be allocated to the deferral of fees for local equity applicants and licensees, and would require at least 60% of the total dollar amount of waivers of fees pursuant to the program to be allocated to the waiver of fees for local equity applicants and licensees. The bill would authorize a licensing authority to adopt emergency regulations to implement these provisions. The bill would condition its operation upon an appropriation in the annual Budget Act or another statute for purposes of this provision.

Near Misses

• Gov. Newsom vetoed Cannabis on Party buses/limousines

• Fall back on existing rule protecting employees from second hand smoke for now

• Bill that would of allowed dying patients to use smokeless forms of medical marijuana in hospitals, skilled-nursing facilities and hospices.

No Direction

• CBD• AB 228 (or similar legislation)

• Cannabis cafes/lounges• AB 1465

• Vaping• Seems to be being addressed locally,

state legislation was tabled

Black Market v. Legal Market

• Black Market Valuation ~ $9 billion

• Legal Market Valuation ~ $3 billion

• Cannabis remains unavailable in much of the state

• Communities have either banned commercial activity or failed to establish local rules for sales and growing.

Taxation

• Sales and Use Tax

• In California, all retail sales of tangible personal property are taxable unless the law provides a specific exemption.

• Cannabis Excise Tax and Cultivation Tax

• Effective January 1, 2018, a 15 percent excise tax is imposed upon retail purchasers of cannabis and cannabis products. The 15 percent excise tax is calculated based on the average market price of the retail sale.

• In addition, a cultivation tax on all harvested cannabis that enters the commercial market is imposed on cultivators at a rate of:

• $9.25 per dry-weight ounce of cannabis flowers,

• $2.75 per dry-weight ounce of cannabis leaves, and

• $1.29 per ounce of fresh cannabis plant.*

• http://www.cdtfa.ca.gov/industry/cannabis.htm

State Licenses

• What type of licenses do I need?

• Where do I start?

• What department regulates what?

• Tax Permits?

Local Ordinances and Licenses

• Which uses to allow?• Where should they go?• How many?• Business License or Zoning or Both? • How to select who gets a license?• Odor Control• Security (at and patrolling the surrounding

area)• Other Issues

What about delivery?

• Bureau of Cannabis Control (BCC) has determined that cannabis delivery must be allowed everywhere within the state of California, including in municipalities that have regulated or banned commercial cannabis.

• SIMPL- Safe Implementation of Marijuana Policy for Local government According to website: County of Santa Cruz; and the Cities of Agoura Hills, Angels Camp, Arcadia, Atwater, Beverly Hills, Ceres, Clovis, Covina, Dixon, Downey, McFarland, Newman, Oakdale, Palmdale, Patterson, Riverbank, Riverside, San Pablo, Sonora, Tehachapi, Temecula, Tracy, Turlock, and Vacaville involved in the litigation.

• Complaint For Declaratory And Injunctive Relief

• Fresno Superior Court

• Alleges that BCC Regulation 5416(d) is invalid because it eliminates the ability of cities and counties to regulate commercial cannabis deliveries within their communities, a key promise in Proposition 64, which legalized commercial cannabis activities in California.

What about delivery?

• Law: Cities cannot prevent a cannabis delivery vehicle from travelling through the city on public roads.

• Reg: A delivery driver may deliver into any jurisdiction within California provided the delivery is conducted in compliance with state law.

• AUMA- complete local control

• Does not say anything expressly in the regulation about local licensing

• Opinion

Cannabidiol (CBD)

• Although California currently allows the manufacturing and sales of cannabis products (including edibles), the use of industrial hemp as the source of CBD to be added to food products is prohibited. Until the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.

Cannabidiol (CBD)

• The California Department of Public Health, Food and Drug Branch (FDB) adopts the federal laws pertaining to food, drugs, cosmetics, and medical devices, and, according to the FDB, the federal FDA has concluded that CBD—whether derived from industrial hemp or cannabis—is, as a Schedule I drug, prohibited in conventional foods, drugs, and cosmetics.

• Federal law in flux…no direction

Industrial Hemp

• "Industrial hemp" means a crop that is limited to types of the plant Cannabis sativa L. having no more than three-tenths of 1 percent tetrahydrocannabinol (THC) contained in the dried flowering tops, whether growing or not; the seeds of the plant; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin produced therefrom.

What does the future hold?

• Licensing has been slow

• Temp, provisional, annual

• Limited Numbers of licenses due to limited municipalities allowing the use

• Addressing cafes/lounges

• AB-1465

• Non-cannabis products

• Consumption allowed in AUMA

• CBD

• FDA DPH

• SB 228 (or similar)

• Growth in Industrial Hemp Industry

• Delivery Kiosks

• Black Market

• Changes in federal law

2019 Best Best & Krieger LLP

Best Best & Krieger

Company/BestBestKrieger

@BBKlaw

Questions?

Henry Castillo, AssociateHenry.castillo@bbklaw.com