Consolidating Cannabis Oversight

Time flies when you are having fun, and it is already the season for many license holders to review licenses issued by the California Department of Food and Agriculture (for cultivation), Bureau of Cannabis Control (for retail), and Department of Public Health (for manufacturing). This means cannabis business owners must recall passwords and login instructions for up to three different State agency online portals, complete similar yet different forms, pay multiple fees, and follow up with numerous staff people to remain in business for the upcoming year. Each agency operates under its own regulations and protocol, so information sufficient for one agency may not be for another. And, processing times can vary dramatically. Keeping a cannabis business compliant with State regulations can be confusing and frustrating.

The current state of affairs is no surprise—it is precisely what canna-preneurs and experienced regulators from other states warned could occur with fragmented commercial cannabis activity regulation. Now inspired by hindsight, Newsom is proposing to consolidate the three State cannabis licensing entities into a single Department of Cannabis Control by July 2021, with details on how this proposal will work expected this Spring. Some consequences of the change could be:

• Delays and complications during the transition, particularly with existing licenses requiring renewal or facing other deadlines that fall during the transition.
• Uncertainty regarding how the multiple existing regulations will be consolidated, particularly where one agency’s regulations are currently more onerous than the others.
• More efficient application and renewal processes, and potentially consolidated fees.
• Streamlined (but potentially more aggressive) enforcement, if resources are allocated. There has been talk among the industry about the State’s interest in increasing its cannabis licensing enforcement efforts.
• Potential uptick in cannabis mergers and acquisitions due to the resulting ease with which vertically integrated businesses will be able to operate (currently a business with a cultivation and retail arm must deal separately with the BCC and CDFA and comply with each agency’s respective regulations).

Tax and Revenue Proposals

The Governor also proposes to simplify cannabis tax administration by shifting responsibility for collecting the cultivation excise tax from the final distributor to the first, and for collecting the retail excise tax from the distributor to the retailer. These changes would address challenges that exist today in supplier and distribution deals where one business pays taxes prior to the final delivery of the product and then must seek reimbursement from a distributor or retailer in the chain of operations. Disputes over collection and payment of taxes can place significant strain on business relationships, especially in a mostly cash-based industry.

Governor Newsom is also considering changes to the existing cannabis tax structure, including a potential rate adjustment, and plans to consult with the cannabis industry and stakeholders on those changes. However, details of the tax proposal are less clear at this time, particularly since Newsom is budgeting for $550 million per year in cannabis tax revenue—a 15% increase over last year. An estimated $332.8 million will be available for allocation this year to meet the priorities specified in Proposition 64, including education, prevention, and treatment of youth substance use disorders and school retention, clean-up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation, and public safety-related activities.

What the Changes Mean for Existing Cannabis Businesses

While the industry response to the proposed changes has largely been favorable, with the United Cannabis Business Association and California Cannabis Industry Association applauding the Governor, the proposed changes may create some difficulties for existing cannabis businesses. Therefore, cannabis businesses may want to:

• Review the details of the proposal when they are available later this year. It may be helpful to sign up for the BCC email list.
• Not wait until the last minute to submit applications to renew or modify existing State licenses. Processing times can vary currently among the various agencies, and delays are almost certain to arise during the transition to a single consolidated agency.
• Reevaluate existing business relationships with retailers and distributors and consider changes that may be needed to reflect the proposed shift in responsibility for taxes.
• Explore opportunities for mergers or acquisitions that may arise from streamlined administration of California’s cannabis licensing.