California Licensing Overview
Although the AUMA (Prop 64) and the Medical Cannabis Regulation and Safety Act ("MCRSA") are in effect, California needs some time to set up the necessary agencies, information systems, and regulations to actually begin issuing licenses. Currently, California is waiting in anticipation for the application process that is tentatively set to begin no earlier than January 1, 2018.
However, California cannabis law has not been at a standstill while awaiting 2018 licensing. On April 4, in the face of the carrying regulations under the MCRSA and Prop 64, Gov. Brown released the Trailer Bill language ("TBL"). The Trailer Bill is attached to the California budget and is set to be voted on in Summer 2017. The Trailer Bill works to reconcile the differences between Prop 64 and the MCRSA and make regulation more straightforward and streamlined by repealing the MCRSA and pasting most of its provisions into the Prop 64 sections.(For more on the proposed regulations, See our Blog Article: Legislative Update: State Trailer Bill & Federal Reform Package Bills Encourage Progress for Legal Weed)
Most recently, however, despite the Trailer Bill's intent to derail the MCRSA and Prop 64,on April 28, 2017, the Bureau of Medical Cannabis Regulations ("BMCR") released proposed regulations for their cannabis licensing process. Proposed regulations were issued by the Department of Food & Ag, the Department of Public Health and the Bureau to set forth regulations for dispensaries, cultivation, manufacturing, testing, transportation etc... With the release of these proposed regulations, a 45-day public comment period was triggered to receive feedback. Currently, the rules and regulations of the California State licensing is under construction in preparation for the January 1, 2018 application release date. (For more on the proposed regulations, See our Blog Article: Time to Speak Up: California Releases Proposed Medical Cannabis Regulations)
The Medical Cannabis Regulation and Safety Act 2015 (“MCRSA”)
Composed of three separate bills – AB 266, AB 243 and SB 643 – the MCRSA[i] creates a comprehensive state licensing system for the commercial cultivation, manufacture, retail sale, transport, distribution, delivery, and testing of medical cannabis. This means that new and existing cannabis businesses ("CB"s) must comply with the state's licensing system in addition to local government permitting, effective January 1, 2016.
Under the MCRSA, a new state agency was established within the Department of Consumer Affairs – The Bureau of Medical Cannabis Regulation (BMCR) - for the purpose of enforcing the MCRSA under the direction of Cannabis Czar Lori Ajax. Several other state agencies are creating departments to oversee and be responsible for different aspects of regulation.
Facilities currently operating in accordance with California and local laws may continue to do so until their license applications are approved or denied. Medical Cannabis Businesses permitted by both a state license and local government will be deemed lawful and are protected from arrest, prosecution, or other legal sanctions.
The Components of the MCRSA
AB 243, AB 266, and SB 643, collectively, make up the MCRSA. Each bill deals with different aspects of licensing and regulating commercial medical cannabis cultivation, manufacturing, distribution, transportation, sales, and testing.
AB 243, among other things, establishes standards for a physician prescribing medical cannabis. The bill requires the Department of Consumer Affairs to have the sole authority to create, issue, renew, discipline, suspend, or revoke licenses for the transportation and storage of medical cannabis.
SB 643 and AB266 (discussed in depth below) work together to create a licensing scheme. Specifically, SB643 engages the following governmental agencies to oversee regulations or standards relating to medical cannabis and its cultivation:
- The Dept. of Food and Agriculture is responsible for regulating cultivation;
- The Dept. of Public Health is responsible for developing standards for the manufacture, testing, production and labeling of edibles;
- The Dept. of Pesticide Regulation is responsible for Developing pesticide standards; and
- The Depts. of Fish and Wildlife and State Water Board are responsible for protecting water quality.
These agencies are incorporated to mitigate the impact that cannabis cultivation has on the environment. This portion of the collaborative Act requires cities, counties, and their local law enforcement agencies to coordinate with state agencies to enforce laws addressing the environmental impacts.
Finally, AB 266 establishes a new Bureau of Medical Cannabis Regulation (“BMCR”) under the Department of Consumer Affairs. The BMCR must establish a comprehensive Internet system for keeping track of licensees and reporting the movement of commercial cannabis and cannabis products. AB266 further creates fines and civil penalties for specified violations of the Act, and would require money be collected as a result of these fines and civil penalties to be deposited into the Medical Cannabis Fines and Penalties Account.
Adult Use of Marijuana Act (“AUMA”) or (Prop 64)
When California voters passed Proposition 215 in 1996 to legalize medical cannabis, the Golden State appeared poised to be the one to set the stage for cannabis legalization in the rest of the country. Since 1996, however, several states – Colorado, Oregon, Alaska, and Washington – and the District of Columbia have beaten California in the cannabis race towards legalization.
Like similar initiatives in Colorado, Washington, Oregon and Alaska, the AUMA sets the stage for the road towards legalization. Although it's not perfect, the 62-page initiative still represents the best practices to-date and has the best chance to replace a failed system of prohibition with an effective, legal and regulated system. With the passage of Prop 64, California now joins the ranks of states that have legalized recreational cannabis.
The AUMA, however, is an extremely lengthy and complex initiative. Its stated purpose is to establish a comprehensive system to “legalize, control and regulate … nonmedical marijuana”[i] activity for adult use, while also consolidating and streamlining it with the current regulations for medical cannabis activity. The AUMA writes hundreds of new restrictions and regulations into state law, but the general gist of the initiative is to:
(1) “semi-legalize” recreational cannabis by allowing adults 21+ to possess up to one ounce of cannabis and cultivate up to six plants for personal use;
(2) regulate and tax the production, manufacture and sale of nonmedical cannabis for adult use (which would be largely patterned on existing MCRSA regulations for state licensing); and
(3) reduce criminal penalties for common cannabis crimes and allow prior cannabis offenders to petition for reduced charges.
In short, the AUMA's biggest change to existing law would be the legalization and regulation of cannabis for nonmedical adult use, leaving all the hard work surrounding medical cannabis intact. Other changes include:
Cannabis Cafés – California is the second state to host Amsterdam-style cannabis cafés, right behind Alaska. The AUMA sidesteps the hassle associated with allowing public consumption by instead allowing localities to permit places for on-site smoking, vaping and edible-ing.
Larger Cultivation Licenses Available in 5 years – Under the AUMA, an additional category of Type 5 cultivation licenses were created for large farms that exceed the MCRSA's current limit of 22,000 sq. ft. indoors or 1-acre outdoors.[ii] This would make Type 5 licenses the largest cultivation licenses available. However, in order to encourage small business growth, no Type 5 licenses will be issued before January 1, 2023.[iii] This is consistent with the AUMA's policy statement related to existing growers: “The [AUMA] ensures the nonmedical marijuana industry in California will be built around small and medium sized businesses by prohibiting large-scale cultivation licenses for the first five years.”[iv]
“Microbusiness” Licenses – The AUMA creates an additional category of Type 12 licenses for “microbusinesses,”[v] which are basically vertically-integrated small farm operations not exceeding 10,000 sq. ft. Basically, think of a craft beer microbrewery or a vineyard tasting room, but for cannabis.
Vertical Integration – Unlike the MCRSA, the AUMA doesn't prohibit vertical integration of licenses. Instead of being limited to only having up two different license types under the MCRSA, the AUMA instead allows a licensee to hold any number or combination of licenses: cultivator, manufacturer, retailer, distributor and tester. There will be one exception: large-scale growers (Type 5) will be prohibited from holding certain other licenses.
Higher Taxes – The AUMA imposes a 15% excise tax on retail cannabis sales (in addition to state and local taxes already in place).[vi] There will also be a cultivation tax imposed on all harvested cannabis that enters the commercial market, at a rate of $9.25 per oz. of dried flowers and $2.75 per oz. of dried leaves. Only medical cannabis patients with a state ID card would be exempt from the existing 7.5+% state sales taxes, but not the other taxes.
Lifting Bans on Personal Indoor Grows – Under the AUMA, adults 21+ will be able to lawfully grow up to six cannabis plants for personal use. Local governments will be allowed to enact local ordinances to reasonably regulate personal cannabis grow. While local governments will be allowed to totally prohibit outdoor grows if they so choose, they cannot totally prohibit personal indoor grows.
Eliminates Mandatory “Distributors” and “Transporters” – Unlike the MCRSA, the AUMA allows, but does not require, that cultivators send their product to Type 11 distributors for transportation to other licensees. This mandatory requirement, modeled on the alcohol industry, is one of the most controversial features of the MCRSA, as it interjects a whole new costly distribution layer between the grower and distributor. The AUMA, however, removes this mandatory “middle-man” from the weed supply chain. Only large-scale growers (Type 5) will be required to use Type 11 distributors under the AUMA. The remaining licensees will be eligible to distribute for themselves.
Small-business friendly – The AUMA will restrain big business by withholding Type 5 licenses for large-scale growers for a period of five years.[vii] The AUMA also throws a lot of obstacles in the way of big business and adds several anti-monopoly sections – e.g. no price fixing, no red lining, no undercutting the competition, no selling at a loss or giving away cannabis to hurt competitors, etc.
[i] AUMA, § 3.
[ii] AUMA, § 26061.
[iii] AUMA, § 26062(d).
[iv] AUMA, §2(J).
[v] AUMA, § 26070.
[vi] AUMA, § 34011.
[vii] AUMA, § 26062