Legislative action needed to keep California’s legal cannabis industry afloat

Legislative action needed to keep California’s legal cannabis industry afloat

Photo Credits: RAEL HANUS / AGGIE FILE

California Senate Bill 67 proposed to revalidate cannabis farmers’ temporary licenses

California’s legal cannabis industry is about to experience a shortage in its marijuana supply, experts say, as nearly 10,000 cultivators’ licenses are set to expire by the end of April. Without a valid license, these farmers will be forced by the state government to halt their operations.

This is expected to cause major disturbances down the industry’s supply chain if a legislative fix doesn’t pass. Enter California Senate Bill 67. Published on Feb. 19, SB 67 would revalidate temporary licenses for farmers who have submitted their applications for a permanent annual license.

“If SB 67 doesn’t happen, that will have repercussions up and down every single aspect of the supply chain,” said Matt Z’Berg, the vice president of public affairs for Perfect Union retail stores, Fireworx Farms and Metta Distribution and Transportation LLC. “So cultivator, distributor, testing lab, retail — retail includes store and delivery only dispensaries — and then there are manufacturers too. Seed to sale, everything begins with the cultivator.”

Starting on Jan. 1, 2018, cannabis farmers were able to apply for temporary CalCannabis Cultivation Licenses through the California Department of Food and Agriculture (CDFA). This cultivation license is required to commercially grow and distribute to dispensaries in California.

These temporary licenses were valid for 120 days with an option for 90-day extensions. The extensions allowed commercial cannabis farmers to continue their operations as they applied for permanent annual licenses. Close to 3,000 licenses have already expired, with the remaining set to expire by April 30. Although 7,000 farmers got their applications in on time, only 52 Adult-Use Cannabis Cultivation licenses have been approved, according to the CDFA license database.

The issue is that it could take up to two months for the bill to reach Governor Gavin Newsom’s desk, leaving farmers unable to distribute their bud and posing a threat to the legal cannabis market.

“Even if they do that super fast — get it to committee and get it passed as soon as possible — there are going to be lots of temporary license holders that have no clear path forward and are going to have a legal and ethical quandary as to whether to continue their operations or not,” said Gabriel Garcia, Principal at Garcia Law Corporation.

The bill has an urgency clause that would allow the temporary license extensions to take immediate effect once signed.

“It’s going to create some very interesting issues, not only from a criminal law aspect, but also it’s going to be a civil act because there will probably suits against the state — you can imagine that,” Garcia said.

The newly legalized marijuana industry in California has experienced turbulence in its transition to becoming a government-regulated industry, and this poses the biggest detriment yet. SB 67 serves as a bandage, an immediate fix to buy the CDFA more time to process these applications.

“SB 67 is trying to right a wrong that is currently happening, which is that […] the desks at the state level are piled up too high with these cultivators trying to get their application to the state for their annual license,” Z’Berg said.

Z’Berg is part of a vertically-integrated cannabis operation in Sacramento that encompasses cultivation, distribution and retail — a rarity in the cannabis industry. At the time of the interview, the temporary cultivation licenses for all three Fireworx Farms locations were still valid, but upon publication, one of their licenses had expired.

“We have applied for our state annual license, but obviously we haven’t gotten it yet,” Z’Berg said.

Z’Berg said this backlog was a long time coming, posing the question, if the CDFA issued nearly 10,000 temporary licenses, how did this pile up happen? Did the CDFA not expect a large number of these temporary license holders to apply for their permanent licenses before their expiration date?

“I don’t think that [the CDFA] didn’t prepare, I think we are in a challenging situation given that in 2018 the regulations were in flux and we had five different drafts of the regulations,” said Jacqueline McGowan, a consultant at K Street Consulting LLC, who also works for several operators throughout the cannabis supply chain and industry.

Farmers had to consistently modify their annual license applications to adhere to a fluctuating regulatory environment. These readjustments created more work for both the CDFA and cultivators, forcing the CDFA into a time crunch.

In 2016 — 20 years after California became the first state to legalize medical marijuana — Proposition 64, the Adult Use of Marijuana Act (AUMA), was passed, legalizing cannabis for adult recreational use. On June 27, 2017, Governor Jerry Brown signed Senate Bill 94 into law, which consolidated the Medicinal Cannabis Regulation and Safety Act (MCRSA) and Prop 64 to form a singular regulatory and taxation framework called the Medicinal and Adult Use of Cannabis Regulation and Safety Act (MAUCRSA).

Of California cities, 85% still ban recreational dispensaries. Regardless of the state law, SB 94 gives local governments the ability to issue licenses, zone or ban cannabis businesses through a dual-licensing system.

Unique to the state of California, this dual licensing means that both state and local governments set regulations for the industry — all operators must abide by the state regulations, but local governments can tack on additional regulations. In order to obtain state cultivation licenses, businesses must be granted local licenses first.

This complicated policy framework is putting a stress on the legal market, which is already struggling to compete with the ever-present black market.

“All this is doing is helping fuel the black market that we then have to compete with,” McGowan said. “I don’t like to call it black market — I like to call it ‘duty-free’ — and the duty-free market is winning at the moment, while the legal industry is in a severe recession.”

The California Cannabis Advisory Committee within the Bureau of Cannabis Control (BCC), said in its 2018 annual report that the regulatory process has not given unlicensed businesses incentive to seek licensure, and has not de-incentivized the underground market in order to effectively protect public health and safety.

“The dual nature of the licensing process (i.e., state and local) has created a bottleneck in licensing at the local municipal level where unless a local municipality actually issues a license, permit, or other authorization, businesses are not able to apply for a state license,” the report stated.

In addition to filing 44-page license applications, businesses must also pay a steep annual fee, ranging from a couple thousand dollars to $78,000, depending on the size and type of site.

“The black market isn’t just about people who are gangsters and felons and weird stuff like that, they are people who are pointing a finger at SB 67 and this whole problem and saying, ‘see, look at how jacked up this whole thing is,’” Z’Berg said.

Cultivators are also taxed $9.25 per dry-weight ounce of cannabis flowers, and $2.75 per dry-weight ounce of cannabis leaves, which are collected by manufacturers and distributors and paid to the state. For small farms that have been distributing to the medical market for decades, these ‘excessive regulatory burdens’ that came with Prop 64 would be enough to put them out of business, which is why many are staying in the ‘duty-free’ market.

In February, the California Department of Tax and Fee Administration (CDTFA) reported $103.3 million in tax revenue at the end of the fourth quarter, far below the initial $185 million estimate.

Taxes collected by the state from across the industry through Prop 64 are allocated to community grant programs that fund job placement assistance and substance use disorder treatment, California universities to evaluate effects of the measure and studies that measure the risks and benefits of medical cannabis and the California Highway Patrol to create and adopt methods for detecting impaired driving.

As policymakers are quickly learning, there are still logistics that need to be worked out.

“Many of these temporary licenses will expire in the coming months, and we are making every effort to complete the review of the annual applications for business entities operating under soon-to-expire temporary licenses,” said Rebecca Forée, the communications manager in the CalCannabis Department at the CDFA, via email. “However, it can take months to complete this application review process because an annual license application has more requirements than a temporary license application.”

The way the system is set up now, it can take many months for the CDFA to process a single application.

“Each application must first go through a local authorization verification process before it can be reviewed by the state, and local jurisdictions have up to 60 business days to respond to this request for local authorization,” Forée said.

The applicant must receive approval, or no objection from local jurisdiction in the 60-day period. From there, the application moves through two more stages, each of which can take up to 90 days to process.

“Incomplete applications cause many delays in this process, as each applicant has to be notified about any deficiencies in his or her application, and applicants are allowed 90 days to respond to deficiencies,” Forée said.

Forée confirmed that this “backlog” was expected, and said that the CDFA was prepared for the volume of applications.

“Processing the annual licensing applications is our top priority and staff at CDFA’s CalCannabis Cultivation Licensing Division have been working overtime to expedite the process wherever possible,” Forée said.

Despite the CDFA’s preparedness, the legislative fix from SB 67 is necessary to keep the legal cannabis industry running.

“The bottom line is this: This bill is going to protect thousands of cannabis farmers, in particular, who did the right thing and applied for a state license after the passage of Prop. 64 but their temporary license is about to expire,” said Senator Mike McGuire, the lead sponsor of the bill, in a hearing, according to The Sacramento Bee.

As for the cultivators whose licenses have already expired and can no longer distribute their product, they must decide whether to halt operations, or proceed with caution.

“I don’t see why there would be opposition to [SB 67] by anybody because the legislature has already decided to have this legal cannabis market,” Garcia said. “This is a bad situation that needs to be alleviated and can only be fixed through legislative action, so I think they will take it seriously and get it to committee as quickly as possible to buy the agencies more time to start approving annual licenses.”

Written by: Grace Simmons — city@theaggie.org

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