Will California’s New Cannabis Regulations Actually Make Legalization Worse?

And what about taxes? Are they going to lower the taxes? Or will cannabis taxes keep getting higher? There is a bill going through the legislature now to lower the taxes, but similar measures have previously been defeated twice over the past two years. Even if the bill passed, it wouldn’t take effect until signed by the governor. Then, it would start in 2021, so no relief will be in sight this year. That is, unless the governor addresses the excessive tax issue in the proposed changes under his budget trailer bill, which is a special legislative maneuver that doesn’t go through the normal committee process. The budget bill can be voted on immediately upon introduction, and it goes into effect as soon as the governor signs it.

Every change, so far, has hit all of us in the cannabis world hard. In 2015, the Medical Cannabis Regulation and Safety Act (MCRSA) was approved by the California legislature and signed by Governor Brown. Then, in 2016, Proposition 64 — the Adult Use Marijuana Act (AUMA) — was approved by the voters of California. In 2017, the two laws were combined and “streamlined” into Senate Bill 94 (SB94). Every one of these Big Changes brought the extinction of tens, if not thousands, of small cannabis entrepreneurs, and along with that, the loss of tens of thousands of jobs.

After January 2018, when recreational cannabis became legal in California, disruption continued with the step-by-step implementation of new laws and regulations. Basically, every six months, tighter and more onerous restrictions have been imposed. More businesses have gone under, and more jobs with them. Many previously “semi-legal” businesses and co-ops have folded, because they couldn’t complete the application in time. Seemingly simple changes, such as larger print on warning labels, child-proof containers, or additional lab tests incurred even more costs, putting more out of business.

Most insulting of all, in July 2018, cannabis products were pulled from shelves and destroyed, without reimbursement, because of non-compliance with new rules — rules which had changed at least four times since 2015. As a result, patients were denied their medicine, and compliant businesses lost a lot of money. This was in violation of Prop. 215 which authorized medical use of cannabis in 1996 for those who had a doctor’s written recommendation. It also meant that either the retailer or the cultivator had to eat the loss. So, more companies went out of business, and more people were laid off.

But many more stayed underground, as the old-timers began to see what was happening to those who tried to be legally compliant.

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Now that another Big Change is coming, what’s left of California’s cannabis community has to ask the following:

• Is this change necessary?
• Will it do any good?
• Are the worst parts (taxes) going to be changed?
• Has the worst already happened?
• Is the cannabis world that existed until 2015 totally extinct?

The largest stakeholders in a heavily regulated, heavily taxed cannabis industry have piles of money to pay lobbyists and to contribute to political campaigns: Big Pharma, Big Tobacco, Big Alcohol, Big Cosmetics, labor unions, cities and counties, and police chiefs. All have a greedy interest in the cannabis business. The legacy of craft, heritage, small-scale entrepreneurs hardly stands a chance.

But Prop. 64 was a ballot initiative that specifically promised to protect small cannabis businesses. To quote from Prop. 64:

Section 2. Findings and Declarations

J. The Adult Use of Marijuana Act ensures the non-medical marijuana industry in California will be built around small and medium sized businesses by prohibiting large-scale cultivation licenses for the first five years. The Adult Use of Marijuana Act also protects consumers and small businesses by imposing strict anti-monopoly restrictions for businesses that participate in the non-medical marijuana industry. [Emphasis ours…]

Well, so far, the implementation of the program certainly has not done that. Was this a typical bait-and-switch operation?

The intent to protect small- and medium-sized businesses was already violated when SB 94, the bill that consolidated MCRSA with Prop. 64, allowed vertical integration with no limit on the number or type of permits allowed to any single person or entity. Vertically integrated entities could own and control the entire process from breeding and sprouting the seed, to processing the harvest, to manufacturing, packaging, delivery, and then making the final retail sale. Any individual (provided they weren’t a felon) or any company could effectively cultivate on as many acres as they could buy, or own as many dispensaries as they could afford. This was the Big Change that allowed the big corporations to steamroll its way into an industry originally founded by small farmers and cooperatives.

And here’s the kicker: The governor’s new proposal would not change this unlimited licenses rule.

Consider that, prior to 2016, there were 50,000 to 60,000 pot farmers, and at least 20,000 cannabis dispensaries, clubs, and co-ops all operating in a paranoid grey area right before the Attorney General of California issued by then Governor Jerry Brown’s new rules in 2008.

At the moment, there are only about 3,000 licensed cultivators in California, a mere 5 percent of the presumed number of growers in 2015. But big money has already come in, with some newly created business entities possessing 20 to 30 cultivation licenses, from the smallest to the largest allowed canopy tiers. Similarly, there has been a drastic reduction in the number of retailers, currently around 800, of which 150 or so are delivery-only — in other words, non-storefront operators.

Will this new Big Change bring back any of those who have already gone out of business? Will it bring back any lost jobs? Will the change inspire or entice any of the thousands of underground cultivators to sign up for the regulated program, and if so, what are the incentives? There are only permits, fees, taxes, and the high costs of state compliance to enter a legal marketplace that barely exists.

Is California’s Government Breaking Its Own Promises?

Now, let’s take a look at what else Prop. 64 promised and see what the state actually delivered.

Section 2. Findings and Declarations

1. The Adult Use of Marijuana Act creates a comprehensive regulatory structure in which every marijuana business is overseen by a specialized agency with relevant expertise. The Bureau of Marijuana Control, housed in the Department of Consumer Affairs, will oversee the whole system and ensure a smooth transition to the legal market, with licenses issued beginning in 2018. The Department of Consumer Affairs will also license and oversee marijuana retailers, distributors, and microbusinesses. The Department of Food and Agriculture will license and oversee marijuana cultivation, ensuring it is environmentally safe. The State Department of Public Health will license and oversee manufacturing and testing, ensuring consumers receive a safe product. The State Board of Equalization will collect the special marijuana taxes, and the Controller will allocate the revenue to administer the new law and provide the funds to critical investments. [Emphasis ours…]

Obviously, adult-use legalization has been anything but a smooth transition. It’s more like a series of extinction events for the legacy farmers, retailers, and the back-hills medicinal manufacturers.

The governor is now proposing to take oversight away from those “specialized agencies with relevant expertise”— the CDFA, the CDCA, and the CDPH — and transfer the authority into a new agency that will control everything having to do with cannabis. Granted, even these specialized agencies haven’t been able to make the system work, but if they can’t do it, how will creating yet another agency by bunching them all together do any better?

Navigating a Labyrinth of Never-Ending Regulations

Maybe it’s not the state’s licensing agencies that are really the problem, though. Maybe it’s the 58 different sets of ordinances, regulations, permit fees, and tax systems that California’s 58 counties have enacted independently of one another. To make matters worse, individual cities within those counties also have additional rules, fees, and taxes on top of the county’s and the state’s.

Or, maybe it’s the super-stringent rules that the California Department of Fish and Wildlife applies only to cannabis, but not for all other agricultural crops. Or, maybe it’s the State Water Resource Control Board’s strict water-use restrictions that, again, only apply to cannabis and not for all other crops. Or, is it the pesticide, mold, and contaminant testing requirements for cannabis that even fruits and vegetables at Whole Foods could not pass?

Perhaps the problem is that the regulations change every six months. Or it could be that so many new people were hired to staff the new sub-groups within each agency that no one really knows what they are doing. Maybe they did not actually have the “relevant expertise,” after all. And at the county level, at least, there have been so many turnovers and replacement hires among regulatory staff that one new worker in the Building Department opined that I probably knew the county codes better than he did, since I had been involved in the cannabis markets for so much longer than he had.

In addition, Prop. 64 imposed unrealistic deadlines for each new phase of the program, making it difficult for the government agencies to create new rules and even more difficult for the cannabis businesses to meet the new requirements. Further, every department also had to create totally new computer programs so that applicants could upload their materials directly to the state. Of course, this new IT had bugs. And many of the legacy cultivators are off-the-grid and not quite computer-friendly. Will the Big Change simplify computer access and minimize costly and time-consuming glitches?

Legal Definitions Have Real-World Consequences, Too

Nevertheless, the consequences of this new Big Change are potentially very harmful to the cause of the small organic cultivators, manufacturers, distributors, and retailers.

The problem for the farmers is that if the Department of Food and Agriculture loses oversight of cannabis cultivation, the chances of cannabis being declared an agricultural crop or agricultural commodity will be even more remote. This is not an insignificant distinction.  Currently, California defines cannabis as an agricultural product, not a crop. In contrast, in California, hemp is defined as a non-edible agricultural commodity.

Yet cannabis is the same plant as hemp! The only difference between hemp and cannabis is that hemp cultivars have less than 0.3 percent THC. Otherwise, until you test it or smoke it, no one can tell the difference. One solution for fix part of California’s regulatory mess, then, is crop designation for cannabis.

How is cannabis not also a crop? The farmer takes a seed or clone, puts it in the ground, fertilizes it, waters it, harvests it, dries it, and then consumes it or sells it for consumption by others. For all other crops (except tobacco), there are already established pesticide regulations, organic standards, and numerous other environmental regulations — we don’t have to reinvent the wheel.

As mandated by Prop. 64, which was approved by California’s voters, cannabis should be regulated by the Department of Food and Agriculture. Further, it should be defined as an agricultural crop. If cannabis is taken away from the CDFA, will farmers be eligible for all the programs that the CDFA has to assist and educate farmers? The University of California’s agricultural extensions, crop insurance, crop loans, banking privileges, agricultural discounts, and protection under the Right to Farm laws all depend on cannabis being designated an agricultural commodity or crop. At the moment, cannabis farm workers are not classified as farm labor. If cannabis were deemed a crop, it would have wide-reaching effects on taxes and overtime pay for agricultural workers in cannabis, potentially reducing labor costs.

Cannabis testing labs, distributors, retailers, and product manufacturers should be monitored by the same agencies that already regulate similar industries, like other agricultural testing labs, supermarkets, commercial kitchens, or dry cleaners.

If Anything, California Needs More Cannabis Stores Than Anything Else

But the governor’s proposal won’t do anything to solve the real problem in California, which is simply that the cannabis market has only about 800 licensed retail stores available to sell the product. Just 800 cannabis shops for a population of 38 million people! That’s only one store for every 47,500 residents, and we’re not even counting tourists here. Think, for a second, about how many places in Cali you can buy booze or cigarettes — it must be in the hundreds of thousands. Oregon has more cannabis retail outlets than California, but only one-tenth of the population.

As a result, in California, we have very few places for the farmer to sell or for the consumer to buy. Why is that? Prop. 64 gave counties and cities the right to opt-in or opt-out of retail cannabis sales, in whole or in part. Of the 58 counties in the state, only 20 have authorized any cannabis business within their borders, which means the other 38 said no and opted out!

Just as Gov. Newsom’s upcoming Big Change does not address the underlying problems in the regulated cannabis industry, his proposal will not take this opt-out provision away from local jurisdictions, either. Opt-out provisions are the key impediment to bringing more retailers into the legal market. Cities and counties that have chosen to keep cannabis out of their jurisdictions have, in effect, prohibited legal cannabis. In doing this, they negated the Purpose and Intent of Prop. 64:

Section 3. Purpose and Intent. 

1. Take non-medical marijuana production and sales out of the hands of the illegal market and bring them under a regulatory structure that prevents access by minors and protects public safety, public health, and the environment. [Emphasis ours…]

Ironically, by prohibiting legal cannabis and contravening the will of the local electorate, these provincial small-minded powers-that-be have effectively facilitated the continuance — indeed, the flourishing — of the illicit market. In addition, if most, if not all, cities and counties would allow regulated cannabis sales, they could enforce zoning codes, spur economic development, collect reasonable taxes, and make safe medicine available to their citizens. The ongoing vaping crisis shows that the public health is not being protected, because virtually all of the poisonous vape pens responsible for vaping-associated lung injuries were purchased illegally.

Ironically, Legalization Has Emboldened the Illicit Markets

Another aspect of Prop. 64 had to do with taxes:

Section 3. Purpose and Intent.

(s) Tax the growth and sale of marijuana in a way that drives out the illicit market for marijuana and discourages use by minors, and abuse by adults. [Emphasis ours…]

The imposed taxes on adult-use cannabis have done the exact opposite of Prop. 64’s Purpose and Intent. They are unfair and extremely high, making legal cannabis twice as expensive as pot sold through the underground market. Excessive taxes are one of the principal reasons that the illicit market is back and stronger than ever. Sky-high taxes cause undue hardship on those intrepid few who have entered into the process of becoming compliant.

It is often the case that when a new industry wishes to enter a community, they are offered tax incentives and other considerations such as zoning variances to attract businesses, which subsequently promise to create jobs for the community.  When Twitter or Amazon want to open offices or fulfillment centers, local governments fall all over themselves offering incentives to move these businesses to their cities. Not the case when the business is cannabis.

Here, we have just the opposite. Cannabis was once a thriving industry throughout the state, and now the unsuccessful attempt at legalization is killing an entire industry that generates billions of dollars annually and employs untold hundreds of thousands of workers. Further, the money grown out of the soil was, traditionally, spent by resident farmers and their employees within their own communities. Now, big corporations will extract this money from local communities.

There’s more, still.

Section 3. Purpose and Intent.

(x) Reduce barriers to entry into the legal, regulated market.

Sec. 14.  26014.

(a) …while ensuring a regulated environment for commercial cannabis activity that does not impose such barriers so as to perpetuate, rather than reduce and eliminate, the illicit market for cannabis. [Emphasis ours…]

Despite Prop. 64’s Purpose and Intent, barriers to entry have not been reduced. On the contrary, barriers for cannabis entrepreneurs are higher than any other industry and are preventing small cultivators and businesses from coming into the legal market. The joke is that there are even more hoops to cannabis compliance now than there are in the March Madness Basketball Tournament. Which current barriers will the governor’s new plan remove? There are no details on this, as of yet.

There is another stipulation in Prop. 64 that has been disregarded, not to say egregiously violated:

Section 12 and 26013 of the Business and Professional Code

(c) …nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson. [Emphasis ours…]

In the final analysis, four years later, it is now clear that the rollout of California’s cannabis regulations have not come close to fulfilling the Purpose and Intent declared in Prop. 64, a Purpose and Intent that was voted on by the public. The cumulative effect of the punitive taxes and the singularly extreme regulations has made “compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent business person.”

It appears that, for the moment, the smart businesspeople are the ones who stayed in the illicit market. Think about it: Underground marketeers have no taxes, no permits, no consultants, no upgrades, and no inspections to pay for, and they’re selling to three-quarters of California’s market at prices far lower than compliant businesses offer.

It’s Not Quite Over Yet, Though

Will the governor’s new plan remove any of the onerous regulations mentioned above? I want to see the details before I can support the proposal. The whole thing looks more like a reshuffle rather than making any meaningful changes in a failed program.

The entire cannabis community would do well to unite to protest the government’s failure to fulfill the “Purpose and Intent” and “Findings and Declarations” of Prop 64. Specifically the state has:

• failed to remove barriers to entry,
• failed to reduce the illicit market,
• failed to protect the public health,
• failed to make cannabis medicine more easily available to patients in need of medicine by imposing punitive taxes,
• failed to protect small- and medium-sized businesses or to prevent monopolization,
• failed to “ensure a smooth transition.”

The language from Prop 64 cited above is what the people of California voted for in 2016, but the state has not fulfilled this mandate. The cumulative effect of all these failures is a thriving illicit market, the one thing this entire legalization exercise was meant to stop.