Building a Cannabis Industry in California: Can We Learn From Other States

Story by Dale Schafer

     California’s 1996 initiative (Prop 215) began the change, in this state and across the nation, in how cannabis is viewed. As problems developed with production and distribution, our Legislature passed the Medical Marijuana Program Act (MMPA or SB 420) in 2004, which allowed for collective/cooperative cultivation projects. Distribution was handled by dispensaries, where some taxes were collected but the rest of the stream of commerce remained unregulated, untaxed and essentially running wild. Local cities and counties began to enact bans on all parts of the industry, supported by our courts. In turn, deliveries have taken off. Nature abhors a vacuum.
     In October, Governor Brown signed the Medical Marijuana Regulation and Safety Act (MMRSA) and now we are off and running. Local bans proliferated in the face of a March 1, 2016, deadline for state grow limits. That deadline has since been removed, but local politics are running wild as competing political interests battle over different initiatives, more local ordinances and demands that politicians open their eyes to the reality of cannabis being part of life.
     MMRSA sets up a seed-to-patient system of tracking cannabis. Regulations will be enacted to deal with water use and discharge, pesticides, transportation, distribution, manufacturing, testing, dispensing and, of course, cultivation. There will be fees and local taxes, but none yet at the state level.  Additionally, local counties can still totally ban all cannabis activities, even personal medical grows.
     Waiting in the wings is our recreational initiative, the Adult Use of Marijuana Act (AUMA). It closely follows the regulatory outline of MMRSA, but imposes some hefty production and excise taxes. Small personal grows will be protected from local bans, and a personal cultivator may maintain products of the grow, but can only lawfully be in possession, away from home, of one ounce of bud or 8 grams of concentrate. For those over 21, recreational cannabis possession and private use will be legal. The industry that will provide, distribute, transport, manufacture, test and dispense cannabis under AUMA, and MMRSA, is yet to be built. Participants are lining up for an opportunity at this multibillion dollar venture.
     Both MMRSA and AUMA have similar frameworks upon which state regulators will build. Cultivators may be permitted locally, and state-licensed for multiple sizes, depending on square footage of canopy and whether growth takes place outdoors, indoors or in mixed light. In order to give smaller cultivators a foothold, larger grows—up to 1 acre outdoors and ½ acre indoors or under mixed light—will be limited under MMRSA.
     Under AUMA, grows over an acre outdoors and over ½ acre indoor or under mixed light—deemed large grows—will not be licensed until January 1, 2023. Transportation will be either licensed or regulated to ensure that buds and shake get to distributors where inspections and testing will occur. All movement of cannabis will be strictly tracked in a state database as it proceeds from cultivator to consumer.
     Testing will be compulsory and standardized. Once tested, cannabis can be packaged with strict labeling and control, or proceed on to licensed manufacturers for further processing or concentration. After the manufacturing process of concentrates and oils to edibles, additional testing is required, before final packaging. Packaging will also require listing of cannabinoids, terpenes, potential allergens and abundant warnings.
     When a consumer finally receives the cannabis, fees and costs will have been collected under MMRSA and hefty taxes added under AUMA. A final sales tax will be collected by the dispenser, who can deliver.
     All along the stream of commerce, opportunities abound for people—loosely defined as almost anyone—to enter this for-profit industry.
     MMRSA has no residency requirements, while AUMA requires two years of state residency. MMRSA limits vertical integration of licenses, while AUMA does not—except for testers, distributors and transporters. The other industries to service the new cannabis industry will also be built, although they will not necessarily require licensure. With financial backing, a good business plan, decent business IQ and a willingness to work within California’s crazy local control structures, the future looks bright.
     Our cannabis Czar, Lori Ajax, has acknowledged that the black market is waiting to service cannabis consumers if the taxes are too high or the regulations too burdensome. Small personal medical grows, or the six plants of AUMA, can hopefully avoid the problems of Colorado’s medical grows of up to 99 plants. Allowing at least some personal grows can also avoid Washington’s problems of limiting legal product to dispensaries only. Of course, the number and placement of licensees in relation to production and consumption areas will be critical, so demand can be met. The next year and a half will hopefully clarify the local jurisdictions that will allow, or restrict, cannabis activities within their boundaries.
     Both MMRSA and AUMA are written to allow the little guy an opportunity to get in the game, before the truly large commercial ventures are unleashed. In areas like the Los Angeles basin, consumption will create great demand. Areas like the Emerald Triangle, or the San Juan Ridge, will demand control over their appellations, and small, vertically integrated microbusinesses will thrive. Many local jurisdictions are already willing to allow cannabis activities and more should follow, as the benefits of regulation and taxation over criminal prosecution become more apparent.
     The ballot in November will help to clarify what laws will be in effect in California and what local ordinances will allow, as the cannabis industry begins to build in California. We are watching and trying to learn from other states that have already begun building their industries. However, the rest of the country and the world are watching as California begins to build its cannabis industry. The future seems bright.
     For more information about, or to contact, Mr. Schafer please go to www.daleschaferlaw.com