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Even Big Cannabis Struggles in CA Market

California industry giant, MedMen, is selling its holdings in Arizona — a state it entered a little more than a year ago. It is also selling a factory in Illinois to help the multi-state operator cut costs and shore up cash. In part, the company is trimming down its holdings in order to focus more on markets like California.

California cannabis industry a lot to navigate successfully

CNN reported recently that MedMen has been struggling with cash flow problems, falling behind in paying vendors. Speculation ranges between too fast growth and asset grab issues. But most certainly, the Culver City, CA based company struggles to navigate the California market like all licensed cannabis companies in the state who continue to compete with black market cannabis, a part of the industry that persists even three years after legalization and is not beholden to the same requirements.

And another rub for the marijuana industry. Despite reports that MedMen is heading into “bankruptcy”, that is not an option available to marijuana businesses because cannabis remains illegal on the federal level.

All along the supply chain the industry can struggle with the ever-changing regulation landscape. Growers are faced with recalls almost inevitable. The culprits are often mold or yeast, not pesticides or other man made contaminants.

Retailers also compete for business with unlicensed, black market retailers which can look a lot like “real” dispensaries. The BCC recently implemented a requirement to post QR Codes, an attempt to inform the public whether a retailer was licensed and to help protect health and safety.

The industry took a hit, along with non-cannabis vape industry, late last year with the emergence of a lung disease connected to vaping and e-cigarettes consumption, sending even stock offerings plummeting.

California’s 3rd phase of testing regulations went into effect at the end of last year, increasing testing costs to cultivators. Some growers worry that the cost of compliance is getting too high to sustain.

And, of course, the taxing structure in the California industry continues to be daunting, amounting to over 30% of retail price, one of the highest in the nation. The direction of cannabis tax rates does not appear to be going down any time soon, despite attempts by the Legislature to give the industry some relief. The CDTFA increased the markup rate as of the new year, requiring an increase in collection of excise taxes from retailers to distributors.

California Cannabis Industry May See New Regulations

Inside Governor Gavin Newsom’s budget proposal released January 10 are a few proposals that would affect the cannabis industry’s regulation and taxation structure.

A simplification of CA cannabis tax?

With the aim of simplifying the regulatory burden those who enter the legal cannabis industry in California find themselves under, the Administration plans to consolidate the three licensing entities that are currently housed at — the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health — into a single Department of Cannabis Control by July 2021. The hope is that a standalone department will help build a more successful legal cannabis market.

Proposed changes in Newsom’s budget intend to the move the responsibility for the cultivation excise tax from the final distributor to the first, and for the retail excise tax from the distributor to the retailer. Moving the incidence of this tax to the retailer will eliminate CDTFA’s requirement to estimate product mark-up and set wholesale tax rates. The proposed changes would simplify the tax collection burden. The Administration plans to release more detail later in the year.

Newsom’s Administration, in consultation with the industry and stakeholders, says it will consider other changes to the existing cannabis tax structure, including the number of taxes and tax rates to simplify the system and to support a stronger, safer legal cannabis market.

Cannabis Taxes

Ever wonder what other states pay in taxes on cannabis products? The non-profit Tax Foundation has done an analysis of cannabis taxes on states where it has been legal for recreational sales.

Tax burden on marijuana products

It may feel as if taxes in California are high, but in a state like Alaska, where this is no state-wide sales tax, the $50 per ounce levy must feel high.

California is subject to an ever changing tax landscape and starting this year increased its retail markup value – the percentage used to calculate what distributors must collect from retailers – to 80%. These costs get passed along to customers who also pay the local sales tax rate on the products they purchase along with the local marijuana excise tax imposed by the municipality where the dispensary is housed.

When Illinois made recreational sales legal this year they started with a graduated tax system where products are taxed higher based on potency. Even still, they ended up with one of the highest tax rates, topped only by Washington State whose rate is over 43%.

Other states like Massachusetts, Colorado, Oregon and Michigan’s state excise tax hovers around 17%. But, of course, on a state by state and municipality by municipality there are other imposed tax burdens along the supply chain that affect the retail price to customers.

One thing is certain, the taxing landscape is shaping up to be uneven and burdensome in some places, mirroring the convoluted nature of the tax system on beer, wine, spirits and cigarette and nicotine products.

Notification for Track-and-Trace System Users

Track & Trace

MANUFACTURED CANNABIS SAFETY BRANCH

Notification for Track-and-Trace System Users

External transfer functionality will be removed January 15, 2020

Notification for Track-and-Trace System Users

The Track-and-Trace system is being reconfigured to disable External Transfer and Temporary Transporter functionality. This functionality was intended to be used solely to facilitate transactions between annual or provisional licensees who had been credentialed into Track-and-Trace and temporary licensees who had not yet received system access. As there are no remaining temporary licensees in California, this feature will be removed.

Beginning on January 15, 2020, you will no longer be able to transfer cannabis or cannabis products that are not tagged and uploaded as inventory in Track-and-Trace. All manifests for movement of cannabis items will be required to be generated through the Track-and-Trace system. Any pending external transfers must be completed prior to January 15, 2020.

A detailed bulletin about this change is available to system users. To access the bulletin, please log into your Track-and-Trace account and click on the envelope in the upper left-hand corner. Licensees are required to order Package Tags within five calendar days of receiving access to the Track-and-Trace system (§40517). If you have not yet ordered Package Tags, you must do so immediately. After ordering, it takes approximately 10 business days for tags to be delivered. Once you receive your tags, you must use them to document all cannabis inventory held on your premises and record all commercial cannabis activity.

Track-and-Trace System Resources

Detailed instruction booklets for California users of the Track-and-Trace System are available on the Metrc California website, www.metrc.com/california. The California Supplemental User Guide contains the following instructions that may aid you in ordering tags and inputting inventory prior to the removal of the External Transfer functionality:

  • Ordering Package Tags – page 48
  • Receiving Package Tags – page 52
  • Creating Packages from Existing Inventory – page 88

In addition, the California Transition Period Guide contains instructions for new users, including steps for uploading beginning inventory. 

California Cannabis Track and Trace Reporting Requirement

Legal Weed

All California License Holders,

All license holders are required to conduct the commercial cannabis activity pursuant to their license within the California Cannabis Track-and-Trace (CCTT-Metrc) System. Failure to conduct your commercial cannabis activity within the CCTT system by January 6, 2020 will result in the suspension of your license.

If you have not yet completed the required Account Manager training, please register for training by visiting: California Cannabis Track and Trace Account Manager Training. Please reference your annual application number. 

If you have completed the required Account Manager training, please contact Metrc support at support@metrc.com to complete the credentialing process.  

If you are credentialed, but not yet tag enabled, please forward your existing inventory to bcctrackandtrace@dca.ca.gov. Your inventory should contain the following information:

  • Item Name
  • Product Type (i.e. vape cartridge, tincture, edible)
  • Weight Per Unit (i.e. 3.5 grams, 300ml, 10mg)
  • Quantity
  • Batch ID

Upon receipt and review of your inventory, the Bureau will increase your tag allotment, at which time you can log into your portal to initiate your tag order. 

If you are currently credentialed and tag enabled, you are required to immediately begin working within the California Cannabis Track and Trace (CCTT) system, as well as with those annual/provisional license holders who are also working within the CCTT system.

Failure to conduct your commercial cannabis activity within the CCTT system may be grounds for disciplinary action and the suspension of your license.

Changes to Cannabis Excise and Cultivation Taxes Regulation

Special Notice

The California Department of Tax and Fee Administration (CDTFA) recently adopted Regulation 3700, Cannabis Excise and Cultivation Taxes, which addresses and clarifies the Cannabis Tax Law regarding the administration of the cannabis excise and cultivation taxes. The effective date of the regulation is September 4, 2019, unless otherwise specified in the regulation.

New wholesale cost definition

Effective January 1, 2020, the wholesale cost definition will mean the amount paid by the cannabis retailer for cannabis or cannabis products, including transportation charges. The wholesale cost plus a mark-up rate determined by the CDTFA is used to determine the average market price of the cannabis or cannabis products sold in an arm’s length transaction. The 15 percent cannabis excise tax applies to the average market price of cannabis or cannabis products sold in a retail sale. Prior to January 1, 2020, the wholesale cost is the amount paid by the retailer, including transportation charges and adding back any discounts or trade allowances.

Cannabis or cannabis products sold with cannabis accessories

Generally, the 15 percent cannabis excise tax does not apply to accessories. However, when a distributor does not separately state the sales price of the cannabis or cannabis products sold or transferred with cannabis accessories (for example, vape cartridges) to a cannabis retailer, the cost of the accessory is included in the calculation of the average market price when determining the cannabis excise tax due.

Other miscellaneous changes

•             Adds the definition of the California Cannabis Track-and-Trace system.

•             Clarifies the definition of cannabis accessories, cannabis flowers, and fresh cannabis plant.

•             Adds the cultivation tax invoicing requirements and clarifies the invoicing requirements when there are multiple licensees in a transaction.

o             The distributor that conducts the final quality assurance review on the cannabis or cannabis products is responsible for reporting and paying the cultivation tax to the CDTFA.

•             Clarifies information cannabis retailers must include on their receipts to purchasers.

•             Clarifies how a cannabis retailer or a distributor shall handle any excess cannabis excise tax collected from a purchaser.

•             Clarifies when the cannabis excise tax shall be collected when there are multiple distributors involved in a transaction.

The distributor that supplies a retailer with cannabis or cannabis products is responsible for reporting and paying the cannabis excise tax to the CDTFA.

Please see the current text of Regulation 3700, Cannabis Excise and Cultivation Taxes.

For More Information

This special notice is intended to give you an overview of some of the requirements for the cannabis industry. We encourage you to read our online Tax Guide for Cannabis Businesses. You may also call our Customer Service Center at 1 800 400 7115 (CRS:711). Customer service representatives are available Monday through Friday from 8:00 a.m. to 5:00 p.m. (Pacific time), except state holidays. When calling, select the option for Special Taxes and Fees.

Brief History of Cannabis

Cannabis Banking

Once upon a time in the U.S. cannabis was not legal or illegal, it was somewhat under the radar, until in 1911 Massachusetts became the first state to prohibit its use.  Several other states enacted similar bans until finally in 1937 the Federal Government enacted the Marihuana Tax Act which imposed a tax on the sale of hemp.  It was a roundabout way to regulate the drug but it may have been a lobbying effort by the likes of Andrew Mellon and Randolf Hearst to limit the size of the hemp industry, which was in direct competition as a natural fiber producer with their own production of paper using timber.

It wasn’t until 1970, though, that the Controlled Substances Act was enacted listing marijuana a Schedule I drug.

The definition of a Schedule I drug:

  1. The drug or other substance has a high potential for abuse.
  2. The drug or other substance has no currently accepted medical use in treatment in the United States.
  3. There is a lack of accepted safety for use of the drug or other substance under medical supervision.

Almost immediately there was public pushback with several states moving to decriminalize marijuana.  In 1996 California became the first state to legalize cannabis for medical use.

That was an important moment in cannabis time.  With legalization for medical use comes production and sale which means legitimate cannabis businesses opening.

But what do you do if you are a business that is not allowed to open a bank account?  Well, you have to manage in cash.  Or find a bank that is willing to work with your business which is not so easy.  See our article on banking for cannabis industry on our website here. 

With an ever increasing acceptance of the legalization of marijuana, a recent Pew Research Center poll put approval of legal use of the substance at 62% of Americans, the question Congress is now attempting to tackle is how to facilitate industry growth.

Without a banking relationship a business can’t do things like take credit card payments from their customers, take out a loan, or pay their vendors using electronic methods.  In lieu of banking, cannabis businesses have been operating in cash, which can be dicey, and without a way to invest cash into a financial product, it has been a de facto ceiling on growth.

What the proposed SAFE Banking Act of 2019 would do is to give financial institutions and ancillary businesses that work with cannabis companies more security in conducting those banking relationships.  For instance, currently the Financial Crimes Enforcement Network (FinCEN) under the Department of Treasury which is tasked with preventing money laundering by criminals and terrorists can shut down a bank account of a customer simply if it suspects the funds in the account were derived by the cannabis industry.  And more importantly, it can deny a banking institution its FDIC coverage and/or levy a fine.  What’s more, FinCEN can go after employees of cannabis companies, denying them access to financial products like home loans and credit cards; it can target ancillary companies like insurance companies, landlords, and accounting firms that work with cannabis with closure of their bank accounts, etc.  All this leverage has been, since the events of 9/11, one of the Federal government’s big guns against terrorist organizations and organized crime, following the money, as you will, to get to the criminals.

Under Obama

But what of State’s rights and their ability to govern and make their own laws?  Well, this is certainly a tenet of our democracy, but it has put cannabis businesses and the banks that want to work with them in a sticky wicket.  As States began legalizing the use of marijuana, it became clear that there had to be a way for the Federal government not to step on State toes and allow them their own laws.  So, in 2013 U.S. Deputy Attorney General James M. Cole issued guidance (Cole Memo) on how the U.S. Attorney General’s office would/would not prosecute cannabis companies in States where use, cultivation, and distribution had been made legal.  A year later FinCEN issued guidance to banking and other financial institutions on how to conduct themselves in their relationship with the cannabis industry. (See our article on banking for the cannabis industry here for more information) 

So, all settled, right?  Not so much. 

What makes it SAFE

Congress decided that with an ever increasing number of States jumping on board, and the need to allow the industry to grow – thus provide tax revenues not only to the States but to the Federal government – they introduced the SAFE Banking Act which lays out further parameters how banking and other financial institutions and ancillary businesses can work with legitimate cannabis businesses without fear of their accounts be shut down, seized, or themselves being fined or prosecuted simply for working with the industry.

Where We Are Now

The House passed the SAFE Banking Act in September 2019.  Now the Senate needs to pass a compatible bill before it can go to the President’s desk for either signing or veto.  Even if the Senate passes their bill there is no guarantee that the President will be inclined to sign it into law.  Public opinion not withstanding, many in Washington don’t approve of legalization and/or believe that the Federal government should ways trump State’s rights.

To wit, the Trump administration rescinded the Cole Memo and there is fear that they may also rescind the FinCEN guidance as well throwing the industry back years.  The fear is that if this happens the U.S. Attorney General’s office will begin prosecutions of legitimate cannabis businesses in States where it is legal.

There have also been murmurings that the GOP in Congress is interested in opening a debate on rescheduling cannabis which is not a bad thing in itself (after all legalizing medical use gives the lie to criteria B in Schedule I), but it would probably mean putting off any vote in the Senate on the SAFE Banking Act, a vote that has yet to be scheduled as of this writing. 

In addition, critics believe that because of the reporting requirements of the Act and the obligation banks and financial institutions would find themselves under may make administrative costs untenable, costs that would certainly be passed along to the cannabis industry – already heavily weighed down by local licensing requirements and costs, and heavy local, state, and federal tax burdens – essentially making legitimate banking too expensive.

So, on the face of it the SAFE Banking Act is a step in the right direction for the industry.  But the unknowns point to a neither positive nor negative outcome, at this point, leaving the industry, financially speaking, just as it was before SAFE.

Notice for CDPH-licensed cannabis manufacturers impacted by public safety power shutdowns:

Power Outages

If your business is impacted by public safety power shutdowns that result in a loss of connectivity to the California Cannabis Track-and-Trace (CCTT-Metrc) system, you may continue operations on your licensed premises, but you must maintain comprehensive records detailing inventory tracking for all activities that happen during the loss of access period; once access is restored, you must enter these inventory tracking records into the CCTT-Metrc system within three days. Licensees may not transfer any cannabis or cannabis product from the licensed premises until access has been restored.

If you lose access to CCTT-Metrc for more than 72 hours, you must report that loss of access to the California Department of Public Health. Email MCSB.CCTT@cdph.ca.gov and include the following information:

  • License number
  • Business name
  • Premises address
  • Date and time when access to the CCTT was lost
  • Cause of loss of access
  • Best point of contact for us to reach you

View the regulatory requirements for use of and loss of access to CCTT-Metrc (§40510-40517): www.cdph.ca.gov/mcsb/regulations. If you have any questions, please contact our office via email, MCSB.CCTT@cdph.ca.gov, or phone, 855-421-7887. 

BCC Advisory Committee meeting: report on Vaping Illness

Vaping

The CA State Dept of Health delivered a report to the BCC Advisory Committee at 10am today, so we’re sharing notes from this report:

Charity Dean, the Assistant Director of the CA Dept of Public Health, provided an update on “Vaping Related Illnesses”. The report provided some new detail but re-iterated much that is already known. Ms. Dean shared the fact that 133 confirmed cases have been identified in CA, with 3 deaths, and the vast majority of cases vape-related illness have coming from vaping illicit products — products which include THC (81%), CBD (36%), and others with nicotine added. The State Health department, along with Federal (CDC) and other state Health departments, have not located any common variable, but they’re looking at the ongoing outbreak as something “new”, given people have been vaping THC for years — “Why now? What’s new? And what changed in devices or additives?” are all questions being looked into. The CDPH is investigating different additives, but have also not ruled out toxicity by chemicals caused by heating or device-specific causes. They’ve identified not only lipid-driven cases (caused by vitamin E and other additives), but also chemical pneumonitis, caused by toxicity of chemicals inhaled.

The most important takeaway for the industry is the fact that the BCC subcommittees did not bundle the nicotine vaping epidemic among youth, or dangers of illicit THC products, together with legal THC vape products. Ms. Dean noted only a single case may have been caused by products bought from regulated sources. Ms. Dean also noted this outbreak was largely a US-issue, with few known cases in Canada and none reported internationally.

The CDPH is continuing to investigate, and until more is known, it will maintain its public advisory that all vaping is unsafe. The BCC website posts this warning: “Although CDPH regulates manufacturers of cannabis vaping products to ensure they are as safe as possible for those who choose to vape, CDPH warns that individuals put themselves at risk any time they inhale a foreign substance into their lungs. The risk of vaping now includes death. CDPH urges everyone to quit vaping altogether, no matter the substance or source.”

Marijuana Media is inviting industry to join our Lunch & Learn event on 11/6, in downtown LA, to discuss product safety, additives, heating temperatures and devices in vape products. Tickets to this event are FREE to Licensed Industry, but must be reserved in advance. Lunch will be provided. For details, and to register, please use this link: https://marijuanamedia.safechkout.net/Product-safety-register

BUREAU OF CANNABIS CONTROL;§ 5814. Disciplinary Guidelines

Disciplinary Guidelines

In reaching a decision on a disciplinary action under the Act and the Administrative Procedures Act (Govt. Code section 11400 et seq.), the Bureau shall consider the disciplinary guidelines entitled “Bureau of Cannabis Control Disciplinary Guidelines November 2017,” which are hereby incorporated by reference. Deviation from these guidelines and orders, including the standard terms of probation, is appropriate where the Bureau in its sole discretion determines that the facts of the particular case warrant such a deviation, e.g., the presence of mitigating factors, the age of the case, or evidentiary problems. Authority: Section 26013, Business and Professions Code; Reference: Section 26031, Business and Professions Code.

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