California’s Cannabis Compliance Is on Shifting Sands
The cannabis industry is growing at a rapid pace. Legislators across the country are racing to develop regulations that will allow the industry to prosper. In the process, they are creating a patchwork quilt of regulations. These are often confusing and contradictory.
The sands are constantly shifting and it will be some time before the ground beneath the industry becomes firm and stable. This makes cannabis compliance especially difficult for entrepreneurs whose businesses are growing faster than the regulations intended to govern the industry.
Dual Licensure and Regulations
Many cannabis enterprises must obtain licensing from both local and state jurisdictions. In California, this dual licensure requires business owners to comply with a considerable number of regulations. It’s unwieldy and many businesses often fall out of compliance in the process.
For example, only 161 of California’s 482 municipalities and 24 of the 58 counties have opted to allow commercial cannabis activity of any sort, according to data from CannaRegs, a website that tracks local marijuana rule developments in the state.
Part of the transition into a state-regulated system also means that tens of thousands of legacy operators who fueled California’s gray medical marijuana market for two decades have been shut out of the legal industry, either by local license caps or by city and county ordinances that ban their business models.
Many of those pioneers are small companies, often one-person operations, that don’t have the money to relocate to a city or county that will grant them permits to continue doing business in the legal marijuana sector. Consequently, Proposition 64, which legalized adult recreational use of cannabis in California, didn’t turn out to be the open-market boom small businesses were sold on. High compliance and licensing costs are beyond the reach of small marijuana artisans.
The original law was written with the provision that the state would hold off on issuing licenses for any grow operations larger than one acre until 2023. But after California voters approved Prop. 64, the state’s Department of Food and Agriculture seemingly shifted course by allowing growers to compile an unlimited quantity of small grow licenses.
“It’s a continued form of prohibition,” Monica Senter, founding executive board member of the Nevada County Cannabis Alliance, told Rolling Stone. “The NorCal cannabis brand is born on the backs of these farmers [and] now large corporate farmers are coming in and capitalizing on it. And Prop 64 allows that to happen.”
That meddling with the intended free-market, pro-small business model has now resulted in soaring prices and a state facing a marijuana shortage.
Medicinal and Adult-Use Cannabis Regulation & Safety Act (MAUCRSA)
Recognizing the hurdles to compliance, legislators passed the Medicinal and Adult-Use Cannabis Regulation & Safety Act (MAUCRSA). This legislation became law and went into effect on January 1, 2018. The law aims to streamline the regulatory framework and make cannabis compliance easier to anticipate as the industry expands. Provisions within the law require businesses to have at least one employee complete the OSHA industry course.
The law also stipulates the quantities of cannabis products consumers can possess. Other provisions outline product testing and labeling requirements, transportation and delivery, manufacture, and protection of minors from cannabis products.
The MAUCRSA streamlines the licensure process and fees required for both commercial adult-use cannabis and medicinal cannabis into one license structure. As other states consider legalization of both medicinal and adult-use recreational marijuana.
The Medicinal and Adult-Use Cannabis Regulations and Safety Act (MAUCRSA), signed into law in June 2017, established a regulatory framework for commercial cannabis operations in the state of California.https://t.co/dvnKLwlabG pic.twitter.com/OYb9eN4K1T
— HCL Labels Inc. (@HCLLabels) February 17, 2019
The California law is iterative, as well–constantly being updated to tend to the latest unforeseen scenario or market-debilitating crisis. Just last month, new California cannabis regulations were adopted reversing “emergency regulations” that had been set in place for the understaffed, underfunded oversight organizations to meet their own deadlines.
These revisions also introduced noticeable changes in:
- Update the definition of “owner” for purposes of cannabis license applications;
- Clarify the CEQA compliance process for cannabis license applications;
- Clarify the definition of licensed premises;
- Update manufacturing processes and procedures;
- Update cannabis labeling requirements for all cannabis products, including required government warnings
If you’re a small California cannabis business, that list represents a world of paperwork, man-hours, rework, and money. The kind only the companies with larger pockets can keep up with.
Cannabis Businesses Are Under Close Scrutiny
Cash deals done with a handshake don’t cut it. The IRS requires thorough financial records from every cannabis-related business. Cannabis compliance requires knowing how to maintain these records. It requires knowing the information they must contain and how regulators want it presented.
Even though marijuana is illegal under federal law, businesses are still required to pay their federal taxes. Businesses need to pay particular attention to the types of deductions they claim and the methods they use to calculate expenses. Audits are common in the cannabis industry and marijuana purveyors don’t want to be on the wrong side of the law when/if that notice comes in the mail.
Expertise Is Essential
Keeping your business current with California’s cannabis regulatory law requires knowing more than what the laws currently are. It also requires anticipating what may be in the pipeline. As legislators across the country scramble to pass legislation to match voter sentiment, they are creating a thicket of paperwork and policy to sort through.