The California "Green Rush"

Marijuana has been legal in California for medical use only (for adults) since 1996. During the 2016 elections, voters passed Prop 64, which makes recreational marijuana legal in California (for adult use). Since Nov 9, 2016, adults 21 and over have been allowed to possess, privately use and give away up to 1 oz. of cannabis and are allowed to cultivate no more than 6 plants for personal use at their residence.[1] As of January 1, 2018, commercial sale, distribution and production of marijuana was legalized for adult use at state-licensed facilities in California. However, local city and county governments can restrict or ban cannabis businesses within their jurisdiction.[2]

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Which jurisdictions in California have allowed for cannabis businesses?

Less than 1 in 3 cities (144 out of 482) allow any kind of cannabis businesses to operate within their respective borders. 18 of the 58 counties in California permit cannabis businesses within their unincorporated areas. So the question is - which cities are the most cannabis friendly? You may be surprised.

According to a recent study (the “Study”) by Southern California News Group and other Digital First newspapers, Riverside County has by far the highest number of permissive cities, followed by Humboldt, Inyo, Del Norte, Monterey, Sonoma and Los Angeles counties.[3] The Study awarded points, on a 100-point scale, to cities and counties, based on the number of lenient policies each jurisdiction has.[4] The highest score received by a number of cities, including 6 in Riverside County, was 96.[5] To receive over 96 points, a jurisdiction would need to allow every type of marijuana business licensed by the state.[6] In other words, a city or county would have to allow permitting medical and recreational licenses for cannabis sales, cultivation, manufacturing, distribution and testing.[7] They would also have to allow their residents to grow marijuana at home(indoors and outdoors).[8]

Currently, 4 out of the 5 biggest cities in California either allow or plan to allow recreational cannabis shops. These cities are Los Angeles, San Diego, San Jose and San Francisco. Sacramento, Oakland and Santa Ana also allow cannabis stores. According to Seedo’s 2018 Cannabis Price Index, Los Angeles is the 4th highest cannabis consuming city in the world.[9] Los Angeles is the nation’s most populous county with 22 of 88 cities permitting cannabis enterprises. Bellflower, Culver City, Los Angeles and Maywood are in the lead with West Hollywood following as the friendliest cannabis cities in Los Angeles county.[10]

What do I need in order to start a cannabis business?

Apart from what you would need in any other industry to start a business - solid business and marketing plans, funding, insurance, location- start by obtaining a license for the type of cannabis business you want. The California Department of Food and Agriculture is responsible for licensing cannabis cultivators. The California Department of Public Health is responsible for licensing cannabis manufacturers. The California Department of Consumer Affairs, through its Bureau of Cannabis Control, is responsible for licensing cannabis distributors, testing facilities, and retailers. In addition, you will need to register with California Department of Tax and Fee Administration for your seller’s permit and a cannabis tax permit, if applicable to your type of business. As a cannabis seller, you will also be required to file standard sales and use tax returns to report your sales figures.

As of January 1, 2018, two new cannabis taxes have been introduced:

1. A 15% excise tax for purchasing cannabis and cannabis products. Retailers of cannabis and cannabis products are required to collect the 15% excise tax from the purchaser based on the average market price of any retail sale and pay it to their cannabis distributor.

2. A cultivation tax is imposed upon cannabis cultivators on all harvested cannabis that enters the commercial market. Cannabis cultivators are required to pay the cultivation tax to either their distributor or their manufacturer. The rate of the cultivation tax is:

3. $9.25 per dry-weight ounce of cannabis flowers that enter the commercial market,

4. $2.75 per dry-weight ounce of cannabis leaves that enter the commercial market, and

5. $1.29 per ounce of fresh cannabis plant.*

*To qualify for the "fresh" plant category, the unprocessed cannabis must be weighed within two hours of harvesting.[11]

What is the impact to California’s economy as a result of the Prop 64?

California is now the world’s largest market for cannabis. It is projected that there will be additional revenues amounting to over $1.5 billion in 2018. By 2020, this industry is expected to grow to $4 billion in additional annual market size. California has three large agricultural markets: milk & cream ($6.1B), grapes ($5.6B) and almonds ($5.2B). Cannabis comes in at $8.5 billion in projected worth.[12] On the other hand, while it’s difficult to say how the increase in taxes and corresponding increase in the price of “legal” marijuana will affect the market, there could be, at least in the short term, a demand increase on the black market.

State vs. Federal Law on Cannabis - what’s the deal?

Well the answer is bit complicated. So let’s break it down.

The Federal Government still classifies cannabis under the same restrictive category alongside heroin and ecstasy, deeming it illegal under Schedule I of the Controlled Substances Act. This means the Feds consider cannabis to be a highly addictive and dangerous drug with no medical value. Generally, federal law supersedes state law. This principle certainly applies in the case of conflicts between federal and state cannabis laws. However, the attitudes and willingness of recent federal administrations to enforce federal cannabis laws at the expense of conflicting state laws has shown a general pattern of leniency, with a hiccup.

The Cole Memo, issued during the Obama administration, was a memorandum issued on Aug 29, 2013 that provided U.S. Department of Justice guidance regarding federal marijuana enforcement, written by then-Deputy Attorney General James M. Cole. It stated that the Department of Justice would serve this memorandum to the Department’s attorneys, law enforcement and prosecution to help focus their efforts and resources on the following factors:

1. Preventing distribution of cannabis to minors.

2. Preventing revenue from the sale of cannabis from going to criminal enterprises, gangs and cartels.

3. Preventing the diversion of cannabis from states where it is legal under state law in some form to other states.

4. Preventing state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or illegal activity.

5. Preventing violence and the use of firearms in the cultivation and distribution of cannabis.

6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use.

7. Preventing the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands.

8. Preventing cannabis possession or use on federal property.

Outside of these priorities, the federal government would rely on states and local law enforcement agencies to address cannabis activity.[13]

Here comes the hiccup. In January of this year (2018), current Attorney General Jeff Sessions, under the authority of the Trump administration, withdrew the Cole Memo, creating new confusion, and ostensibly returning the Department of Justice’s focus back to ensuring enforcement of current federal cannabis laws.

In even more recent news, President Trump appears to have changed his attitude on legalization of marijuana. This decision, perhaps not coincidentally, came after U.S. Senator Cory Gardner, a Republican from cannabis-friendly Colorado, vowed to block Justice Department nominees in protest of the rescinding of the Cole Memo. The Trump-Gardner standoff appears to have just ended, with President Trump promising Gardner that he would allow states’ rights to govern cannabis related activity and how to best approach it.[14]

Our Conclusion

While the legalization of recreational marijuana per Prop 64 is great news for cannabis businesses, there are still lots of unanswered questions on how California will roll out requirements and criteria. However, President Trump’s recent public proclamation that he will respect states’ rights in regards to cannabis laws should be viewed as a positive development, and in line with a general trend of federal leniency of enforcement of federal cannabis laws. Of course, as long as current federal laws regarding cannabis remain in place, uncertainty will remain in states where cannabis has been legalized.

There is no doubt that the laws, rules and regulations for opening a cannabis business are confusing and complicated, especially as change continues to occur on a national, state, county, and city level. That is why we recommend that you hire an attorney with broad knowledge of the current laws to help you navigate the process of setting up your cannabis business. Please feel free to contact Law Unboxed with any further questions/concerns and we would be happy to assist!

Disclaimer: This article may constitute attorney advertising and is provided for informational purposes only. This article does not constitute legal advice nor does it form an attorney-client relationship. Specifically, this article does not address all potential situations and is in no way intended to apply to your particular situation. Qualified counsel in your jurisdiction should be consulted for your specific concerns and/or needs. If you want more information, please contact Law Unboxed with any questions!

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[1] Prop 64. California NORML (National Organization for the Reform of Marijuana Laws).

[2] Prop 215. California NORML.

[3] Staggs, Brooke. Wheeler, Ian. “Marijuana laws for every city and county? Our database shows California slow to accept Prop 64”. The OCR. https://www.ocregister.com/2018/04/09/database-of-marijuana-rules-from-every-city-and-county-in-california-shows-slow-acceptance-of-prop-64/. 10 April 2018.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Seedo 2018 Cannabis Price Index . http://weedindex.io/.

[10] Staggs, Brooke. “Marijuana may be legal in California, but cities are creating their own cannabis regulations - and bans. Here’s how that affects you”. The OCR. https://www.ocregister.com/2018/01/04/marijuana-may-be-legal-in-california-but-cities-are-creating-their-own-cannabis-regulations-and-bans-heres-how-that-affects-you/. 4 Jan 2018.

[11] “Tax Guide for Cannabis Businesses”. California Dept of Tax and Fee Administration. http://www.cdtfa.ca.gov/industry/cannabis.htm.

[12] Desjardins, Jeff. “How legal marijuana could change California’s economy”. Business Insider. http://www.businessinsider.com/how-legal-marijuana-could-change-californias-economy-2018-2. 20 Feb 2018.

[13] Cole, James M. Memorandum for all United States Attorneys. https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf29. Aug 2013.

[14] Kim, Seung Min. “Trump, Gardner strike deal on legalized marijuana, ending standoff over Justice nominees”. The Washington Post. https://www.washingtonpost.com/politics/trump-gardner-strike-deal-on-legalized-marijuana-ending-standoff-over-justice-nominees/2018/04/13/2ac3b35a-3f3a-11e8-912d-16c9e9b37800_story.html?noredirect=on&utm_term=.a39ad126718f. 13 April 2018.