Even with the release of state cannabis regulations — taking effect Jan. 1 — the overall regulatory process will still be a work in progress until next May, according to some legal firms assisting clients planning to get into the business of selling the legal recreational drug.
“It’s going to be interesting to see what Sacramento does,” said Blair Gue, an attorney and regulatory compliance team leader with Rogoway Law Group. “There are a number of things we just don’t know, such as how distributors will be able to get their product if there are only a few licensed suppliers in January. Or, how will a patient know if his or her medical cannabis dispensary obtains a state license — and how long will a patient be able to visit a dispensary that doesn’t apply for a state license? At the end of the day, it remains to be seen how many recreational dispensaries will be open in January.”
While details surrounding the state’s licensing process are still not cast in stone, those wishing to operate legally — including cultivators, manufacturers, transporters, distributors, lab testers and retail vendors of cannabis — have some decisions to make that affect their ability to function within compliance.
For example, before being eligible for a state license, cannabis operators must first receive local authorization to operate (usually in the form of a use permit, zoning clearance, or similar local permit) and all those they work with in the supply chain, from growers through retailers, must also be licensed, said attorney Kyndra Miller, CEO of CannaBusiness Law.
Each applicant faces a multitude of issues at the state and local level.
She said cannabis entrepreneurs must register with regional water quality control boards and be able to show proof that they plan to use water from a legal source.
“I’ve been accompanying local inspectors all over the state as they walk through properties intended for cannabis cultivation to see exactly what they are looking for,” said Miller. “Across the board, most people are focusing on local compliance, not state licensing requirements. While business operators may be able to negotiate with local authorities, the state typically formulates uniform rules and expectations covering all of California. My advice to those engaged in cannabis activities is keep their eyes on the prize, which is state licensing, not just municipal approvals.”
She said the land upon which a cannabis manufacturing operation is to be conducted must be properly zoned for this purpose. All 58 California counties have their own zoning rules. In most cases, manufacturers should seek light industrial or specific cannabis zoning to be in compliance.
For those planning to become distributors, track-and-trace systems must be in place from the start to record the sources and all subsequent parties that handle cannabis throughout the supply chain.
Distributors are also responsible for lab testing prior to placing cannabis on retail shelves, and these labs must also be licensed. This process can determine if pesticides are being used by farms adjacent to the cannabis growing area, which can affect the ability of the grower to market “organic” cannabis if runoff brings pesticide residue into a marijuana field.
From a federal perspective, all cannabis operations are illegal, according to U.S. Attorney General Jeff Sessions, Miller observed. California clients of leading cannabis legal consulting groups are advising operators to become aware of the civil and criminal consequences associated with cannabis.
“If the federal government decides to enforce its laws, this could severely impact the recreational cannabis market, since medical and recreational use issues are considered separately.”
This could also adversely affect someone looking to lease land for cannabis production, for example. “Should a neighbor file a legal challenge on the basis of having a nuisance on this adjacent property, civil asset forfeiture laws could apply. No landlord wants to lose his or her property.”
She said the government collected more than $28 billion over the past decade in civil asset forfeiture sales that are often split with local authorities.
“My advice to those entering the cannabis industry is to keep abreast of what’s happening at the state level. At the same time, get to know how your local board of supervisors and city planning and building directors feel about having cannabis operations within their jurisdictions. It’s hard to stay on top of the changes, since local and state ordinances and rules are not cast in stone as yet.”
According to Dan Beck, an attorney with CannaLegal, financial issues also require professional accounting advice.
“We don’t file a cannabis permit application unless there is a CPA on the team,” he said. “It’s not a question of if you will be audited, but when.”
He said what most do not realize is that when a state license for cannabis is issued, that entity can only do business with other firms that have state licenses.
“I’ve heard estimates that only about 150 licenses will be issued in California and then initially only for about four months beginning Jan. 1,” he said. “I’m hopeful the entire process at the state level can be fixed by spring, including the call for public hearings and the need for vetting procedures, background checks and other processes.”
What is not fully understood by some is that licenses issued on or before the first day of 2018 are under an emergency ordinance subject to further changes.
“If the state license will cover recreational and adult use, so even if you have a medical license, will you have to reapply for a recreational license?” he asks.
For Gue of Rogoway, there needs to be more meat on the state’s cannabis regulatory bones.
“There’s a ton of stuff still up in the air, such as how distribution and self-distribution, will be handled,” Gue said.
Operating with a License
Gue said the biggest concern right now is that people want to operate a cannabis business with a state license. But first they must get a local permit to be eligible for even a temporary state license that could be issued as early as December.
At the same time, Gue indicated that some local groups are grappling with land use policies, the fact that medicinal use is regulated but not recreational use at the present, or even considering the possibility of banning recreational use for lack of time to develop municipal ordinances.
“What happens if someone doesn’t just want to distribute only within Sonoma County but across the state? If they need a separate state license for each hub or distribution point, the cost could be huge,” Gue said.
Are stronger rules pending?
She said after attending a state cannabis-licensing workshop she learned that there is the possibility of seeing both temporary and permanent cannabis license applications being issued simultaneously by the state In her opinion, since the threshold requirements for a temporary license are lower than for a permanent one, it seems likely that many applicants will seek temporary licenses rather than permanent licenses at first.
“I believe the state is preparing the public for a much more extensive licensing process than originally expected,” Gue said. “It is unclear at this point what the outcome will be. However, it does appear that the state is giving more power to local government to make cannabis decisions — but this could change quickly.”