California pioneered the modern cannabis policy reform movement in 1996 when voters passed Proposition 215, the Compassionate Care Act. State voters approved Proposition 215, the law that made it legal for doctors to recommend cannabis to patients.
In 2015 Gov. Jerry Brown signed three bills that toughened regulations for medical cannabis businesses and sought standards for documentation and testing. The bills are known as the Medical Marijuana Regulation and Safety Act (MMRSA). Collectively, the legislation also paved the way for medical cannabis businesses to turn a profit. The legislation is impacting marijuana business models in other ways. The laws have eliminated the idea of home-based dispensaries. The Act requires licenses for the cultivation, manufacture, distribution, transportation, laboratory testing, and sale of medical cannabis.
Though voters failed to approve adult use in 2010, they voted overwhelmingly in 2016 to make adult use legal in a state that represents the world’s sixth-largest economy.
The California Legislature passed and the Governor signed into law the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which creates the general framework for the regulation of both commercial medicinal and adult-use (recreational) cannabis. Under MAUCRSA, the California cannabis industry is regulated by three state agencies: Bureau of Cannabis Control (distribution, testing, retail and microbusiness), Department of Food and Agriculture (cultivation), Department of Public Health (manufacturing).
On June 27, 2017, the legislature passed, and Governor Brown signed into law the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) which provided one regulatory framework for both medicinal and adult-use commercial cannabis activity within the state. The state cannabis authorities adopted emergency regulations in December 2017 for initial implementation of the provisions of MAUCRSA and are now using the regular rule making process to adopt permanent regulations.
The current emergency regulations, adopted by the Bureau of Cannabis Control, California Department of Public Health and California Department of Food & Agriculture in December 2017 and readopted in June 2018, were originally issued through the emergency rule-making process to meet the legislative mandate to open California’s regulated cannabis market on January 1, 2018. These emergency regulations will remain in effect until the non-emergency rule-making process is complete.
Recreational cannabis sales officially began in California and during the first six months of 2018 the number of granted licenses jumped from 1,272 licenses on January 17th to 6,421 licenses on June 30th. The number of licenses grew during the first six months of 2018:
- cultivation – 1001%
- distributor and delivery – 263% and 252%, respectively
- manufacturing – 175%
- microbusiness – 160%
- retail/dispensary – 113%
- testing licenses – 107%
- The monetary value of product that delivery drivers may carry at any time was increased from $3,000 to $10,000.
- Drivers must receive orders and stock their vehicles at a physical location before hitting the road to deliver them.
- Single facilities that house multiple licensees now may utilize the same common areas, such as break rooms and restrooms.
- Industry-friendly tweaks eliminated unnecessary overlaps for security and testing samples.
- A handful of changes favored by the Growers Association were added, such as expanded water source protection and transportation of immature plants.
Laboratory Testing Requirements
- Untested cannabis goods cannot be sold by a retailer and must be destroyed. A retailer may not send cannabis goods to a distributor for testing.
- Untested cannabis goods manufactured or harvested before January 1, 2018, in possession of a distributor that are owned by the distributor must be destroyed.
- Untested cannabis goods manufactured or harvested before January 1, 2018, in the possession of a distributor owned by a manufacturer or cultivator may be returned to the licensee who owns the cannabis goods. If a cultivator or manufacturer chooses to sell the returned cannabis goods, the cannabis goods must be sent to a distributor for testing and must meet all of the testing requirements in effect at the time of testing before transported to a retailer for sale.
Packaging and Labeling Requirements
- A retailer shall not accept cannabis goods that are not properly packaged and labeled. A retailer shall not package or label cannabis goods, even if the cannabis goods were in inventory before July 1, 2018. However, for medicinal sales, retailers will place a sticker on cannabis goods stating, “FOR MEDICAL USE ONLY” upon sale to a qualified medicinal consumer, unless the statement is already printed on the package.
- A retailer may not send unpackaged cannabis goods to another licensee for packaging or labeling. Cannabis goods in possession of a retailer that do not meet packaging and labeling requirements must be destroyed.
- Exit packaging is not required to be child-resistant and can no longer be used to satisfy the child-resistant packaging requirements. All cannabis goods must be in child-resistant packaging prior to delivery to a retailer.
For Edible Cannabis Products
- Edible cannabis goods may not exceed 10 milligrams of THC per serving and may not exceed 100 milligrams of THC per package.
For Non-edible Cannabis Products
- Non-edible cannabis products shall not contain more than 1,000 milligrams of THC per package if intended for sale only in the adult-use market.
- Non-edible cannabis products shall not contain more than 2,000 milligrams of THC per package if intended for sale only in the medicinal market.
California Cannabis Market Projections
- According to a study by the University of California Agricultural Issues Center (UCAIC), California’s recreational cannabis market could be worth more than $5 billion; however, the benchmark will only be achieved once cannabis consumers fully embrace the state’s legal market.
- The $2.7 billion legal marijuana sales are expected to grow more than 18 percent annually to hit $5.6 billion by 2020. (Arcview Group)
- According to the UCAIC, about 29 percent of cannabis consumers may, at first, stay in the illicit market to avoid the costs of new regulations, which will add 15 percent to retail values.
- After the state adopts regulations, legal recreational use will make up 61.5 percent of the overall market, illegally purchased marijuana will make up about 29.5 percent of the market and legal medical marijuana use will be about 9 percent of the overall market, the analysis estimated.
At year-end 2018, sales from recreational use are projected to account for over half of total Concentrate sales in California and continue to increase in proportion to overall category sales. Medical cannabis sales are expected to decline down to $600 million as people migrate toward the adult-use market to avoid medical cannabis ID fees.
Cannabis Sales (million $)
California’s cannabis industry reported $2,692 million in retail sales via nearly 2,800 dispensaries in 2016, that is 10% more than all other MMJ states combined as of 2016 according to Arcview Market Research.
In 2017, California’s regulatory regime allowed only holding state-issued medical cannabis cards to legally purchase cannabis. But that hasn’t stopped sales in the state from eclipsing the other states with recreational sales.
CA state dispensaries sold $2,757 million worth of cannabis products, compared to $1,129 million in Colorado’s robust cannabis marketplace, $975 million in Washington, and $502 million in Oregon.
On November 8, 2016, California voters approved Proposition 64, Control, Regulate and Tax Adult Use of Marijuana Act, which provides:
- Effective November 9, 2016, certain sales of medical marijuana are exempt from sales and use tax.
- Effective January 1, 2018, a 15 percent excise tax is imposed upon purchasers of all marijuana and marijuana products. Additionally, a tax on cultivators of marijuana is imposed as follows:
- $9.25 per dry-weight ounce of marijuana flowers
- $2.75 per dry-weight ounce of marijuana leaves
Immature plants (including clones) and seeds are excluded from the cultivation tax.
Within the first quarter of calendar year 2018, the cultivation tax generated $1.6 million, the excise tax generated $32 million, and the sales tax generated $27.3 million in revenue, according to the California Department of Tax and Fee Administration.
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