APRIL 2019 - Capitol Corner

California Cities Finally File Suit over Cannabis Delivery Regulation

In the first significant challenge to California’s open cannabis market, 24 cities that restrict pot sales sued Gov. Gavin Newsom’s administration Thursday, arguing that by allowing home deliveries in their city limits, the state is violating 2016’s Proposition 64, which legalized recreational marijuana.

The lawsuit, which was filed in Fresno County Superior Court against the California Bureau of Cannabis Control and its chief, Lori Ajax, comes in response to a regulation adopted by the agency in January that permits state-licensed firms to deliver cannabis in cities that have banned pot shops. Officials from cities with prohibitions on pot sales objected to the rules, voicing concerns that home deliveries of cannabis would lead to robberies of cash-laden vans and an influx of illegal sellers blending in with licensed delivery fleets.

To avoid opposition from city leaders and police chiefs, backers of Proposition 64 offered assurances in 2016 that the measure would preserve local control of pot sales. The lawsuit notes that the ballot proposition’s introduction said that it “safeguards local control, allowing local governments to regulate marijuana-related activities.”

The cities behind the suit contend that the bureau lacks legal authority to allow deliveries in conflict with local ordinances because Proposition 64 and a law signed by then-Gov. Jerry Brown guarantee local governments veto power over pot sales in their jurisdictions.

Plaintiffs including the cities of Covina, Downey, Riverside and Beverly Hills are among the 80% of California’s 482 municipalities that have banned stores selling cannabis for recreational purposes. Other cities that have joined the lawsuit allow retail stores but want to ensure that only businesses they have screened and licensed are able to make home deliveries within their city limits.

The lawsuit could jeopardize ongoing state efforts to expand cannabis sales as delivery services compete with retail storefronts in California over a legal market estimated last year to be valued at nearly $1 billion.

The lawsuit asks the court to rule that the state regulation is invalid “because it is inconsistent with the statutory authority of local jurisdictions to regulate or prohibit the delivery of commercial marijuana to a physical address within their boundaries.” The cities behind the lawsuit said they are not opposed to deliveries in cities where they are welcomed.

In approving home delivery in all cities, Ajax cited a provision of a law approved by the Legislature that says, “A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads” by a state licensee.

The lawsuit, which also includes Santa Cruz County as a plaintiff, argues that provision does not allow deliveries to the doorsteps of private homes, citing a memo from the Legislative Analyst’s Office.

The cities’ legal challenge notes that the official voter information guide for Proposition 64 said the initiative would create a governing system that allows local governments to regulate marijuana-related activities. A 2016 report on the initiative by the Legislative Analyst’s Office also told voters that the ballot measure allowed cities and counties to completely ban pot businesses.

The lawsuit is also supported by the League of California Cities, which said in a statement that the home-delivery rule “undermines the voters’ intent.”

A response to the lawsuit was not immediately available from Newsom.

Cannabis Permitting Bill Clears the Senate

With the legal cannabis market teetering while temporary cannabis growing licenses are expiring, Senate Bill 67 passed overwhelmingly with bi-partisan support out of the State Senate on last Thursday.

Next, the bill will head to the state assembly.

Along with the state administration’s announcement last week to streamline the permitting process to help keep growers operating in the legal market, the bill is meant to help ensure legal cannabis farmers don’t fall into the illegal cannabis market through no fault of their own, as a press release from Sen. Mike McGuire reads.

“The state is moving quickly to catch up to the massive backlog of cannabis farmers’ temporary licenses that have expired,” said McGuire in a statement. “Today’s action by the Senate and last week’s move by the administration will help keep farmers from dropping back into the black market at no fault of their own.”

McGuire continued to say, “We’re grateful to work with the administration—ensuring good actors who want to comply with state law don’t fall out of our regulated market. Without valid licenses, there isn’t a legal, regulated market here in the Golden State and a crisis will take hold.”

Senator McGuire and Assemblymember Jim Wood introduced SB 67 this year, which, if signed into law, will allow the California Department of Food and Agriculture to extend temporary licenses held by cannabis farmers while their annual application is being processed.

While the administration will be streamlining the permitting process, the state legislature is moving forward with SB 67—which was approved on the senate floor with a bipartisan 32-4 vote—to fill the gaps in timing for temporary permit holders while their annual licenses are being processed by the California Department of Food and Agriculture through the end of this year.

Currently, there are over 6,900 temporary state cannabis growing licenses in the state system that would have expired between now and July 2019. In March alone, over 1,000 temporary growing licenses issued by the California Department of Food and Agriculture expired, another 4,000 will expire in April.

The state—under current law—has no ability to extend a temporary license, despite the fact thousands are set to expire. To make matters worse, thousands of applicants who wanted to comply with the law and applied for a temporary license did so in the last quarter of 2018, leaving a massive backlog for the state regulating agencies.

As temporary licenses come due, if the state can’t approve or deny an annual license prior to the temporary license expiring, a license holder will no longer be operating legally and will be kicked into the black market.

“While we are hopeful that the provisional program is successful, CCIA believes that SB 67 will give further assistance to the licensing authorities in processing the backlog of thousands of annual applications,” said Lindsay Robinson, Executive Director of California Cannabis Industry Association. “This is a critical bill for stabilizing the regulated cannabis industry, and we commend Senator McGuire for his leadership in addressing this issue.”

Cannabis Tax Relief Bill Passes Key Committee

On Monday, Assembly Revenue & Taxation Committee passed out a critical cannabis tax-relief bill.  This bill suspends the cultivation tax and reduces the excise tax from 15% to 11% for a period of about three years.  The goal, as stated by the author, is to allow time for cannabis businesses and consumers to transition from the black market into the regulated market.  The elasticity of cannabis suggests that such a reduction could have a positive effect in encouraging more consumers to purchase from regulated dispensaries since the price difference between the illicit and regulated markets would be smaller as a result of this bill.

According to a report recently published by Arcview Market Research, California cultivator produced about 13.5 million pounds of cannabis in 2016, but California only consumed about 2.5 million pounds].  The remaining 11 million pounds is believed to have been shipped to illicit markets elsewhere.  It is estimated that California consumers will spend about $9.2 billion on cannabis products in 2018, but only an estimated $3.7 billion will be spent on legal cannabis products.  Clearly, most of the California cannabis market is still illegal; California has the largest and the most developed illicit market in the nation.  This could create problems as California attempts to bring the black market under regulation.  According to the report, a significant problem facing the legalization of the market is the high tax burden on cannabis products and the complex regulatory scheme.  It is believed that these two factors will disadvantage legal sellers by as much as 77% on pricing compared to well- established black market sellers.

The Sacramento Bee recently reported that California is not meeting revenue projections for commercial cannabis.  In the first two months of legalization, Californians bought $339 million worth of cannabis products, about 13% less than expected.  Many in the industry are blaming high taxes, regulation, and the ease with which consumers can buy products from the gray market.  According to Kristi Knoblich, board president of the California Cannabis Industry Association and co-founder of Kiva Confections, a manufacturer of edible cannabis products, "Sales are happening but they're not happening in the regulated market.[7]"  As an example of how large the illicit market is, the Sacramento Bee reported that in February of 2018, 6,000 dispensaries and delivery services were listed on Weed Maps, but the state had only issued licenses for 580 dispensaries and delivery services at that time.

AB 286 was passed out with a unanimous, bipartisan vote and will be heard in Assembly Business & Professions before the April 26th legislative deadline.

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