Overview of California’s proposed rulemaking for the cannabis industry
Last week, the Department of Cannabis Control (“DCC”) and California Department of Tax & Fee Administration noticed proposed emergency regulations to govern California’s medical and adult use cannabis industry. The DCC also noticed further modifications to the proposed regulations concerning large cultivation licenses and the conversion to large and medium licenses.
Public comment for DCC proposed regulations are due by Wednesday 12/21 @ 5 PM PT.
Public comment for CDTFA proposed emergency regulations will be due within five calendar days after submission to the Office of Administrative Law (OAL).
In addition to releasing the proposed rule sets, the DCC also released its Final Statement of Reasons for the Large Cultivation and Conversion to Large & Medium license types, a document explaining the reasoning behind each rule, including a Summary & Response Table to relevant public comments received. Finally, the CDTFA also released its policy intent for proposed amendments to the cannabis tax rules in its Notice document. We encourage all licensees and stakeholders to review the documents and participate in public comment by the due dates above.
See the links below for a set of all released documents:
Finding of Emergency & Notice of Proposed Adoption Re: Delivery
Large Cultivation & Conversion Further Modified Text of Regulations
Delivery Traceability Proposed Rules
Current state law requires the DCC to incorporate delivery into the traceability program by January 1, 2023, in a manner that captures information relating to cannabis goods leaving a retailer’s premise on a delivery vehicle. Some of the key provisions in the proposed regulations are outlined as follows:
· Requires licensees to record all deliveries of cannabis goods on a delivery inventory ledger within METRC before each delivery trip begins. (Section 15049.3(a),(b))
· Specifically, licensees must enter into METRC the following information before an employee leaves the premises for each delivery trip:
o The delivery inventory ledger number generated by METRC and assigned to the specific delivery trip.
o The name and license number of the licensed retailer.
o The name, employee ID, and driver’s license number of the delivery employee conducting the deliveries.
o The make, model, and license plate number of the vehicle used to conduct deliveries. The Department will use this information to determine whether the vehicle in use has been disclosed to the Department and authorized to be used for cannabis delivery.
o The name, category, UID, and number of units for each cannabis good carried on the delivery trip.
o The UIDs of any cannabis goods that were ordered by customers and processed by the licensed retailer prior to the delivery employee leaving the licensed retailer premises. This is so the Department can track which goods were pre-ordered prior to leaving the premises and which were ordered during transit.
o The date and time the delivery employee leaves the licensed premises to determine when a delivery trip begins. (Section 15049.3(c))
· The following information pertaining to each sale must be recorded into METRC before the end of the calendar day on which the sale was completed:
o The date and time the sale was completed. A sale is completed at the time the cannabis goods are physically provided to the customer.
o The identity of the type of customer, including “adult use”, “medicinal patient”, or “patient primary caregiver”. This information will be used to audit applicable tax compliance.
o The UID and quantity of each cannabis good sold in METRC.
o The purchase price of each cannabis good sold as part of the sale transaction.
o The county of the physical location of delivery. This information satisfies the location requirement and does not require recording of specific addresses where cannabis goods are delivered due to “customer privacy protection” reasons.
§ However, recording only the county, as opposed to the city, is arguably too broad to record accurate sales data that allows local governments to audit and support locally licensed activities. This in turn may undermine local operators who face unequal competition from outside delivery operators who may fail to register and pay required local fees for delivering within its jurisdiction. (Section 15049.3(d))
· Allows a delivery employee returning to the licensed premises to obtain additional cannabis goods for delivery and add to the existing delivery trip within METRC. Since the additional cannabis goods are considered part of the existing delivery trip a new inventory ledger is not required to be created within METRC as long as all deliveries occur on the same day. For adding newly obtained cannabis goods to the inventory of an existing delivery trip, the following information must be recorded:
o The name, category, UID, and quantity of each additional cannabis good.
o The date and time the delivery employee left the licensed premises to continue deliveries. (Section 15049.3(e))
· The end time and date for the delivery trip must be recorded in METRC. A delivery trip ends depending on whether a delivery employee is required to return to the licensed premises due to holding unsold cannabis goods within the delivery vehicle.
o For delivery trips where the delivery employee still holds cannabis goods at the end of the trip, the delivery trip ends when the delivery employee returns to the licensed premises. All cannabis goods that remain unsold at the end of the delivery trip must be removed from the METRC delivery ledger and moved back into the retailer’s physical inventory.
o In cases where a delivery employee sells all cannabis goods carried on a delivery trip and does not return to the licensed premises, the end of the delivery trip is when the last sale of cannabis goods was completed. (Section 15049.3(f))
· Licensed retailers must comply with all new delivery traceability requirements by April 1, 2023. This is to allow for third party developers (i.e. POS) to implement the necessary changes to account for the new regulatory requirements. (Section 15049.3(e))
· Prior to April 1, 2023, licensees must maintain physical or electronic delivery inventory ledgers outside of METRC and record the following for each cannabis good carried on a delivery trip:
o The item name, category, and UID.
o The quantity of units. (Section 15049.3(e))
· Any delivery inventory ledger maintained outside of METRC must identify all cannabis goods prepared for orders received prior to the delivery employee leaving the licensed premises. This ledger must be updated to accurately reflect the current inventory of cannabis goods held by the delivery employee and all sales of cannabis goods conducted through delivery must be entered into METRC within 24 hours of the date and time the sale was completed. (Section 15049.3(f))
Large Cultivation Licenses & Conversion to Medium and Large Proposed Rules
Per state law, the DCC must begin accepting applications for large cultivation license applications on January 1, 2023. These rules create a licensing framework to license Type 5, 5A, and 5B Large cultivation operations as well as a conversion process for existing licensees to convert medium and large licenses.
Some of the key provisions in the proposed regulations are outlined as follows:
· Requires large cultivation license applicants to submit an attestation that all persons who hold an ownership or financial interest in the large cultivation license do not currently hold any ownership or financial interest in a Type 8 Testing Lab, Type 11 or Type 12 Distribution license while maintaining ownership or financial interest in a large cultivation license. (Section 16300.1)
o This essentially means that no matter the ownership structure, the DCC will apply this rule to individuals, making it restrictive on who can hold a large cultivation license in California. While it is true that state law BPC section 26061 prohibits “licensees” from holding large cultivation licenses, the DCC proposed rules seems to expand this definition to include any owner or financial interest holder.
· Large cultivation license application fees range from $1,555 to $8,655 depending on the type of license sought. (Section 15014.2)
· There are no limits on total canopy for large cultivation licenses and annual fees will be assessed based on a base annual fee as well as a variable fee per 2,000 SF of canopy that exceeds the medium cultivation canopy limits. (Sections 16201.1, 15014.2)
· Existing small and medium cultivation licensees may apply to convert licenses into medium and large licenses at no cost, if they meet the following requirements:
o Submit License # to be converted
o Confirm same premises as active license
o Ownership must remain the same
o Submit premises diagram
o Submit cultivation plan
o Submit CEQA documentation
o Submit all owners and financial interest holders. (Section 15027.1)
Once the DCC notifies that all conversion application requirements are met, the licensee will be assessed the annual fee and must pay within 30 calendar days. (Section 15014.2)
CDTFA Cannabis Tax Regulations
This past June, CA passed AB 195 which amended the Cannabis Tax Law to do the following:
· Discontinue the imposition of the cultivation tax beginning July 1, 2022.
· Change the cannabis excise tax calculation from the average market retail price to 15% of the retailer’s gross receipts, beginning January 1, 2023.
o Currently the excise tax is not assessed on actual sales remitted by the retailer in the marketplace. Instead, it’s the final distributor the transfers the inventory to a retailer who is responsible for remitting the taxes. Since the tax is based on an assumed markup of 80% from the wholesale price at which the inventory is sold to the retailer, tax liabilities are claimed and remitted before any retail sales occur. This includes cases where the inventory is never sold prior to the end of its shelf life.
· Gross receipts include the sales price of the cannabis good, and all charges related to the sale, such as delivery fees and any local cannabis taxes listed separately on the invoice or receipt provided to the purchaser. They do not include sales tax or the gross receipts from retail sale of any non-cannabis item.
o This tax must be listed separately on the receipt or invoice provided to the retailer purchaser and included in the gross receipts subject to sales and use tax.
· Move the reporting and remittance of the cannabis excise tax from the distributor to the retailer beginning January 1, 2023. This month, the DCC will automatically register cannabis retailers and microbusinesses who sell cannabis good at retailer with a cannabis retailer excise tax account based on the licensing information within their DCC account. Cannabis retailers who have not received notification of automatic registration should register for an excise tax account through the CDTFA’s online services, which will be available late December.
· Distributors will have their excise tax accounts closed on December 31, 2022, and will be required to file their last cannabis excise tax returns, reporting their sales and transfers of cannabis and cannabis products to cannabis retailers, with the Department on or before January 31, 2023.
· Cannabis retailers must file cannabis retailer excise tax returns online and pay the cannabis excise tax collected from purchasers to the CDTFA. New cannabis retailer excise tax accounts will be assigned to a quarterly reporting basis, due and payable on or before the last day of the month following each quarterly period.
o The first cannabis retailer excise tax return will be due May 1, 2023, for the January 1, 2023, through March 21, 2023, quarterly reporting period.
· Cannabis retailers who received cannabis goods from, and paid corresponding excise taxes to, a distributor prior to January 1, 2023, but sold such goods after January 1, 2023, will be able to claim a tax credit on their cannabis retailer excise tax return. Any amount of cannabis excise tax due to a distributor for purchases made prior to January 1, 2023, must be paid to the distributor no later than April 1, 2023.
· Cannabis retailers must keep documentation to support any credit reported on their tax return to avoid any disallowed claims. Documentation can include the following:
o Sales invoice or receipt indicating cannabis goods sold in a retail sale on or after January 1, 2023.
o Purchase invoice or manifest indicating the cannabis goods that were sold in a retail sale on or after January 1, 2023, were sold or transferred by a distributor to the retailer prior to January 1, 2023.
o Other information supporting the payment of the cannabis excise tax to a distributor for cannabis goods purchased from the distributor prior to January 1, 2023, and sold at retail on or after January 1, 2023.
· If already approved for a license fee waiver with the DCC, retailer licensees can apply to CDTFA to retain Vendor Compensation equal to 20% of the excise tax.
· New enforcement provisions allow the CDTFA to impose penalties on unlicensed persons and agents of licensees for failure to pay cannabis taxes that are due, as well as on licensees for failing to or falsely reporting sales or transfers of cannabis in METRC.
o Any unlicensed individual or cannabis business who possesses, keeps, stores, or retains for the purpose of sale, or sells or offers to sell cannabis goods may be held liable for cannabis taxes due to CDTFA. A penalty of 25% of the tax due or $500, whichever is greater, will be added to any assessment issued to an unlicensed cannabis business.
o CDTFA may hold any officer, member, manager, partner, or other person personally liable for any unpaid cannabis taxes, interest, and penalties when a corporation, partnership, limited liability partnership, or limited liability company fails to pay cannabis taxes due.
o Any licensed person who sells or transfers cannabis or cannabis products, and knowingly does not report or falsely reports that sale or transfer in METRC may be held liable for the cannabis excise tax due to CDTFA.
The newly proposed 3703, 3704, and 3705 sections do the following:
· Regulation 3703 defines excess tax to include the following and to provide procedures to ensure that excess cannabis tax is refunded to the person that paid it or paid it to the Department:
o Any amount a distributor or manufacturer collected from a cultivator under the representation it was a cultivation tax that was computed upon an amount that is not subject to cultivation tax or was in excess of the amount of cultivation tax required to be collected from the cultivator is not tax and constitutes a debt owed to the state unless returned to the cultivator that paid it.
o Any amount a distributor or manufacturer collected from a cultivator under the representation that it was a cultivation tax on cannabis or cannabis used to make cannabis products that did not enter the commercial market on or before June 30, 2022, is not tax and constitutes a debt owed to the state unless returned to the cultivator.
o Any amount a retailer collected from a purchaser under the representation that it was a cannabis excise tax that was computed upon an amount that is not subject to cannabis excise tax or was in excess of the amount of cannabis excise tax required to collected from the purchaser constitutes a debt owned to the state unless required to the purchaser that paid it.
· Section 3703 also provides procedures to refund unreturned excess cannabis tax that has not been paid to the state once the Department they collected it and allows for the Department to issue Notices of Determination (NOD) for any amounts fails to be paid. It also includes provisions for licensees to file petitions for determination if they do not agree with their NODs.
· Regulation 3704 provides regulatory guidance to cannabis retailers about how to claim a credit on their cannabis tax return for cannabis excise tax amounts and explains the records necessary to support a cannabis excise tax credit or refund. It also clarifies that this credit must be taken on the cannabis retailer’s cannabis tax return filed for the period in which the retail sale occurred.
· Regulation 3705 prescribes the form and manner of the application to retain vendor compensation, clarifies the requirements to receive approval to retain vendor compensation, clarifies the periods for which vendor compensation may be retained, clarifies the cannabis excise taxes from which vendor compensation may be retained, and provides procedures for reporting vendor compensation.
o Retailer licensees can submit a Vendor Compensation Application via the DCC portal to obtain DCC approval. Licensee fee waivers are a prerequisite for vendor compensation approval.
o Vendor compensation approvals take effect the first day of the calendar quarter commencing after the date of approval and is valid for four consecutive quarters unless it expires earlier due to ineligibility. For example, a retailer would no longer be eligible for a license fee waiver under DCC regulation 15014.1 if their gross revenues exceed $5 million or if the ownership requirements are not met.
For more information, contact a Global Go cannabis consultant by filling out the form below:
by Simone Sandoval
Partner / Director of Licensing and Compliance
Simone focuses on cannabis licensing and compliance and has extensive experience in understanding and deciphering complex cannabis regulations. Prior to entering the cannabis industry, Simone worked in Washington, D.C. as an intern for Congressman Raul Ruiz, M.D. (CA-36). During her time on the Hill, she worked on legislation, and researched policy on renewable energy, healthcare, and tribal relations.
About Global Go
Global Go provides sophisticated consulting services to the global cannabis and hemp industry. In tandem with strategic allies around the world, Global Go serves clients throughout the world from offices in Austin, Bogota, Chicago, Cyprus, Denver, Johannesburg, London, Los Angeles, Mexico City, New York, Palm Springs, Phoenix, Quito, São Paulo, Silicon Valley, Toronto, and Zurich. Powered by a team of cannabis industry pioneers and world-class consultants, Global Go helps leading cannabis funds and companies assess and enter new markets; acquire assets; raise capital; launch new product lines; improve SOPs; comply with regulations; implement technology and security systems; find talent; diagnose and execute solutions to growth obstacles; and apply for cannabis licenses (with a 99% success rate on over 175 cannabis license applications across the United States).
