California Cannabis

In 1996 California became the first state to legalize medical marijuana. Proposition 215, known as the Compassionate Use Act, allows patients to posses and cultivate medical marijuana when deemed appropriate by a physician for the treatment of any illness for which marijuana provides relief. The Compassionate Use Act did not create a state regulatory agency or provide guidelines on possession limits, taxes, or a patient registry. Local jurisdictions are able to adopt ordinances to regulate or prohibit the location, operation, or establishment of medical marijuana businesses. With no uniformity across the state, the availability, civil, and criminal enforcement of medical marijuana varies greatly from jurisdiction to jurisdiction.

In 2003, Senate Bill 420 passed creating possession and cultivation limits of eight ounces per patient, a voluntary identification card program administered by the State Department of Health Services, and prohibited the sale of marijuana for profit. The possession limits of SB 420 were later found to be unconstitutional in People v. Kelly, however a patient must still show that an amount over eight ounces is medically necessary. In 2005, the California State Board of Equalization began requiring sellers of medical marijuana to hold a seller’s permit and pay sales taxes.

Despite operating in a legal grey area with little to no statutory framework for the past twenty years, California is the largest cannabis market in the world, with a total market size of $1.3 billion in 2014.  The California market is expected to grow exponentially with the recent passage of three bills designed to bring structure and uniformity to the California cannabis industry.

On October 9, 2015, California Gov. Jerry Brown signed into law the Medical Marijuana Regulation and Safety Act (“MMRSA”).  MMRSA, comprised of three bills (Assembly Bill 243, Assembly Bill 266, and Senate Bill 643) is intended to provide “comprehensive regulatory framework for the production, transportation, and sale of medical marijuana.” While MMRSA only applies to medical marijuana, it is widely anticipated that these regulations will pave the way for legalized recreational adult use by 2018.

MMRSA creates the Bureau of Medical Marijuana Regulation (“BMMR”) within the Department of Consumer Affairs. BMMR is responsible tracking licenses and the movement of cannabis and cannabis products throughout the state. BMMR will oversee distributors, dispensaries, and transporters. MMRSA appoints the Department of Food and Agriculture to regulate and license cultivation; the Department of Pesticide Regulation to develop standards for the use of pesticides in cultivation; the State Department of Public Health to develop standards for the production and labeling of edibles; the Department of Fish and Wildlife and the State Water Resources Control Board to regulate the effects of cultivation on water resources.

MMRSA establishes a multi-tiered licensing system for medical marijuana cultivation, manufacturing, testing, distribution, transportation, and dispensaries. There are ten cultivation licenses determined by the square footage of the facility, its location inside or out, and the type of lighting used. Two manufacturing licenses distinguished by the use or nonuse of volatile solvents. One testing license, one distribution license, and one transportation license. Two dispensary licenses, determined by the total number of facilities operated.

There are a number of restrictions on the types of licenses held to prevent vertical integration within the industry. In general, only two different licenses may be held by a licensee. For example, a licensee may hold a transportation and distribution license, but no other. A small cultivation licensee may hold a manufacturing license, but a medium cultivation licensee may not. 

There are no residency requirements for owners, directors, employees, or investors of a medical marijuana business. However, prior conviction of an offense substantially related to the functions or duties of the business applied for, including a felony controlled substance conviction, may result in denial of a license. A licensee must obtain a local permit or license prior to obtaining a state license, or a licensee will be subject to revocation or termination of the state license. 

While there are no express tax provisions within MMRSA, it does authorize local cities, counties, and municipalities to assess fees and taxes on all medical marijuana related business within their jurisdiction. Nothing in MMRSA limits a local jurisdiction’s ability to regulate or prohibit the location, operation, or establishment of a medical marijuana business.

In a departure from the language of SB 420, MMRSA includes in the definition of person, “a firm, partnership, joint venture, corporation, limited liability company, etc.” This means that moving forward medical marijuana businesses will be able to operate as for profit entities, eliminating the necessity to operate as collective and cooperative non-profits.

With the passing of MMRSA and recent adult use legalization in neighboring states, advocates and activists determined to legalize adult use recreational marijuana see this as the perfect time to introduce ballot measures in California. In an April 2015 study the Public Policy Institute of California found that fifty-five percent of Californians believe marijuana should be legal.