Policy Matters: A 2022 California Policy Update
With only a week until the Legislature reconvenes to wrap up work for the year, it's a great time to review their progress on some of the most stubborn policy challenges in California cannabis. Persistent needs include reducing the burden of state taxes, narrowing the licensing gap between suppliers and retailers, and reducing the size of the illegal market.
Another major issue lawmakers are working to solve before session ends is helping cannabis businesses navigate state environmental requirements per the California Environmental Quality Act (CEQA). As of June 30th of this year, the Department of Cannabis Control (DCC) ceased issuing provisional licenses, and holders of such licenses must now secure a permanent “annual” license by January of 2026. To obtain a permanent license businesses will need to demonstrate compliance with CEQA, which will be a significant challenge for the roughly 70% of the legal marketplace currently operating on provisional licenses.
So what have state elected leaders agreed to enact for 2023 to head-off these existential legal market threats?
State Tax Reform
California’s complex, disproportionate, and burdensome tax and fee regime has been a major contributor to the shuttering of cannabis businesses across the state, and an albatross around the neck of those who remain. As a result, several bills were introduced this session seeking to modify the state’s cannabis tax policy, and language was included in the Governor’s May budget revision to reduce cannabis business taxes. The final tax deal included in budget trailer bill AB 195 makes, among other things, the following changes:
Eliminates the cannabis cultivation tax starting on 1/1/2023;
Maintains the current state excise tax rate of 15% through fiscal year 2024;
Allows for increases in the state excise tax rate in the 2025-2026 fiscal year and every two years thereafter, if revenue from the excise tax falls short of the amount the state would have collected under the weight-based cultivation tax that AB 195 eliminated;
Moves the point of excise tax collection and remittance from the distributor to the retailer;
Authorizes eligible equity retailers to keep 20% of the excise tax they would have been otherwise required to pay; and
Creates a new tax credit program for equity licensees and cannabis businesses providing employment compensation, employer-provided group health insurance and retirement benefits. The credit will be equal to 25% of the operator’s expenditures capped at $250,000 per year, be offered from 2023 to 2028 and capped at $20 million over this period.
The bill also included non-tax cannabis policy riders, such as reducing the employee threshold (from 20 employees to 10) that triggers the need for businesses to have a Labor Peace Agreement in place. AB 195 was signed into law on June 30, 2022.
Increasing the Volume of Legal Retailers & Reducing the Illegal Market
Since its 2018 debut, the regulated California cannabis industry has had a licensing imbalance that has significantly and negatively affected the integrity of the legal market. For example, the majority of licenses issued to date have been to supply-side operators such as cultivators and manufacturers. Meanwhile, retail licenses issued over the same timeframe are scarce by comparison. In fact, six years after the legal market opened, legal retail is still prohibited by roughly two-thirds of California’s local jurisdictions. As a result, 60% of California cannabis sales occurred in the illegal market in 2022. So, what is behind the retail licensing logjam and what can be done to increase their number and create a balanced market?
While there are many culprits, first on the list is local government capability. Since 2016, cities and counties have cited a lack of staffing resources and cannabis policy know-how as the main reasons for limited cannabis permitting and ongoing retail moratoriums. For many local governments these challenges still persist, and are about to get more complicated and costly with the introduction of CEQA compliance requirements.
With local control over land use protected from state interference, state lawmakers and regulators used this session to offer strategic proposals to help cities and counties with licensing programs, and cannabis businesses with CEQA compliance. Below is an update on how these measures are doing so far this year.
SB 1186: As originally drafted, this bill by Senator Scott Wiener would have required all California local governments to authorize medical cannabis delivery retailers to ensure patient access to legal cannabis. However, the legislation was amended several times during committee consideration in each chamber, and no longer includes this mandate. As of this publication, the measure simply clarifies that California local governments may not prohibit licensed cannabis retailers from delivering to patients residing in jurisdictions that prohibit cannabis retail licensing. The bill has already passed the Senate and two Assembly committees, and is now pending additional consideration by the Assembly Appropriations Committee on August 3, 2022.
AB 195: The budget trailer bill includes several passages aimed at improving local government cannabis licensing outcomes and curbing illegal market activity. First, the trailer bill requires the DCC to establish a task force to improve communication between state and local cannabis regulators by January 1, 2025. The task force is expected to collaborate on illegal market enforcement, social equity, state licensing and labor compliance.
Also included is language imposing civil fines of up to $10,000 per violation for commercial landlords who permit illegal cannabis operations by their tenants, with each day the violation continues constituting a separate violation. Similarly, AB 195 also imposes a penalty of $3,500 per day for unauthorized diversion or use of water for unlicensed cannabis activity. Finally, the trailer bill imposes cannabis cultivation and excise taxes on any person who stores cannabis for the purpose of illegal sale as if they are purchases, and imposes an additional penalty of 25% of the amount of those taxes or $500, whichever is greater.
CEQA Exemptions
As of June 30, 2022, the DCC stopped issuing provisional licenses. Over 70% of the current legal market is operating pursuant to provisional licenses and must migrate to permanent licensing by 2026. This is a significant development for cannabis businesses, given the enormous costs and lengthy review process that is typically associated with CEQA compliance. So how will this large segment of the legal marketplace afford to comply with this state mandate?
In an effort to help, Senator John Laird introduced SB 1148 in 2022. The bill would exempt cannabis businesses from CEQA compliance so long as the local government authorizing their business has either (a) approved the project with a negative or mitigated negative declaration, or (b) approved the project after determining that the project complies with the local cannabis licensing ordinance, in which there must be an environmental impact report requirement that is certified. After clearing the Senate and several Assembly committees, the bill is scheduled for action before the Assembly Appropriations Committee on August 3, 2022.
Next Steps
State lawmakers return to Sacramento on August 1st to wrap up work for the year which will conclude on August 31st. Throughout the final month of this legislative session, they will hold final consideration on bills addressing immediate challenges to California cannabis businesses and consumers. Stay tuned for details on the end-of-session deals on each of these important measures. For regular updates on extended California cannabis legislation visit: https://www.squarerootgroup.com/ca-cannabis/legislativetracker