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California’s Plan for Changes in Federal CBD Law

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When it comes to CBD, California is thinking ahead.

Earlier this month, the California Legislature passed Assembly Bill 710, which will amend certain sections of the Business and Professions Code and the Health and Safety Code to account for any future changes in federal law regarding cannabidiol (CBD). The purpose of this bill is to ensure that patients are able to obtain access to CBD as a medical treatment as soon as federal law makes it available.

Under existing California state law, and pursuant to the California Uniform Controlled Substances Act, controlled substances are placed into one of five designated schedules, with the most restrictive limitations placed on controlled substances in Schedule I, and the least restrictive limitations placed on controlled substances in Schedule V. Cannabis, despite the passage of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), is still on Schedule I in California. Because CBD is a compound contained in cannabis, it is likewise designated as Schedule I.

Because of this designation, the prescription, furnishing, possession, sale, and use of CBD is restricted by existing law. AB 710 would, if one of certain specified changes in federal law regarding CBD occurs, deem a physician, pharmacist, or other authorized healing arts licensee who prescribes, furnishes, or dispenses a product composed of CBD in accordance with federal law, to be in compliance with state law governing those acts. And upon the effective date of a change in federal law regarding CBD, the prescription, furnishing, dispensing, transfer, transportation, possession, or use of CBD products in accordance with federal law would be for a legitimate medical purpose, and therefore authorized pursuant to state law.

Currently, the cultivation, processing, and sale of medicinal and adult-use cannabis in California, including CBD, is regulated by the MAUCRSA. AB 710 would expressly exclude from regulation under the MAUCRSA any medicinal product composed of CBD that has been approved by the federal Food and Drug Administration (FDA) and either placed on a schedule of the federal Controlled Substances Act (CSA) other than Schedule I, or exempted from one or more provisions of the MAUCRSA.

AB 710 is short and sweet:

SECTION 1. The Legislature finds and declares that both children and adults with epilepsy are in desperate need of new treatment options and that cannabidiol has shown potential as an effective treatments option. If federal laws prohibiting the prescription of medications composed of cannabidiol are repealed or if an exception from the general prohibition is enacted permitting the prescription of drugs composed of cannabidiol, patients should have rapid access to this treatment option. The availability of this new prescription medication is intended to augment, not to restrict or otherwise amend, other cannabinoid treatment modalities currently available under state law.”

The legislation will add the following Section 26002 to the Business and Professions Code:

“This division shall not apply to any product containing cannabidiol that has been approved by the federal Food and Drug Administration that has either been placed on a schedule of the federal Controlled Substances Act other than Schedule I or has been exempted from one or more provisions of that act, and that is intended for prescribed use for the treatment of a medical condition.”

And the following Section 11150.2 will be added to the Health and Safety Code:

“(a) Notwithstanding any other law, if cannabidiol is excluded from Schedule I of the federal Controlled Substances Act and placed on a schedule of the act other than Schedule I, or if a product composed of cannabidiol is approved by the federal Food and Drug Administration and either placed on a schedule of the act other than Schedule I, or exempted from one or more provisions of the act, so as to permit a physician, pharmacist, or other authorized healing arts licensee acting within his or her scope of practice, to prescribe, furnish, or dispense that product, the physician, pharmacist, or other authorized healing arts licensee who prescribes, furnishes, or dispenses that product in accordance with federal law shall be deemed to be in compliance with state law governing those acts.

(b) For purposes of this chapter, upon the effective date of one of the changes in federal law described in subdivision (a), notwithstanding any other state law, a product composed of cannabidiol may be prescribed, furnished, dispensed, transferred, transported, possessed, or used in accordance with federal law and is authorized pursuant to state law.”

This legislation obviously won’t mean much unless and until federal law regarding CBD changes. But AB 710 signals that the California legislature is taking this issue seriously, and is prepared to pivot on a moment’s notice to ensure that patients have unfettered access to CBD once those federal laws do finally change.

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Los Angeles Priority Dispensary Applicants: No Changes Allowed

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california marijuana cannabis L.A.
Prop M priority applicants need to sit tight — for now.

We’ve received a lot of questions from existing City of L.A. dispensaries regarding whether or not they can make any corporate entity, location, or “ownership” changes before submitting their Prop M Priority Applications to the Department of Cannabis Regulation (DCR) pursuant to the Prop M ordinances. With MAUCRSA allowing for for-profit operations, many Prop. D dispensaries now desire to  leave behind the old “cooperative/collective” model and many want to leave their current locations for better digs. However, the DCR has made clear (at least to us based on our communications with them) that it likely will not honor or recognize those Prop. D dispensaries wanting to amend their business tax registration certificates (“BTRCs”) to reflect new corporate entities, “owners”, managers, or locations. Here is the rundown on key issues:

  1. Converting to a For-Profit: MAUCRSA provides that commercial cannabis businesses can organize as for-profit companies. The issue Prop. D dispensaries are facing is that their past BTRCs (certain ones of which are necessary for priority processing under Measure M) will not match their new for-profit entities where most Prop. D dispensaries are already some form of non-profit. The DCR has relayed that it will most likely not accept your application if the new entity does not match entity listed on the relevant BTRC, and that it’s best wait until after City licensure to convert to a for-profit company.
  2. Moving Locations: At this point, pretty much all cannabis businesses, especially retailers and deliveries, are hoping to capitalize on California’s robust tourist market and are seeking to open shops in high-traffic, popular areas. However, for Prop. D dispensaries, they’re likely going to have to wait on that real estate grab because of the BTRC issue–if you relocate before filing your Measure M application, and your new location fails to match the location listed on your old BTRCs, the DCR isn’t likely to recognize your City license application as valid. So, waiting to re-locate is probably wisest according to our communications with the DCR.
  3. Ownership Changes: Lots of existing Prop. D dispensaries have had massive “ownership” and management disputes over their storefronts. Even more are looking to take on new owners or “sell” all of the business to new buyers looking to cash in on L.A. cannabis. However, just like changing entities and re-location, any changes to ownership that don’t match up with past BTRCs or manager disclosures probably won’t be recognized by the DCR.

Fear not, though: all of the above changes will be doable eventually, just probably not before the March 4th filing deadline for existing dispensaries.

We should note that the City has not made clear whether businesses will be able to make the foregoing changes while waiting for their actual City license (post receipt of Temporary Approval), after they are granted the City license, or upon renewal of that license. In turn, where City and state commercial cannabis licenses are not transferable, if existing L.A. dispensaries want to apply for their state temporary and/or annual licenses as for-profits with new owners, at new locations, they’re going to have to wait on the City of L.A. to acknowledge those moves, or they’ll face jumping through the same administrative hoops with the state.

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Cannabis Equity Programs: Updates from Oakland and San Francisco

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As most everyone now knows California’s statewide licensing and regulatory regime for medical and adult-use cannabis businesses took effect on January 1st of this year. However what readers of our Canna Law Blog know is that every jurisdiction is free to decide whether to regulate or prohibit cannabis businesses within their border. It’s the state’s deference to cities and counties that make our California Cannabis Countdown series so popular. Not only are local jurisdictions regulating what types of cannabis businesses they’ll allow, but also WHO is eligible for a cannabis license.

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Oakland and San Francisco are trying to even the balance.

In many of California’s major metropolises local legislators have made it a priority to enact social equity programs. The goal behind many of these social equity programs is clear: the war on drugs disproportionally affected communities of color and as a just society we need to right that wrong. In the Bay Area both Oakland and San Francisco have enacted legislation that stresses the importance of social equity programs.

We previously covered Oakland’s regulatory regime here but as a quick refresher Oakland’s ordinance requires that half of all cannabis businesses permits are issued to equity applicants. Oakland defines an equity applicant as an individual that:

  • Is an Oakland resident; and
  • Has an annual income at or less than 80% of Oakland’s average median income;
  • and either
  • Was arrested after November 05, 1996 and has a cannabis conviction in Oakland, or;
  • Has lived for 10 of the last 20 years in a number of police beats

After equity applicants, Oakland’s licensing regime gives priority to general applicants that are equity incubators. In order to serve as an equity incubator a general applicant must provide the following:

  • Providing free rent for a minimum of three years;
  • Provide a minimum of 1,000 square feet to the equity applicant; and
  • Provide the equity applicant with all required security measures.

Oakland has also realized that just providing priority processing to equity applicants alone is not enough to combat a history of disproportionate targeting of communities of color for criminal law enforcement. Oakland will also be hosting cannabis summits, orientations, and bootcamps for equity applicants. They’ve also created an online portal for equity applicants to connect with incubation partners.

San Francisco, like Oakland, has also created an equity program but has also taken the extra step by placing restrictions on who can apply for a cannabis business license. In 2018, San Francisco’s Office of Cannabis (“Office”) will only issue cannabis licenses to applicants that meet one of following criteria:

  • Qualify as an equity applicant or equity incubator;
  • Previously possess a valid medical dispensary permit under Article 33 of the Health Code;
  • Were issued a temporary cannabis business permit by the Office of Cannabis (which required you to register with the Office and show proof of operation prior to September 26, 2017);
  • Demonstrate compliance with the Compassion Use Act of 1996 (a/k/a Prop 215) and were shut down by federal prosecution or threat of federal prosecution;
  • Applied and received approval for a medical cannabis dispensary from the Planning Commission; or
  • Registered with the Office as pre-existing non-conforming operator.

On top of restricting the individuals that can obtain a license in 2018, San Francisco is placing an emphasis on social equity by granting equity applicants and equity incubators with priority processing in the permitting process. San Francisco’s equity applicant definition and incubator requirements differ from Oakland’s. In San Francisco an equity applicant is defined as someone that meets at least three of the following six conditions:

  • Meet certain household income limits (income limit varies depending on the number of people in your household);
  • Have been arrested from 1971 to 2016 for a cannabis offense;
  • Had a parent, sibling, or child arrested from 1971 to 2016 for a cannabis offense;
  • Lost housing in San Francisco after 1995 through eviction, foreclosure, or subsidy cancellation;
  • Attended school in the San Francisco Unified School District for a total of five years from 1971 to 2016; or
  • For a total of 5 years from 1971 to 2016, have lived in San Francisco census tracts where at least 17% of the households had incomes at or below the federal poverty level.

On top of those requirements there are also certain ownership interests and corporate positions that an equity applicant must hold in the cannabis business. If you want to operate a cannabis business in San Francisco in 2018 and don’t meet any of the criteria previously mentioned (prior operator or equity applicant) you’ll have to act as an equity incubator, which requires ALL of the following for three years:

  • Have local residents perform 30% of all work hours;
  • Have half your employees meet three of the six conditions for equity applicants; and
  • Provide a community investment plan with businesses and residents within 500 feet of your location.

And at least one of the following conditions:

  • Submit a plan to the Office of Cannabis for providing guidance to equity applicants running a new cannabis business; or
  • Provide an equity applicant with rent-free commercial space and use of security services for three years. The rent-free space has to equal or exceed 800 square feet or be at least 10% of the incubator’s space.

Both Oakland and San Francisco will be issuing progress reports on the status of their respective social equity programs and it will be interesting to see how many cannabis permits end up being issued. These are noble and necessary programs and we hope that they succeed. We’ll be sure to keep you posted.

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CBD Beauty and Skincare Products in California’s Shifting Regulatory Landscape

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CBD and skin care: it’s complicated.

As I read this week’s Forbes article titled, “Cannabis Could Be The Most Profitable Ingredient In Skincare, If The U.S. Government Allows It,” it felt like déjà vu. Legislators, law enforcement, lawyers, and cannabis business owners have been going in circles for years now trying to figure out how, exactly, CBD products fit within the current state and federal regulatory structure. But despite the potential legal ramifications of violating the Controlled Substances Act (CSA), CBD companies, particularly those manufacturing beauty and skincare products, are cropping up everywhere and expanding rapidly.

We wrote a few months ago about Target, which pulled a line of CBD products from its website after a BuzzFeed article calling out the sales. And even Forbes, which stated that “A Sephora executive who asked to remain anonymous confirmed the beauty giant has plans to launch at least one CBD-based skincare brand this year,” was unable to reach anyone at Sephora for comment. These large companies have legal counsel who are undoubtedly cautioning them against venturing into the realm of cannabis and CBD; such high-profile sales of CBD products would be an easy target for federal enforcement.

Because we’ve been getting so many inquiries on this topic in California and elsewhere from companies that are unsure whether or not they need a manufacturing license to make these products and a retail license to sell them, and because this is obviously still a hot topic in the media, we thought it would be a good time to revisit the Drug Enforcement Agency’s (“DEA”) stance on the subject, as well as the scenarios under which CBD products are arguably legal under federal law.

Currently, the DEA’s stance is that CBD as well as other cannabinoids derived from cannabis are Schedule I substances under the CSA, regardless of their source. In 2016, the DEA clarified that “marihuana extract,” which is an extract “containing one or more cannabinoids derived from any plant of the genus Cannabis,” is marijuana, and therefore a Schedule I controlled substance. The DEA’s use of the word “any” means that this interpretation applies to any derivative of the cannabis plant, including CBD and any of the other cannabinoids found in cannabis. This definition is extremely broad, and according to the DEA, makes derivatives of the cannabis plant that were formerly thought to be legal, illegal.

As we’ve discussed before, there are three scenarios in which cannabis extracts are arguably legal under federal law. The first scenario is when extracts are derived from the “mature stalk” of the cannabis plant, because the CSA’s definition of marijuana “does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 USC §802(16). The DEA has clarified that the rule does not apply to portions of the plant specifically exempt from the CSA’s definition of marijuana, but there is debate as to whether products that contain any meaningful amount of CBD can be derived from the mature stalks.

Another scenario is when extracts are derived from an industrial hemp plant lawfully grown in compliance with Section 7606 of the 2014 US Farm Bill (“The Farm Bill”). The Farm Bill allows states to enact pilot programs for hemp research purposes. Hemp that is cultivated in compliance with a state’s pilot program is legal pursuant to the Farm Bill, although the sale of any products derived from this research is not explicitly allowed.

The third scenario is when products are derived from imported hemp. In the early 2000’s, two cases out of the Ninth Circuit, Hemp Indus. Ass’n v. DEA, 357 F.3d 1012 (9th Cir. Cal. 2004) and Hemp Indus. Ass’n v. DEA, 333 F.3d 1082 (9th Cir. 2003) clarified that the DEA could not regulate hemp products merely because they contained trace amounts of THC. This was because some portions of the cannabis plant are explicitly outside the scope of the CSA, and the DEA was not permitted to expand the scope of the CSA to encompass all parts the cannabis plant. At the time of the ruling, it was illegal to grow hemp so it only applied to hemp imported from outside the USA. Some now argue that the holding could apply to hemp grown pursuant to the Farm Bill although, as stated above, commercial sales of these products is not explicitly allowed.

The Hemp Industries Association has sued the DEA over the “marijuana extract” rule, and that case is still pending. Until it’s decided, we’re left with a legal quagmire of rules interpretations that leave businesses selling CBD products in a precarious legal position. And of course, if you’re hoping to sell to cannabis dispensaries in any regulated state, including California, you’ll have to be licensed by that state, and you’ll only be able to sell to other licensees. Given the recent shift in federal enforcement priorities, we wouldn’t be surprised to see an uptick in enforcement action against companies selling CBD skincare and beauty products, particularly in interstate commerce and outside the ambit of state regulatory systems. But that’s a legal and business risk that many are clearly still willing to take.

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California Commercial Cannabis Leases: Planning in a Time of Uncertainty

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Leave yourself some room to maneuver with that cannabis lease.

The year 2018 began with a mixed bag. California, the nation’s most populous state and its most powerful economic engine, finally began issuing licenses to medicinal and adult use commercial cannabis businesses under the state’s new regulatory regime. Days later, the Attorney General issued a memorandum rescinding the 2013 Cole Memo enforcement guidelines, despite indicating to the contrary several months prior. There has since been bipartisan backlash against Mr. Sessions’ decision, and there are now numerous legislative proposals in congress as to how the federal government will move forward with respect to cannabis.

In the meantime, property owners still have to plan for the future, whether that means deciding how to use their property, or whom to rent commercial space to and under what terms. Operators and landlords alike are uncertain what to expect: on the one hand, state governments are issuing cannabis licenses freely; on the other, the federal government is telling its prosecutors to pursue any and all of them as they see fit–  regardless of any state’s laws. One strategy for approaching all this uncertainty is by building early termination contingencies into the lease. Below are a few of many contingencies that commercial cannabis landlords and tenants alike should consider including as part of a potential tenancy.

  1. Federal enforcement actions. This is what keeps state-legal operators up at night and what many legislators are currently trying to protect against. As long as cannabis remains federally illegal in all forms, however, this will remain a risk. One way to potentially mitigate that risk is by allowing for mutual early termination options in the event of any actual or specifically threatened enforcement actions, such as civil asset forfeiture. If the federal government’s goal is for cannabis operations on the premises to cease, then allowing each party an opportunity to force termination of the lease should be helpful.
  2. Changes in federal law and/or enforcement priorities. Similar to federal enforcement actions, the parties may want to include options to terminate the lease early if something changes at the federal level to an extent that both parties no longer feel comfortable with state law compliance alone. How significant that change would need to be is up to the parties’ negotiations and levels of risk tolerance. For example, while the Cole Memo has been rescinded, the Rohrabacher-Blumenauer amendment protecting state-compliant medicinal operations is still in effect (if only barely), so the recent federal action may not necessarily be cause for parties to end a tenancy.
  3. Cole Memo priorities as affirmative lease obligations. Just because the Cole Memo has been withdrawn does not make it irrelevant. The Cole Memo is essentially a well-thought-out list of the federal government’s highest priorities for enforcement against cannabis operators, such as preventing sale to minors, diversion to non-cannabis-legal states, and revenue to criminal organizations. Keeping these priorities in the lease as affirmative obligations that the tenant must comply with, and giving the landlord an early termination option if any one is violated, adds an extra layer of protection for both parties and helps further the state’s goal of elevating good actors and sorting out the bad. Also, we’ve already seen some federal prosecutors issue statements to the effect that existing enforcement priorities (i.e. the Cole Memo) will guide future enforcement decisions.
  4. Change in local laws/nonconforming use designation. Federal enforcement and changes in federal law are not the only things to pay attention to. California law gives cities and counties final say in whether and to what extent cannabis operations will be allowed in their jurisdictions. If something changes in local law, such as a zoning ordinance, and the proposed use becomes nonconforming and unlawful, then whether or not operations have commenced, the parties may want an option to exit the tenancy rather than fight the local government.
  5. Secured interests. Just as with residential mortgages, contracts supporting secured interests on commercial property often contain “compliance with all laws” provisions. In light of the recent federal action, lenders may be less comfortable with cannabis uses on the property securing their investment, and may be more prone to call the loan due in full, creating a problem for both landlord and tenant. In such event, the landlord may want an option to terminate the lease early without penalty.

We don’t know where the state-vs-federal conflict will go from here, and for now the cannabis industry will have to continue dealing with uncertainty. So far it seems the market is betting on the states to come out ahead. In the meantime, there are some meaningful items to include in a commercial cannabis lease that may mitigate some uncertainty and risk.

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California Cannabis Licensing and Labor Peace Agreements

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Labor Peace Agreements can save you from strikes.

We recently hosted a webinar discussing cannabis disputes and litigation. Over 1,000 people signed up to learn about the different types of litigation that can occur, how to avoid disputes, and, if necessary, how to prevail when litigation is unavoidable. During the presentation, I covered employment litigation and received quite a few questions. Several people were curious about labor peace agreements in particular, which are an important topic for the California cannabis industry. Because we ran short of time during the webinar, however, I will address those agreements here.

California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) requires adult use cannabis and medicinal cannabis licensees with 20 or more employees to provide a statement that the applicant will enter into, or demonstrate that it has already entered into, a labor peace agreement. In other words, once your business reaches a certain size, you will not be able to operate in California without a labor peace agreement. But, what is a labor peace agreement?

In short, a labor peace agreement is an agreement your cannabis business enters into with a union that represents cannabis workers. The agreement includes obligations for both the union and the cannabis employer. This types of agreements are highly specialized.

As a preliminary matter, the cannabis employer must agree to remain neutral regarding unions and their representation of employees. This means the employer cannot make any statement opposing or advocating for unionization and cannot retaliate against any employee for discussing joining a union or disparaging unions. Employers are responsible for ensuring all managers and supervisors are aware of the neutral requirements of labor peace agreements.

Usually, labor peace agreements include a provision that requires employers to provide a list of the name and contact information of all non-supervisory employees. Employers typically are required to provide these lists at the request of the union, although most labor peace agreements include a limit on the frequency of the requests the union may make (i.e., no more than once a week). A labor peace agreement also grants the union the right to contact the cannabis business employees. However, this right must not disrupt normal business and productivity activities.

Unions also have obligations under Labor Peace Agreements. The union is required to be neutral in its communications with employees. The union cannot disparage the company and cannot paint the cannabis employer in a bad light to employees or to the public. The union must also agree to not disrupt or interfere with the employer’s operations or businesses, and cannot encourage or engage in a strike, slowdown, or picketing of the company.

In addition for individual obligations for both employer and the union, labor peace agreements also typically contain provisions related to collective bargaining if the cannabis employees decide to unionize. The collective bargaining agreement requires the parties to bargain in good faith, and it usually includes a provision about how to resolve an impasse if the parties cannot reach an agreement.

Labor peace agreements may seem intimidating or burdensome but they are nothing more than an agreement to work with your local union and allow the union access to your cannabis employees. In return, the union agrees to not disrupt your business practices in contacting employees, and agrees to not strike or to cause a labor strike.

Ultimately, when looking to enter into a labor peace agreement, your foremost concern should be entering into the agreement with a union that is easy to work with. The union should be open to your ideas and open to negotiations in the labor peace agreement. In the end, you will have options over what union you choose to enter the agreement with, but you will always need a labor peace agreement if your California cannabis business has more than 20 employees.

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California Sales Tax: Good News for Cultivators!

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Your standard CDTFA qualified cannabis tractor.

California cannabis businesses are now acquiring temporary permits to enter the new cannabis marketplace made possible under MAURSCA. As part of that process, all cannabis businesses have been introduced to the California Department of Fee and Tax Administration (“CDTFA”), the agency tasked with administering the new cannabis cultivation taxes and sales tax.

The CDTFA administers sales tax exemptions on purchases of certain farm equipment and agriculture products. These exemptions are available to cultivators, processors and manufacturers. California sales tax rates are high – ranging from 7.25% to 10.25% of the sales price. Sales tax savings go directly to the bottom-line and a business could save up to $1,025 on every $10,000 invested in eligible supplies and equipment.

This post provides a quick outline of California sales tax exemptions available to cultivators. A second post will cover licensed processors and manufactures.

Seeds and Plants

The sale of seeds and plants are exempt from sales tax so long as the purchaser uses those seeds and plants to create products sold in the regular course of business. Plants include “cuttings of every variety”. Consequently, a cultivator should be able to purchase clones and plants exempt from sales tax. To document the exemption, a cultivator must give a seller an exemption certificate.

Fertilizers

The sale of certain fertilizers is exempt from sales tax so long as the fertilizer is applied to land or in “foliar application” where the products of such plants (i.e., cannabis) are sold in the regular course of business. Only very specific types of fertilizers and nutrients qualify and the definitions are highly technical. For example, “commercial fertilizer”  and “agricultural minerals” qualify. These substances generally contain combinations of nitrogen, phosphoric acid and potash under 5%. On the other hand, “packaged soil amendments” (i.e., hay, straw, peat moss) do not qualify. To document the exemption, a cultivator must give a seller an exemption certificate.

Farm Equipment and Machinery

As a rule, the sale of farm equipment and machinery is taxable. However, the purchase of certain farm equipment and machinery is partially exempt from sales tax. The partial exemption is currently 5% of the sales price. For example, the sales tax rate on the purchase of eligible equipment in Arcata is 3.5% (8.5%-5.0%); resulting in a $500 savings on the purchase of $10,000 worth of equipment.

Three requirements must be met to take the credit. The first and most problematic requirement, is that the purchaser’s business must fall within specific federal SIC codes.  SIC codes are created by the federal government to track statistical information on U.S. businesses. Because cannabis is illegal under federal law, no specific SIC code is currently available for the sale of consumable cannabis. Nonetheless, a cultivator may argue that their business operation meets this requirement because it is included in the general farm category of SIC 0191.

The second requirement is that the equipment should be used at least 50% or more in harvesting agricultural product. The third, requirement is that the equipment should be farm equipment and machinery as defined under regulations. The regulations broadly define farm equipment and machinery. The CDTFA has identified the following equipment as qualifying for the exemption:

  • Planting equipment;
  • Trimming Tools;
  • Drying racks and trays;
  • Grow tents and lights;
  • Environmental controls;
  • Hydroponic equipment;
  • Irrigation equipment;
  • Hand tools;
  • Repair and replacement parts;
  • Wind machines.

Vehicles that are designed to be used exclusively on roads and highways, such as pick-up trucks, do not qualify. To document the exemption, a cultivator must give a seller an exemption certificate, Form CDTFA-230-D.

Buildings for Raising Plants

Certain buildings are considered farm equipment for purposes of the farm equipment and machinery exemption discussed above. Generally, they must be single purpose structures and do not include structures used for storage or administrative purposes.  The buildings must:

  • Be specifically designed for commercially raising plants;
  • Used exclusively for that purpose.

For example, a greenhouse would generally qualify. To document the exemption, a cultivator must give the seller an exemption certificate, Form CDTFA 230-D.

Solar Power Facilities

A business that otherwise qualifies for the farm equipment partial exemption, may purchase certain solar equipment at the reduced sales tax rate.

In general, solar power equipment used at least 50% in the production of cannabis would qualify for the farm equipment and machinery partial exemption. Solar power equipment may qualify even if the equipment is tied to the local power grid.

For example, a solar facility producing a total 1000 kw of electricity per year would qualify so long as at least 500 kw per year was used to power the cultivator’s farm equipment and machinery. Note that in this example, the cultivator could sell on the open market the excess 500kw of electricity. Potentially, the cultivator can deduct on its federal income tax return all expenses related to this separate power distribution business.

Diesel Fuel Used in Farming

The purchase of diesel fuel is generally subject to sales tax; however, a partial exemption from sales tax of 5.0% applies to the purchases of diesel fuel used in farming activity or in transporting product to a manufacturer or a distributor. The computation for this sales tax exemption is the same as for the exemption for farm machinery and equipment. To obtain the partial exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA-230-G.

Furthermore, California imposes a $0.36 per gallon excise tax the sale of diesel fuel. However, a cultivator may purchase diesel fuel used to power farm equipment exempt from the diesel fuel excise tax. To obtain the exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA-608 REV.

Liquid Propane Gas Used in Farming

Sales of liquid propane gas used to operate machinery used in farming or harvesting are fully exempt from sales tax. To obtain the full exemption, a cultivator must present to the seller an exemption certificate, Form CDTFA 230-N REV.

Conclusion

As cultivators make capital investments in their cannabis operations, they have an opportunity reduce the amount of sales tax they pay on their purchase of certain consumables and high-ticket items. These exemptions provide bottom-line savings; however, the CDTFA strictly enforces compliance in this area. Accordingly, cultivators should keep meticulous books and records and ensure that they issue completed exemption certificates on these purchases, and check in with a qualified CPA or tax lawyer with any questions.

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California Cannabis Countdown: Culver City

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culver city california cannabis marijuana
Adult use cannabis stores, coming soon.

On December 11, 2017, Culver City Council voted to approve an ordinance that allows for the establishment of medicinal and recreational commercial cannabis businesses. Culver City becomes the fourth city in Los Angeles (including West Hollywood, Los Angeles, and Maywood) to implement a framework for regulating both medical and adult-use cannabis.

Since January 1 and the legalization of adult-use cannabis in California, clients have been asking us constantly about licensing their businesses. As we have explained time and again, getting local approval is paramount before getting a state license.

Here is how the rest of Los Angeles County currently looks:

  • The City of Los Angeles is only accepting Prop M Priority Applications until at least March 4, 2018. The city has stated that applications for the general public probably will not be available until mid-2018.
  • West Hollywood has been processing applications, but the city is known for having high rents and minimal property space.
  • Maywood is one of the smallest incorporated cities in Los Angeles County. Although they allow commercial cannabis businesses, there is not a lot of space to establish one.

Culver City expects to have an application process open soon, sometime during the first quarter of 2018. The ordinance allows for the establishment of storefront retail, delivery only retail, manufacturing, distribution, laboratory testing, and indoor commercial cultivation. There will be limits placed on the number of permits issued for each type of business, so it will be important to be ready once the application process opens. The city expects that getting a storefront retail business permit will be competitive.

The ordinance additionally lays out strict standards for business permits. A commercial cannabis business permit is not transferable to other persons, projects, or locations. Businesses will not be able to relocate unless approved by the City Council. The ordinance also sets forth rules for changing ownership and changing the form of the entity. These types of things will be important to get organized before applying for a commercial cannabis business permit in Culver City.

Located in the heart of West LA and easily accessible by many major freeways, Culver City offers a great alternative to those seeking business licenses in the City of Los Angeles. Anyone interested should continue to monitor closely, and be ready to move quickly.

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California Announces End Date for Collectives and Cooperatives

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california cannabis marijuana
Roll up that California collective and get a license.

This week, the Bureau of Cannabis Control (the “BCC”) announced that as of January 9, 2019, Section 11362.775 of the Health and Safety Code (the “Code”) will no longer be in effect. The BCC notice ends the popular collective and cooperative models of cannabis cultivation, manufacturing and distribution in California. These models were promulgated through the use of “creative” legal advice in order to take advantage of the Compassionate Use Act’s multiple loopholes and ambiguities, and usually involved patients joining a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive medical cannabis from other patients in the collective who grow or process it for them.

California’s transition into a regulated commercial cannabis system left many operators, particularly those with non-profit mutual benefit corporations structured as collectives or cooperatives, uncertain as to just how much time they have left to operate. We’ve encountered some operators who, for a variety of reasons including the time and expense of the process, or their inability to comply with local zoning requirements at their current location, are reluctant to abandon the collective model in favor of receiving a state license under MAUCRSA.

Unfortunately, these operators will have no choice but to join the regulated system, and there are a laundry list of reasons why it makes sense to do that sooner rather than later. Given the recent dismantling of the federal government’s former cannabis enforcement framework, operators will be opening themselves up to much greater risk if they are choosing to operate outside of the state’s licensing framework. U.S. Attorneys now have full discretion to determine to what extent they can and should enforce federal law in the context of marijuana crimes, and we would be willing to bet that California’s U.S. Attorneys won’t be turning a blind eye to cannabis businesses that continue to operate in contravention of local law, or without a state license.

Following the implementation of MAUCRSA, qualified patients and their caregivers may continue to operate with limited criminal immunity without a state license, so long as: (1) the patients and caregivers operate in full compliance with state law, and (2) the local government does not prohibit the activity. See, H&S Code sections 11362.5, 11362.765, 11362.77, and 11362.7. But as we stated above, immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.) will expire on January 9th of next year.

And although MAUCRSA expressly exempts qualified patients and caregivers from licensure requirements, it does not allow qualified patients, their caregivers, or cannabis businesses to conduct commercial cannabis activity without a license. Any collective currently engaging in commercial cannabis activity that exceeds the strict qualified patient and primary caregiver limits is in violation of MAUCRSA and is operating illegally.

As a reminder, to be immune from prosecution under the Compassionate Use Act and MAUCRSA, a primary caregiver (or a collective) must operate within the following confines when acting without a state license:

  1. Cultivation, possession, storage, manufacture, transportation, donation, or provision of cannabis must be exclusively for the personal medical purposes of no more than five specified qualified patients for whom the caregiver is the primary caregiver. (B&P section 26033(b));
  2. The caregiver cannot receive remuneration for these activities other than for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis, or for payment for out-of-pocket expenses incurred in providing those services. (B&P section 26033(b), H&S Code section 11362.765(c));
  3. The caregiver cannot possess more than eight ounces of dried cannabis per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)); and
  4. The caregiver cannot maintain more than six mature or twelve immature cannabis plants per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)).

In addition, everyone, including collectives and caregivers, must still comply with applicable local law. And collectives and cooperatives that opt not to apply for a state license right away will be limited in their ability to distribute their product. The bottom line is that commercial cannabis activity is only permitted among licensees, and once a business entity or individual receives and active temporary license or a full license from the state, they must immediately cease doing business with non-licensed entities, or they risk losing their license. See B&P section 26053(a). And for those licensees looking to “have their cake and eat it too” by obtaining a state license while maintaining a collective or cooperative, keeping that non-licensed entity will put the state license at risk.

With local license caps quickly being reached, stringent legal limitations on collectives and cooperatives, and an uncertain federal enforcement landscape, we cannot emphasize enough the importance of integrating into the regulated state system as soon as possible. Holding on to the collective model through the next year will make that transition much more difficult, and perhaps even impossible.

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California Cannabis Trademarks: The “Legal Use In Commerce” Debate

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california cannabis trademark
In California, trademark use comes before registration.

It was big news for California cannabis business owners when the California Secretary of State’s office announced that it would be accepting applications for cannabis-related trademarks under limited circumstances. Until January 1st, one of the biggest hurdles for California cannabis brand owners had been the inability to secure California state trademark registrations for their marks. But we are still receiving a lot of questions from clients regarding whether they are actually eligible for those registrations, particularly when they have not yet received their temporary or full license from the state, or even when they are not yet operating.

As we’ve discussed before, one of the key requirements for obtaining a California state trademark registration (or a federal trademark registration, for that matter) is that you must be making lawful use of the mark in commerce at the time of your application. For any state trademark application, this means you must be making lawful use of your mark in commerce within that state. This requirement has created a good deal of difficulty for those seeking to enter into cross-state brand licensing deals, but it’s also creating some confusion here in California, where it isn’t always clear what “legal use” of a mark entails.

The California Secretary of State’s office has indicated that it will accept trademark applications for goods and/or services that fit within an existing classification code from the USPTO’s Identification of Goods and Services Manual. While it will be easy to register for things that fit squarely within the USPTO specifications, like retail services, registering for cannabis products themselves will prove less clear cut. So every application must specify goods and/or services that the applicant is actually selling, and the sale of those goods and/or services must be legal under state law. Note that mere token sales of goods or services are insufficient to support trademark registration.

To sort through the requirements for a successful state trademark application, it’s useful to go back to the basics of legal trademark use under federal law.

One of the key considerations in any trademark application is that it doesn’t matter how clever the wording of your specification of goods and services is, if you aren’t actually selling goods or services that comply with the relevant law. For example, under federal law, calling your goods “dried herbs,” “dried plant matter,” or “agricultural goods” will not fool the examining attorney if what you are actually selling is cannabis.

How this will play out at the state level, however, is less clear, where the sale of cannabis is now legal for those with a state license (we are intentionally taking a conservative position on this, as a trademark registration that is open to challenge and cancellation down the line could end up doing an applicant more harm than good). As under federal trademark law, you must actually be selling the goods you specify in your application, and the goods you are selling must comport with state law. The Secretary of State’s office has taken a rather ambiguous position here, but we think it’s the best they could do given the lack of legislation amending California’s trademark law. Until the state establishes a specific class under which businesses can register their marks for cannabis products, we expect to see trademark applications with intentionally vague specifications of goods and services, which won’t benefit anyone, including trademark owners.

And remember that this determination does nothing to increase your odds of obtaining a federal trademark, even though the state has deemed your use “lawful.” An applicant must have a bona fide intent to use their marks lawfully (under federal law) in commerce under Sections 1 and 45 of the Trademark Act, 15 U.S.C. §§ 1051, 1127.

Note that even an application filed on an intent-to-use basis could be rejected if the record indicates that the identified goods or services are unlawful, because actual lawful use in commerce is not possible. Many applicants have tried and failed to make an argument that because they sold goods only in states that allow for the legal sale of cannabis, their current and intended use therefore constitutes lawful use in commerce under the Trademark Act. The USPTO has repeatedly rejected this argument, citing a decision that “the fact that the provision of a product or service may be lawful within a state is irrelevant to the question of federal registration when it is unlawful under federal law.” In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016). In other words, the federal interdiction against cannabis will control over state law cannabis legalization.

The takeaway here is that lawful use in commerce will be key to obtaining a California State trademark registration that will hold up in court, and provide you with adequate brand protection. It’s better to hold off on filing your trademark application until you are certain you meet all the legal requirements under trademark law, than to rush and file an application that could be subject to cancellation. We cannot stress enough the importance of engaging with an experienced trademark attorney to ensure that your application is viable before you file.