The year 2022 was a busy one for the California cannabis industry, with everything from tax reform to the beginning of enforcement. In this post, I’ll go back through some of the highlight’s for California’s cannabis industry last year.
California hints at enforcement?
Anyone who knows anything about California cannabis knows that the regulators simply do not take enforcement seriously. Probably the biggest complaint our California cannabis team hears is just how bad of a job the state has done in terms of letting the illegal market fester. A few things happened in 2022 that indicate the agencies may be changing their approach.
First, our cannabis team saw a big uptick in inspections by the state Department of Cannabis Control (DCC) and by local agencies. From what we’ve seen, DCC will often drop in with little to no advanced notice and demand that a licensee cure a series of regulatory violations in an exceedingly short time. It’s hard to read the tea leaves in a lot of cases – inspections can be a prelude to enforcement, but they can also be a way for the agencies to spur compliance without clogging up the court system.
In a much more highly publicized case, Kushy Punch and some of its owners were tagged with a $128 million fine in late 2022 for alleged illicit market sales. The ruling in the Kushy Punch case highlights how much power the agencies have, even though they hardly ever use it. I don’t expect the case to have much of a chilling effect, unless the agency starts filing more and more actions. But DCC’s victory again may signal a change in tune.
California overhauled its cannabis taxes
If the illegal market and California’s relinquishment of its duty with respect to enforcement was the most frequent complaint we saw, the second biggest was cannabis taxation. The California Department of Tax and Fee Administration (CDTFA) is the California cannabis agency that oversees state-level cannabis taxation. Under state law, CDTFA collected both a cultivation tax and an excise tax. These taxes were not collected from cultivators and retailers as one would expect, but instead from middle-men distributors, making collection and reporting a huge mess.
In 2022, that all changed when the state adopted tax reforms. Essentially, the cultivation tax was wiped off the books starting July 1, 2022. And importantly, the burden to remit the excise tax was shifted to retailers. There will definitely be some growing pains as switches are made, but we are hoping that the changes in cultivation tax will simplify things for everyone, including the CDTFA – the California cannabis industry is currently in arrears on about a quarter billion dollars in late taxes, fines, etc.
One thing we hope for in 2023 is that the state revisits some of the penalties associated with late CDTFA payments. Today, payments that are a day late can lead to penalties and interest that amounts to more than half of the overdue amount. We’ve helped lots of businesses negotiate tax payment plans with CDTFA and have seen even modest tax bills snowball into six-plus figure payments in no time. It’s a real shame and something we hope the state will clean up next.
California expanded medical deliveries
One of the biggest issues for cannabis in California historically has been the “cannabis deserts” across the state. State law allows local jurisdictions to decide what happens in their borders and, predictably, most cities in the state banned or severely restricted cannabis activities. State regulators tried allowing statewide deliveries, was sued, and basically caved.
This all changed when State Senator Scott Wiener (famous for his psychedelics advocacy) managed to pass SB-1186, otherwise known as the Medicinal Cannabis Patients’ Right of Access Act. I won’t get into all the details of what the new law does, since we wrote about it in detail here. Suffice it to say, the law is a victory in the battle for expanded access to medicinal cannabis by people living in so-called cannabis deserts.
DCC updated its cannabis regulations… again
Since recreational licensing started back in 2018, the regulations have changed dozens of times – emergency regulations, re-adoption of emergency regulations, proposed regulations, final regulations, more emergency regulations, and so on. After the three former cannabis agencies were consolidated into the DCC, there were yet more changes. At the end of 2022, DCC adopted new final rules, which govern quite a bit. I won’t get into all of the details here, but note that they impose additional restrictions on inhaled products and allow for large licenses (which I’ve written about here and here).
Prop. 65 rules add more focused cannabis provisions
Another thing that’s been a huge annoyance for industry is Prop. 65 – a law from the 1980s that requires warning labels on certain products that the state deems carcinogens or reproductive toxicants. Of course, cannabis smoke and THC made the list a few years back, meaning that cannabis (and even hemp products with trace amounts of THC) needs Prop. 65 warnings too.
Now, the state has passed targeted Prop. 65 rules just for the cannabis industry. We wrote about those rules here. They are detailed and impose all kinds of new disclosure requirements on certain cannabis products by product type (i.e., inhalable v. dermally applied and so on). There’s a brief one-year windup period for compliance that will run later this year. In the meantime, California cannabis companies are going to need to keep their eyes on the ball when it comes to label redesigns.
Bad news for Los Angeles
The City of Los Angeles is a local jurisdiction with the largest cannabis industry in the country (it’s certainly the biggest California cannabis jurisdiction) – and likely the world. Nevertheless, the city has had a very hard time launching and managing its cannabis program. Since it opened for licensing, we’ve seen the agency get sued over alleged problems with its applicant selection process, go through numerous and byzantine changes to its municipal code, and largely stall out on processing owner changes and other application changes during the early COVID-19 days.
Things got worse this year after the LA Controller released a massive report detailing many shortcomings in the city’s handling of its cannabis industry, the illicit market, and so on. I did a pretty detailed write-up of the city’s audit here; and it’s a pretty searing indictment of various aspects of the city’s regulatory program.
I should mention that no one person or even one agency is responsible for the situation – we have dealt with plenty of folks in various city agencies who are great at what they do. However, by definition, the city’s program is divided across a half dozen or more different agencies with varying degrees of cooperation. Add to that a complex social equity scheme that people constantly try to find ways to get around, vast illicit market, and just massive amount of licensed businesses and applicants, and you get a difficult situation to control.
Be careful with all the Dormant Commerce Clause stuff!
One other note on LA is that it got sued in late 2022 just days before opening its most recent round of social equity applications by a guy claiming that the program violated the US Constitution’s Dormant Commerce Clause. I wrote about that case here, and took the position that the case had some real problems. Well, it turns out I was right and that he failed. The same plaintiff filed a similar case in Sacramento, and it may be that these cases keep getting tossed unless there is a very clear burden on interstate commerce. Without rehashing the Dormant Commerce Clause analysis here, courts are probably not going to toss licensing schemes that require prior in-state convictions, though they would be very likely to toss licensing schemes that require in-state residence. If Sacramento’s law is anything like LA’s, the chances of success are slim.
California started the slow hemp roll-out
From 2018 to late 2021, California effectively banned hemp-derived CBD products (though enforcement was pretty lax). We wrote about the crazy saga of California hemp regulation in detail on this blog over the years. In 2021, the state passed AB-45, finally creating a regulatory model for the statewide hemp industry. Unfortunately for a lot of folks, the law was pretty bad for inhalable products, though that could change. In 2022, the state finally opened up the registration process for certain hemp activities. This was a massive breakthrough for the state and anyone in the industry.
I’m sure I’m leaving a lot off the above list but as you can see, 2022 was a huge year for the California cannabis industry. It remains to be seen what’s in the cards for 2023, but we’re hoping it’s just as busy. As always, stay tuned to the Canna Law Blog for more updates.