The Governor of California has announced a proposal to consolidate the three main cannabis licensing bodies in the state starting in 2020. In his budget announcement made on January 10, 2020, Governor Gavin Newsom revealed that the State Administration plans to consolidate the three main bodies into one by July 2021. This was just one of many proposed modifications to the California cannabis industry made by the Governor in his proposal.
Governor Newsom oversaw the legalization process of recreational cannabis in California across 2016, 2017 and 2018. Currently, the cannabis industry in California is regulated by three separate bodies: the Bureau of Cannabis Control, the Department of Public Health and the Department of Food and Agriculture.
Each of the bodies covers a stage of the cannabis growth-to-sale/consumption cycle. The Department of Food and Agriculture, through its CalCannabis Cultivation Licensing division, is responsible for licensing and regulating commercial cannabis cultivators as part of its ‘public safety and environmental protection’ mandate. It also tracks all cannabis products from cultivation to market, in addition to enforcing industry compliance to state rules.
The Department of Public Health handles public health, mainly through its specialty division, the Manufactured Cannabis Safety Branch. Through this division, the Department has been regulating and licensing commercial cannabis manufacturers since its inception. It is responsible for ensuring that cannabis manufacturers keep their shops sanitary, manufacture contaminant-free cannabis products and pack their products right.
The Bureau of Cannabis Control takes overall charge of the licensing and regulatory process for the state’s commercial cannabis players in the medical and adult-use market, including laboratories, retailers, distributors, cannabis events and more. Part of its mandate includes providing necessary information to cannabis industry players and giving them licenses when approved.
The consolidation plans announced by the Governor mean that each of these bodies is going to be restructured soon as one major body is molded out of all three. In her notice on the issue, Lori Ajax, Chief of the Bureau of Cannabis Control, noted that the state was looking to ‘improve access to licensing and simplify regulatory oversight of commercial cannabis activity’; hence the consolidation. She also noted that one major regulation body will create a ‘single point of contact for cannabis licensees and local governments’.
The new body is expected to have a joint enforcement division to make sure its rules are observed. Currently, the main enforcement outfit in service is the Cannabis Enforcement Unit under the Department of Consumers Affairs, and it partners regularly with each of the three bodies to implement state law.
This development comes at a time when the state of California continues to grapple with a strong illegal cannabis market. As long ago as 2018, the illegal market for marijuana in California was already eclipsing the legal one. The trend continued well into 2019, with reports that the black market for marijuana was overshadowing legal adult-use sales.
It’s important to note that the illegal market was already in place and widespread before cannabis in California was made legal. Legalization was expected to blanket the illegal market and prop up its legal counterpart. Today, almost two years after the legalization, legal marijuana sellers continue to report very low margins in addition to a still-narrow market share.
Some experts view these new State developments as part of the Governor’s attempt to curb the illegal marijuana market and its reach. For legal marijuana sellers, the new proposed body is giving them some hope. A spokesperson for the California Cannabis Industry Association told the Orange County Register that sellers were waiting to start seeing ‘the impacts of these changes’ in order ‘to see who survives.’
Along with the consolidation announcement, Governor Gavin Newsom is also proposing major changes to the state’s existing tax collection system for the cannabis industry. For starters, he is considering shifting the cultivation excise tax and its burden from the final distributor in the cannabis sales cycle to the first. Previously, final distributors such as dispensaries incurred the cultivation excise tax.
In addition, he is considering shifting unto the retailer the retail excise tax, freeing the distributor of its burden. Among the many presumed benefits of these changes, the state government hopes that the latter shift will make the tax collection process easier, especially for the Department of Food and Agriculture. Because of the current jurisdiction that requires cannabis distributors to absorb the retail excise tax, the Department has been shouldering the task of estimating and anticipating product mark-ups in a bid to set fair wholesale tax rates every year.
If this proposal is accepted, the task will be eliminated entirely and tax collection will become easier. Altogether, the state government looks to make tax collection easier for both its officials and the cannabis industry’s players. The Newsom administration is also considering changes to other aspects of the state’s cannabis tax structure as it seeks to create a ‘safer, legal cannabis market.’
Some aspects of the Governor’s proposal propose no major change at all, such as the section on Allocation of the Cannabis Tax Fund. According to Ajax, in her written notice, expenditures related to administrative and regulatory tasks set by the Cannabis Act will continue to be of priority.
Expenditures related to research will come next, as usual, followed by those incurred in activities pertaining to the legalization of cannabis and the effects of criminalization because of it. Other expenditures such as youth education, environmental protection and public safety plus early intervention and treatment will then be catered to. Unchanged is the state’s budget and allocation for each of these activities.
California has a long and storied history with cannabis regulation. As early as 1972, the state was attempting to legalize the drug’s use with mostly negative results. The state became the first in the United States to legalize medical cannabis when it passed Proposition 215, better known as the Compassion Use Act of 1996. The state has since made the use of recreational cannabis legal, too, a process that started when Californians voted in favor of Proposition 64, better known as the Adult Use of the Marijuana Act, in November 2016. Cultivation of cannabis in California was legalized in 2018, followed by the sale of cannabis for non-medical use.