The Future of Marijuana Sales in California

Beginning January 1, both medical patients and adult consumers will be able to buy marijuana from state-regulated facilities—if state regulators meet their deadlines and all goes according to plan.

The Cannabis Clock Is Ticking

The personal cultivation and possession of medical cannabis has been legal in California since 1996. Yet it took until 2015 for lawmakers to enact legislation that explicitly authorized its licensed sale to qualified patients. That law, the Medical Cannabis Regulation and Safety Act (MCRSA), establishes statewide regulations governing the production, testing, packaging and sale of medical cannabis products.

Up until now, medical-marijuana regulations have largely been left up to the discretion of local governments. Not anymore. Beginning next year, dispensary operators who possess a business license from their city will also need an additional license from the state Bureau of Marijuana Control. Applicants will be required to undergo background checks prior to receiving that license, and may be denied one if they have been convicted of a felony drug offense. Those engaged in ancillary services—including commercial growing, manufacturing, testing, and delivery—will have to pay for state licenses as well.

The MAUCRSA also directs state agencies—the Department of Food and Agriculture, the Department of Public Health, and the Department of Pesticides Regulation—to craft specific rules for various aspects of the medical-cannabis trade. Health regulators will oversee regulations for the production of cannabis-infused edibles and extracts, while the Department of Agriculture will impose “track-and-trace” procedures to monitor plants from seed to sale.

Under draft regulations issued by the Department of Health in May, state-licensed dispensaries would have to adhere to specific hours of operation (between 6 a.m. and 9 p.m.), have security on site and sell their products in child-resistant packaging. Dispensaries could no longer provide free samples to patients, and edibles must not contain more than 10 mg of THC per serving or 100 mg per package. There would still be no state taxes on medical-marijuana-related sales, but localities would remain free to impose them.

Adult-Use Sales Forthcoming

Medical-cannabis sales aren’t all that’s getting a facelift. In January, regulations permitting recreational, or adult-use, marijuana sales also are anticipated to go into effect, under the Adult Use of Marijuana Act, approved by California voters as Proposition 64 in 2016.

Like MAUCRSA, it allows local control—meaning that municipalities have the power to prohibit dispensaries and adult-use retailers in their community—and requires retailers to apply for state licenses. However, it sets fewer barriers to entering the business. Applicants for retail licenses won’t need to prove they have local licenses, and those with past marijuana or other drug-related convictions will not necessarily be denied licenses. This may lead to many more adult-use shops opening and far fewer dispensaries remaining.

Recreational marijuana will be taxed as follows: a 15% state excise tax on retail purchases and a $9.25 per ounce cultivation tax on producers. These revenues will go into the newly created “California Marijuana Tax Fund” to pay for cannabis-related research, health programs and more. Some revenues will also be returned to counties as grants. However, counties that prohibit marijuana businesses will be forbidden from applying for those grants.

Cash-Only Transactions to Continue

According to a recent assessment by the market-research firms The Arcview Group and New Frontier, total legal cannabis sales in the U.S. are expected to reach $6.5 billion by 2020. Yet, without changes in federal laws and regulations, this booming retail sector will remain cash-only. The federal government still largely prohibits banks and credit card companies from doing business with state-approved cannabis retailers. California state Treasurer John Chiang is heading the Cannabis Banking Working Group to develop “actionable steps and recommendations designed to open access to the banking system to cannabis-related industries.” Some cities are also exploring the notion of forming “public banks” for the cannabis industry that would operate independently of the Federal Reserve banking system.

Will Governor Brown Merge the Markets?

One potential wrinkle in these plans comes from Gov. Jerry Brown’s office. In April, his administration floated a plan to merge the medical and retail markets, as Washington state did after the passage of I-502 in 2012. Under Brown’s proposal, one set of regulations would apply to all commercial cannabis providers and retailers, and patients would no longer have a distinct status recognized by the state. However, that change would need a two-thirds majority vote in the state legislature, and lawmakers as of now appear to be largely skeptical about it.

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