Canadian Companies Continue European Cannabis Moves

By Marguerite Arnold

There is a lot of European news afoot from the big public Canadian companies between all the headlines about Israel. Namely, established cannabis companies in the market already continue to shore up their presence across multiple member EU states.

What is at stake? Establishing some kind of European foothold in an environment where licensing and production costs will not bust the bank- and what will be the first government-set, pre-negotiated bulk price for medical cannabis flower. For all the high-flying news of even hundred million-dollar (or euro) investments, right now the biggest hunt is on for ways to trigger sales figures that continue to grow steadily in the customer column.

There is also a dawning realization that prices are going to start stabilizing if not falling after the German government finalizes its selection of bid winners.

As a result of all of this, to compete against each other and streamline distribution and supply chain costs, the larger Canadian companies in the market are clearly angling to set up efficient distribution networks- even if that means buying pieces of them one country and property at a time.

How well that will work in the longer run remains to be seen- but it is a play that is starting to show up in other European developments (from the Israeli side). That said, the latest news of the big guys in the field make sense within this context, if none other.

Canopy Growth Announces UK and Polish Moves

Spectrum Cannabis, the European-based medical brand of Canopy Growth chalked two more achievements off its Euro “to do list” in January. At the beginning of the month, Spectrum announced it was preparing to enter the UK market via the creation of a joint venture with Beckley Canopy Foundation, Spectrum Biomedical.

In Poland, the company also announced the successful shipment of its high-THC whole flower “Red No.2.” The Polish government began allowing sales late last year.

Neither development however should be a surprise to those watching the strategy of either Canopy or for that matter several other public Canadian cannabis companies. Aurora, for example, announced its first successful shipment into the country on the same day that the Polish government changed the law. On the British side, the combined forces of changing the regulatory scheduling of cannabis and allowing the drug to be dispensed by prescription have certainly changed the game on some levels. Brexit is about to play havoc with most imported products, and cannabis is no exception to this.

In this sense, the challenges facing both British and Polish patients right now are also fairly analogous. Importing is the only way to get the drug to patients, and the cost of import is also prohibitively high for most. Then of course, there is actual approval beyond that, which is also a problem everywhere cannabis has become legal.

While both developments of course, are good news for the company, this does not mean that the initial going will be easy or smooth for any company, including one as skilled at strategic market entry in core countries across the continent for the last several years as Spectrum has reliably proven to be.

Green Organic Dutchman Gets Cultivation License In Denmark

TGOD has now gone where other Canadian Euro cannabis players have gone before– namely it has joined the national trial program and several other Canadian cannabis companies before it (see Spectrum Cannabis for one) in Denmark.

Why are so many public cannabis companies attracted to the tiny country? The first is that the country, like Switzerland, in fact, is not as bound by EU rules as say, Germany and France. It can “experiment” in ways that are notably different from its neighbors.

As a result of this and a change in the law that began a multiyear trial to experiment with regulation and medical efficacy, cultivation licenses are also easier to obtain than in other places. There are also other plusses to establishing a presence in the country if not the continent including a strong social care system, and a research environment that promises to produce great results on the medical efficacy discussion continent wide.

January 30, 2019

Here Comes The Start-Up Nation Of Cannabis: Israel

By Marguerite Arnold

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For those who have been watching (if not in the thick of) the drama over Israeli medical cannabis export rights, this latest development was not only inevitable but overdue. Israel’s parliament unanimously approved the legislation on Christmas Day (along with Thailand). Less than a month later, the cabinet concurred.

That means that export rights are now actionable law.

Beyond this final passage into reality, export rights have been at the forefront of a global drama on cannabis- most recently in this part of the world, as a specific chip in political dealmaking between U.S. President and Israel’s Prime Minister, Benjamin Netanyahu since the former entered office. This go around at least.

The political bargaining that even allowed Israel’s medical program to flourish and get funding from its earliest days (including of the U.S. federal government kind) of course, is nothing new.

Pioneers Of The Cannabis Industry

Hard as it is to believe, most of what is widely known and easily digitally shared (including on social media) about cannabis (as a plant, let alone distinctions between cannabinoids) is information created during this last four to eight-year period (certainly since 2010). This has been driven by reform, and a birth of wider education about medical and recreational cannabis plus the cannabis industry and broader lifestyle press. And most of what is credible out there, no matter who claims credit today, has an Israeli origin, and of the medical kind.

Add this history of scientific research and insight to the philosophy of a nation driven by entrepreneurial zest, and say no more.

Now that Israel can begin to export its cannabis, the interesting thing to see is whether cannatech will in the end, be more valuable than individual strains themselves. The pick axe in this particular “green gold rush?”

For now, of course, all bets are off, even on the cultivation front. Because, no matter what else it is, it is well timed, globally, to give even the Israeli medical production market a big green shot in the arm.

Germany and Europe Beckons

The change in the law in Israel also comes as those who made first qualifying round in the German cultivation bid are getting prequalification letters, although this time, no firms, anywhere, have issued press releases about their finalist round status.

And here is the other issue to consider: While the bid itself does not have anything to do with import capability, new Israeli game in town is, in itself, a big game changer for anyone whose hat was thrown into the coalitions who applied for the pending cultivation license. Why? Until they deliver their first crops grown auf Deutschland, firms have to deliver from somewhere. And this being Germany, the import destination has to be from a place where the plant is federally legal. Israel becomes another option in a market so far dominated by Dutch and Canadian firms.

cannabis close up — The Tikun Olam strain Avidekel being grown in Israel.

Can you smell new bid lawsuits also, if this scenario has not already been addressed by BfArM? The history of cannabinoids in Germany in general (historically as well as recently) is fraught already. This pending challenge, should it come, will be laden with symbology modern Germany will do everything to avoid provoking.

Beyond the soap opera that the bid has turned into in Germany (the ultimate test case for cultivation and insurance-backed medical and industry acceptance across the rest of the EU essentially), there are of course, other markets beckoning. This includes all of Eastern Europe and much of the EU. This includes France and the UK immediately.

In other words, no matter what the longer-term impacts will be, this well timed, politically astute Israeli decision is coming at the beginning of what is going to be, as everyone is clearly seeing at the end of January, a momentous and earth-shaking year not only for Europe, but globally.

And that is big business for a little country with an eye on the export game.

January 29, 2019

Illinois Legislators To Introduce Legalization Bill

By Aaron G. Biros

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It is not news that Illinois Governor J.B. Pritzker favors recreational cannabis legalization. But State Senator Heather Steans (Chicago-D) and State Representative Kelly Cassidy (Chicago-D) introducing a formal bill to legalize recreational cannabis is certainly news. With what they hope will be bipartisan support in the legislature and a Governor on their side, Illinois seems poised to pass legislation legalizing recreational cannabis for adults.

According to the Herald & Register, State Sen. Steans says that public opinion polls show that roughly two-thirds of voters in Illinois favor recreational legalization. “We have a huge opportunity in Illinois to do this right and carefully,” Steans told an audience at a town hall meeting in Springfield, IL yesterday. From what the lawmakers told the public during that town hall meeting, the legislation sounds like it mirrors programs in other states.

The bill “would allow Illinoisans 21 and older to purchase and possess up to 30 grams, or about 1 ounce, of marijuana,” Steans and Cassidy said. “Nonresidents would be able to buy and possess half that amount. Use of the drug in public wouldn’t be allowed.” The bill would expunge previous criminal records with respect to cannabis, make it harder for minors to access it and raise an estimated $350 million to $750 million, providing funding for “community development of impoverished neighborhoods,” says Cassidy. “If we don’t address the social-justice issues of this, if we don’t address the collateral consequences of the ‘war on drugs,’ we will have failed,” Cassidy added. The bill would also allow people to grow up to five plants at home, would not allow for public or social consumption, and municipalities, employers and landlords would be able to prohibit possession and use, according to the lawmakers.

In 2015, the state legalized medical cannabis and there are roughly 42,000 patients currently in the medical cannabis program, with roughly 40 qualifying conditions approved for use. Some critics have argued, according to the Chicago Tribune, that before the state legalizes recreational use for adults, they should first expand the list of qualifying conditions for patients. This would provide greater access to those in need while the state implements a regulatory framework for recreational use, which could take upwards of a year to establish the program.

January 9, 2019

Sequoia Analytical Labs Caught Falsifying Results

By Aaron G. Biros

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Last month, Sequoia Analytical Labs admitted that they falsified hundreds of pesticide tests for batches of cannabis products. The Sacramento-based laboratory faked data on 22 different pesticide tests for more than 700 batches over a period of four months.

According to a notice posted on Sequoia’s website, the skewed results were originally found due to a “faulty instrument” but “it was further discovered” that the lab director knew about it and was fraudulently posting the results in order to hand out certificates of analysis. The lab director in question has since been fired and Sequoia voluntarily relinquished their state license.

Joe Devlin, Sacramento’s chief of cannabis enforcement, told KCRA3 News “We’re going to be taking a look at suspending or possibly revoking their permit.” He followed that up with saying that California needs more testing labs. “The shortage of labs has really created a bottleneck in the supply chain across the state,” says Devlin. There are only 43 licensed laboratories in the state of California as of this time, and just three of those are in Sacramento.

The Bureau of Cannabis Control (BCC), the regulatory authority overseeing the cannabis testing market in California, has not commented on this story, but they did reach out to distributors who had sent batches to Sequoia for testing. “Any cannabis goods from these batches, returned by consumers to the retailer, must be destroyed,” reads the BCC letter. “Any cannabis goods returned from a retailer’s inventory or remaining in your inventory may be destroyed, or may be re-sampled and re-tested after obtaining approval from the Bureau. Any cannabis goods from these batches may not be released to a retailer without re-sampling and re-testing.”

Sequoia Analytical Labs posted two notices on their homepage, one was a letter to their clients informing them of the fraud and the other is that BCC letter to distributors doing the same. “Management and ownership were horrified to learn about this severe breach of a very important safety regulation,” reads the notice. “We have voluntarily surrendered our license to do COA testing to the BCC while we make the required corrections. We are already hard at work making the needed changes to the instrument and revamping procedures so that we may get our license reinstated January 1.”

As of today, the lab’s license has not been reinstated.

January 8, 2019

Israel and Thailand Approve Cannabis Exports

By Marguerite Arnold

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On Christmas Day, not only did Israel, global leader in medical cannabis in particular, finally decide to legalize medical exports, but in a surprise move, so did Thailand.

Both developments are likely to have huge implications on the entire global cannabis discussion, albeit in slightly different ways.The impact will be interesting to watch.

Israel’s Export Decision

The issue of exports from the original home of the medical cannabinoid revolution has been a perennial sticky wicket for the last several years. As the Israeli medical market liberalized at home and certainly in the last five years, the government steadfastly refused to export the drug. Further, the country’s president Benjamin Netanyahu also cut a political deal with Donald Trump to move the Israeli capital from Tel Aviv to Jerusalem that delayed this discussion over the last 18 months. With a global market now exploding that Israel to date has been excluded from and Netanyahu’s political capital tarnished with corruption, things are about to change.

The impact will be interesting to watch. Especially with the network of Israeli production farms also sprinkling around particularly Eastern Europe and Greece.

Thai Surprise

Thailand’s parliament voted to legalize the use of medical cannabis, making it the first country in Southeast Asia to do so.

Here is also what is intriguing: The country is, like Israel, looking at creating a domestic boon with a tightly controlled domestic economy booster. Not to mention clearing the jails, which are filled to bursting with people on even low level drug offenses.

And just like Israel, Thailand is also, already, talking protectionist measures to shield domestic producers from being bought out by foreign interests, certainly of the corporate kind.

The Combination Package

In the short term this means, at least on the export front, that there will be more competitors to the Canadian giants now entering the room. And between Israel and Thailand alone, this also means that new strains on the medical side, will begin to enter global medical markets.

For all the future promise of tweaked product, cheap cannabis flower and oil flooding markets globally by importers and distributors realizing that the game is far from over, is going to be the first real challenge the Canadian cannabis companies have yet faced.

In the wake of the news that Epidiolex is not as effective longer term as hoped (which is a common phenomenon in the pharmaceutical industry known as a “drug holiday” where users initially improve and then develop tolerance to the drug), this is also an intriguing new development. This means that new strains are entering the global market at an unprecedented pace, literally competing with pharmaceutical products at a time when reform continues apace.

At a time when cannabis investments (particularly in the US), quadrupled in 2018, this also means that western dollars, if not companies, will begin to find other markets and market outlets.

And that is a Christmas present in 2018 that will reverberate long into the future.

January 2, 2019

Farm Bill Analysis: Is Hemp Legal Now?

By Aaron G. Biros

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On December 20, President Trump signed the Agriculture Improvement Act of 2018 (the Farm Bill) into law, which included an important change to the way federal agencies regulate hemp farming and production. The Farm Bill essentially removes hemp-derived cannabidiol (CBD) from the Controlled Substances Act in states that choose to regulate it. It strips the Drug Enforcement Agency’s (DEA’s) authority from outlawing hemp and gives states the ability to regulate hemp markets on their own, with approval from the United States Department of Agriculture (USDA).

This gives the USDA the authority to regulate hemp farming, providing for things like access to banks, insurance, grants, certifications and gets rid of the need for a pilot program, which was previously the case under the 2014 Farm Bill. It also defines hemp a little better, to include cannabinoids, derivatives and extracts.

According to Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), the signing of the Farm Bill is a crucial step towards full legalization. “The lifting of the federal ban on non-psychoactive hemp is a concrete sign that the ‘reefer madness’ which first led to its criminalization is finally coming to an end,” says Smith. “This Farm Bill is a step in the right direction for comprehensive cannabis policy reform and will help fuel discussions in Congress about the best ways to end federal prohibition and create a regulated national cannabis market.”

However, one particularly important caveat needs to be mentioned: The Food and Drug Administration (FDA) still retains regulatory authority over CBD products. In a statement released the same day that the Farm Bill was signed, the FDA addressed their oversight capabilities. “We’ll take enforcement action needed to protect public health against companies illegally selling cannabis and cannabis-derived products that can put consumers at risk and are being marketed in violation of the FDA’s authorities,” reads the FDA statement. “The FDA has sent warning letters in the past to companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer. Some of these products were in further violation of the FD&C Act [Federal Food, Drug and Cosmetics Act] because they were marketed as dietary supplements or because they involved the addition of CBD to food.”

The Farm Bill signing opened the doors for hemp cultivation and production in the United States.What the FDA said in their statement is crucial information for those developing hemp-derived products. They recommend that companies use traditional pathways to get approval from the FDA to market their products, providing the Epidiolex example where the drug manufacturer used clinical studies to prove the drug’s efficacy.

The FDA also notes that there are circumstances “in which certain cannabis-derived compounds might be permitted in a food or dietary supplement.” That means they are exploring opportunities for companies to develop, manufacture and market legal CBD products without going through the extensive drug approval process.States need to establish programs approved by the USDA and companies need to cooperate with the FDA, taking the necessary steps to get their products and marketing approved.

In the food ingredients realm, they have already taken steps to approve hulled hemp seeds, hemp seed protein and hemp seed oil as generally recognized as safe (GRAS). “Therefore, these products can be legally marketed in human foods for these uses without food additive approval, provided they comply with all other requirements and do not make disease treatment claims,” reads the FDA statement.

The Farm Bill signing opened the doors for hemp cultivation and production in the United States. It allows farmers to access the same goods and services extended to other commodities farming, it makes conducting business easier across state lines, it will pave the way for more research into hemp as an effective medicine and helps to end the debate over hemp’s legality. But this doesn’t mean any business can just start producing and selling CBD products. States need to establish programs approved by the USDA and companies need to cooperate with the FDA, taking the necessary steps to get their products and marketing approved.

In the coming months and years, we will see which states decide to develop hemp cultivation programs and how the proliferation of hemp-derived products will evolve under FDA regulatory oversight.

December 11, 2018

Phenova Gets Accreditation For Cannabis Proficiency Testing

By Aaron G. Biros

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Phenova, Inc., a proficiency testing products and reference materials provider based in Golden, Colorado, works with labs and regulatory bodies to develop proficiency testing (PT) programs. According to a press release sent out by the American Association for Laboratory Accreditation (A2LA), Phenova is A2LA’s first ISO/IEC 17043 accredited PT provider for the cannabis marketplace.

According to Ty Garber, director of new business development for the cannabis and food and beverage markets at Phenova, they have been working with A2LA for over a decade in other industries, but the cannabis testing industry is a huge new market for them. “Our Cannabis Proficiency Testing products and services are experiencing high demand across North America and we are fortunate to offer our expertise in proficiency testing to client laboratories and regulatory agencies in their joint efforts to ensure cannabis product quality and safety,” says Garber. “By working with the laboratories and stakeholder agencies, we have been able to develop and operate Proficiency Testing Programs based on real marijuana matrices, especially where the matrix creates specific analytical challenges. This approach has proven to be very beneficial for everyone involved, and we are working diligently to expand these efforts.”

Trace McInturff, senior director of accreditation services at A2LA, says this could help fill a serious need for conformity assessments in accredited cannabis labs. “A2LA is excited to announce the expansion of Phenova’s existing ISO/IEC 17043 Proficiency Testing Provider scope of accreditation to become the first A2LA accredited Proficiency Testing Provider for cannabis,” says McInturff. “This milestone adds to the positive historical relationship between Phenova and A2LA that dates back to 2005 when A2LA implemented a new TNI SSAS program for Proficiency Testing Providers and A2LA performed one of the first assessments of its kind at Phenova.” McInturff also says that A2LA has been instrumental in establishing the initial ILAC Proficiency Testing Provider accreditation requirements which ultimately became the basis for ISO/IEC 17043.

In addition to the “real marijuana matrix PT programs” that Phenova offers in certain states and countries where legal, they also offer alternative PT standards for labs that have obtained or are working on obtaining ISO/IEC 17025 accreditation.

December 10, 2018

A Busy 4th Quarter Heralds An Amazing Cannabis Year Globally

By Marguerite Arnold

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In retrospect, when the cannabis history books are written, 2018 may come to represent as much of a watershed year as 2014. Much has happened this year, culminating in a situation, much like at the end of the first year of modernization, where great victories have been achieved. But a long road to true acceptance and even basic and much broader medical use still beckons. Even if the new center left ruling coalition party in Luxembourg has just announced that recreational cannabis reform is on its agenda for the next five years.

This is a quick and by no means a full review of both fourth quarter activity globally, and how that ties into gains for the year.

Canada Legalizes Rec Sales

Beyond all the other banner headlines, October 17 will go down in history as the day that Canada switched the game.

Will 1017 replace 420? Not likely. But it is significant nonetheless.

What does this mean for the rest of the industry (besides international border checks and lifetime bans for Canadian executives and presumably others traveling into the U.S. to cannabis industry conferences at present)? For starters, a well-capitalized, public industry which is building infrastructure domestically and overseas like it is going out of style.

This is important for several reasons, starting with the fact that the big Canadian LPs are clearly not counting on supplying Europe from Canada for much longer. Why? The big European grows that were set up last year are starting to come online.

So Does California…

And other significant U.S. states (see Massachusetts this month and Michigan) are following suit. However the big issue, as clearly seen at least from Canada and Europe, is there is no federal reform in sight. That opens up a raft of big complications that so far, most U.S. firms have not been able to broach. That said, this situation is starting to change this fall, with two U.S. firms entering both Greece and Denmark, but in general, a big issue. Canadian firms are still trying to figure out how to both utilize the public markets in the U.S. without getting caught in detention when crossing the border.the U.S. is continuing to be a popular place to go public for Canadian firms

Regardless, the U.S. is continuing to be a popular place to go public for Canadian firms, who are also looking for access to global capital markets and institutional capital. Right now, Frankfurt is off limits for many of them. See the Deutsche Börse. That said, with the rules already changing in Luxembourg, one firm has already set its sights for going public in Frankfurt next spring.

The German Situation

Like it or not, the situation in Germany is key to the entire EU and increasingly a global enchilada, and no matter where companies are basing their cultivation sites at this point, there are two big gems in the European cannabis crown. Deutschland is the first one because of the size of the economy, the intact nature of public healthcare and the fact that the German government decided to mandate that sick people could get medical cannabis reimbursed by their public health insurer.

german flag — Photo: Ian McWilliams, Flickr

Ironies abound, however. In the last quarter, it is clear from the actions of the Deutsche Börse that Frankfurt is not a popular place to go public (Aurora went public on the NYSE instead in late October).

The cultivation bid was supposed to come due, but it is now likely that even the December deadline might get pushed back again, interminably at least until April when the most recent lawsuit against the entire process is due to be argued.

In the meantime, there is a lot of activity in the German market even if it does not make the news. Distribution licenses are being granted all over the country (skip Berlin as there are already too many pending). And established distributors themselves, particularly specialty distributors, are increasingly finding themselves the target of foreign buyout inquiries.

There are also increasing rumours that the German government may change its import rules to allow firms outside of Canada and Holland to import into the country.

The German market, in other words, continues to cook, but most of it is under the surface a year and a half after legalization, to figure things out.

The UK

Next to October 17, the other date of note this fall of course was November 1. The Limeys may not have figured out Brexit (yet). But cannabis for medical use somehow made it through the national political fray this summer. Hospitalized children are compelling.

Now the question is how do other patients obtain the same? The NHS is in dire straits. Patients must still find a way to import the drug (and pay for it). And with newly imposed ex-im complications coming Britain’s way soon, there is a big question as to where and how exactly, patients are supposed to import (and from where). All looming and unanswered questions at the moment.

But hey, British doctors can now write prescriptions for cannabis.

Greece and Malta

Greece and Malta are both making waves across Europe right now. Why?

The licensing process that has continued into the fall is clearly opening up inexpensive cultivation in interesting places. Greece is growing. Malta, an island nation that is strategically placed to rival Greece for Mediterranean exports across Europe is still formalizing the licensing process, but don’t expect that to last for long.

Look for some smart so and so to figure out how to beat Brexit and import from Malta through Ireland. It’s coming. And odds are, it’s going to be Malta, if not the Isle of Mann that is going to clinch this intriguing if not historical cultivation and trade route.

Poland

Just as October came to a close, the Polish government announced the beginning of medical imports. Aurora, which went public the same week in New York, also announced its first shipment to the country – to a hospital complex.

Let the ex-im and distribution games begin!

It is widely expected that the Polish market will follow in German footsteps. Including putting its cannabis cultivation bid online whenever the Polish government decides to cultivate medical supplies domestically. The country just finalized its online tender bid system in general.

Does anyone know the expression for “pending cannabis bid lawsuit in Warsaw” in Polish?

Notable Mentions

While it gets little press outside the country, the Danish four year experiment is reaching the end of its first year. While this market was first pioneered by Canopy/Spectrum, it was rapidly followed by both Canadian LPs and others entering the market. Latest entrant this quarter? A tantalizingly American-British conglomerate called Indiva Ltd. as of November 21.

Italy is also starting to establish a presence in interesting ways as multiple firms begin to establish cultivation there.

There are also increasing rumours and reports that Israel might finally be able to start exporting next year. That will also disrupt the current ecosystem.

And most of all, beyond a country-by-country advance, the World Health Organization meeting in early November and in the early part of December is likely to keep the pressure on at a global level for rescheduling and descheduling the cannabis plant.

This in turn, is likely to set the stage as well as the timeline for rec use in Luxembourg. Look for developments soon.

A busy time indeed. Not to mention a quarter to end a very intriguing year, and certainly destined to sow returns for years to come, globally.

November 27, 2018

Massachusetts Opens Recreational Market

By Aaron G. Biros

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Last week, on November 20, dispensaries in Massachusetts began selling cannabis to recreational consumers. The market was off to an obviously electric start, following the path of other states that legalized recreational cannabis. Consumers waited in long lines on opening day, more than two years after voters in the state legalized cannabis.

While this marks an important milestone as the first legal recreational cannabis sales began on the East Coast, regulators only approved two licensed dispensaries to begin operations on opening day. Those two retailers allowed to begin sales are Cultivate Holdings in Leicester and New England Treatment Access in Northampton.

The Cannabis Control Commission (CCC), the state’s regulatory body overseeing the new marketplace, received some criticism for taking more than a year to establish and implement regulations for the industry. In April of this year, regulators were just preparing the final rules.

It has taken them a fair amount of time to establish the regulatory framework, but much of the recent delays were due to a lack of laboratory licenses. Earlier in November, the CCC finally approved two laboratories for testing in the recreational market. Those two labs are MCR Labs LLC of Framingham and CDX Analytics LLC of Salem. With the labs approved for third-party independent testing in the recreational market, regulators began allowing retailers to open shortly after.

Shawn Collins, executive director for the CCC, told Boston 25 News that they are delivering on the voters’ requests to provide for a safe marketplace. “When Massachusetts voters legalized adult-use cannabis, they communicated a desire to purchase products that are safely regulated and properly tested,” says Collins. “The Commission has done scrupulous due diligence to make that vision a reality and ensure licensed independent testing labs maximize public health and public safety.”

November 18, 2018

New Taxes for California Cannabis Industry

By Jasmine Davaloo

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Welcome to the evolving world of cannabis legislation and taxation in California. With the recent 2018 midterm election, a green wave of new laws and regulations has washed ashore, and Taxnexus, a cannabis tax compliance service provider for cannabis businesses, has analyzed the results, looking for insights to guide cannabis business owners in 2019.

In summary, the trend of local counties and cities imposing new cannabis taxes on dispensaries, distributors and cultivators continues, but with some important lessons being learned.

A Brief History of California Cannabis Tax Regulations.

The legalization of cannabis in California brought with it cannabis excise tax and cultivation taxes with the hope of bringing in significant amounts of income in cannabis taxes. The state had projected $185M in cannabis tax revenue for the first six months of 2018. Although California has since collected tens of millions of dollars fewer than anticipated, it did bring in over $135M in the first and second quarters from a brand new industry.

Local governments are able to collect these taxes directly from cannabis businesses. With the green light from the state and the need for a new source of revenue, many local governments followed suit and passed laws to impose taxes on cannabis businesses operating in their jurisdictions. The need for additional revenue is even greater for localities that allow cannabis business operations given that the state takes virtually all of the state-imposed cannabis taxes while the local government entities are burdened by the related costs of regulations and enforcement at the local level.

Cannabis business taxes have an extra allure for local jurisdictions. Unlike local sales and use taxes, the state does not require local cannabis business taxes to go through the state before a portion of it gets funneled back to the localities. Local governments are able to collect these taxes directly from cannabis businesses.

Since January 1, 2018, many local jurisdictions have come onboard and placed ballot measures for their voters to decide whether to tax cannabis businesses. According to research conducted by Taxnexus, by the end of the second quarter this year, there were over 500 different local cannabis tax rates in California.The new cannabis tax measures are also continuing the trend of widely ranging local cannabis tax laws.

Midterm Results Continue Overwhelming Support for Cannabis Industry

With over 50 cannabis tax measures placed on the November 6 local ballots, most of which passed with overwhelming support from voters, the number and variation of local cannabis business taxes continue to grow. This demonstrates the continuing trend of local governments welcoming cannabis businesses, the evolving voter attitude toward recreational cannabis, and perhaps most importantly, the localities’ desire to take their cut of the new industry’s tax revenue.

The new cannabis tax measures are also continuing the trend of widely ranging local cannabis tax laws. Given that the Medicinal and Adult-Use Cannabis Regulation and Safety Act granted local jurisdictions control over deciding their own cannabis business regulations, there is no statewide uniformity. Here are a few examples of the cannabis business tax measures that were on local ballots on November 6:

San Francisco

While some local jurisdictions were quick to impose cannabis taxes, others have delayed in taxing their local cannabis businesses. San Francisco’s Proposition D, which received a 66% voter approval, won’t go into effect until January 1, 2021. It imposes taxes on cannabis businesses that do business in the city, whether or not they are physically located there. The new cannabis business taxes are as follows:

For cannabis retail businesses, 2.5% of gross receipts up to $1M and 5% of gross receipts over $1M.
For cannabis non-retail businesses, 1% tax of gross receipts up to $1M and 1.5% of gross receipts over $1M.

These taxes do not apply to the first $500,000 of recreational cannabis gross receipts nor revenues from medical cannabis retail sales. The measure allows the Board of Supervisors to adjust the tax rates up to 7%. The cannabis businesses taxes are expected to generate $5M to $12M in cannabis tax revenue, and will go into the City’s general fund.The new tax measures underscore the lack of uniformity in local cannabis business taxes throughout the state.

Emeryville

Emeryville passed a new cannabis business tax measure to increase its current nominal rate. Measure S imposes a cannabis business tax of up to 6% of gross receipts. This is estimated to generate $2M in tax revenue to be used for unrestricted governmental purposes.

Oakland

Oakland is among the few local jurisdictions that placed a measure on its November 6 ballot to lower its existing cannabis business tax rates. Previously, Oakland imposed a 5% tax on medical cannabis and a 10% tax on recreational cannabis, for all cannabis activities throughout the supply chain. These are among some of the highest cannabis tax rates in the state and are squeezing out small operators. Although Oakland has long been seen as the leader in California’s cannabis industry, the high taxes are making it difficult for its cannabis businesses to compete with nearby cities that charge lower taxes. While the city acknowledged the hardship its high taxes imposed, it maintained that it could not lower the rates on its own and required the voter approval. On November 6th, Oakland voters passed Measure V by 78%, which gives the City Council the authority to lower the city’s cannabis tax rates through an ordinance. To give additional relief to the cannabis businesses in the city, this measure also allows them to deduct the cost of raw materials from their gross receipts- something they cannot do on their federal tax returns. Furthermore, local cannabis business taxes can now be paid on a quarterly basis instead of one annual payment at the beginning of each year, which was severely burdensome for most businesses.

Lake County

Voters in Lake County approved Measure K by a majority vote to tax cannabis businesses in the unincorporated county effecting January 1, 2021. The county was previously only taxing cultivators at $1 to $3 per square footage depending on the method of cultivation. These rates will be reduced to $1 per square footage for cultivators and nurseries, and other cannabis businesses will be taxes between 2.5% and 4% of their gross receipts.

Mountain View

While there is a maximum of four cannabis businesses permitted to operate in Mountain View, over 80% of voters approved Measure Q to tax them. The measure imposes up to 9% of gross receipts to fund general city purposes, with an estimated annual revenue of $1M.Some have even set the effective dates of their cannabis tax laws several years out to allow their local cannabis businesses an opportunity to establish roots and drive out the black market.

Lompoc

Some jurisdictions have passed more creative cannabis business tax regimens than one rate applicable to the entire supply chain. Voters in Lompoc in Santa Barbara County approved Measure D2018 to authorize the city to impose following cannabis business taxes:

Up to $0.06 per $1 (6%) of recreational retail sales proceeds;
Up to $0.01 per $1 (1%) of cultivation and nursery proceeds;
An annual flat fee tax of $15,000 if net income is less than $2M of manufacturing and distribution proceeds;
An annual flat fee tax of $30,000 if net income is $2 Million or more of manufacturing and distribution proceeds;
A total aggregate tax of $0.06 per $1.00 (6%) of microbusinesses proceeds, not including medical cannabis transaction proceeds; and
No tax on testing.

Riverbank

There are signs that other localities that waited to jump onboard have learned from these high-taxing jurisdictions and opted for lower rates. There are even those localities that although they do not statutorily permit cannabis businesses to operate in their jurisdictions, they still want a piece of the action when it comes to cannabis taxes. The city of Riverbank in Stanislaus County currently does not allow cannabis businesses to operate without first obtaining a permit from City Hall and entering into a development agreement with the city that negotiates how much of their revenue the city would take. However, the voters just passed Measure B, which authorizes Riverbank’s City Council to impose a business license tax of up to 10% of gross receipts on cannabis businesses in the event the city allows cannabis businesses to operate within its city limits in the future. This tax has incentives other than the apparent potential of tax revenue. This guarantees the city a cut of the earnings of any illegal cannabis businesses, and serves as a protection in the event the permit and development agreement scheme the city has enacted is later found to be invalid.

The Chaos Continues

The new tax measures underscore the lack of uniformity in local cannabis business taxes throughout the state. Compliance is especially burdensome for delivery companies and multi-location and multi-license cannabis businesses. Cannabis businesses are required to keep up with new and evolving cannabis tax regimens, which, judging by the shortfall in cannabis tax revenues compared to their projections so far, is a difficult feat for these highly-regulated businesses.Of course, there are still some local governments that appear to have missed all the signs and have passed new high taxes.

The overall trend in 2018, persisting through the midterm elections, is that more local jurisdictions are joining the cannabis tax bandwagon, and while the tax rates and structures are still all over the map, there appears to be some movement toward honing the cannabis business rates toward that “sweet spot.”

Cities like Oakland and Berkeley that immediately began to tax cannabis businesses at high rates have lowered or taken steps to lower their tax rates to keep their competitive edge and retain cannabis businesses within their jurisdictions. There are signs that other localities that waited to jump onboard have learned from these high-taxing jurisdictions and opted for lower rates. Some have even set the effective dates of their cannabis tax laws several years out to allow their local cannabis businesses an opportunity to establish roots and drive out the black market.

Of course, there are still some local governments that appear to have missed all the signs and have passed new high taxes. In due time, they, too, will give in to the market pressures and make necessary adjustments if they want to continue to benefit from the legal cannabis industry in their jurisdictions.

Taxnexus is an automated transaction-to-treasury cannabis tax compliance solution for the entire cannabis supply chain that provides point-of-sale state and local cannabis tax calculation, sales and use tax calculation, tax data management as the authority of record, and timely filing of returns with all applicable taxing authorities.