Tag Archives: California

Why California Cannabis Businesses Remain at Risk After the Schedule III Order

By Richard Ormond
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On April 22, 2026, Acting Attorney General Todd Blanche signed an order placing state-licensed medical marijuana into Schedule III of the Controlled Substances Act. The cannabis industry declared it a turning point. In certain respects, it is.

But turning points are not endpoints. And for California cannabis retailers who operate in the most complex, most taxed, and most litigated cannabis market in the country, the April 22 order resolves far less than the headlines suggest.

 

The §280E Problem, Revisited

Section 280E was enacted in 1982 in response to a tax court decision that allowed a convicted drug trafficker to deduct ordinary business expenses. Congress’s response was blunt: no deduction or credit shall be allowed for any amount paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances prohibited by federal or state law. Only the cost of goods sold (or “cogs”, which is treated as an adjustment to gross income rather than a deduction) survives.

The practical consequence is financial absurdity. Cannabis businesses are taxed not on net income but on a fictional gross margin that bears little relationship to actual profitability. Effective tax rates routinely exceed 70% of gross revenue and, in loss years, can exceed 100% of cash flow. The tax obligation exists regardless of whether the business is solvent. The statute thus becomes a primary driver of insolvency, causing businesses to appear profitable for tax purposes at the precise moment they are failing.

The Schedule III order addresses this problem — but only partially, and only for one category of operator.

Section 280E applies to businesses trafficking in Schedule I or Schedule II controlled substances. For licensed medical cannabis operators in California, the federal tax picture changed materially on April 22 when medical cannabis was moved to Schedule III. Rent, payroll, insurance, utilities, professional fees, and interest are now deductible. Taxable income will, for the first time, bear a rational relationship to actual profitability.

For adult-use retailers — which represent the majority of California’s licensed retail market — nothing has changed. Recreational cannabis remains on Schedule I under the April 22 order. The broader rescheduling rulemaking that would extend Schedule III treatment to all cannabis is now the subject of a new DEA administrative hearing scheduled to begin June 29, 2026. That process will take time. Its outcome is not guaranteed. Until it concludes, the typical California Type 10 licensee is still being taxed as if it were running a criminal enterprise because, under federal law, it still is.

 

The California Tax Stack: Even Without 280E, the Math Is Brutal

Even for a California cannabis retailer that qualifies for Schedule III treatment and sheds its §280E burden, what remains is formidable.

California imposes a 15% cannabis excise tax at the point of sale, collected by the retailer and remitted to the California Department of Tax and Fee Administration (CDTFA). That excise tax is not optional and is not deferred. It is due whether or not the business is profitable. It sits on top of state and local sales tax, and on top of municipal cannabis business taxes, which in some California jurisdictions approach ten to fifteen percent of gross receipts on their own.

The cumulative tax burden of state excise, local cannabis tax, and sales tax consumes thirty-five to forty cents of every dollar of retail revenue before a single operating expense is paid. Now add the cost of goods, rent at two to three times conventional commercial rates (because landlords price in the regulatory risk), payroll, security, compliance consultants, insurance, and accountants. What remains, in many cases, is insufficient to service debt, fund reserves, or generate a return on invested capital.

I have sat across the table from operators who did everything right, licensed on time, METRC compliant, CDTFA current, local permits in order, who still could not make the economics work. The math is not a function of poor management. It is a function of a cost structure that the regulatory regime has made structurally unworkable for a significant share of the market.

When a California cannabis retailer falls behind on its CDTFA obligations, the consequences are not merely civil. Under Revenue and Taxation Code Section 34015.2, enacted in 2022, officers, managers, and other responsible persons of a cannabis business can be held personally liable for unpaid cannabis excise taxes. The CDTFA does not merely pursue the entity. It pursues the individual. That exposure is one of the most underappreciated risks in California cannabis, and one that rescheduling does not touch at all.

 

The Licensing Regime: A Patchwork Quilt That Does Not Lie Flat

A retail licensee in California must maintain: (1) a valid state license from the Department of Cannabis Control; (2) a local license or permit from its city or county; and (3) often a conditional use permit or variance from the local planning department. These three tracks run on separate timelines, have their own independent and significant costs, answer to different agencies, and typically do not “speak to one another”.

The local licensing bottleneck is the most consequential. Many jurisdictions cap the number of cannabis retail licenses available within their borders. Once those caps are filled, the market is closed, not because an applicant is unqualified, but because the cap has been reached. Getting an existing license transferred in connection with a business sale requires regulatory approval at both the state and local levels, a process that can take months and that introduces material uncertainty into any transaction. Deals collapse not because the buyer and seller cannot agree on economics, but because the regulatory approval timeline makes the financing structure unworkable.

License compliance is existential. A cannabis retailer whose state or local license is suspended or revoked does not merely face a fine. It faces the destruction of its enterprise value overnight. And because adult-use cannabis businesses still cannot access federal bankruptcy protection, the April 22 order did not change that; a distressed California retailer’s options are confined to state-court tools: a receivership under Code of Civil Procedure Section 564, an assignment for the benefit of creditors, or an out-of-court workout.

These are legitimate and sometimes effective mechanisms. The state court receivership inherits all of the regulatory complexity of the underlying cannabis license, including CDTFA priority claims under Revenue and Taxation Code Section 6756, which places the state’s tax claim ahead of most other creditors in the distribution waterfall.

Rescheduling does not simplify the licensing regime. It does not reduce the number of layers, accelerate transfer approvals, or change the CDTFA’s priority position. The regulatory architecture of California cannabis retail is unchanged by the April 22 order.

 

The Illegal Market: The Structural Competitor That Tax Relief Cannot Fix

The illegal cannabis market in California is winning on price, and it has been winning on price for years.

The arithmetic is straightforward. A fully compliant California cannabis retailer pays the state excise tax, local cannabis taxes, sales tax, and a full load of regulatory compliance costs: METRC, Livescan, insurance, security, professional fees, that an unlicensed operator does not pay. The licensed retailer must charge a price that sustains all of that. The unlicensed operator pays none of it: no excise tax, no local tax, no CDTFA reporting, no DCC compliance, no background checks. The price differential between licensed and unlicensed products in many California markets is thirty to fifty percent, and that gap is not the product of better growing or lower overhead. It is the direct product of tax and regulatory avoidance.

Rescheduling and the partial elimination of §280E will reduce the licensed retailer’s federal cost burden. But it will not reduce the state excise tax, the local cannabis tax, or the compliance cost burden that drives the price gap. The unlicensed market’s competitive advantage is not primarily a function of federal law. It is a function of California’s own tax and regulatory structure.

State and local enforcement against unlicensed operators is chronically underfunded and inconsistent. In Los Angeles, thousands of unlicensed cannabis retailers operate openly. A business that is raided often reopens under a different name within weeks. Until enforcement becomes a genuine deterrent rather than an occasional inconvenience, the licensed retailer will continue to compete at a structural disadvantage against operators who have simply declined to follow the rules. No federal rescheduling order fixes that.

 

Banking and Civil Asset Forfeiture: Still Unresolved

For adult-use retailers, the banking environment after the April 22 order remains unchanged. Recreational cannabis remains on Schedule I. Bank Secrecy Act obligations — KYC, AML, SAR filing — continue to apply to any financial institution serving cannabis clients. The FDIC insurance, FedWire access, and charter risks that have kept most mainstream financial institutions out of cannabis banking are not eliminated by Schedule III treatment of medical cannabis alone.

The civil asset forfeiture exposure for adult-use operators is similarly unchanged. Federal law authorizes the forfeiture of property used in the manufacture, distribution, or sale of Schedule I controlled substances, and for adult-use licensees, that authorization remains fully intact. Lenders who hold a UCC-1 security interest recorded under California Commercial Code Section 9610 have established creditor priority within the state court system — but that position offers no tangible protection against a federal forfeiture action targeting the same collateral. The “innocent owner” defense under the Civil Asset Forfeiture Reform Act exists as a potential avenue of relief, but asserting it requires expensive, slow, and uncertain litigation. And, it places the burden of proof on the “innocent owner” to prove a negative. In practice, most lenders in this position lack the appetite for that fight, and most borrowers lack the resources to fund it.

Hopefully, the banking picture will improve as the broader rescheduling process advances and federal banking regulators issue updated guidance. Yet sadly, that guidance has not arrived.

 

What the April 22 Order Actually Accomplishes

Precision matters here because the market has created significant confusion about the scope of the order.  To be clear, recreational cannabis, unlicensed cannabis, and synthetically derived THC products remain on Schedule I.

The April 22 order places two categories of cannabis into Schedule III: FDA-approved cannabis drug products, principally Epidiolex, the first FDA-approved prescription medication derived from the cannabis plant, indicated for the treatment of seizures associated with Lennox-Gastaut syndrome, Dravet syndrome, and tuberous sclerosis complex in patients one year of age and older, and marijuana products subject to a qualifying state-issued medical marijuana license.

What the order accomplishes for qualifying medical operators is meaningful: it eliminates §280E exposure on a going-forward basis, it opens the door to expanded banking relationships, and it reduces civil asset forfeiture risk. For research institutions, it meaningfully eases the regulatory burden on clinical studies.

What it does not do is equally important. It does not open federal bankruptcy courts to cannabis businesses. It does not resolve the FDA’s prohibition on cannabinoids in food and beverages — a live issue for any California retailer selling edibles, beverages, or infused products. It does not reduce California’s excise tax, local cannabis taxes, or compliance cost burden. It does not address the personal liability exposure under Revenue and Taxation Code Section 34015.2. It does not accelerate license transfer approvals. And it does nothing to level the competitive playing field between licensed retailers and the unlicensed market.

 

The Path Forward, Stated Plainly

The §280E reform embedded in rescheduling is the most consequential positive development for cannabis businesses since California legalized adult use in 2016. For the medical cannabis sector, it is transformative. For adult-use operators, it remains a promise to be kept, pending the June 29 hearing and the subsequent rulemaking process.

But rescheduling, even in its most complete form, addresses only the federal dimension of a problem that is substantially a California problem. The state tax stack, the licensing fragmentation, the enforcement gap that sustains the illegal market, and the personal liability exposure for responsible persons under Revenue and Taxation Code Section 34015.2. These are California-made conditions, and they require California-made solutions.

For the California cannabis retailer navigating the CDTFA, the local licensing authority, the Department of Cannabis Control, and a price-cutting unlicensed competitor down the street, the finish line remains further away than the headlines suggest.

 

 

Industry Coalition Warns New Bill Would Wipe Out California’s Legal Cannabis Beverage Market

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A letter to California’s Assembly Committee on Business and Professions argues a proposed 10mg THC-per-package cap would eliminate 93% of beverage sales — and more than $21 million in annual tax revenue. But the bill has a longer backstory rooted in child safety, audit findings, and a statewide crackdown on unregulated hemp products.

 

A broad coalition of California cannabis operators, trade associations, and supply chain companies has formally opposed AB 2532, legislation authored by Assemblymember Jacqui Irwin (D-Ventura) that would cap the total THC content of cannabis beverages at 10mg per package. In a letter submitted to the Assembly Committee on Business and Professions, the group argues the measure would effectively eliminate a legal category generating $79 million in annual retail sales — but the bill’s origins stretch back years, to a state audit Irwin herself requested and a wider political battle over unregulated intoxicating hemp products flooding California’s general retail market.

 

The backstory: audits, ER visits, and a hemp gray market

Irwin has been focused on cannabis packaging and youth safety for several legislative cycles. She requested a state audit of cannabis packaging practices, which found that enforcement by the Department of Cannabis Control against repeat violators was inconsistent and that existing rules on what constitutes youth-appealing packaging lacked clarity. One finding from that audit stood out and appears to have directly shaped AB 2532: 100mg THC beverages — ten times what regulators consider a standard adult dose — were being sold with no built-in mechanism for a consumer to easily take a smaller amount.

Irwin also pointed to rising calls to California Poison Control Centers and increases in emergency room visits involving children who had ingested cannabis products, arguing those incidents weren’t coming exclusively from the illicit market. That framing was disputed during legislative hearings: researchers noted that some of the steepest increases in poison control calls came after 2019, when hemp was descheduled at the federal level and intoxicating hemp-derived products proliferated in mainstream retail — and that distinguishing legal-market from illegal-market incidents in those statistics is difficult.

 

Context: Irwin’s previous cannabis bill, AB 762, originally proposed banning all-in-one cannabis vaping devices. The industry fought it and secured amendments removing vapes from the bill’s scope. That precedent — broad legislation followed by industry negotiation — is likely informing both sides’ strategies on AB 2532.

 

The bill also arrives amid an aggressive statewide crackdown on the intoxicating hemp gray market. Governor Newsom issued emergency regulations in September 2024 requiring hemp food and beverage products to contain no detectable THC per serving, and he set a minimum purchase age of 21. The state conducted nearly 15,000 business inspections and removed thousands of illegal products from shelves. That enforcement push culminated in AB 8, which mandated that all intoxicating hemp-derived products transition out of general retail and into licensed cannabis dispensaries, primarily in beverage format. The irony now raised by the industry coalition: the state just directed those products into the regulated beverage category, and AB 2532 would eliminate that category before the transition is complete.

 

What the bill would do — and what the industry says it would cost

Products containing more than 10mg of THC currently account for 93% of all cannabis beverage sales in California dispensaries. The 100mg format alone represents $66 million — roughly 84% of total category revenue. A 10mg cap, the signatories contend, would reduce the viable market to approximately $5 million, making the economics of maintaining a beverage supply chain untenable for most operators.

 

The coalition breaks down the fiscal impact in detail: the lost $74 million in sales would translate to roughly $12 million in foregone state cannabis excise tax, $6 million in state sales tax, and $3 million in state income tax — a combined state-level loss of approximately $21 million annually, before accounting for local cannabis taxes that often run 5–10% or higher. This comes at a moment when total California cannabis tax revenue declined approximately 7% year-over-year in 2025, according to CDTFA data, while the beverage category grew an estimated 5–10% over the same period.

 

“Beverages grew an estimated 5–10% over the same period, one of the only functioning growth engines in the legal market.”

 

The illicit market concern — and why beverages are different

Opponents of the bill make an unusual argument when it comes to illicit market dynamics: unlike flower or edibles, cannabis beverages are structurally impossible to replicate outside the licensed supply chain. The category requires sophisticated manufacturing, cold chain logistics, and licensed retail distribution. While more than half of all cannabis flower consumed in California is purchased outside the licensed market, the coalition argues that beverages have zero illicit leakage. Eliminating the one category the state captures entirely within its taxed system, they contend, runs counter to every stated goal of cannabis regulation.

 

A safety record and an unresolved tension

The coalition points to five years of adverse event data in the FDA’s CAERS database showing zero instances of adverse events involving children from licensed cannabis beverages, a safety record they argue is unmatched by any other cannabis product category. They contend that the child safety concerns cited in support of AB 2532 are products of the illicit and hemp-derived gray market, not of licensed operators, and that the bill would penalize compliant businesses while leaving non-compliant actors untouched.

Irwin and her allies point to Poison Control data and audit findings suggesting the legal market isn’t entirely blameless, while the industry argues those incidents can’t be cleanly attributed to licensed products and that the regulatory infrastructure already in place, mandatory dispensary consultations, third-party lab testing, child-resistant packaging, and age verification, provides multiple layers of consumer protection that general retail never had.

 

What they’re proposing instead

Rather than a blanket dosage cap, the signatories put forward a set of alternatives: standardized per-serving THC disclosure requirements with minimum font size standards; uniform warning label mandates clearly indicating multi-dose formats; consistent child-resistant packaging standards across all manufacturers; restrictions on single-serve marketing language; and a funded statewide consumer education campaign modeled on alcohol responsibility programs.

The letter was addressed to Chair Marc Berman and members of the Assembly Committee on Business and Professions, with a copy to Assemblymember Irwin. The signatories close by requesting a direct meeting with committee staff to discuss alternatives, echoing the same strategy that secured amendments to Irwin’s earlier vaping bill. Whether it works a second time may hinge on how willing the legislator is to treat the beverage category as meaningfully different from the packaging and potency concerns that originally motivated her focus on this space. 

 

Meet California’s New Director of Cannabis Control

By Pam Chmiel
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California’s medical cannabis market began in 1996 when voters passed Proposition 215 (the Compassionate Use Act), making it the first state to legalize cannabis for medical use. Twenty-two years later, Proposition 64 ushered in adult-use sales, which commenced in January 2018.

Initially, three separate agencies handled different aspects of the industry:

The Bureau of Cannabis Control (BCC) oversaw retail sales, distribution, testing laboratories, and microbusinesses for both medical and adult-use cannabis. Cannabis Cultivation Licensing (part of the Department of Food and Agriculture) regulates and licenses commercial cannabis cultivation operations, including track-and-trace systems. The Manufactured Cannabis Safety Branch (part of the Department of Public Health) managed licensing and oversight of cannabis product manufacturing, such as edibles, concentrates, and topicals.

In July 2021, these three programs were consolidated into the California Department of Cannabis Control (DCC) to streamline licensing and enforcement, enhance consumer protection, eliminate redundancies, and simplify compliance for businesses.

 

A Market Teetering on the Edge

Clint Kellum, the newly appointed DCC Director, faces one of the hardest jobs in cannabis: stabilizing California’s struggling market. This is no small task in a state that serves as the genesis of cannabis culture and cultivation expertise—the very foundation on which the industry is being built.

Kellum is no newcomer to the challenge. He has served as the department’s chief operating officer for the past five years and brings more than 18 years of state government experience, including budget and policy development at California’s Department of Finance. The DCC’s responsibilities span issuing licenses for cultivation, retail, manufacturing, distribution, and laboratory services; monitoring operators to ensure compliance; and maintaining a law enforcement division focused on dismantling the illicit market.

 

Navigating the Framework of Prop 64

In a recent interview, Kellum broke down the hurdles facing the DCC, pointing out that many of the industry’s biggest pain points were baked into the original voter-approved initiative. Proposition 64 established high tax rates, dictated how revenue would be allocated, and granted 550 individual jurisdictions the right to “opt out” of the legal market.

While the industry often looks to the DCC for sweeping changes, Kellum notes that as a regulatory agency, his office does not have the authority to rewrite tax policy or override local land-use decisions. Instead, his strategy focuses on working within the existing legal framework to drive progress.

 

The Push for Local Expansion

One of Kellum’s primary objectives is addressing “cannabis deserts” across the state. Because many local governments remain hesitant to permit retail sales, the DCC is pivoting toward an educational role to bridge the gap between state legality and local reality.

“We have efforts to help educate and share information with local governments about the challenges of not having legal access in their jurisdictions,” Kellum explains.

He points to a recent Cal Poly research study demonstrating a direct correlation between the lack of retail access and the growth of the illicit market. By sharing this data, Kellum hopes to prove to local officials that “opting out” often creates the very public safety issues they were trying to avoid.

Beyond advocacy, Kellum recognizes the administrative burden placed on small municipalities. “It is complicated on their end, too,” he admits. “They may not have the resources to know how to run an RFP, a lottery, or a first-come, first-served licensing process.” To combat this, the DCC is actively absorbing and sharing best practices to help local governments navigate the complexities of retail implementation.

However, Hirsh Jain, CEO of Ananda Strategy, a business advisory firm working with many of California’s leading cannabis brands and retailers, offers a more cautionary perspective. While education has value, many California cities remain reluctant to license cannabis businesses not because of an information gap, but because of what they’ve observed in practice—widespread business failures and disappointing tax revenues.

“The hundreds of millions of dollars in cannabis tax revenue that the City of Los Angeles is owed, but will likely never collect, is frequently cited by other jurisdictions as evidence that California’s legal cannabis model is fundamentally flawed,” Jain notes, attributing the problem largely to state regulatory and tax burdens.

Education alone, he argues, will not overcome the deep skepticism many local governments have developed in the decade since Proposition 64 passed—skepticism that continues to drive their refusal to participate.

Jain suggests the state could go further by spotlighting successful local models already operating within California. “Cities such as San Francisco, which has adopted a 0% local cannabis tax rate and offers free medical cannabis ID cards, demonstrate how thoughtful local policy can support legal market participation,” he says. By elevating these proven practices, the state can provide cities with concrete, real-world examples of what works.

 

Reducing The Burden of Costs

It doesn’t take an MBA to understand that increasing taxes on already struggling operators could be the final blow for many in the California market. Director Kellum commended Governor Newsom for signing AB 564 in late 2025. The legislation effectively halted a planned 25% tax hike (which would have seen the excise tax jump from 15% to 19%) and locked the current rate until 2028

Beyond tax relief, the DCC has restructured its funding to avoid increasing operators’ costs. Previously, the department was funded almost entirely by regulatory fees paid by licensed operators during their annual licensing process. Last year, the department shifted approximately $70 million—40% of its budget—from licensing fees to the state’s cannabis tax fund.

“Which really avoided us having to do what would have otherwise been a significant licensing fee increase,” Kellum explains. “So, in some ways, I can understand if you’re an operator, you didn’t see that because you didn’t feel the actual increase, but it is a cost avoidance because we’re trying to be mindful of those.”

While the change may not be immediately visible to operators who didn’t experience a fee hike, it represents a significant effort to prevent additional financial strain on an industry already struggling with high operational costs and illicit market competition.

 

Shifting The Regulatory Focus

Beyond financial relief, the DCC is actively working to reduce regulatory complexity for operators. This year, the department’s focus is on streamlining cultivation requirements. Currently, cultivators must tag each plant individually in the state’s track-and-trace system—a labor-intensive process that adds significant operational burden.

“We’re looking at ways to bring that into other groupings to track it, still maintain safety and integrity of our system, but not be so cumbersome on that front,” Kellum says.

Jain says this reform is particularly urgent in light of a December 2025 court ruling that found California’s implementation of the METRC track-and-trace system imposed unlawful and excessive burdens on licensees without adequate statutory authority. The decision, he notes, exposed long-standing flaws in how track-and-trace requirements have been administered and underscored the need for a more practical, legally sound approach.

There are also legislative efforts underway to develop a combined activities license. This new license type would allow businesses engaged in multiple activities—such as cultivation, manufacturing, and retail—to operate under a single license rather than maintaining distinct licenses for each activity. The change would eliminate friction points that currently exist when moving products between different license types within the same business.

“Both of those are in development now, they’re not released publicly,” Kellum notes, “but we are developing efforts to get those out.”

 

Combating the Illicit Market

Nearly everything the DCC does is focused on supporting the legal market while suppressing illicit activity, including burner distros that transport products out of state. According to Kellum, this requires a multi-pronged approach that goes far beyond enforcement alone.

“It is a confusing market for consumers and our law enforcement partners,” Kellum acknowledges. The department is working to establish deeper relationships with local governments and local law enforcement entities to clarify the distinctions between legal and illegal operations and build coordinated responses.

The DCC is also requesting additional resources to expand its enforcement capacity, though Kellum stresses the limitations. “We’re not going to enforce our way out of it, but it is a part of that effort,” he says.

Financial support for local enforcement is coming. The Board of State and Community Corrections, which receives funding from the Cannabis Tax Fund, will soon release a $125 million RFP prioritized for illicit market enforcement. This funding addresses resource constraints that prevent local governments from taking action against illegal operators in their jurisdictions.

Kellum believes expanding retail access reduces the illicit market’s foothold by providing legal alternatives for consumers and, by supporting licensed operators with reasonable regulations and costs, keeping them competitive with unlicensed sellers. “Having a legal market that’s functional for our operators supports against the illicit market, and so it’s doing all those things in combination that are really the work we’re trying to do,” says Kellum.

While the illicit market continues to erode legal market revenue, Kellum sees encouraging signs of stabilization. “If you actually look at the units sold at retail, that has continued to go up,” he notes. “However, while the lower prices are better for consumers, it does shrink margins for operators, and that becomes more and more challenging.”

He also pointed to signs that price compression is starting to reverse for cultivators—potential signals that the market is stabilizing. But Kellum is quick to temper optimism. That doesn’t mean the job is done or that the industry is out of the woods. “I just think it reinforces all the things I was describing here and the importance of continuing those,” he said.

 

Navigating the Future

Director Kellum recognizes the critical importance of transparency and clear communication to avoid misperceptions, confusion, or misdirected frustration within the industry.

“I do think it’s really important in all this that we try our best to understand each other and what levers we do control,” Kellum explains. He’s keenly aware that stakeholders often raise issues—such as taxes and local control—that fall outside the DCC’s direct authority. “Those policies and authorities don’t sit with me,” he notes, pointing out that many of these constraints were embedded in Proposition 64 itself and approved by California voters.

This complexity isn’t an excuse, Kellum emphasizes, but it’s essential to understand the context of the challenges. Statutory and regulatory changes require processes, which can be frustrating when the industry needs relief now.

Since stepping into the director role, Kellum has prioritized meeting with industry participants to understand their challenges firsthand and establish clear feedback loops. “I’m not going to be able to do everything each individual asks,” he acknowledges, “but are there themes and areas where we can pick up and make progress together?”

His approach centers on open communication, providing clarity about what the DCC can and cannot control, and consistent execution. “I can’t promise that everything’s going to change tomorrow, because that wouldn’t be realistic,” Kellum says. “What I can say is we know the areas of challenge, we’re putting forth efforts intentionally in those areas of challenge, and we’re hoping that steady progress will get us to the right outcome.”

And if the current strategies don’t deliver the needed results? “We’ll revise what we’re doing and continue to make efforts along those lines,” he says

You can listen to Clint Kellum’s full interview on the Innovating Cannabis Podcast and YouTube.

STIIIZY Expands by Opening 44th Retail Store

By Cannabis Industry Journal Staff, Rick Biros
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The STIIIZY Hawthorne grand opening marks the company’s ninth retail store launch in the past year — proving how the brand recognizes the growing demand and is answering the call to bring its quality products to consumers by scaling its operations in licensed states with a successful expansion strategy.

  The U.S. cannabis brand STIIIZY is expanding its footprint with the opening of its newest retail location in Hawthorne, CA. As the brand’s 44th dispensary, the new storefront is located at 12831 Crenshaw Blvd, Hawthorne, CA.
  Perfectly located on Crenshaw Blvd at El Segundo Blvd, STIIIZY Hawthorne is a convenient stop for South Bay locals and tourists alike. Designed for the modern cannabis consumer, STIIIZY Hawthorne provides a sleek, welcoming environment and a knowledgeable team ready to help its customers find the perfect product for their needs. For seasoned aficionados or those who are new to the cannabis scene, the STIIIZY Hawthorne dispensary offers an extensive selection of premium products, including world-class flower, innovative concentrates, delicious edibles, and state-of-the-art accessories.
  The STIIIZY Hawthorne grand opening marks the company’s ninth retail store launch in the past year — proving how the brand recognizes the growing demand and is answering the call to bring its quality products to consumers by scaling its operations in licensed states with a successful expansion strategy.
  “STIIIZY Hawthorne is more than just a dispensary, it’s a hub for cannabis culture in the South Bay. As we continue to expand and establish our brand’s presence across the map, it’s especially meaningful to continue this growth within our home state of California—where it all started,” said Tak Sato, President at STIIIZY. “With our roots here, every California store we open reinforces our deep connection to the local communities that have supported us from the beginning. Now with 44 operating stores, we are dedicated to bringing STIIIZY to more markets statewide and beyond.”

Cannabis in Texas: A Look Ahead to Legalization and Beyond

By Abraham Finberg, Rachel Wright, Simon Menkes
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A Uniquely Texas Approach to Cannabis

The last few decades have seen the United States move forward state-by-state with the legalization of cannabis. Every state is charting its own unique path, and nowhere is this truer than with the state of Texas.

The Lone Star State has made its way from being staunchly anti-cannabis to expressing its own blend of temperance and careful action, combined with a medical cannabis program that’s expanding.

Any predictions regarding the future of cannabis in Texas must take into consideration both the state’s past and its values. In the end, it’s clear that Texas will embrace cannabis in its own individual way and at its own pace, but with a timeframe that appears to be arriving sooner rather than later.

The Debate Continues

108 years after Texas first banned cannabis and the debate continues. Even though Texas has a medical cannabis program, cannabis is still illegal in the state, with possession of less than two ounces a misdemeanor. Possession of more than four ounces is a felony punishable by a $10,000 fine and from 2-99 years in jail.

Texas’s 2015 Compassionate Use Act created the state’s medicinal cannabis program, which now makes treatment available only in the form of low-THC oil of a maximum strength of 1%, and only to a small list of serious conditions: epilepsy, terminal cancer, autism, multiple sclerosis, amyotrophic lateral sclerosis (ALS), seizure disorders, incurable neurological disorders such as Alzheimer’s, Parkinson’s, Huntington’s Disease and PTSD.

Support for a Stronger Medicinal Cannabis Program Comes from Prominent Politicians

Texas Department of Agriculture Commissioner Sid Miller, a leader in Texas politics and one of the architects of Texas’s burgeoning hemp industry, has encouraged Texas legislators to create a more complete medical cannabis program.

Texas Department of Agriculture Commissioner Sid Miller

“I am for medical use,” Miller said in an August 2023 interview. “We have so much good science now. And we know what diseases it can treat, yet our legislature picks winners [and] losers. If you’ve got this disease, you can get treated, but if you’ve got this disease and cannabis will help you, you can’t get treated. We need to let the doctor-patient relationship make those medical decisions and not some bureaucrat or some politician … I’m not a supporter of recreational marijuana, but if someone has a condition that this chemical will help, they should be able to use it.”

Texas Representative Joe Moody from El Paso has worked for many years to promote adult-use cannabis. He recently co-authored two pro-cannabis bills, HB 1805, which would have expanded covered medical conditions and defined a per-doze THC limit instead of a percentage limit on cannabis products, and HB 218, which would have decriminalized cannabis.

Although both bills passed the House of Representatives, they were stopped in the Senate. The next session of the state legislature, which happens every two years, won’t begin until January 2025, so that is the earliest any change in cannabis statutes could take place.

The Future of Medicinal Cannabis

There are currently only three dispensaries in Texas. They appear to be servicing the state’s 268,000 square miles through a series of weekly drop-offs to satellite “partner locations,” which are open an average of only two days per week. This is not exactly a corner-CVS type of arrangement, and the need for new dispensaries for the state’s 61,000 registered patients is high.

The Texas Department of Public Safety took applications for new medical dispensary licenses between January and April 2023. Tony Gallo, managing partner of Sapphire Risk Advisory Group, which helped twelve licensees prepare their applications during this round, anticipates around ten new dispensaries being approved.

All licensees must be vertically integrated – product must go from seed-to-sale under one license – and each applicant paid $7,356 to apply. If approved, the applicants will owe another $488,520.00 for a two-year period.

Many knowledgeable Texans, including Agriculture Commissioner Sid Miller, predict a fully-functioning medicinal cannabis market is just a few years away. “If you can get it to the floor, probably 70% or 80% of the legislative body will vote in favor of it because we have such good science on it. [Originally] we thought, ‘Well, that’ll lead to recreational use or more drug use,’ but it’s not. It’s a plant derivative. Medical marijuana is not nearly as addictive as some of the prescription drugs we use now.”

The Push is On for Adult-Use

Representative Joe Moody believes that adult-use is not too far away in Texas’s future either, and that the way to speed its arrival is through education. He recently sponsored HB 3652, the Texas Regulation & Taxation of Cannabis Act, in order to start a dialogue on what a retail cannabis market will look like in Texas.

Texas Representative Joe Moody

On April 26, 2023, Moody and his bill received a public hearing in the House Committee for Licensing and Administrative Procedures in which many points about setting up a retail market in Texas were discussed. A 10% cannabis tax was proposed by Moody, to be split evenly between the state and local government. Licenses would be required for those growing, selling, transporting or testing cannabis, although individuals would be allowed to grow or possess it in small amounts for personal use. Legal sale and consumption would be limited to adults 21 years of age and older, like alcohol. And of course, cannabis possession would be decriminalized.

How Strong is the Market Potential for Cannabis?

One indication of how strong even a fully-open medical cannabis market might be in Texas came during Moody’s hearing from the testimony of Estella Castro. Castro owns two medical dispensaries in Oklahoma just across the state line from Texas and suspects most her buyers are from Texas. “They have a Texas plate and they come in and buy $500 to $600 worth of product,” she said. Her two shops generated $158,000 in taxes to Oklahoma, most of which she believes should have gone to Texas.

New Mexico recently legalized adult-use cannabis, and the small towns along the Texas-New Mexico border are seeing a lot of traffic from Texas. In the first week of adult-use sales, the New Mexico did adult-use sales totaling $6 million. Of those sales, $1.5 million came from dispensaries in 5 small border towns.

Florida and California Suggest the Scope of a Mature Cannabis Market in Texas

The potential for a fully developed medical cannabis market can be gleaned by studying the next smaller state, Florida, which has an open, mature, medical cannabis market. Florida, with 20 million people, is about two-thirds the size of Texas, which has 30 million inhabitants. Right now, Florida boasts 700,000 cannabis patients whereas Texas only has 61,000. Simple math suggests a fully open, mature, medical cannabis market in Texas could see over a million patients gain relief.

California is the nation’s most populous state with 39 million inhabitants, and its cannabis revenue gives some perspective as to the size of a Texas adult-use market. 2024 estimates of California’s cannabis revenue suggest the Golden State will see $7.2 billion legal cannabis sales while the illegal market will generate another $6.4 billion for a total of $13.6 billion. With a reduction for Texas’s smaller size, these numbers suggest a fully-mature Texas adult-use cannabis market could generate close to $10 billion in annual revenue.

Large adult-use states like California and New York are notorious for having an illicit market that threatens to derail their legal, tax-paying cannabis license holders. Texas’s strong business-friendly focus should help deter such an illicit marketplace from gaining too significant a foothold.

The Back-Door Cannabis Industry

Meanwhile, an extensive “back door” cannabis industry is in full swing in Texas. CBD shops now sell delta-9 (fully psychoactive) THC/CBD gummies and tinctures made from the hemp plant, which is the low THC-version of the cannabis plant. These THC/CBD products adhere to the 0.3% definition of hemp as required by the federal 2018 Farm Bill and are legal and available for over-the-counter or online purchase in Texas’s CBD stores.

Gummies, tinctures and other products made form them hemp plant

Current estimates are that there are over 5,000 hemp, CBD and cannabinoid retailers, manufacturers and distributors in Texas that employ more than 50,000 workers and generate more than $8 billion in annual revenue. With these numbers, the 1,100+ licensed Texas hemp growers are sitting well where they are and are poised to take advantage of a legal adult-use market if and when Texas decides it is ready to go down that path.

Next Steps for Texas’s Cannabis Market

People familiar with Texas’s cannabis market believe that adult-use is a ways down the road for the Lone Star State, and that the near-term focus needs to be on decriminalization and achieving an unincumbered medical cannabis system. Tony Gallo of Sapphire Risk Advisory Group advises the Texas cannabis community to concentrate on “increasing what conditions are allowed for medicinal use” and “increasing what areas of the state it’s allowed to be sold.”

There is a groundswell of public support for decriminalizing cannabis as well as for allowing adult-use. A December 2022 poll showed 55% of Texans support legalizing at least small amounts of cannabis for recreational purposes, and another 28% said it should be legal for medicinal purposes.

A February 2023 poll by the University of Houston found that 82% of Texans support the Legislature passing a bill that would allow people to use marijuana for a wide range of medical purposes with a prescription. The belief that cannabis is a “gateway drug” that would make people more likely to use other illegal drugs is losing traction as well – 70% said it would make people less likely to do so or would have no impact.

Final Thoughts

The demand for cannabis in the Lone Star State is strong. With the likelihood of a fully-functioning medical cannabis market coming soon, and the possibility of decriminalization not too far behind, it’s clear that the future of cannabis is bright in Texas.

While the legalities around adult-use will take longer to work out, and the place of hallucinogenic hemp in the mix needs to be examined and clarified, one fact is certain. The path forward that Texas cannabis takes will certainly be a unique one, as unique and as individual as the Texan people themselves.

Alternatives to Bankruptcy for Cannabis Companies: Part 2

By Brent Salmons, Yuefan Wang
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Part 1 of this series discussed the lack of bankruptcy protections for cannabis companies, since bankruptcy in the U.S. is an exclusively federal procedure and cannabis remains illegal under federal law and proposed a number of alternative options for businesses struggling in the current environment. Part 2 of this series focuses on one of these alternatives: state law receiverships.

Background

A cannabis operation facing financial difficulties may try to avail itself, on the one hand, of the contractual remedies described in Part 1 of this series, but these remedies may be flimsy given their narrow scope and reliance on voluntary negotiation between parties whose relationship is already likely tense; on the other hand, the statutory remedies described in Part 1 of this series may be too rigid and absolute, necessitating the disposition of a business as a collection of assets, instead of its continued operation as a going concern. An alternative is receivership, a flexible but powerful quasi-judicial approach paralleling federal bankruptcy able to be administered by state courts. Compared to federal bankruptcy, state receivership is both over and under-inclusive: while receivership can be used in many more situations than insolvency, such as a financially healthy business that is nonetheless subject to regulatory action, receivership provides less comprehensive protection for an insolvent business.

Receiverships have their roots in English and Welsh courts of equity, which were seen as offering fairer remedies than their contemporary common law courts, bound as they were by ponderous precedent. In contrast, courts of equity had more discretion to apply remedies which could be more tailored and “equitable” to an individual petitioner, even if such remedies were not codified. While this separation of equitable and common law courts does not generally exist in the modern U.S. legal system (except for a few hold-out states, most notably, Delaware), the legacy remains in the type of civil remedy available: while most remedies are awarded as monetary redress for a past wrong suffered by a plaintiff (e.g. liquidated damages for the discloser of confidential information or the “benefit of the bargain” for the seller of a company), equitable remedies often require prospective action (or forbearance of an action) by the defendant (e.g. an injunction on disclosure by a recipient of confidential information or specific performance by a purchaser of a company). To draw the analogy out, bankruptcy is a “legal” process to address insolvency since it is governed by a comprehensive regime of federal statutes and rules in the Bankruptcy Code (which is, ironically, applied by specialized federal courts), while receivership is the “equitable” side of the same coin: a judicially-created remedy to manage or liquidate a business, among other actions, where it would not be equitable (or, most importantly for cannabis businesses, not possible) for a bankruptcy action.

Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.As an equitable remedy used by various states and federal entities, generalizations about the receivership process are difficult to make. However, broadly speaking, a typical receivership process begins with a complaint filed against the entity for which receivership is sought in state court. This filing can be made by a variety of parties outside of the standard debtor-creditor relationship (reflecting the equitable nature of receiverships), including by regulators and disputing owners of a business. After this filing, a motion to appoint the receiver (which is usually but not always a third party) is filed with the court; consent of the opposing party is generally not required in appointing a receiver but can often make the process easier. The complainant must then establish standing and the occurrence of certain events, including insolvency, but also mismanagement of a corporation or a foreclosure. The requirements of such events are fact-specific and may often be governed by statute or the contractual relationship between parties. The order appointing the receiver usually sets out the specific powers the receiver has in any given case to oversee the disposition or operation of the assets subject to the receivership (called the “receivership estate”) for the benefit of its’s creditors.

Receivership laws generally fall into two categories: some states provide for a broad general statute, sometimes accompanied by statutes specific to industries which are heavily regulated, entity types, or process, while in other states the power is an extension of the court’s powers, set forth in the state’s rules of civil procedure. States also differ as to whether a receivership is considered an independent remedy, a standalone legal action which can be pursued in and of itself (e.g. a petition by a creditor to appoint a receiver to resolve settle an unpaid debt), or an ancillary remedy, a legal action that supports a primary claim (e.g. a request to appoint a receiver in connection with a dispute over the ownership of a business). Some states provide for general receiverships, which allows receivers to take control of an entire business, while other states also allow limited receiverships, which allows the receiver take control of a portion of a business, while the owner operates the remainder. Some states with legalized cannabis have cannabis-specific receivership statutes, usually providing that the receiver either be temporarily or fully licensed similar to any other operator of a cannabis business.1

Below is an overview of the laws and rules governing receiverships in certain states which have legalized cannabis.

Arizona
In Arizona, receivership is governed by statute, with a general statute and specific statutes for certain industries and type of receivership. Arizona law recognizes that principles of equity apply to all matters relating to receivers, providing the court overseeing the receivership with additional power to decide the remedies available to the receiver. In addition, Arizona has enacted a specific statutory framework for the appointment of receivers for commercial real property and personal property related to or used in operating the real property. Arizona also uses a separate receivership statute to provide for corporate dissolution receiverships, in which a court in a judicial corporate dissolution proceeding may appoint one or more receivers to wind-up, liquidate, or manage the business and affairs of the corporation.

There are no specific statutes governing receiverships of cannabis businesses, so the general receivership statute applies to cannabis businesses, subject to Arizona’s rules governing the operation of a cannabis business. For example, Arizona cannabis regulations that require anyone volunteering or working at a medical or recreational cannabis dispensary to be registered with the cannabis regulator similarly apply to a receiver appointed over a licensed cannabis business.

California

California does not have significant entity-specific or industry-specific statutes for receiverships; rather a California court’s power to appoint a receiver is granted under the state’s rules of civil procedure. Receiverships in California are solely an ancillary remedy; a receivership is commenced once a complaint is filed and any party to the action may seek to appoint a receiver. Circumstances that allow for the appointment of a receiver are fact-specific and at the discretion of a judge, although contractual provisions for the appointment of a receiver are given weight under the rules. Sales of assets in the receivership estate must be submitted to, and approved by, the appointing court.

While the rules of civil procedure provide for the general powers of a receiver, the specific powers a receiver possesses in any given case is granted by the judicial order appointing the receiver; this appointment order is therefore, along with the court itself, the primary authority for the parties in any given receivership. California explicitly disqualifies certain persons, such as parties to the lawsuit, an attorney of a party, a person interested in an action, or any person related to any judge of the court within the third degree, as receivers.

While California’s receivership rules do not explicitly contemplate cannabis businesses, receiverships for cannabis companies have taken place, but in our experience are less common in California than assignments for the benefit of creditors (which we will address in a later article). Like other licensed businesses in California, cannabis companies must provide notice to the state regulatory agency which granted the license. It is up to the agency’s discretion whether the business may be operated under the existing license or whether the receiver must secure a new or temporary license.

Colorado

Like California, no generally applicable receivership statute exists in Colorado; instead, receiverships are governed by the state’s rules of civil procedure. Under these rules, a receiver can be appointed under a court’s general equitable powers. Appointment of a receiver is an independent remedy in Colorado, but is contingent on a lawsuit having commenced and the court having deemed the receivership as necessary and proper. In addition to the court’s general equitable powers to appoint a receiver, and unlike California, Colorado has receivership statutes that are entity and industry specific. The entity-specific statutes permit the appointment of a receiver for the judicial dissolution of for-profit corporations, non-profit corporations, limited liability companies, and cooperatives, and the industry-specific statutes permit the appointment of a receiver for the windup of failed insurance companies and the closure of long-term care facilities.

Similar to California, the court order appointing a receiver governs the entire receivership process and any disposition of the assets of the receivership estate must be submitted to and approved by the court.

As befitting the first state to legalize adult-use cannabis, Colorado’s cannabis regulations specifically address receiverships: the rules create a notice and application requirement for all court appointees, including receiverships, and require receivers to register with the regulator as a “temporary appointee” of the court.

Illinois

Illinois does not have a comprehensive receivership statute; instead, the state has industry-specific statutes, including for regulated industries such as nursing home facilities and telecommunication carriers. Illinois also provides for “equity receiverships”, which are used as an ancillary remedy in business disputes in order to stabilize a business that is adversely affected by fraud, neglect, waste, dissipation, or other misconduct during the pendency of the underlying proceeding. If the underlying matter is within the general or statutory jurisdiction of the court, then such court has jurisdiction over the receivership.

There are no specific statutes governing receiverships of cannabis businesses, but the governing statute does contemplate operation of a cannabis business by a receiver, so regulations promulgated thereunder should apply to receivers as well, including with respect to licensing.

Maryland

Adult-use cannabis sales only began in Maryland July 1, 2023. Maryland has a general receivership statute.

Receivers in Maryland are generally appointed by the person seeking appointment, including the court, and must meet certain qualifications, such as not having any material financial interest in the outcome of the receivership, and not having any debtor-creditor relationship with or equity interest in any party to the receivership. While the general receivership statute provides for broad powers of the receiver, including general management of receivership property, hiring professionals, and issuing subpoenas, the court may modify or expand the powers of the receiver via the appointment order.

While there is no cannabis-specific receivership statute, Maryland’s medical cannabis rules contemplate and authorize the transfer of licenses to a receivership; similar rules have been proposed for adult-use cannabis licenses as well.

Nevada

Nevada has a broad receivership statute, in addition to both entity and industry specific statutes. Case law is not well-developed and mostly predates the current statutory scheme, but there is support for a receiver being appointed outside of a statutory context, specifically when the situation is governed by contractual agreement.

The general receivership statute provides that a receiver may be appointed in a variety of situations, such as fraudulent property purchases, foreclosure of mortgages, or the dissolution or insolvency of a corporation.

Nevada has a statutory regime for receiverships for cannabis companies. Unlike the general statute, there are significant requirements for who can be a receiver for a cannabis business. A receiver must first secure a cannabis establishment agent registration card for a cannabis receiver issued by Nevada’s cannabis regulator. In addition, the receiver must submit an application to the regulator accompanied by, among other requirements, a statement saying the receiver has not previously had an agent registration card revoked. The receiver must also provide proof that she has (1) experience or knowledge of the cannabis industry, (2) experience as a receiver appointed by a court, (3) knowledge and skills necessary to make reasonable financial decisions, and (4) adequate financial capacity to fulfill the duties of a receiver. If the regulator is satisfied with the receiver’s application, it will issue the receiver an agent registration card which must be renewed two years after issuance. It is worth noting that Nevada’s statute governing the non-transferability of certain agent registration cards for cannabis allows the regulator to adopt regulations that give priority in the processing of transfers of licenses for transferors subject to receivership. To date, however, no such regulations allowing priority for receivership processing have been adopted.

Washington

Washington has a general receivership statute, but not any entity or industry-specific receivership statutes. Washington’s receivership structure with overhauled in 2004 with the passage of a new law, so it is not completely settled whether receivership is now an independent or ancillary remedy; however, the language of the statute language suggests that it is an independent remedy.

To be appointed a receiver in Washington, the individual must meet certain requirements, including not being a party to, or be closely controlled by a party to, the underlying action and not having materially adverse interest to the person against whom receivership is sought. The general statute specifically outlines the powers of the receiver. Certain actions by the receiver require court approval before being finalized, including the assumption or rejection of executory contracts, and sales of property outside the ordinary course of business.

Washington law specifically provides for receiverships for cannabis companies. To be a receiver, the person must satisfy the requirements of Washington’s receivership law, and either be preapproved by the cannabis regulator or else be approved post-application. In order to qualify for the regulator’s preapproved receiver list, or be approved post-application, the putative receiver must (1) submit an application, (2) have been a Washington resident for at least six months prior to submission, (3) submit to and pass a criminal background check, (4) provide financial disclosures as requested by the regulator, and (5) disclose any interests in the cannabis licensees. Once a person is appointed as receiver for a cannabis licensee, she shall not have a financial interest in, or simultaneously serve as receiver for, another licensed cannabis retailer. The receiver may not also serve as a receiver for, or be a party of interest in, more than five cannabis retail licensees or more than three cannabis producer and/or processor licensees at the same time. Finally, any person who files a receivership action involving a cannabis licensee must provide notice to the regulator.

Part 3 of this series on Alternatives to Bankruptcy for Cannabis Companies continue our review of receivership in various states and other bankruptcy alternatives, including assignments for the benefit of creditors.

Reference

  1.  As cannabis legalization continues to spread, more robust industry-specific receivership rules may be promising given the heavily regulated and specialized nature of the business, similar to how a number of states have industry-specific rules for other heavily regulated industries.

California’s Social Equity Fee Waiver – Late Is Better Than Never

By Abraham Finberg, Rachel Wright, Simon Menkes
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In a move that Old Guard California Cannabis viewed with bittersweet appreciation, the Department of Cannabis Control on January 1, 2022 announced it would waive license fees for those cannabis companies impacted by the War on Cannabis. Many pre-2017 operators experienced persecution by law enforcement including confiscation of inventory. For those who refused to admit defeat and remained in or returned to the business of cannabis, this significant fee waiver feels something like an apology.

As we move through Year 2 of the Equity Fee Waiver, it’s important for all cannabis companies to review their history and their current operations to see if they qualify for this significant reduction in expense. Instead of arrest or conviction, a cannabis business may also qualify through its eligible owner’s income level or location of residence. Since this is a fee waiver for small businesses, a maximum yearly revenue level of $5 million is also a requirement.

For those Qualified Equity Licensees who have already received a fee waiver, it’s important to remember that this is a yearly process, and that they must continue to submit a request for equity fee relief at least 60 calendar days before the annual expiration date of their license.

Who Qualifies for the Equity Fee Waiver?

Gross Revenue: Your cannabis business must have no more than $5 Million gross revenue per year.

Equity Ownership: At least 50% of your business must be owned by people who have only ONE of these three characteristics:

  • Have experienced a cannabis conviction or arrest, or
  • Have a lower income level, or
  • Reside in a neighborhood affected by the criminalization of cannabis (as defined by the DCC)

Arrest or Conviction

The DCC requires that the equity individual have been convicted or arrested for cannabis crimes before November 8, 2016. Crimes must have been sale, possession, use, manufacture or cultivation. The equity individual may also be eligible if an immediate family member was convicted or arrested for cannabis crimes and the equity individual themselves lived in a California county with drug arrest rates that were higher than the state average drug arrest rates.

Lower Income Level

In order to qualify under income level, the equity individual must have household income no more than 60% of the area’s median income (see DCC charts showing county, number of people in household, and eligible income levels) or prove eligibility for financial aid like CalFresh or Medi-Cal or Supplemental Security Income.

Residence in a Neighborhood Affected by Criminalization of Cannabis

If an equity individual seeks to qualify by location of residence, they must have lived in the qualified location for at least 5 years between 1980 and 2016. The location must have higher than state average drug arrests and be in the top 25% nationally for unemployment and poverty. The DCC provides an interactive map to check your location for these requirements.

Worth the Trouble

Again, your business needs to be below $5 million annual gross revenue, and at least 50% of the ownership needs to have only 1 of 3 disadvantaged characteristics: cannabis arrest or conviction, or lower income level, or residence in an affected neighborhood.

While it will definitely take time to apply for the Equity Fee Waiver, the savings in zeroed-out license fees can certainly make it worthwhile. In addition, qualifying for the Equity Fee Waiver makes a business eligible for other state equity tax advantages including the California Equity Tax Credit. (See our article on the CETC here.)

The state’s application for the Equity Fee Waiver is available online, and more info is available as well.

Desperate California Cannabis Vendors Seek Credit Protection

By Abraham Finberg, Rachel Wright, Simon Menkes
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Cannabis companies representing 45% of California’s cannabis sales are pushing a bill that will crack down on non-paying customers. Well known operators, including Kiva, Lowell Farms, Nabis and Sunderstorm, recently formed Financial Stability for California Cannabis (FSCC) and moved to support Assembly Bill 766.”

The bill, nicknamed “The Cannabis Credit Protection Act,” would require a cannabis licensee to pay for goods and services sold or transferred by another licensee no later than 15 days following the final date set forth in the invoice. If full payment is not received by that date, the seller would be required to report this to the Department of Cannabis Control (DCC), which in turn would notify the delinquent buyer and begin disciplinary proceedings. The buyer would be prohibited from purchasing any other cannabis products on credit until the delinquent invoice was paid. In addition, the DCC would be empowered to issue a penalty (unspecified), taking into account “the frequency and gravity of the licensee’s [past] failure to pay outstanding invoices”.

In a letter of support for AB 766, the FSCC stated, “This culture of nonpayment that has emerged in California’s cannabis market leaves businesses across the entire industry and supply chain – as well as ancillary businesses that support legal cannabis operators – with outstanding balances and unpaid invoices sometimes totaling hundreds of thousands of dollars…This ballooning debt bubble in the cannabis industry will only continue to grow without proper oversight, putting the entirety of the state’s supply chain at risk of collapse and impacting state revenue decline even further.”

Opponents of the bill acknowledge the problem of non-payment in the industry, but feel AB 766 is too heavy handed and is “ripe for abuse.” In a blog post for the international legal firm Harris Bricken, cannabis attorney Griffen Thorne writes, “[L]icensees who are reported would be legally prohibited from buying goods or services on credit from other licensees until they pay the invoices for which they were reported in full … The person making the report has to give the DCC almost no information in order to make the report. There is no hearing. There does not even seem to be an opportunity to contest the report. The second a report is made, the other side loses its rights to buy goods on credit – presumably even under preexisting contractual arrangements with third parties. This seems like an obvious due process concern and ripe for abuse.”

The number and amounts of unpaid cannabis product invoices have ballooned over time and have driven California cannabis vendors to take such extreme measures. Collections and outstanding receivables are a symptom of an industry struggling under heavy taxes and competition from illegal operations that pay no taxes whatsoever, and which now account for over 60% of all cannabis sales within the state.

In order to ascertain the current status of AB 766, 420CPA reached out to Assemblymember Phil Ting (D-San Francisco), co-sponsor of the bill along with FSCC, the Cannabis Distribution Association, California Cannabis Industry Association and the California Cannabis Manufacturers Association. We corresponded with Tania Dikho, Ting’s Legislative Director. Ms. Dikho informed us that the bill was heard in the Assembly Appropriations Committee on May 18, but it was not passed.

“It’s a 2-year bill meaning we can’t act on it until this legislative year is over, so the bill will not have another hearing [and we] can’t make any changes to it until next year,” explained Ms. Dikho.

The 2-year status is a tenuous one. The bill must be approved by the Assembly and make its way to the Senate between early January 2024 and January 31, 2024 or it may no longer be acted upon and will die a legislative death.

Businesses that would like to voice their opinion for or against AB 766 should contact their state legislative representatives.

SC Labs Expands, Acquires C4 Laboratories

By Cannabis Industry Journal Staff
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According to a press release published on Monday, SC Labs has acquired C4 Laboratories, a cannabis testing lab located in Scottsdale, Arizona. The acquisition means SC Labs has expanded their footprint into five states total. Originally based in California, the cannabis testing company now has locations in Arizona, California, Colorado, Michigan and Oregon.

Ryan Tracy, Founder/CEO of C4 Labs.

Ryan Treacy founded C4 Laboratories and has been a vocal advocate for product safety testing since 2016. As CEO of the company, he led the laboratory through regulatory upheaval and a lot of changes the state has seen since legalization.  He also co-founded the Arizona Cannabis Laboratory Association and led lobbying efforts on behalf of patients and stakeholders to require lab testing.

He says they are excited to join forces, becoming the largest cannabis testing platform in the US. “Our combined leverage of top scientists with specialized cannabis testing knowledge and a leadership team of industry experts will allow us to do everything from harmonizing R&D efforts to improving the data experience to pushing for positive regulatory change,” says Treacy. All current employees of the C4 team will stay on, joining the new SC Labs team.

Jeff Journey, CEO of SC Labs

This acquisition represents another important milestone for the SC Labs expansion plan. Last year, they hired a new CEO, Jeff Journey, and launched their national hemp testing partnership based in Colorado. That, coupled with the expansion through Can-Lab into Michigan last year along with the C4 acquisition, SC Labs has expanded into three new states within the last twelve months.

Journey says they’re thrilled to acquire the C4 team and that they have shared values, a proven track record and good expertise. “With this acquisition, we can continue to expand best-in-market cannabis testing services and the opportunity to service multi-state growers and manufacturers,” says Journey. “It is truly an exciting time for growth, and we know that the C4 team will be an invaluable addition to our team, culture and operations.”

The Importance of Regulatory Compliance for Cannabis Delivery Providers

By Katherine Lehman
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Cannabis retail is becoming more and more commonplace in the United States. According to a consumer trends survey by North Hollywood-based cannabis brand Ganja Goddess Inc., 90% of respondents said they used online ordering and delivery services to purchase cannabis. Around 60% reported that online ordering and delivery would continue to be their preferred method of purchase post-pandemic. The pandemic hugely impacted the delivery market, pushing sales up 300% by the end of 2020. However, in a lot of states, brick-and-mortar stores remain illegal. Delivery services allow cannabis companies to reach customers in areas where dispensaries are not allowed. While cannabis delivery is an incredible opportunity for companies to reach new customers they would not otherwise be able to, following the law can be difficult in an environment with a patchwork of local laws and changing regulations. So, what do you need to know about regulatory adherence to stay ahead of the curve?

Delivery services allow cannabis companies to reach customers in areas where dispensaries are not allowed.

The short answer is it’s complicated. Each state has dramatically different laws regarding cannabis delivery, and laws can vary by jurisdiction. Some states allow full access to adult use cannabis, some only allow medical cannabis and some completely ban delivery, making it tricky to adhere to the law. There are currently 6 states that allow cannabis delivery: California, Colorado, Massachusetts, Michigan, Nevada and Oregon. Others like New York are taking the steps to allow delivery with careful regulation. With more states legalizing cannabis sales every year, delivery laws in existing delivery states are evolving and adapting to licensing changes. California introduced major changes to laws on January 1, 2023. These changes included allowing drivers to carry double the amount of product (up to $10,000 worth), no longer requiring vehicle inventory to be allocated or pre-purchased, and allowing curbside delivery for all licensed retailers. These changes to the largest cannabis market in the world showcase how much delivery is still changing and being regulated, and stresses the value of staying up to date on the latest laws and regulations.

Another aspect of delivery to consider is licensing specifically for delivery. Like regulations, licensing varies state to state and jurisdiction to jurisdiction. For example, in Massachusetts there are two types of licenses. Licensed providers must register as either a Marijuana Courier or as a Marijuana Delivery Operator. Couriers are allowed to earn a fee for delivering cannabis products from licensed retailers to consumers, and operators may buy and sell cannabis products wholesale, as well as deliver them. In Colorado, delivery requires two permits, however, a holder of both permits can still get in trouble if they deliver to an area or jurisdiction that has not affirmatively permitted delivery.

Although highly dependent on local, state and federal laws, the cannabis delivery space shows no signs of slowing down anytime soon.

A big win for delivery services came when Apple allowed cannabis delivery apps on iPhones in June 2021, with downloads restricted to states that allow adult use cannabis. Even then, a lot of individual counties or cities within adult use states still prohibit the delivery of cannabis. This patchwork of regulation makes adherence tricky, and makes certain software features like real-time driver tracking and proof-of-age verification crucial to delivery operations. With competition increasing it’s even more important for cannabis delivery operators to provide an outstanding experience for customers every time. One way they can achieve this is by improving their cannabis delivery software. According to cannabis last mile delivery management software provider Onfleet’s study, 72% of cannabis delivery operators said a delivery management tool was “critical to running delivery operations.” Delivery software also helps companies stay compliant with local regulations. Route planning allows your drivers to stay within legal zones. These platforms can also capture images of state-issued ID for age verification and record customer signatures so drivers can focus on ensuring customers are getting the best experience.

Although highly dependent on local, state and federal laws, the cannabis delivery space shows no signs of slowing down anytime soon. And if (or when) cannabis is legalized on a federal level, it would pave the way for major corporations like Uber and Amazon to enter the space – Uber is already taking steps in Canada. Whether that’s a good thing is up for debate, but delivery certainly isn’t going anywhere anytime soon. Depending on regulations and the market’s next moves, we will see a variety of delivery models and services in the coming years. Delivery services are the future of cannabis, providing customers with ease of access and personalized deliveries as well as benefiting retailers by lowering overhead costs and providing options for easy, quick customer service. Just make sure to check local laws before you confirm a delivery order, even in states where cannabis is legal.