The Buck Down: Breaking Down California’s Compliance
January 1, 2018… the date everyone in the industry was waiting and waiting and waiting on has become somewhat of the boogie man. Not everyone understands it. How does it look? How does it feel? What does it mean for me and my business? For the purpose of our discussion, January 1 should be interpreted as the date your business enters into the state-regulated market.
The reality is, the State has done a terrible job at ushering in these changes. In their defense, it’s not entirely their fault. The progression from the calculated march to regulation under MCRSA, to what we are experiencing now, was due to the voters of this great State of California passing an adult use initiative. With the clock ticking, the governor’s office took it upon themselves to merge the medical regulations created by the legislature and the adult use initiative of the people. The MCRSA and the AUMA joined under unholy matrimony and their offspring was born, MAUCRSA. What did that mean for cannabis operators? We lost our chance at proper feedback before the start of the state program. We have been forced to comply with emergency regulations with only weeks to prepare for them, with the latest tax notice published as late as December 11th. Only the most progressive jurisdictions have been able to keep up with the changing regulations. We have heard stories from across the state ranging from outright bans on all things adult use (thanks, league of cities, happy holidays to you, too) to Palm Springs (yes, they were first) leading the adult use regulations months before MAUCRSA was finalized.
If your business is in one of the few areas allowing for adult use sales starting January 1st, congratulations. You’re holding the proverbial golden ticket to the green rush. If you’ve been lucky enough to have a medical permit from your local government but no movement on adult use, you’re now in a situation where you gain nothing by applying for a state license and likely lose connection to your entire supply chain. If you’re like 90% of operators in southern California, you’re neither here nor there and will likely wait for change to come to your door. The SoCal market rejected change and has withstood the repercussions for over a decade but with $58M in enforcement funds, we’re expecting a heavy-handed sweep sometime in 2018. Many cities there have decided to regulate and take part in the green rush instead of dealing with tenuous grey zone operations. The City of Los Angeles, The Big Bud, is the cannabis retail capital of the world but has moved its regulations along like a slug. They finally agreed upon a set of medical rules and will begin taking applications in the new year. Take away from the story: legalizing adult use cannabis across California comes in all shapes and sizes. You may be enjoying an adult use joint in a smoking lounge in San Francisco, cross the Golden Gate Bridge, and find yourself in a dry county. Sound familiar? Like something we’ve learned about in history class? Well, it is. This is the end of prohibition and if you are reading this you’re about to make history.
As the Chief Product Officer of Treez, it’s my responsibility to understand all of these changes and regulations. I can tell you this has not been an easy task and that’s because the regulators do not understand exactly how the regulations are going to be interpreted. The questions we have emailed, posted, voiced, requested written responses for are digging into the heart of the gaps left by the “temporary” regulations. I’ve compiled a quick guide to compliance to help those entering the state-regulated market navigate all the changes. I’ve also included a guide to packaging and labeling to help clarify what has become the cloud of mystery for legal operations. As soon as you’re issued your temporary or permanent state permit, these guides will help your retail operations comply from day one.
A good portion of the compliance guide deals with taxes and calculations in detail, but here are some high-level comments on the changes. The first major change is the new 15% excise tax that’s supposed to be paid by the end consumer. Guess what, if you’re just a retailer, it’s a tax on buying. The state is using an average market price (AMP) calculation on buying from a 3rd party distributor so the tax can be calculated before all the product is sold to end consumers. Using the AMP calculation, buying has a 24% tax on it starting with your first purchase in the new year. Tax gets built into the cost and then passed on to the customers with the language the state suggested, stating all excise taxes have been paid on your receipt. This is what’s being called an “arm’s length” transaction. With this type of regulation, you can discount a product 99% but don’t forget you’ve already paid 24% of the cost of the product as a tax. The 24% tax on buying is calculated using this calculation: Cost x Industry Standard Markup (60%) x Excise Tax Rate (15%).
If you’re vertically integrated (single entity with multiple licenses) or a micro business you get a more complicated calculation. For products that you self-distribute, you can charge 15% as an additional tax on the subtotal at the point of sale, a simple excise tax calculation. This is what is being called a “non-arm’s length” transaction. For products you bought from a 3rd party distributor, you follow the same arm’s length transaction described above. There is a situation where you could have arm’s length and non-arm’s length transactions on a single receipt. Doing one or the other is simple. Doing both at the same time presents complications we’ve been working through while aiming at delivering an elegant solution in the first weeks of January as our clients enter the state-regulated market. I expect other software providers will keep the state suggested language and include the tax into the price of some items and charge a line item tax on others. We’ve decided we’ll always show the tax component of arm’s length transactions as a line item. Customers may not be able to reverse calculate how the excise tax is calculated but they’ll know the price increase is going to the state and not to the dispensary.
The CDTFA (formerly the Board of Equalization) took the liberty of setting up the most unfavorable sales tax calculation possible. Currently, dispensaries have set their own regulations charging all taxes (Sales, City or County) on the original subtotal and adding them in a simple computation. The state has now ushered in the era of compounding taxes. Sales tax is compounded on top of local taxes which is compounded on top of excise tax.
Packaging and labeling are equally impossible to grasp. I’ve included every provision that deals with packaging and labeling in this guide. The largest change that goes into effect with your state permit is surrounding edible strength and servings. These are transitional requirements that will fade away from the minds of retailers as distributors take over packaging and compliance. As soon as you have your temporary permit, you will not be able to sell previously manufactured edibles with more than 10 servings per package or have a serving size larger than 10mg. If the servings are not clearly scored, delineated, or separated you will not able to sell those edible products either. All manufactured products need to be in child-resistant packaging or placed in a child-resistant exit bag. Manufactured products need to have state warning language on the label or placed inside an exit bag with the language on it. Manufactured products that are not edibles have a maximum of 1000mg of THC for adult use and 2000mg of THC for medical use. If the products contain more they are not allowed to be sold. As long the servings and THC limitations are met, the labeling requirements could be placed on the exit bag. Yes, you read it right. The state expects you to destroy products that do not meet these requirements when you get your state temporary permit.
I hope these guides, links, and words make your transition into the state-regulated market as smooth as possible. Please, feel free to fire off as many questions as you can think of in the comments below. I am lucky to have been apart of many discussions across the state with our customers and have built a strong understanding of the changes coming. Use these guides to lay the boogie man to rest and move into the new era of California cannabis with confidence. Enjoy the rest of 2017! Have a Happy New Years and let’s get ready to make history together.