Governor Jerry Brown recently signed a bill that allows thousands of cannabis operators surviving on expiring temporary licenses to stay open for an additional year without new approval from local authorities.

Brown signed Senate Bill 1459 amid a flurry of legislation on September 27. The bill addresses a problem faced by much of the California commercial cannabis industry: the state cannot issue licenses to operators who have completed state applications until the relevant city or county provides approval, but that local approval has been very slow to come.

In response to the slow local process, the state provided applicants with the option of operating on a 120-day temporary license (and three 90-day extensions) until they were issued a standard state license. The state required some form local authorization to issue the temporary license, but not a finalized local permit. However, the temporary license program was only meant to be a short-term fix and is scheduled to expire on December 31, 2018. After that, a cannabis business could only operate if it obtained a standard license. Yet, many local governments are still moving at a snail’s pace.

Making matters worse, some local jurisdictions announced that they would not provide applicants with local approval for their standard state license unless the applicant had obtained a finalized local permit. In one example, The City of Oakland sent applicants a letter in April refusing to provide local approval for a standard (non-temporary) state license until the applicant had obtained a city permit. Meanwhile, permit-seekers who had filed complete applications more than six months prior were still awaiting inspections from Oakland’s Building and Fire departments, placing applicants in a Catch-22.
Recognizing the protracted delays at the local level, AB 1459 wrests some control from the hands of city and county agencies and gives the state “sole discretion” to decide whether to issue the new a 12-month “provisional” license. The state does not plan to hand out provisional licenses casually however, and has included its own criteria that applicants must meet. In order to be eligible for the provisional license, applicants must have met the following list of conditions:

• Submitted a completed a standard (non-temp) state license application
• Filed and signed a provisional license application under penalty of perjury
• Held or currently holding a temporary license
• Provided evidence that compliance with the California Environmental Quality Act is underway

The bill represents a lifeline for the vast majority of cannabis permit applicants in counties and cities facing long permitting backlogs that have occurred by no fault of their own.

In Oakland, hundreds of applicants are awaiting sign-off from the City’s Building and Fire Departments before their final permits can be issued. The departments’ staffs have been overwhelmed by the volume of applications and the new complexities that cannabis infrastructure presents.

John Oram, CEO of Oakland-based Bloom Innovations, which owns the popular NUG brand said, “99.9 percent of Oakland cannabis businesses would have had to shut down” while waiting for their local permit to be issued had the Governor not signed SB 1459.

“If the bill had not passed The City of Oakland could have chosen to deny local authorization, which would have forced us to close,” Oram said.

On May 11, 2018, the California Department of Tax and Fee Administration (CDTFA) released its cannabis tax revenue numbers for the first quarter of 2018. These numbers fall short of the high expectations of industry analysts and the state. The CDTFA reports that it has collected a total of $60.9 million from licensed cannabis operators in Q1. This amount includes the state’s cultivation, excise and sales taxes, but does not include local tax revenue collected by cities or counties. Breaking it down a bit further, the excise tax generated $32 million, the cultivation tax brought in a mere $1.6 million, and the sales tax generated $27.3 million. Medicinal cannabis sales are exempt from sales tax if the purchaser holds a valid Medical Marijuana Identification card.

In addition to regulation and the elimination of the black market, the promise of tax revenues  was a major force behind the passage of Prop 64 back in 2016. The governor’s budget proposal had predicted $175 million in revenue in the first six months of 2018, which has proven to be optimistic based on the first quarter results. Two prime culprits for the tax shortfall may be suppressed sales volumes due to competition from healthy gray and black markets and fewer tax paying operators due to widespread local government bans on commercial cannabis activity and major delays in those jurisdictions that are allowing commercial cannabis.

In addition to competing with leaner gray and black market competitors, compliant operators face strict zoning requirements, slow and reticent local permitting bodies, and moratoriums on commercial cannabis activity. These obstacles result in fewer regulated operators, fewer sales, and fewer tax dollars. The expected tax revenue will only come if the cannabis industry is able to launch at scale and thrive. Imposing high taxes on a fledgling industry, much of it still emerging from the gray and black markets, is not an ideal way to encourage transitioning and new operators to jump through the numerous hoops set up by state and local governments. Local prohibitions on commercial cannabis exist in 70-80% of local jurisdictions. This means that operators are flooding those few jurisdictions that are permitting commercial cannabis activity with applications, resulting in delays.

The CDTFA’s report may have already put a damper on AB 3157, a bill  currently in committee that, if passed, would reduce the excise tax to 11% and eliminate the cultivation tax until June 2021. A recent addition to the bill allows the Legislature to restore the excise tax rate to 15% if the revenues collected from the excise tax are “insufficient to adequately fund the reasonable regulatory costs” outlined in the Revenue and Taxation Code. This language seriously weakens AB 3157 and puts a significant amount of pressure on a brand new industry.