Governor Gavin Newsom recently signed the 2022-23 state budget into law, which invests a staggering $308 billion into various state programs, relief proposals, reserves, and more. With the budget came several trailer bills to implement the fiscal appropriations within it, including AB 195, which is specific to cannabis-related provisions of the budget. Let’s take a look at the details of AB 195:
Cannabis Tax Changes and Relief
- Cultivation Tax: Is suspended from July 1, 2022 to June 30, 2025. The California Department of Tax and Fee Administration (CDTFA) published a special notice with tips for operators.
- Excise Tax: Will stay at 15% until June 30, 2025, after which CDTFA can adjust every two years based on the amount of revenues that would have been collected from the cultivation tax.
- Rebates and Relief
- High Road Employer Rebate: Cannabis employers who meet certain workplace standards will qualify for tax credits of up to $250,000. This program will begin in the 2023 taxable year and has a total of $20 million allocated for the rebates. The program will be in effect only until December 1, 2028.
The fine print: Qualified taxpayers are those who have a Type 10 or 12 license; pay their full-time employees between 150% and 350% of the applicable minimum wage; and provide group health insurance and retirement or pension benefits. In addition, the maximum amount a qualified taxpayer can claim is equal to 25% of the total amount of their qualified expenditures in the taxable year (which can total no more than $250,000).
- Cannabis Equity Tax Credit: Qualified cannabis equity operators will be eligible to claim tax credits of up to $10,000. This program will begin in the 2023 taxable year and has a total of $20 million allocated for rebates. The program will be in effect only until December 1, 2028.
The fine print: Qualified cannabis equity operators include only those licensees that received approval, including approval contingent upon the availability of funds, for the Department of Cannabis Control (DCC)’s license fee waiver and deferral program. Beginning January 1, 2024, the DCC will provide the state Franchise Tax Board a list of the eligible operators every six months.
- Vendor Compensation Program: Qualified cannabis equity retailers will also be able to apply to retain 20% of the cannabis excise tax they collect. The program becomes operative on January 1, 2023 and will be available until December 31, 2025.
The fine print: Eligibility for vendor compensation depends on maintenance of eligibility for a DCC license fee waiver (via either approval of approval that is contingent upon availability of funds) and licensees must apply through an application that will be established by CDTFA.
- Labor Peace Agreements (LPAs): Authorizes new enforcement tools regarding LPAs and lowers the threshold for needing to sign one from 20 employees to 10.
- Crackdown on landlords: Allows state and local authorities to impose civil penalties on individuals who knowingly rent, lease, or otherwise make available commercial properties for unlicensed cannabis operations.
- Additional State Authority: Authorizes CDTFA to revoke an operator’s tax permit if they violate cannabis tax provisions. It also makes illicit cannabis operators liable for the cultivation and excise tax they would have had to pay if they were operating in the legal market.
- Delivery and Metrc: Beginning January 1, 2023, Each delivery will be assigned a unique “trip” that will be tracked in Metrc. DCC must allow access to information in the track-and-trace system to assist law enforcement in their duties and responsibilities if requested by a state or local law enforcement agency.
- New Taskforce: AB 195 establishes a task force on state and local entity regulation of commercial cannabis activity to promote communication between state and local entities engaged in the regulation of commercial cannabis activity and facilitate cooperation to enforce applicable state and local laws.
The fine print: Task force membership includes representatives from DCC, CDTFA, the Department of Fish and Wildlife, the State Water Resources Control Board, the Department of the California Highway Patrol, the Labor and Workforce Development Agency, and the Department of Justice. Locals regulating commercial cannabis activity may opt in to task force participation. The task force must meet twice a year and their meetings are not subject to the Bagley-Keene Open Meeting Act or the Brown Act. The task force provisions sunset on January 1, 2025.
- Economic Report: The Legislature also pushed for the inclusion of an economic report on the condition and health of the cannabis industry on or before March 1, 2025. The report must be submitted by the DCC, in consultation with the Department of Finance and CDTFA.
The fine print: The report must contain several items including the number of local jurisdictions that regulate and prohibit commercial cannabis activity; an analysis concerning potential expansion or contraction of the market; the number of equity licensees approved by DCC and their locations; the health of the Cannabis Tax Fund and future revenue projections; an analysis of the viability of cannabis businesses in the state for general and equity licensees; and, the impacts of the suspension of the cultivation tax.
AB 195 and the 2022-23 state budget include significant investments in the cannabis industry – arguably the greatest the state has seen since the initial passage of Proposition 64 and establishment of California’s regulatory framework. However, some groups feel the Governor and Legislature should have done more. Equity organizations, in particular, are split about whether the budget moves the industry in the right direction. While some praise the inclusion of tax relief targeted directly at equity operators and reporting requirements on the impacts of current policies specifically on equity operators, others believe the current eligibility requirements to be considered an equity applicant or licensee are too broad. The fight to further hone the definition will certainly continue in the next legislative session. Senator Steven Bradford (D-Gardena) may work to champion the issue given his public disappointment in the state’s investments in cannabis equity thus far. The Legislature and DCC would be wise to monitor the relationship between urban equity operators and rural, legacy equity operators in the near future.
What happens next? The DCC, CDTFA, and other state authorities will work to execute their new responsibilities under AB 195, including the tax relief programs, the regulation task force, delivery under Metrc, the economic report, and other programs. Given the short timeline for implementation of each requirement, it will be important to stay on top of any announcements from state regulators. Be sure to sign up for the state newsletters and social media, and stay in touch with our team at Manzuri Law to ensure you don’t miss out on anything!