July 19, 2019

Trailer Bill Tackles Illicit Market

Trailer bills, or legislation that helps implement the budget, are yet another vehicle for shaping the rules governing California’s evolving cannabis industry. AB 97, this year’s cannabis trailer bill, was approved by the Governor on July 1, fast-tracking a slew of policy changes and programs for cannabis businesses. New qualifications for provisional licenses will arguably have the greatest reach, providing countless businesses that have never held a temporary license with an on-ramp to timely licensure. But stringent citations, a quasi-organic program, and changes to grant award processes for local social equity programs will also provide the cannabis industry with new challenges and opportunities.

High Cost of Non-Compliance

AB 97 takes enforcement to the next level with citations—accompanied by notable administrative fines—for licensed or unlicensed businesses that violate state cannabis rules and regulations. The maximum administrative fine for any given citation issued to a licensed business is $5,000. For unlicensed businesses, it is $30,000.

The real kicker? Each day of a violation constitutes a separate violation, so the administrative fines can be assessed daily. A week of non-compliance with a regulatory requirement that likely has changed at least three times in the past few years could cost a licensed business tens of thousands of dollars.

The hefty fines on unlicensed businesses are a clear move to shutter the illicit market, and in many localities, this is an essential step to ensure the success of businesses operating legally. Given the cost of licensing fees, permits, and state and local taxes—not to mention the price tag of compliance in general—unlicensed businesses need to go to in order to give licensed ones a chance of survival.

However, the guidelines for issuing citations and the associated administrative fines are murky at best. Per the trailer bill, the licensing authorities must consider the gravity of the violation, as well as the good faith of the licensee and any history of violations, when assessing fines. Yet there is no clear methodology for determining the severity of a violation, which leaves businesses vulnerable to inconsistent enforcement tactics that could put them at a serious financial disadvantage compared to their competitors.

Comparable-to-Organic Program

The trailer bill also extends the framework for the comparable-to-organic program, which will allow cannabis businesses to achieve organic certification outside the scope of the National Organic Program (NOP) since cannabis is still a scheduled drug at the federal level. AB 97 ensures that manufactured cannabis products will be included in the organic-equivalent program by allowing the State Department of Public Health to help determine standards and oversee certifications for edibles and other manufactured cannabis goods.

Establishing the program will come with its own obstacles. On the agenda for the first CalCannabis Comparable Organic Working Group, for example, is how to approach mimicking the NOP that governs non-cannabis goods without actually issuing or referencing NOP guidance or materials. Businesses eager to adopt a cannabis-equivalent of organic certification should chime in at the meeting, which will be held Wednesday, July 24 at the California Department of Food of Agriculture in Sacramento.

Local Equity Program Grants

Lastly, AB 97 creates more opportunities for social equity programs at the local level. Building on SB 1294, which established a grant program to provide funds for technical assistance to cities and counties with existing equity programs, the trailer bill broadens the scope of the grantmaking to local jurisdictions wanting to develop and implement one. Now, grants can be applied to fund equity assessments, the first step in setting up a new equity program.

While we don’t expect to see a proliferation of equity programs across the state—plenty of jurisdictions are still tiptoeing around cannabis regulations or steering clear altogether—this is a step in the right direction for answering the many calls for social equity considerations during the rulemaking process.

All in all, the trailer bill resolved, at least in some capacity, some of the most pressing issues facing the cannabis industry:

  • With the adoption of provisional licenses that are no longer tied to the now-retired temporary license, there is a pragmatic path to licensure for new cannabis businesses and a fix for those already in operation that would have had to cease operations to remain compliant.
  • The state is trying to address rampant illegal operations through aggressive administrative fines.
  • A quasi-organic program for both flower and manufactured products is in the works, an important environmental initiative and key marketing strategy for many businesses.
  • New guidelines for local equity grants will help the state follow through on its promise to keep social equity at the forefront of the industry.

Now we just have to make sure that implementation is done correctly.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.