California cannabis regulators issue new industry rules as tax revenue inches closer to the $3 billion mark

Bethan Rose Jenkins, Cannabis News Writer/Editorial

On Wednesday, September 8, the newly-unified California Department of Cannabis Control (DCC) published a 197-page draft of cannabis industry rules that will permit the increased sales of branded goods, as well as broaden product sample-sharing opportunities among businesses involved in the supply chain.

The official release of California’s new draft cannabis regulations sparks a public comment period. Feedback is welcomed before the rules are adopted at the end of September. 

Agency spokeswoman for the DCC, Christina Dempsey, says that the newly proposed rules will trigger a countdown for stakeholders to provide the commission with feedback.

“Today is the first step of the emergency rulemaking process. Today (the emergency proposed rules are) out for public notice,” Dempsey said after California’s cannabis rules were updated. “They’ll be out for public notice for five business days, then they will be filed with (the Office of Administrative Law) and then they’ll have five calendar days of public comment.”

Reports state that California’s new cannabis rules will be finalized and enforced before the end of September. DCC, the agency responsible for publishing the new rules, was established in July. Its formation occurred after the merging of three separate bureaucracies that previously provided oversight for state-legal cannabis businesses.

What rule changes are included in California’s cannabis law?

Included in the extensive list of rule changes for California’s cannabis law include the following:

  • New limitations for how industry trade-sample sharing can operate. Trade-sharing rules will enable growers, manufacturers and distributors to share product samples with other legal suppliers for no cost.
  • Meticulously modified definitions for cannabis company owners and individuals who possess a financial stake in the state’s cannabis businesses.
  • Salaries for non-vertically integrated cannabis companies to sell branded stock from other licensed businesses.

Regulated businesses are expected to win big as a direct effect of California’s updated cannabis law. On the other hand, the proposed regulations stipulate that only cultivators, manufacturers and complete distributors will be permitted to trade a certain amount of cannabis goods in the California track-and-trace system; before sharing those samples with fellow industry businesses as part of their marketing tactics.

Contrastingly, trade samples cannot be given away by testing laboratories, retailers, event organizers and distributors who specialize in the area of transportation. Rather, industry workers with these job titles would be allowed to receive trade samples.

“Hopefully this will make it easier for small businesses to show their products to other potential business partners and compete in the marketplace,” Dempsey said, adding that the amended law includes changes relating to the way in which business owners and “financial-interest holders” are identified.

“If you’re a business owner and you were applying for multiple licenses, it was different information you’d be sharing about your owners and financial-interest holders, and to some degree, even different interpretations of who was an owner or financial-interest holder,” Dempsey explained. “So we’ve created consistent definitions for those.”

Last, but not least, California’s updated cannabis rules state that companies without vertical integration will not be able to legally sell branded merchandise unless it is their own. Because of this, smaller companies could gain a leading edge over large-scale corporations.

“The change here is that the restriction that a retailer can only sell their own branded merchandise was removed. So they can sell any licensee’s branded merchandise. The goal is to not penalize someone who’s not vertically integrated,” said Dempsey. She noted that the DCC is likely to enact a string of additional regulatory changes in the future.

“The intention of the DCC is to have more efforts at regulation, through the regular rulemaking process, to continue to streamline this. This is not the end.”

California’s cannabis program is generating a healthy amount of tax revenue

In 2016, California voters approved Proposition 64. Soon after,  California’s Control, Regulate and Tax Adult Use of Marijuana Act was enacted, which meant that the state started gathering a 15 percent excise tax, cultivation tax and sales tax on cannabis.

Since the first adult-use sales kicked off across the state in January 2018, the ever-growing industry has bulked up total program revenue to the amount of $2.8 billion. Included in this amount is $1.4 billion in cannabis excise tax, as well as $347.4 million in cannabis cultivation tax and $1 billion in state sales tax; all amounts demonstrate tax revenue accumulated over the past 3.5 years.

According to the California Department of Tax and Fee Administration (CDTFA), California’s adult-use industry recorded almost $1.4 billion in taxable cannabis sales and $333.2 million in tax revenue over a 91-day period that stretched across April, May and June of 2021.

For the second quarter of 2021, a record-breaking $172.3 million was earned through California’s 15 percent cannabis excise tax. These figures represent a 9.2 percent increase from Q1 2021. 

In regards to cannabis sales tax revenue generated from cannabis businesses, the figure rested at $120.5 million for Q2 2021 – 11.8 percent more than the first quarter. Furthermore, cultivation tax earned during Q2 amounted to $40.4 million — 3.1 percent more than Q1. 

“CDTFA-administered programs account for more than $73 billion annually, which in turn supports local essential services such as transportation, public safety and health, libraries, schools, social services and natural resource management programs through the distribution of tax dollars going directly to local communities,” reads a statement from the department responsible for managing taxes related to California’s cannabis sales and consumption, alcohol, tobacco and fuel.

In summary, the state’s $333.2 million in tax revenue during Q2 2021 highlights a 9.3 percent increase from Q1 2021 and a 26 percent year-over-year (YoY) increase.