The middle classes replaced drinking saloons with speakeasies nobody mentioned. Portable stills hit the streets in the first week. California grape farmers became rich, selling grape concentrate with a warning, “After dissolving the brick in a gallon of water, do not place the liquid in a jug away in the cupboard for twenty days, because then it would turn into wine”.

A new industry of criminals evolved to supply alcohol products at a price. Sheer practicality dictated these were concentrates like whiskey and brandy. Thus America changed from a nation of sociable wine and beer sippers, into a people who knocked back hard liquor on dark street corners, and behind closed curtains in their homes.

The medical profession did not take long to catch up. Within six months, some fifteen thousand doctors and fifty-seven thousand pharmacists held licenses to prescribe medicinal alcohol. Doctors made $40 million for whiskey prescriptions through to 1933. That was a heap of money in those days. The USS West Virginia battleship launched in 1921 and sunk at Pearl Harbor cost a mere $3.8 million for the hull and machinery.

The State of California was wise to relieve the pressure by allowing medical marijuana when the people asked for it. Lawmakers developed a complex system of licensing and regulation we are still trying to unpick. If they thought prohibition of adult cannabis was working, they should have thought again.

Los Angeles Times reports healthy people continue to work their way around the problem just as whiskey drinkers did during prohibition. Most medical doctors take an easy-going approach because they are after all only making recommendations. In-out-ten-minute-consultations cost an average $40, although doctors that do a thorough job charge considerably more.

As California approached January 1, 2018, there was a ‘graduation spirit’ on the streets. Los Angeles Times reported dispensaries “are not even asking for recommendation letters anymore”. Furthermore, “many of the heavily guarded medical dispensaries … are letting [people] stroll in without their state-issued IDs”.

Does this mean the carefully crafted California medical marijuana industry will fall on its head now adult marijuana is finally legal? Not entirely: Farmers will still grow cannabis, and doctors will still manage genuine cases of epilepsy, cancer, and other serious conditions. However, could dispensaries go the same way as speakeasies?

Speakeasies continued servicing their customers after Prohibition ended in 1933. They could put the shades up and let the streetlights in, although they had more competition. California dispensaries will have to adapt to a new reality of more open trading too. There may be less of them in future, although there will be more street-front stores engaging in adult marijuana sales.

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• Even though you established the non-profit initially, you cannot sell it to a larger company because you never owned it in the first place
• Even if the non-profit made a surplus, you cannot take the money out. The assets belong to the Collective and distribution is only legal on dissolution.

If you did all the hard work, this can be extremely frustrating. Fortunately, there is a way out. You can replace the non-profit with a for-profit, instead of dissolving it and claiming the founding member’s part-share.

The Legal Hoops You Have to Go Through:

Everyone who wants to start a marijuana business in California has to make application to the Secretary of State Alex Padilla. If you are in an existing non-profit situation, you can join the merry throng on 1 January 2018. After that, you can start negotiating licenses with other state and local authorities. Here’s a guide to better understand your entity options. Traditionally many attorneys recommend becoming either an LLC or S-corporation.

Your choice of business entity depends on your particular situation. But be careful how you go about this, because your decision will affect how you operate your business, the licenses you need, your obligations under tax law, and your freedom to moved assets in and out the business. The process for registering is then as follows:

• File your application per your chosen entity and pay the fee applicable
• Register a name for your new business. You can register a trading one later
• Unfortunately, you may not trade until you have state, county, and city licenses
• Apply for your employer identification to determine your employer tax duties
• Register your trademark (s) with the Secretary of State Office (SOS)

You now have the bare bones of a legal for-profit business. After you move your marijuana business activities across, all that’s left is to dissolve the non-profit and distribute the assets among the members.

The Legal Hoops You Have to Go Through

• Obtain consent from the majority of members
• If there are no members have a vote by the directors
• File intention to wind up and dissolve with the SOS and AG
• Inform creditors, claimants, and non-approving members
• Wind up the non-profit and distribute the proceeds
• File a certificate of final dissolution with the SOS
• Submit the dissolution package to the AG
• Make the necessary depositions to the IRS

That is quite a mouthful. We are available to advise and assist further, so you can finally start turning your marijuana business into a profit center.

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Summary of Regulations by the Three State Agencies

The regulations are in three packages emanating from the California Department of Food and Agriculture, the California Department of Public Health, and the Bureau of Cannabis Control itself. We summarize the highlights briefly in the paragraphs following and provide links to the detail at the source.

California Department of Food and Agriculture

• Cultivation, and processing licensing applications / fees
• Track and trace systems and training requirements
• Waste management rules and renewable energy phase-in
• Allowable generator types and permitted air pollution
• Standards for inspections, investigations, and audits
• Maintenance of sales invoice records and receipts
• Powers of suspension and revocation for regulation breaches
• Dollar value of fines for minor, moderate, and serious offenses
• Procedures for administrative holds on raw cannabis and products

Please visit this page for more information on the above summary.

California Department of Public Health

• Detailed listing of dozens of definitions
• Licenses required and prohibited persons
• License categories, types, and applications
• Limited waiver of sovereign immunity
• Application costs, processes, and license fees
• Disqualifying criminal offenses and rehabilitation
• Appeals against denials of license applications
• License constraints and changes in operations
• Security plans and implementations
• Permissible methods of extraction
• Product and employee health and safety
• Manufacturing procedures and standards
• Batch production records, complaints, and recalls
• Inventory management and control
• Waste disposal and documentation thereof
• Cannabis product standards
• Rules for failed product batches
• Labeling and packaging requirements
• Standards for record keeping, track and trace
• Standards for advertising and marketing
• Inspections by Department of Health / agents
• Temporary license application form

Please visit this page for more information on the above summary.

California Bureau of Cannabis Control

• Temporary and annual licenses
• Additional requirements by license type
• Conduct during transition period
• Procedures and standards for enforcement

Please visit this page for more information on the above summary.

A Forest of Paperwork Lies Ahead of Us

With the best will in the world, we are left wondering why we need such a legal minefield of rules. The California Department of Public Health’s document alone is 99 pages long. If the industry managed to deliver an acceptable product without all these prescriptions, what will become of small operators now? To the jaundiced eye, the rules almost seem intended for corporate minds.

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Writing in Forbes, William Langbein says we have a way to go with replacing traditional marijuana supply chains, which still rely on informal social structures to connect. For better or worse, California has chosen the route of separate licenses for farming, distributing, and selling. Moreover, as 1 January 2018 approaches, we still do not know exactly how these licenses will work.

We are also going live with an unconnected supply chain. No wonder William Langbein begins his piece as follows: “While many expect sales of marijuana for recreational use to take off in January, when California will allow existing dispensaries to sell to adults, growth should be gradual next year before accelerating over the next three years, according to investors and advisors”.

We are inclined to agree his vision that 2018 will be a year for ‘building the infrastructure and freeways’ to connect California farms to dispensaries, and dispensaries to recreational users. However, we will also have to come to an arrangement that grants these participants access to the financial sector, before we can talk of cannabis really being in business.

Thus, BDS Forecasts is confident things will come together with state recreational sales reaching $4.3 billion annually by 2021. This will however come at the cost of medical marijuana, which they expect will fall by $1.5 billion by then. We found their article ‘Cannabis Boom Shows No Signs of Quieting in Colorado’ an inspiring vision of what may happen in California once we have the paperwork done.

The Silicon Valley dot coms that make the real money, generally speaking get to market early. William Langbein cites Tom Adams, Managing Director of Investment Research at BDS Analytics saying: “The companies that enter the earliest have a five-year head start to lock up market dominance – and to attract bids from major agricultural firms and retailers – before federal law likely will be modified to legalize marijuana sales.”

Business and real estate are both about location, location, and location again. Those who make real money from cannabis in California will be those that snapped up the best “beachfront locations”, wherever these may be. Local communities will undoubtedly cap the number of licenses. While the consumer uptake will be initially slow, the time to prepare license applications is therefore now.

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Those choosing to cross to the legal side of the fence find themselves playing in a very new ballgame. Costs attached to operating a business to legal commercial standards are not inconsiderable, and they have to pay license fees too. The statutory norms they have to meet for quality and safety purposes have surprised many of us. Moreover, they face a truculent president who is hardly sympathetic to their cause.

A Fitch Ratings report puffed a darker cloud of smoke in August 2017. It detailed the various benefits states stand to gain by regulating nonmedical cannabis. Fitch expects these to include reduced arrests, prosecutions, and jail-time. “Public health costs may also be positively impacted, notably by a decline in opioid abuse,” Steve Walsh, the director says.

In California, Fitch expects the effective tax rate on nonmedical cannabis to range from 35 to 45%, just a tad short of Washington’s 50%. By comparison, Alaska, Oregon, Massachusetts, Nevada, and Colorado are 10 to 20%, 20%, 24%, 36%, and 36% respectively. This is tough on California farmers, and dealers who want to be legal, especially as those that don’t, theoretically do not pay any tax at all.

We turned to CNN Money for a detailed breakdown. The news service reports as follows:

• Consumers will pay excise and sales taxes of 22.25 to 24.25%;
• Businesses will pay 1 to 20% of gross receipts on a sliding scale; OR
• $1 to $50 per square foot of plants again on a sliding scale
• Plus farmers will pay $9.25 / $2.75 per ounce for flowers / leaves

This adds up to a complicated numbers game in which we will take Fitch’s word.

The rating firm notes how prices declined in Colorado after legalization. A similar trend would have a knock-on effect in California in terms of excise and sales tax. We can’t help agreeing with CNN that legal, “could be pricey enough to keep the black market healthy.”

Fitch concludes, “High effective tax rates on California cannabis may complicate the state’s efforts to establish legal markets.” Crazy things like that can happen when regulators remain inside their ivory towers.

The post Could This Be Good News for the Black Market, Only? appeared first on California Medical Marijuana Information.

This may be happening in California, where legislators are trying to dot every imaginable ‘i’, and cross every conceivable ‘t’, as they regulate Senate Bill 94. Joseph Schumpeter – who approximately invented economics – believed the role of business is to innovate, and profit is the reward for taking educated gambles. An interest, if you like, on money put at risk.

Rolling Stone relates the tale of a California couple who took a chance with a new medical product, succeeded, and are now losing their business to legislators. Their product is marijuana-infused ice cream. Alex Zafrin and Rekka Nicholson’s Coffee Pot, Vanilla Kush, and Go Fudge is going down a treat, and everything was looking good, but only for a while

Unfortunately for them, the Department of Public Health has decided perishable cannabis products – ice cream, for example – will be illegal come January 1, 2018. No doubt, they have their reasons for this. If ice cream is a dangerous product, will they ruin kids’ birthdays, and ban it outright?

We are of a common mind with Rolling Stone, when it says the new regulations seem set to make life difficult to for small marijuana business. We have expressed concerns in the past that waving a corporate big stick, could have us end up with a market dominated by a few players, along similar lines to alcohol.

It would be a sad day indeed if hundreds of people lost their livelihoods in the scramble to meet a deadline we imposed on ourselves. Right now, we still have a thriving cottage industry reminiscent of early pioneering days, but it seems this may be set to change. Perhaps we need to take a step back, pause, and review where we are going with marijuana before we lose the dream.

Albert Einstein was on the button when he said, “It’s not that I’m so smart, it’s just that I stay with problems longer”. The real mistake is stopping trying.

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The report tracks the personal data of three groups of people, regarding their attitude to the product:

• ‘Consumers’ have used cannabis in the previous six months
• ‘Acceptors’ would consider using cannabis but have not yet
• ‘Rejecters’ have no intention of ever using cannabis in future

Their report confirmed that cannabis consumers are ‘happy campers’, and claims to have debunked the ‘classic stoner stereotype for good’. Their average annual income is $93,800. Acceptors lag $21,000 behind, with rejecters earning an average $75,900 annually. However, they are not only valued workers. An impressive 64% of marijuana customers are in full-time employment, again significantly exceeding the 51% acceptors and 54% rejecters.

California cannabis consumers are better educated too. An impressive 20% have earned master’s degrees, while only 13% of acceptors and 12% of rejecters succeeded. They also exercise more, and are more satisfied with their lives. No wonder they are raising more families, and have a proportionately larger number of kids aged less than 10 years old.

Debra Borchardt, writing for Forbes Magazine, explores where cannabis consumer spend is going. $375 million went up in smoke as flowers in the second quarter, 2017. The top five strains included three sativa / indica hybrids. Gorilla Glue # 4 hybrid claimed first position, followed by the sativa strain Jack Herer. Bubba Kush indica, and Girl Scout Cookies and Headband hybrids ranked third, fourth and fifth respectively.

The spot index opened in January 2017 at $1,413 per pound, and peaked at $1,724 before falling to $1,614 by the end of the second quarter. Debra Borchardt cites Jonathan Rubin, CEO of Cannabis Benchmarks saying, “the reason prices have been climbing is that growers are working to hold onto the current value of their crops, knowing that it will be expensive to operate in compliance with the new rules”.

The California cannabis black market largely exports its crops, although better prices are causing it to start going local too. We are inclined to agree with Jonathan Rubin’s conclusion, that “prices in the California market could become erratic as the year-end approaches”.

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Macroeconomics is a battleground on which buyers and sellers, largely unconsciously jostle the actual price in the direction that benefits them best.  The jumbo Law of Supply and Demand holds that the price point will be where supply and demand curves intersect in an open market thus.

Image Acknowledgement: Paweł Zdziarski: Free to Use under Creative Commons CC 3.0

This forms the basis of the proposition that prohibition keeps the price of substances higher. Suppliers have to go to costly lengths to avoid prosecution / defend criminal charges. Consumers, on the other hand have to tolerate the cost because they have little choice. That situation describes an abnormal market where the principles of open competition do not apply.

The Cannabis Law of Supply and Demand in Action

Keith Humphreys, writing for Washington Post draws attention to an interesting theorem. Legalizing marijuana is an unusual opportunity to observe price shifts as a market dramatically normalizes. Numbers released by the Washington State Liquor and Cannabis Board reveal a fifty-eight percent drop in the price of legal marijuana in the past eighteen months. The price has actually fallen every quarter since legalization in July 2014.

We shall have to wait a little longer before we see similar trends in California. Our prices too have been artificially high due to historic Federal fiddling with free market principles. Certainly, production costs should be lower despite higher quality standards. Surely, purchases will increase in response thereto.

What this Means for Marijuana Farmers and Retailers

This does not however mean that the quality of pot will deteriorate to bargain basement levels. Open market forces will drive a hierarchy of products with differential prices. Yes, there will be basic stuff for people who want adequate for the lowest possible cost. Correspondingly, there will be consumers willing to pay most at auctions for rare vintages and cultivars.

The rest of us will probably be somewhere in the middle, experimenting with different brands and taking up special offers. We will vote without feet when the quality / price ratio does not add up for us individually. This is how American business works. We do not suppose California cannabis should be any different, once the new programs are in place.

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Were it not for these two principles, the Feds had a case as watertight as a good hookah ever was. Los Angeles Times reports they found ‘more than three hundred marijuana plants in a pair of greenhouses’ at Anthony Pisarski and Sonny Moore’s place five years ago. They also discovered ‘guns in a house on the sprawling property and about $225,000 in cash, much of it bundled in vacuum-sealed pouches, hidden in a garage and some pickup trucks’.

When they looked further, they found ‘another large stash of cash, along with bars of gold and silver’ so clearly they thought they had stumbled onto something big. Not true, Anthony Pisarski and Sonny Moore argued before the judge. We sold our palliative pot to legit collectives, and we abide with California law.

Judge Seeborg concurred with them. He ruled, “Their conduct strictly complied with all relevant conditions imposed by California law on the use, distribution, possession, and cultivation of medical marijuana.” In so doing, he relied on these two legal principles:

• The Rohrabacher-Farr Amendment: This prohibits the U.S. Justice Department from spending money to ‘prevent states from implementing their own state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.’
• The S. v. Mackintosh Judgement: This confirmed the authority of the Rohrabacher-Farr Amendment, although agreeing ‘the rider is not a model of clarity’. The 9^th Circuit Appellate Court has jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and the Northern Marianas Islands.

While the dust was settling, Anthony Pisarski and Sonny Moore’s defiance attorney Ronald Richards told LA Weekly “This is the first time in my 23-year career I’ve had a case stopped because of an appropriations rider. What the court did, in this case, may be used as a blueprint for other cases. It opens the door for people not to get scared.”

“This shows that you can prevail – defendants in federal court could have their prosecutions halted,” Tamar Todd of Drug Policy Alliance confirms. “It’s enjoining the prosecution from being able to spend any more money on this case. It’s very encouraging. It gives a lot of teeth to Rohrabacher-Farr.”

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Take Nevada, for example where casual cannabis came out the closet last month. The people queued out the door and down the streets according to LA Weekly. There was only one problem to mar their moment. Somebody in Carson City forgot to approve any distribution licenses.

Clearly, nobody was going to risk the Feds purloining their stuff. It took a whole two weeks before two emergency distribution licenses clicked in, and the product was back on the shelves. If we did the same with alcohol, we may as well reintroduce prohibition.

California is in an even bigger mess. Counties and cities can issue distribution licenses, but only within their jurisdictions. A load could leave San Bernardino County legally, but become contraband after it crossed over into Riverside. However, we are not even near that point yet. The MMJ Law specified independent distributors, while Proposition 64 allowed retailers to ship their own recreational product.

This has created some strange bedfellows in California cannabis circles. Truckers in the Teamsters Union are siding with the Cannabis Growers Association who want independent distributors. They share the hope of the old MMJ Law that nobody should dominate the entire supply chain. The irony is this: If the Teamsters get their way, they could hold small retailers at ransom until they agree the drivers’ rates.

This does not seem to worry some members. Executive director of the Association Hezekiah Allen told the Sacramento Bee, “These manufacturers and retailers have not been treating growers well for the last 15 years. These distributors may not treat us well either. But we’ll take the unknown evil over the known evil.” Meanwhile, other manufacturers and distributors would like to own the vehicles themselves.

California has yet to approve any marijuana licenses under the new Medical and Adult Use Cannabis Regulation and Safety Act. This provides a unified solution for regulating medical and recreational marijuana. Tough choices seemingly lie ahead in terms of distribution as the details roll out.

We’re holding thumbs that things turn out right for small farmers, distributors, and retailers. Meanwhile, it seems there could be a few more slips between the pot and the pipe, before we can settle down and enjoy the truce we all hope lies ahead.

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