There were a lot of happenings in the California cannabis world this week, from tax relief to DCC rule modifications, and CBD registrations going live.
Late last week, Governor Gavin Newsom signed into law a trailer bill AB-195, as part of the state budget legislation, that suspends the cultivation tax and provides some benefits to social equity operators. AB-195 is based largely on SB 1074, introduced earlier this year to shift the tax collected on cannabis to the point of sale. AB-195 does just that – it discontinues the cannabis cultivation tax as of January 2021, transfers the collection responsibility for excise tax from the distributor to the retailer, and it freezes any increase in excise tax for three years. After that, excise taxes are expected to increase, and they may go as high as 19% to compensate for the losses to the state resulting from the discontinued cultivation tax.
However, the bill also reduces the number of employees from 20 down to 10 before a licensee must negotiate a labor peace agreement with a union, which is a point of contention for many already struggling small businesses. The bill also provides some, albeit limited, benefits to equity licensees, such as a $10,000 tax credit and retention of 20% of the excise tax revenue they collect for the next few years. In an effort to combat the still thriving illicit market, the bill adds civil and criminal penalties pertaining to illegal cultivation, such as authorizing local authorities to file civil actions against property owners who lease to unlicensed cannabis businesses and against growers who unlawfully divert water to their cultivation facilities.
DCC Rulemaking Modifications
Earlier this week, the Department of Cannabis Control (DCC) released modifications to its proposed rulemaking to adopt consolidated cannabis regulations. The original proposed rulemaking was released on March, 4, 2002, and these modifications respond to the comments received by the DCC on that original release. These modifications are relatively minimal, but there are a few worth highlighting. Some of the key modifications include:
Redefining outdoor cultivation to allow for light deprivation (which the original proposed rulemaking classified any outdoor grower using light deprivation as mixed light cultivation);
Including delta-8 THC in the calculation of “total THC”;
Clarifying that shipping containers and modular buildings qualify as permanent structures, such that they can be utilized for indoor cultivation;
Removing the requirement that terpenes added to inhaled products be botanically derived;
Permitting applicants to include annual scheduled closure periods of their site;
Allowing canopy area to be used for seed production;
Clarifying that employee break areas can be located in living areas of a residence located on the licensed premises; and
Allowing product designated as trade samples to be redesignated as medical cannabis donations.
The DCC provided a short 15-day comment period for these modifications - comments must be received by July 22, 2022.
IHEOA and Registration Applications open for Hemp Manufacturers
On July 6, 2022 the California Department of Public Health (CDPH) made available the Industrial Hemp Enrollment and Oversight Authorization (IHEOA) and registration applications. In June of 2021, AB-45 was signed into law, which allows for the inclusion of hemp extracts, such as CBD, in food and beverages, dietary supplements, cosmetics, and pet food provided they contain less than .3% THC. AB-45 delegated regulatory authority over the hemp extract products set out therein to the CDPH. It wasn’t until April of 2022 that the CDPH proposed emergency regulations promulgating rules from AB-45, which detailed the IHEOA, product-type registration, and annual fees for hemp manufacturers. Manufacturers can now register and apply for authorization by product type, and by county grouping. Multiple product types require multiple applications and registrations.