Ideas & Insights

Establishing Responsible Cannabis Regulations

FAST FACTS FOR MUNICIPAL EXECUTIVES

Cannabis Transportation and Distribution

Scott Johnson, CPA, Partner, State & Local Government, Advisory Services
Jon Zimmerman, Director, Cannabis Industry, Advisory Services
Macias Gini & O’Connell LLP (MGO) CPAs & Advisors

In November 1996 California became the first state in the nation to allow the use of medical cannabis when voters approved Proposition 215 (also known as the Compassionate Use Act of 1996). In 2003, California enacted Senate Bill (SB) 420, the Medical Marijuana Program Act, which allowed the medical cannabis industry to organize as collectives and cooperatives. However, California lacked a comprehensive statewide regulatory framework until the Medical Marijuana Regulation and Safety Act (MMRSA) was passed by the California Legislature in September 2015.

MMRSA was a series of three bills (Assembly Bill (AB) 266, AB 243 and SB 643) that govern the cultivation, processing, transportation, testing, distribution and sale of medical cannabis to qualified patients. In 2016, MMRSA was renamed the Medical Cannabis Regulation and Safety Act (MCRSA) with the passage of SB 837 and AB 2516, which made changes to implement the act and created a new cottage cultivation license.

More recently, California’s highly anticipated passage of Prop 64, The Adult Use of Marijuana Act (AUMA), was approved by voters in November 2016, legalizing the use of recreational marijuana by adults 21 years and older. The act also imposes taxes on its sale and cultivation and reduces penalties for related crimes.

These acts establish rules and safety requirements, including the transportation and distribution of cannabis and cannabis products. Although the rules for AUMA and MCRSA are similar, there are major distinctions between them that need to be clarified by the California State Legislature. In addition, as state agencies are establishing industry regulations, local governments will need to consider these factors when establishing local policy.

What are the rules for distribution and transportation?

There are two license classifications that facilitate the movement of medical cannabis and medical cannabis products between businesses: Type 11 for distribution and Type 12 for transportation.

Under the Type 11 distributor license, individuals are able to buy medical cannabis from a licensed cultivator or medical cannabis products from a licensed manufacturer, which are to be sold to a licensed dispensary. Distribution under MCRSA mirrors that of the “tied-house” laws of the alcohol industry, which prohibits manufacturers from directly selling to retailers without going through a third party distributor.

The Type 12 transport license is for the transfer of medical cannabis and medical cannabis products between licensees. Cultivators, manufacturers and producing dispensaries may also be licensed as transporters, but all medical cannabis and medical cannabis products must go through a third party distributor before it becomes a final retail sale. A distributor must also be licensed as a transporter, but they cannot have an ownership interest in any other licensing category. Local jurisdictions can regulate transportation and distribution activities by establishing health and safety requirements, issuing business permits for such activities, and setting zoning restrictions for transportation and distribution premises. Preventing the transportation of medical cannabis and medical cannabis products on public roads by a licensee, within compliance, is prohibited.

Under AUMA, a Type 11 distributor license is for all cannabis distribution and transportation activity. It allows a person to procure, sell and transport marijuana and marijuana products between licensed entities. Under AUMA, a Type 11 license can be held either independently or by an entity holding any of the license types. This does however, exclude Type 5 licensees from self-distributing (cultivators with over 22,000 square feet or one acre of cultivation space).

What is happening at the local level?

While both AUMA and MCRSA place local control at the core of their regulatory structures, reflecting the diversity of the social and political environment regarding medical and adult use of cannabis in cities and counties, some local agencies have been proactive in adopting ordinances and regulations regarding the distribution and transport of cannabis. Below are a few examples.

City of Oakland

  • Transporters and distributors are required to follow operating and performance standards, such as; installing security cameras, meeting employee wage requirements and practicing the use of track and trace software.
  • City permits are issued for cannabis transport and distribution and other types of commercial medical cannabis activities.
  • Transporters and distributors are limited to the areas zoned for “light manufacturing /industrial,” or zoned areas for “research and development.”
  • Medical cannabis permit holders are taxed at a rate of 5 percent of gross receipts.
  • Regulations for recreational marijuana have yet to be established. However, Oakland’s municipal code provides for a 10 percent gross receipts tax on future recreational marijuana businesses.

City of Santa Rosa

  • Santa Rosa allows for issuance of permits for medical cannabis manufacturing, testing, distribution and transportation.
  • The city council directs the zoning for cannabis distribution and transportation activities.
  • Both distributors and transporters must obtain a city permit.
  • Transportation activities are limited to areas zoned as “light industrial” or “general industrial.”
  • Distribution activities are allowed in these zones and within Santa Rosa’s “business park” zone.
  • Currently, Santa Rosa does not levy a tax on commercial cannabis activity. The City Council is considering approving a tax ordinance, subject to voter approval on June 6, 2017, of a gross receipts tax up to 8 percent on commercial cannabis activity, other than cannabis cultivation and distribution. Cannabis cultivation would be taxed based on square footage or gross receipts. However, subject to voter’s approval of the ballot measure, the City Council is set to establish lower rates for a term of at least 2 years.

Sonoma County

  • In December 2016, Sonoma County approved an ordinance for commercial medical cannabis activities in the County’s unincorporated areas. The ordinance created land use zoning districts, setting criteria, and established operator qualifications and operating standards.
  • Cannabis transporting and distribution is allowed in industrial park, limited urban industrial, and heavy industrial zones.
  • The County recently approved a 10 percent tax on gross receipts on all commercial cannabis activities, other than cultivation. Cultivation will be taxed per square foot.
Industry best practices for transporting and distributing cannabis

Although state regulations and licenses under AUMA and MCRSA are not likely to be issued until 2018, California’s cannabis industry has an advanced distribution network in place. The industry has been unregulated or under-regulated since its approval in 1996. While many cannabis businesses have taken steps to become responsible players within the industry, the industry still lacks a sense of structure and consistent maintenance. It is often difficult to tell which parties are acting responsibly and following the appropriate laws and which are transporting illegally.

Best practices for cannabis transportation and distribution regulations include:

  • Transport of cannabis should only occur between legal and licensed entities.
  • During transport, drivers should have all relevant and legal paperwork in their possession and should continue to follow state and federal driving laws.
  • Cannabis and related products should never be in public view during transport.
  • Vehicles used in transportation should be in good working condition, have an up-to-date GPS tracking and alarm system and be equipped with proper climate control and/or refrigeration systems, if needed.
  • Vehicles should never advertise cannabis products with visible logos.
  • Buildings where cannabis is stored should allow for control of temperature and humidity.
  • Cannabis in storage facilities should not be exposed to direct sunlight.
  • Inventory logs should be utilized and reconciled often in cannabis storage facilities.

Local governments have the authority to establish strict zoning regulations for medical and recreational cannabis cultivators and dispensaries. Thoughtful transport and distribution zoning can help limit traffic and road deterioration, which can have a negative impact on communities.

While both MCRSA and AUMA give local governments the authority to regulate the cannabis industry within their jurisdictions, local jurisdictions have the authority to set additional rules to meet the needs of their communities. With effective state and local laws and practices, cannabis transport and distribution can be done in a safe, controlled and successful manner in order to protect public safety, communities, patients, consumers and the environment.

About the Co-Authors
Scott is the lead partner for MGO’s State and Local Government Advisory Services. He has over 29 years of high-level organizational management and leadership experience, 24 of which was working for local government agencies including the cities of Santa Clara, Milpitas, San Jose, Oakland, and Concord and the County of Santa Clara. In the area of Medical Marijuana, as Director of Finance for the City of San Jose, working with his Team, Scott led the effort to implement a marijuana business tax; including drafting a ballot measure, developing an outreach and training program for medical marijuana businesses; working with the police and planning departments as well as the City Manager and City Attorney’s offices on regulations and enforcement; and developing an audit program to audit compliance of medical marijuana dispensaries on state and local medical marijuana laws and taxes. He currently works with his municipal clients in assisting them on implementing best practices in cannabis regulatory and tax compliance.

As a member of MGO’s Cannabis Group, Jon brings a unique operational and industry perspective based on his experience in the cannabis and financial industry. Prior to joining MGO, Jon was the head of operations for a kiosk-based financial services technology company where he focused on the cannabis industry’s cash management needs and bringing compliance and transparency to financial transactions activity within the industry. This knowledge comes directly from Jon’s past experience being a dispensary owner and operator in Los Angeles.

Comments or questions are welcome via email: sjohnson@mgocpa.com or jzimmerman@mgocpa.com

Disclaimer: The views expressed in this article are those of the co-authors and do not reflect the official policy or position of Macias Gini & O’Connell LLP (MGO).