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What the Future Holds For a Regulated California Cannabis Industry - By - October 14, 2015 - SF Weekly
SF Weekly

What the Future Holds For a Regulated California Cannabis Industry

California government is finally on board with the state's enormous cannabis industry. Last week, Gov. Jerry Brown signed into law the Medical Marijuana Regulation and Safety Act (MMRSA), a package of laws that — at long last — attempt to get a handle on how the state's biggest cash crop is grown, processed, and sold.

Every step of the supply chain will, by 2018, be overseen by a new Sacramento office called the Bureau of Medical Marijuana Regulation. Run by a “weed czar” appointed by the governor, the BMMR will issue state licenses to commercial cannabis businesses, which will also need to be licensed and approved by local authorities at the city or county level.

The rules were a long time coming, arriving almost 20 years after voters legalized medical marijuana with Prop. 215 in 1996, and 12 years after the Legislature last acted on the issue with 2003's SB 420. It will be some time yet before real change is felt, as existing businesses have until 2018 to secure state licenses — but what can industry insiders and consumers expect?

First, some basic reminders: medical cannabis patient rights under Prop. 215 are untouched. You are still allowed to grow and consume limited amounts without a commercial license. And this has nothing to do with what may or may not happen with future attempts to legalize recreational marijuana.

Local bans stand

If you live on the Peninsula, you know this already: it can be hard to find a legal cannabis store. Many cities and counties around the state strictly limit or ban outright dispensaries or cultivation in some way. All of those bans stand, until campaigns underway in places like Yuba County succeed in overturning them. Allowing local bans was crucial in earning support from Brown and other influential state powerbrokers, but critics say this only encourages black market activity.

Moreover, if an existing marijuana operation is in a county that decides not to issue a local license, it will have to shut down. “There is going to be a lot of disruption in the supply chain,” said attorney Matt Kumin, who specializes in marijuana.

For consumers, this means total uncertainty. However, prices have remained on a relatively stable downward trend for years. We suspect this will continue as the industry becomes more legitimate.

profit is legalized

Under current regulations, cannabis dispensaries must be nonprofit collectives or cooperatives. Under the MMSRA, a cannabis business can be a nonprofit — or an LLC or a corporation, which can turn profits.

Profit will have to wait until state licenses are issued, but profit will no longer be a reason for law enforcement raids (at least from state cops).

advantage to big boys

There are 17 different types of marijuana licenses available — covering every aspect of the industry, from cultivation to manufacturing to sales — and no one entity can have licenses in too many categories. This will discourage vertical integration, but businesses in place as of July are exempt. This means a handful of businesses around the state will be able to keep supply chain monopolies.

How much is too much? Nobody knows

Outgoing state law sets possession limits, but these were declared unconstitutional in a 2010 state Supreme Court decision. Yet, those standards are still used by law enforcement (except in counties, like San Francisco, where you are allowed more plants).

The new laws don't set limits per se, but they do say how large a garden can be. For individual patients, it's 100 square feet. For commercial marijuana production, total canopy can be no larger than an acre. How many plants can fit in an acre? “A lot,” one grower told me. This could lead to some confusion, but most observers believe that a commercial license will protect most large-scale growers from criminal prosecution, as the bills provide for civil — not criminal — penalties in the form of fines if a garden is found to be too big.

The end of the Emerald Triangle?

Cannabis is synonymous with Mendocino and Humboldt counties, where tens of thousands of small homesteaders grow marijuana because the climate is suitable and because it's hard to find a pot patch tucked into a remote mountain valley. In a regulated commercial landscape, however, being hard to access provides little competitive advantage. Large-scale marijuana production facilities will likely shift to the Central Valley, where land is cheap and plentiful, and where large highways lead directly to population centers in Southern California.

Northern California outdoor won't go away — the market has proven demand for organic, boutique strains whose genetics only a few farmers possess — but production will shift south.

STILL MOSTLY CASH ONLY

Cannabis will still be a mostly cash-only business in California for the near future. Both banks and credit unions have been scared off by federal authorities from accepting deposits from cannabis businesses. (After all, drug-related assets are subject to forfeiture.)

Cannabis is not entirely bank-less: some dispensaries do take credit cards, and some daring — and anonymous — credit unions accept marijuana deposits, but in both situations, somebody is telling a lie to someone along the way.

Both Board of Equalization member Fiona Ma and state Assemblyman Jim Wood (D-Healdsburg) — one of the authors of the regulations — have pledged to work on state legislation that would allow the marijuana industry to use banks, but for now, the cash-mostly situation will continue.

NUMBERS TIME

$44 million: sales tax collected on medical cannabis in California in 2014.

25 percent: number of dispensaries that actually paid their taxes, according to the Board of Equalization.

$1.2 billion to $1.8 billion: total sales of cannabis at dispensaries in California. (This range is wide because sales taxes can range from 8 percent (in Humboldt) to 10 percent (in Los Angeles).