What has Changed?
On November 9, 2016, Proposition 64 was passed in California, which implemented the Control, Regulate and Tax Adult Use of Marijuana Act (hereinafter called the Act). The Act legalized marijuana use for those over twenty-one (21) years old and established laws to regulate “marijuana cultivation, distribution, sale and use.” Additionally, it proposes to protect Californians and the environment from potential dangers of an unregulated marijuana market. The Act established the Bureau of Marijuana Control within the Department of Consumer Affairs to regulate and license the marijuana industry.
Potentially, on January 1, 2018, a twenty-one (21) year old adult will be able to buy cannabis from licensed California sellers. Additionally, all regulatory organizations were given the same deadline to come up with a system for licensing those who would grow, manufacture, transport and sell marijuana for recreational use. I say potentially because there are many regulations that have to come into place before then and the government may not meet the proposed deadline.
Local governments, i.e. administrative bodies for cities and counties in California are allowed to ban marijuana businesses by not offering licensing. Currently, for example, licenses for medical marijuana retail shops are offered in San Diego County but not in Los Angeles County. The same will be true for recreational sellers, certain counties will either allow or ban growers, manufacturers and retailers for such use.
What is the First Step?
The first step if you are wanting to grow, manufacture or sell marijuana in California is to figure out if the county that you live in offers licenses for your purpose. If you have a question about your respective county, such as San Diego, please feel free to contact us.
What Type of Entity Can I Incorporate As?
Currently, there are many cannabis businesses in California and most of which are incorporated as non-profit mutual benefit corporations (NMBC). When medical marijuana was legalized by Proposition 215, or the Compassionate Use Act of 1996, the use of business entities for the medical marijuana growers, manufacturers or retailers was not legalized. In legislation that partially has governed the medical marijuana industry in California, S.B. 420, which states, “nor shall anything in this section authorize any individual or group to cultivate or distribute marijuana for profit.” Thus, in this text it is not clear that selling medical marijuana for profit was legal and would be protected as a for profit corporation. This is why most cannabis businesses are incorporated as NMBC’s.
Furthermore, while many marijuana businesses are formed as NMBC’s under state law, they operate as “not for profit” entities which are different from 501(c)(3) non-profit organizations. Non-profits that are established as 501(c)(3) entities with an approved purpose can be authorized as tax exempt by the Internal Revenue Service and the Franchise Tax Board. Thus, while NMBC’s technically cannot earn profit, they still must pay tax on any revenue generated minus expenses because their purpose typically does not qualify for 501(c)(3) tax exempt status. If you have questions about this please contact us.
If you are already a NMBC, it is important to have an excellent Certified Public Accountant to file your taxes. Also, please keep checking here for updates regarding any news releases or updates for your entity structure.
Has Anything Changed Since Prop 64?
Technically, yes, but we do not know each specific regulation and mandate until January 1, 2018, when an licensed seller will be able to sell to an adult. In the meantime, the “status quo” exists where if you are an authorized medical marijuana grower, manufacturer or retailer and are able to get a license in your county for this purpose then you are able to sell to people with medical marijuana licenses. Additionally, business entity changes have not been specified by the California Secretary of State so incorporating entities may want to either incorporate as an NMBC or continue their NMBC status until there have been further changes announced by regulating entities.
What is Defined as Marijuana?
The Act defines “marijuana” as all parts of the plant Cannabis sativa L., “whether growing or not; the seeds thereof; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin.” This included Hemp and CBD. Also, the Act specifically legalized the growing, manufacturing and distribution of Hemp and Hemp products.
Are Federal Laws Going to Change?
Currently, marijuana is considered to be a “Schedule 1 Drug” under the federal Controlled Substances Act of 1970, and is stated to have “no accepted medical use” in the DEA Position on Marijuana and have a high potential for abuse and physical and/or psychological dependence as stated. There are three main sources of power in the Executive Branch for enforcement of Federal regulations: the President as Commander-in-Chief, the Drug Enforcement Agency under the Department of Justice and the Attorney General under the Department of Justice. Before 2016, during the Obama Administration, three states and Washington, D.C. voted to legalize recreational marijuana. When the Obama Administration was asked about this development, they stated that they had “bigger fish to fry.” In the 2016 election, five other states voted to legalize recreational marijuana. However, the Trump Administration through Sean Spicer has stated that they will be enforcing the Federal marijuana laws.
Even with all of this uncertainty, you should protect your business through licensing, incorporation and contracts. Contact us for further questions.
What Do I Do With My Money?
Federal law labels marijuana a controlled substance. Businesses that operate in the cannabis industry cannot deposit any money earned stemming from the growth, manufacturing and the sale of marijuana because it is an controlled substance. A controlled substance is illegal and considered to be against public policy. Banking institutions that receive any money from businesses in the cannabis industry open themselves up to government seizure by the Federal Government. This is due to the fact that banking institutions are federally insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain amount for each account. The FDIC was created in 1933 as a response to thousands of bank failures during the Great Depression. The FDIC insures trillions of dollars of deposits in United States banking institutions, i.e., deposits in virtually every bank in the country. Additionally, the FDIC examines banks for compliance with consumer protection laws and if a bank does not comply then chartering authority, the state regulator, or the Office of the Comptroller of the Currency can close them and seize illegal funds.
If banks are not the answer then where do you keep all of that cash? Some people have opted for safes and security guards like some old western movie. But it is more likely that technology and law changes will fill the void.
PayQwick, which one might liken to PayPal for for the marijuana industry, allows customers and businesses to use an app or cards, which are linked to other bank accounts, to pay for marijuana products. This gets around the problem of not being able to use an actual debit or credit card in a store. In addition to customers, retailers and processors can use the system to make payments to each other as well. While, PayQuwick, offers debit and credit solutions, the cash flow problem for many businesses are still in the dark ages stuffing their money in a mattress, or hiring a large private security company.
What State Entities Are Governing the Marijuana Industry in California?
The Department of Consumer Affairs will license and oversee marijuana retailers, distributors, and micro-businesses. The Department of Food and Agriculture will license and oversee marijuana cultivation, ensuring it is environmentally safe. The State Department of Public Health will license and oversee manufacturing and testing, ensuring consumers receive a safe product. The State Board of Equalization will collect the special marijuana taxes, and the Controller will allocate the revenue to administer the new law and provide the funds to critical investments. Additionally, the California Business and Professions Code – Marijuana, is a good place to find regulations related to licensing, etc.