Sean Hocking, Author at Green Market Report

Sean HockingSean HockingMay 30, 2020
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22min180

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

Salvaging Equity Programs – this is our fourth article relating to the impact of the COVID-19 crisis on the cannabis industry.   This will not be our last article on this topic.  We initially anticipated only four, but we now see additional issues.

The immediate impact of this crisis was obvious.  The long-term impact of this crisis and the related depression is not at all clear.  Businesses large and small are attempting to adjust to an uncertain future.  The cannabis industry has always involved more uncertainties than most industries.  The COVID-19 crisis added a layer of uncertainties that are the grist for additional articles.

This article focuses on the “Cannabis Equity Programs” a number of local jurisdictions have established.  These programs are largely the product of a politically driven social policy.  Cannabis Equity Programs attempt to remedy inequities that flowed from the “War on Drugs” that immorally injured so many.

In this article, we will describe how the information we presented in the first three articles can be utilized to accomplish the goals of these Equity Programs.  The principles we described in these first three articles can be utilized by all cannabis businesses to increase profitability.  The principles we have described for increasing the profitability of any cannabis business provide even larger benefits when these principles are utilized in an Equity Program.

Cannabis Equity Programs invariably involve support for the establishment of cannabis businesses owned by economically disadvantaged individuals.  Preferences relating to licensing along with various forms of economic subsidies are generally provided to those individuals who qualify to participate in such programs.

The City of Oakland’s Cannabis Equity Program was one of the first such programs.  The bedrock concept for Oakland’s Program was a limitation on the number of non-equity cannabis business licenses to the number of Equity cannabis business licenses.  Oakland placed no limit on the number of cannabis business licenses the City would issue except for cannabis dispensaries.  Equity applicants were given financial subsidies and licensing preferences.  Preferences in the issuance of licenses to non-equity applicants were given to those non-equity applicants that sponsored and subsidized applicants that qualified under Oakland’s Program.

 

 

Oakland was very successful in issuing cannabis business licenses.  Oakland has issued more cannabis business licenses per capita than most California jurisdictions.  The vast majority of these licensed cannabis businesses, whether Equity or non-equity, have not been successful.  A license is an essential requirement for the operation of a legal cannabis business.  Success in a cannabis business requires far more than a license.

Oakland encouraged and subsidized the proliferation of Equity cannabis businesses but failed to provide the support and assistance necessary for such businesses to succeed.  Oakland’s Cannabis Equity Program is failing because most of the cannabis businesses that Oakland licensed had no financial advantages and were lacking in business skills.  Oakland’s Equity Program can utilize the principles we described in the first three articles to give its Equity cannabis businesses financial advantages if it can provide the necessary training and education.

The principles we have described in the first three articles provide enhanced financial rewards when they are utilized to benefit a local community rather than to make money for investors. As a consequence, these principles are especially beneficial when used in an Equity Program.  It is far easier to generate quality jobs for the members of a local community than it is to make successful entrepreneurs out of those same individuals.

 

 

 

Oakland’s Cannabis Equity Program was designed to fail, although this design flaw was wholly unintentional.  Oakland’s Program encourages and subsidizes the entry of under-resourced businesses into a highly competitive industry that already has too many participants.  Many well-capitalized and well-organized cannabis businesses will fail.  What is the likelihood of success for an under-resourced business in such an environment?  Success in such an environment requires far more than a license and a modest financial subsidy.

The preceding is the foundation for understanding how shifting Oakland’s approach to its Equity Program will allow it to accomplish far more than it will accomplish if it does not change course.  The COVID-19 pause is forcing all governmental agencies to reconsider their programs and priorities.  Oakland’s leadership can seize the opportunity this crisis has created.  Oakland is uniquely positioned to use the principles we described in the three preceding articles to establish itself as the epicenter of California’s legal, tax-compliant cannabis industry.

Oakland has a once in a lifetime opportunity to establish a top-to-bottom, cultivator to the consumer, wholly legal, fully tax-compliant cannabis industry.  Oakland’s Cannabis Equity Program can utilize local community ownership and control to create an industry that can successfully compete with conventional cannabis businesses.  Conventional business structures have to make money for investors.  Equity cannabis businesses can successfully compete with conventionally structured businesses because Equity status can be utilized to make these businesses financially more efficient.

The present crisis is the most significant opportunity Oakland has seen in this century.  A substantial portion of California’s underground cannabis industry is already conducting business in Oakland.  Oakland can utilize its Cannabis Equity Program to convert its already existing outlaw industry into a wholly legal, fully tax-compliant industry that can effectively compete with conventional cannabis businesses.  Such a course of action will bring money into Oakland from elsewhere in California.

 

 

It will be difficult for some to understand why such a radical change in Oakland’s utilization of its Equity Program is required.  It is likely it will be even more difficult to secure the political support that is required for such a radical change.  Such a change is contrary to one of the major political forces that produced the present state of California’s cannabis industry – the belief in an opportunity to make money.

California has struggled with legalization for multiple reasons.

We have written about some of these issues.  [Major Cannabis Tremors!] One substantial reason California encountered difficulties with legalization was a well-established, quasi-legal cannabis industry.  California is still struggling with the conversion of its underground cannabis industry into a legal, regulated industry.  This struggle will continue for the foreseeable future.  [Reboot in 2020!!]

We have slightly accelerated the publication of this article as a consequence of Hillary Bricken’s publication of “L.A. Cannabis Update: Little Fires Everywhere” on May 28, 2020.  Los Angeles is twenty times larger in population than Oakland.   In every aspect, including problems, the cannabis industry in Los Angeles is more than twenty times larger than the cannabis industry in Oakland.  The same bodies of federal and California law, however, apply both to Los Angeles and to Oakland.

Oakland faces many of the issues that have hampered California as well as Los Angeles.  Oakland is far better situated than either to convert its underground cannabis industry into a wholly legal, fully tax-compliant cannabis industry.  Oakland can utilize its Equity Program to facilitate such a conversion.  The principles we described in the three preceding articles can be utilized through the Equity Program to provide those involved in Oakland’s underground industry with the same financial benefits they are presently achieving through an outlaw industry.  The difference for Oakland and for the participants in such a conversion is that the financial benefits following the transformation of Oakland’s cannabis industry will come from wholly legal, fully tax-compliant businesses.

It is false and misleading to classify cannabis businesses as

“legal” or “illegal,” or as “licensed” or “unlicensed.”

 

All California cannabis businesses fall under a Bell Curve that stretches from 100% legal to 100% illegal.  No Oakland cannabis business is likely to be more than two standard deviations from the center of that Bell Curve in one direction or the other.  Most are within the first standard deviation.  Oakland’s non-equity cannabis businesses, its Equity cannabis businesses, and its underground cannabis businesses are competing for the same consumer dollars.  All fall under the same Bell Curve of California cannabis businesses.

We are publishing this article to describe some resources California’s Equity Programs have that few realize they have that facilitate such a conversion.  The chaos in California’s cannabis industry coupled with the “pause” to address the COVID-19 crisis, has created an opportunity for Oakland to convert its existing cannabis industry into a wholly legal, fully tax-compliant industry that can effectively compete with both conventional cannabis businesses and underground cannabis businesses.

There are provisions in the tax laws as well as in California’s cannabis laws that can be utilized to create a financial advantage for an Equity cannabis business over a non-equity cannabis business engaged in precisely the same business function.  Equity businesses can exploit the tax laws and regulatory laws for the benefit of cultivators, employees, and consumers involved with these businesses far more easily than non-equity cannabis businesses.  Oakland can utilize its Equity Program for the benefit of its residents far more easily than any other California city.  We have written this article for the benefit of Oakland as well as those Emerald Triangle cannabis cultivators who are already positioned to provide the supplemental raw material for Equity cannabis businesses in East and West Oakland.

The impact of the COVID-19 induced depression is different for every country, for every industry, and for every community.  For some industries, this depression is a train-wreck, e.g., sports entertainment.  For some industries, this depression is merely disruptive and requires some adjustments to systems, processes, and operating procedures, e.g., professional services.  For other industries, this depression has created an expansion opportunity, e.g. package delivery services.  Oakland and its Equity Program fall into this third category.

We addressed planning for the conduct of business in post-COVID-19 cannabis industry in our second and third articles.  Our second article introduced Cannabis Consumer Cooperatives as the most financially efficient structure for the operation of a dispensary.  Our third article described how to maximize financial efficiency in the movement of cannabis from cultivator to consumer.  Oakland’s Cannabis Equity Program, and comparable programs elsewhere including Los Angeles, are uniquely able to exploit the principles described in our three earlier articles to accomplish the goals of these programs.

In our third article, we described four different types of Cannabis Consumer Cooperatives: (1) for-profit, adult-use Cannabis Consumer Cooperatives; (2) nonprofit, adult-use Cannabis Consumer Cooperatives; (3) for-profit, medical Cannabis Consumer Cooperatives; and (4) nonprofit, medical Cannabis Consumer Cooperatives.  [“Cannabis Tax Management”]

Each of these four types of Cannabis Consumer Cooperatives provides a different set of financial benefits.

If you compare the total combined financial benefits of these four structures for the owners, operators and consumers, the total benefits increase as you move from (1) to (4).  A comparison of the benefits that can be achieved through these four different structures illustrates how they can be utilized by Equity Programs.

The distribution of medical cannabis has a financial advantage over adult-use cannabis because no Sales Tax is imposed on medical cannabis.  In many jurisdictions, the local tax rates on cannabis are lower for medical cannabis in comparison to adult-use cannabis.  There are also some regulatory benefits for medical cannabis as compared to adult-use cannabis that can be utilized for financial advantage.  Nonprofit business activities have an advantage over for-profit business activities because the owners of the businesses do not directly profit as owners.

Suppose the tax savings from the sale of cannabis to consumers through a medical dispensary in comparison to an adult-use dispensary are 12%.  Stated differently, a medical dispensary can sell cannabis to its customers for 12% less than an adult-use dispensary, and the owners and employees make the same amount of money.  Further suppose that the owners of a for-profit dispensary, whether medical or adult-use, make an average 12% before-income tax profit as owners from the cannabis sales.  If these additional potential savings are taken into account, a nonprofit medical dispensary can sell cannabis to its customers for 24% less than a for-profit dispensary selling the same cannabis to its customers.  In such an instance all of the employees of the cannabis businesses involved as well as the cannabis cultivators make the same amount of money, but consumers save 24%.

The preceding illustrates there is at least a 24% financial advantage available for cannabis businesses that are established through Oakland’s Cannabis Equity Program if it helps these businesses exploit this advantage.  The 24% differential is solely for purposes of illustration.  In some of our earlier articles, we pointed out that the financial advantages of tax minimization can reduce consumer prices by almost 40% with the cultivators making twice as much money.

The savings created through financially efficient operating structures need not be wholly passed-on to consumers.  Owners can take some of these savings and still undercut competitors who are utilizing less financially efficient structures.  It is, for this reason, conventional for-profit cannabis businesses can utilize the information in our first three articles to improve their financial efficiency.  Equity cannabis businesses can do even better than conventional cannabis businesses.

Oakland does not need struggling small cannabis businesses that are trying to survive.  The residents of East Oakland and West Oakland need good-paying jobs.  Oakland’s Equity Program can utilize the tax and regulatory advantages of medical cannabis and nonprofit organizations to establish a cannabis industry in Oakland that has a competitive advantage vis-a-vis California’s for-profit cannabis industry.  Such businesses will not only survive, they will thrive.  They will thrive because they have a competitive advantage.  East and West Oakland as communities will benefit because the residents of these communities are the owners of these businesses whether directly or indirectly.

It will make little difference for a resident of West Oakland to make $90K per annum owning and running a small cannabis business in comparison to being paid $90K per annum for running a nonprofit medical cannabis business sponsored by Oakland’s Equity Program that is engaged in the same business activity.  The latter business, however, has a far greater likelihood of long-term success than the former.  Oakland’s Cannabis Equity Program, however, can do far more than create good jobs.

Oakland’s cannabis industry extends from cultivation to consumption.  Cultivation in Oakland is extensive.  It is almost exclusively indoor cultivation.  In our third article, we described how a Cannabis Cooperative Association (“CCA”) could be utilized to maximize the financial efficiency of the movement of cannabis from cultivator to dispensary through a minimization of the impact of taxes.  [[ In that article we noted that some of the benefits CCAs have been overlooked.  One of the benefits of CCAs that we did not mention in our third article is the utilization of a CCA by indoor cannabis cultivators.

Oakland’s Cannabis Equity Program has the opportunity to use one or more CCAs to create a cannabis industry consisting largely of Equity cannabis businesses.  All of these cannabis businesses will be more financially efficient than those cannabis businesses operated outside the umbrella of a CCA based on Equity businesses.   Oakland’s Equity Program has the opportunity through CCAs to establish cannabis businesses that are so financially efficient they can compete with underground businesses.

We can see a couple of potential flaws in the preceding for Oakland.  It is not obvious Oakland’s politics will allow the City to pivot in this manner.  It is not clear the City Administrator is capable of such radical change.  We believe the most significant flaw is likely to be the inability of Oakland to provide the information relating to business systems and processes as well as the training in the use of these business systems and processes that is necessary for Equity cannabis businesses to compete in a highly competitive industry.

The benefit to Oakland, of course, lies not in creating Equity businesses that can successfully compete with other Oakland businesses.  The benefit to Oakland lies in bringing money into Oakland by successfully competing with cannabis businesses outside of Oakland.  Oakland benefits by using its Equity Program to establish cultivators, distributors, manufacturers, and delivery services that bring money into Oakland from other jurisdictions.

 


Sean HockingSean HockingMay 20, 2020
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20min2390

This is a guest post from Cannabis Law Review and Tom Brown of honahlee.

CBD: Schedule 4 to Schedule 3 Drug

Recently, the Australian Department of Health announced a proposal to down schedule low-dose CBD to a Schedule 3 drug. This change would mean low-dose CBD would be available for sale in pharmacies.

In order to understand what this possible change means for the Australian consumer, we interviewed Rhys Cohen, a cannabis expert, and the Principal Consultant at FreshLeaf Analytics. The following article has been adapted from our interview with Rhys.

In the interview, Rhys answered the following questions:

Rhys Cohen’s cannabis industry experience:

Rhys’ involvement in the cannabis industry dates back to 2015.. He wrote his honours thesis on cannabis legalization in the US. Since writing his thesis, Rhy spent time as the Lambert Initiative for Cannabinoid Therapeutics at the University of Sydney; he’s become the Director of Cannabis Consulting Australia, he participates in medical cannabis education and is now the Principal Consultant at FreshLeaf Analytics.

FreshLeaf Analytics:

FreshLeaf Analytics is a strategic consulting and market intelligence company that services the medical cannabis industry. The company operates in Australia and works with both local and international clients.

FreshLeaf helps companies figure out what’s going on in medical cannabis. They help identify advantages or potential risks and help companies to make better strategic decisions about launching products or building on the success of their existing product ranges.

FreshLeaf also publishes a quarterly cannabis industry reports which help give insights into the cannabis landscape for patients and the general public.

What triggered the review on CBD re-scheduling?

The Australian CBD market is drastically different from those overseas, particularly the USA and Canada. Part of the reason rescheduling CBD is being explored is because of increasing interest and demand, globally, for access to these sorts of products without a prescription.

Also, community demands for better access to cannabis products in general is increasing.

The news about rescheduling came from a submission by the Department of Health to start an inquiry into barriers to patient access. This inquiry may be a political choice made to demonstrate that the government is taking action to improve access to medical cannabis in Australia.

Australia has made a lot of progress since 2016 when our legal framework came into effect. This is an extension of that framework.

What types of CBD would the rescheduling cover?

The proposed Schedule III entry has the same definition as the current Schedule IV entry of CBD.

The current Schedule IV entry says, “CBD for human therapeutic use,” so not for animals, not for recreation, but for human therapeutic use.

To be considered a Schedule IV or a Schedule III CBD product, 98% of the cannabinoid content needs to be CBD alone. That tends to rule out a lot of the less refined or more crude extracts or products.

So, the rescheduling would likely cover products under the isolate or distillate category.

What does rescheduling CBD actually mean?

At the moment, CBD is a Schedule IV drug. The proposal is not to remove or change that definition, but to create a new supplementary definition. The change means that low dose CBD will be available behind the counter through a pharmacist, for minor ailments.

For more serious medical conditions, epilepsy for example, you will still need to see a doctor or specialist to get a prescription for a higher dose CBD.

The proposal is to create an additional entry at Schedule III, which is a pharmacist only medication. These are products that you can access from a pharmacy, but only by speaking with the pharmacist. They’re not available on the shelves. Some examples of Schedule III drugs are sleeping pills and certain cold and flu medications.

What doses would be available?

The proposal would allow specific low doses of CBD to be made available behind the counter for minor medical conditions. The government has recommended a maximum of  60 milligrams per day for this low-dose CBD category.

They would recommend that only 30-days worth of supply be included in a packet of medication, so about 1,800 milligrams per pack, 60 milligrams per daily dose.

Will individuals or any company be able to sell CBD?

If the new scheduling comes into effect, it will work as follows:

February 1st, next year, the changes are implemented and there would be a Schedule III entry for low-dose CBD.

Before companies will be able to sell those products to consumers through pharmacies, they’ll need to get their specific drug registered on the Australia Register of Therapeutic Goods (ARTG). Companies will need to have a well-designed, well characterised product that’s stable and meets all the quality requirements.

They’ll also need to prove, using clinical data, that their product is effective in treating a specific medical indication or symptom. The company will need to submit all of that information to the TGA to get its product assessed and hopefully registered on the ARTG.

Registration on the ARTG can be quite a challenge even for big companies to pursue.

Challenges of ARTG Listing

There are quite a few unanswered questions about the ability to register.

Is it commercially viable for a company to pursue that strategy? Is pure CBD, at 60 milligrams a day, going to show efficacy in treating a specific condition or symptom?

Then we have questions around evidence. What level of evidence might be required? Will companies need full-blown, costly and time-consuming randomised, placebo-control trials to demonstrate that CBD is effective? Or, would observational data be acceptable? Could people make literature-based submissions, based on information that’s already in the public domain?

These are some of the questionsFreshLeaf is going to be working through with clients over the coming months.

It’s still unclear if this rescheduling is actually going to result in genuine access to these products, or if it will just be one step closer but with much more work needed to be done.

Could the draft proposal be different from the final outcome?

Yes, the current draft is not the only outcome that is possible.

There’s a long consultation process that needs to be followed. This proposal has been sent to the Advisory Committee on Medicines Scheduling (ACMS), which is a group of people within the Department of Health who make these decisions.

Currently, the rescheduling is now open for public consultation. The advisory committee is inviting members of the public to make submissions to them about whether or not they support this change or what they would rather it look like.

After receiving the public recommendations, the AMCS will review and produce an interim decision, and then there will be a second round of public consultations on that interim decision.

Because it’s quite a long process with multiple review points, it’s possible the outcome could change. Some possible changes are daily dose limit changes or fewer or additional restrictions imposed. We’ll have to wait and see what the final outcome is.

When would the new regulations officially begin?

If the changes are implemented:

Effective as of the 1st of February 2021.

At schedule III, what conditions could you buy CBD to treat?

Pharmacist only medicines are not intended to treat serious medical conditions. If you have severe pediatric epilepsy, for example, a very serious medical condition for which CBD is occasionally prescribed, you wouldn’t be accessing those products via your pharmacist. You would still need to access higher dose CBD from your GP or specialist via prescription.

Over-the-counter or behind-the-counter medications are available for minor conditions, for example:

  • mild anxiety
  • mild insomnia
  • mild pain

Again, not for the treatment of chronic and severe conditions.

Are there reasons the proposal would not be passed?

The advisory committee needs to consider several issues around public safety. They’ll ask questions like:

  • Will this be safe?
  • Will this meet a clinical requirement of some kind?
  • Is this going to be good for people?
  • Also, will this have any unintended impact on the community?
  • Is there a potential for people to become dependent on products?
  • Is there a potential for side effects or any other kinds of adverse events?

These are the considerations the committee is taking into account when making these decisions. Rhys went on to say:

“The Department of Health reviewed the safety literature on CBD. They came to the conclusion that based on all of the available data, low dose CBD seems pretty safe for pharmacists to dispense. So, I don’t see the advisory committee having additional concerns around safety or side effects.”

How can I help? How do I make a submission?

We are encouraging anyone who feels strongly about safe access to CBD to make a submission. The TGA website (link in step 1 below) has information about how to make a submission. The same page also lists the current regulations, the proposed changes, reasons for the regulations and more.

In order to make it easier for you, we have submission information right here:

  1. Read the proposed amendment thoroughly
  2. Download the TGA Consultation Submission Coversheet.
  3. Write up your submission which must:
    1. Be relevant to the proposed amendment;
    2. Address matters mentioned in section 52E of the Therapeutic Goods Act 1989;
    3. Be submitted by the closing date of 22 May 2020
  4. Send your submission to the Dept of Health:
    1. Send your submission, including cover sheet to medicines.scheduling@health.gov.au
    2. Please include ‘Proposed Amendments to the Poisons Standard (Medicines/Chemicals)‘ in the subject line of the email

In the next section of this article, we give you some ideas of what a strong submission may include.

What information can I put into my submission

Submissions can include:

  • Discussions around how this might impact you personally, both with regards to your health and/or your business and your business interests.
  • You can also provide an informed opinion about whether you think this is safe or not, whether you think that the daily dose limits are appropriate or not.
  • You can discuss your thoughts around the safety of these products or the risks that you might perceive.

It’s important that you are clear about:

  • Do you support the amendment – yes or no?
  • Suggestions or improvements that you may have.
  • If explaining the impact of the proposed changes on you or your business, please attempt to quantify those costs or benefits.

Tips for making a strong submission

Rhys Cohen is well versed in drug policy in Australia. When asked for tips on making a strong submission he said this:

I know that there’s widespread use of CBD products in Australia and around the world already, not done legally. People are frequently using products that are not regulated, that meet no quality standard requirements, and there are some serious concerns around that.

Surveys in the UK have shown that many of the products available for retail sale in supermarkets in the UK don’t contain what’s on the label. Some contain no CBD, some contain twice as much or half as much as they say on the label. Some contain THC and some have unsafe levels of alcohol. This is an unregulated health product market, and it is concerning.

I would assume that a lot of Australians are already purchasing CBD products, probably online, from these websites, and maybe they don’t even realize that they’re breaking the law. Maybe they think they’re buying something that’s legal and safe and well-regulated, but they’re really not.

If you are taking a CBD product at the moment that isn’t prescribed by a doctor, you’re taking an unregulated and illegal product. If you feel like you should have better access to a legal and regulated product instead, then I would encourage you to voice that to the Department of Health.

Source: https://honahlee.com.au/articles/cannabidiol-schedule-4-to-3/


Sean HockingSean HockingMay 18, 2020
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18min1360

This article is the third of four articles that were prompted by the COVID-19 induced depression’s acceleration of the collapse of the cannabis industry. Our … Read More…

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

This article is the third of four articles that were prompted by the COVID-19 induced depression’s acceleration of the collapse of the cannabis industry. Our second article explained how the financial efficiency of store-front and delivery-only dispensaries is improved through operational and structural and changes to these businesses. In a depressed, highly competitive business economy, economic efficiency will be critical to long-term success. This article describes techniques for enhancing financial efficiency in the movement of cannabis from cultivator to consumer.

For reasons we have already described, we will focus on the issues facing California cannabis businesses. Qualified legal and accounting professionals can readily adapt our approaches to California’s cannabis laws and regulations for other jurisdictions. We must emphasize, as we have on other occasions, our deliberate use of the adjective “qualified.” The cannabis industry in California and elsewhere has been given far too much advice from individuals who willfully opine above their level of competence.

The most tax-efficient structure for converting raw materials into thousands of units for retail consumption is mass production through a vertically-integrated business structure in which the profits generated from the retail products are subject to a single level of tax. Some raw materials more easily convert into consumer products through vertically integrated structures than others. The conversion of cannabis as an agricultural commodity into units for retail sales does not easily fit into conventional business models. As a consequence, business planning for the movement of cannabis from cultivators to consumers presents serious challenges.

Business planning for the cannabis industry is particularly challenging for two reasons. Cannabis businesses are criminal activities under federal law, and cannabis legalization involves comprehensive regulation by state and frequently local governmental agencies. California’s regulation of cannabis is particularly complicated because, in most instances, cannabis businesses have to address comprehensive local regulation in addition to state-level control.

In some cases, there are both city and county regulations in addition to the regulations imposed by the State of California. In any such instances, cannabis businesses must comply with three sets of regulations.

In addition to being a highly regulated industry, cannabis businesses are invariably subjected to special tax regimes. Legalization in California was accompanied by the enactment of a Cannabis Cultivation Tax (“CCT”) and a Cannabis Excise Tax (“CET”). The Legislature also authorized the imposition of special taxes on cannabis by local governments. Similar to the regulatory complications, cannabis businesses are frequently subject to special local taxes imposed by both counties and cities in addition to CCT and CET imposed by California. It has always been our opinion the adage, “Be careful what you ask for, you may get it.” is aptly applied to California’s legalization of cannabis.

 

 

Consumers pay directly or indirectly, all of the costs of cannabis regulation. Consumers also pay directly or indirectly all of the taxes imposed on cannabis and cannabis businesses. Taxes on cannabis are recovered from consumers either as an addition to the cost of the cannabis at the point of sale or as part of the purchase price of the product. CET is collected from the consumer at the point of sale; CCT is included in the purchase price. Local taxes are usually collected through both of these methods. The costs of the regulation of cannabis and cannabis businesses are recovered from consumers as part of the cost of the product.

In most instances, taxes will represent 25%-45% of the total amount a consumer pays for cannabis, and the costs related to regulation will represent 2%-5% of that amount. From the perspective of a consumer, in most instances, 30%-50% of the total amount a consumer pays for cannabis in a legal sale in California is supposed to find its way into the coffers of a tax agency. The taxes imposed on legal sales of marijuana in California, of course, are one of the reasons California will have a substantial underground cannabis industry for the foreseeable future.

As a commodity, cannabis is not easily converted into units for retail sales to consumers through conventional arrangements for mass production. The ownership and operating structures that are most financially efficient for the mass production of consumer products from a commodity such as tomatoes are not well suited to cannabis. Cannabis is most efficiently grown in relatively small batches. State and local regulations relating to the ownership and operation of cannabis businesses also complicate the selection of ownership and operating structures.   The special taxes imposed on cannabis, as well as Internal Revenue Code (“IRC”) §280E, add further complexity to the selection of structures for the ownership and operation of cannabis businesses.

Before the passage of Proposition 64 [See “Implementing Proposition 64: Marijuana Policy in California”], the most financially efficient structure for the movement of cannabis from cultivator to consumer in California was a limited liability company (“LLC”) reporting for income tax purposes as a grower-owned partnership through which cannabis was sold directly to consumer/members. The use of this structure in California was based on Proposition 215 [See “Keeping Proposition 215’s Promise”], which legalized medical cannabis in California in 1996. Various legal entities were used to operate under Proposition 215 to facilitate the use of cooperatives and collectives for the organized distribution of medical cannabis in California before Proposition 64.

Some variation on a limited liability company reporting as a partnership, which is a pass-through entity for income tax purposes, and which is vertically integrated from cultivator to consumer, is likely to be the most financially efficient structure for the ownership and operation of cannabis businesses in states other than California. Such an arrangement is no longer the most financially efficient structure for the movement of cannabis from the cultivator to a dispensary in California.

 

 

A Cannabis Cooperative Association (“CCA”) is now the most financially efficient structure for the ownership and operation of business operations that move cannabis from cultivators to consumers in California.

A CCA is a special form of corporation enabled for the benefit of cannabis cultivators as part of Proposition 64.   A CCA is more financially efficient than a pass-through limited liability company, although the effective use of such a structure is not intuitive. [“CCA’s Create Profits”} Qualified professional advice is critical for the use of a CCA.

A CCA is the equivalent of an incorporated agricultural marketing and processing cooperative. CCAs were created by the California Legislature solely for the benefit of cannabis cultivators. Restrictions are imposed by statute on the ownership and activities of CCAs. These restrictions limit the benefits of using this unique form of corporation to cannabis cultivators. These restrictions make CCAs a little more challenging to use than general stock corporations or nonprofit corporations. These difficulties are easily overcome with qualified professional assistance, and the advantages of the utilization of a CCA more than justify the additional effort required to use this structure.

A CCA can be a substantially more financially efficient vertically integrated structure for the ownership and operation of the cannabis businesses that move cannabis from cultivators to consumers than a limited liability company reporting for tax purposes as a partnership. We have already published multiple articles describing the advantages of a CCA over other business structures. [See CCA Advantage! ]

The financial efficiency of CCAs flows from the reporting for federal tax purposes of such organizations under Subchapter T of the Internal Revenue Code. For California income tax purposes, CCAs file corporate income tax returns utilizing one of three different forms applicable in California for income tax reporting for cooperatives. For California and federal income tax purposes, all of the business activities of a CCA are reported in a single income tax return. The California alternatives for a CCA depend on whether the CCA is an exempt or non-exempt cooperative for federal income tax purposes under Subchapter T. We earlier discussed income tax reporting for CCAs.

Unless and until IRC §280E is repealed as a special income tax burden imposed by the federal government on the cannabis industry, dispensary operations should be separately owned and operated from the other businesses that move cannabis from cultivator to consumer. The IRS has historically limited the application of IRC §280E to the retail sale of marijuana by dispensaries. The IRS has also been generous in allowing the reduction of gross revenue by COGS in the computation of gross income for dispensaries.

In 280E – NOT A PROBLEM! we explained how a dispensary could utilize IRC §280E to minimize the taxes imposed at the retail sale level. The separation of the ownership and operation of a dispensary from the ownership and operation of the business activities that move cannabis from a cultivator to a dispensary creates a clear demarcation of wholesale activities from retail activities for the purposes of IRC §280E. Such a separation provides a foundation for arguing that IRC §280E should not be applied above the dispensary level in those instances in which there is a clear demarcation between a distributor that makes a wholesale transfer of cannabis to a dispensary that in turn sells the cannabis products acquired at wholesale in retail sales.

The analysis of the preceding paragraph exposes a flaw in the utilization of a micro-business structure in California to move cannabis from cultivator to consumer. The cannabis micro-business structure authorized under California law for small cannabis cultivators blurs any separation of wholesale and retail functions for IRC §280E. Utilizing a micro-business structure for the movement of cannabis from cultivator to consumer exposes such an integrated cannabis business structure to the possibility of a disallowance of ordinary and necessary business expenses under IRC §280E.

A CCA is treated in the same manner as any other vertically integrated structure. A CCA will utilize a distributor as the last transferor of cannabis to a dispensary in order to maintain a clear distinction between wholesale and retail for the purposes of IRC §280E. A CCA has an advantage over conventionally integrated ownership structures because the transfers from one business unit to another business unit within the CCA structure are treated as internal transfers for income tax reporting purposes provided the controlled business units within the CCA are treated as wholly-owned for income tax purposes.

CCAs were enabled by the Legislature for California’s cannabis industry because some individuals realized the importance of agricultural cooperatives for small farmers. As we pointed out in an earlier article, a significant portion of corporate business in the United States was founded on agricultural cooperatives. [See “CCA’s Good or Better,” CCA’s Create Profits, and “CCA’s Beat Underground” ] CCAs have been under-utilized to date, but we are confident this will change as part of the consolidation occurring in California’s cannabis industry. The economic pressure of the COVID-19 induced depression will likely accelerate this consolidation as well as the utilization of CCAs. Finally, see “Medical CCA’s 101.”

The business strength created for small growers by a processing and marketing cooperative is undeniable. The materials we have referenced in this article explain why CCAs are so financially efficient as operating structures. There is a third reason CCAs create an opportunity for individuals interested in financial success in California’s cannabis industry.

CCAs are subject to the General Corporation Law of the California Corporations Code except to the extent these general provisions of corporate law conflict with or are inconsistent with the express provisions of the California Business and Professions Code (“B&P Code”) applicable to this unique form of corporation. Consequently, CCAs are general business corporations. CCAs have all of the rights, powers, and privileges of other California corporations except to the extent specific provisions of the B&P Code modify general corporate laws.

A CCA can own and operate a business other than a cannabis business. In general, a CCA can engage in any business activity in which another California corporation could engage. This aspect of a CCA appears to have been largely overlooked by the many advisers to California’s cannabis industry. We are confident the financial pressure of the COVID-19 induced depression will cause some to realize how this aspect of CCAs can be utilized in addition to taking advantage of the financial efficiency created by the use of Subchapter T for income tax reporting and the business strength inherent in an agricultural cooperative.

 

© William E. Taggart, Jr. May 2020


Sean HockingSean HockingMay 13, 2020
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5min1920

 

According to reports, up to 30% of cannabis employees have lost their job during COVID-19 in Canada. We’d suggest at least 50% of these would have gone anyway but that’s another day another discussion. … Read More…

The Cannabis Talent List allows those without a job to post who they are what they are etc and it makes fascinating reading and certainly tells us which ones we both would and wouldn’t hire. But more of that later

Here’s what the creators are saying about the list

STATEMENT OF INTENT

To the Cannabis Industry: these are unprecedented times we find ourselves in. Prior to COVID19 the cannabis industry was restructuring and reducing its workforce. COVID19 has only made the employment landscape bleaker. Today, many of our friends and colleagues are out of work and we expect more layoffs in the coming months. As members of the cannabis industry, we owe it to each other to support the workforce that makes this industry possible every day. We started this database to help those who are currently out of work due to layoffs, restructuring, insolvency, etc. If you’re looking to make a permanent or temporary hire please source from this list. If you’re unable to hire right now, then reach out to candidates on this list when you can. Thank you for your continued support and for everything you do to contribute to the success of the cannabis industry.

ABOUT THE CANNABIS TALENT HELP LIST

The “Cannabis Talent Help List” is modeled after single-company layoff lists commonly used in the tech sector, and more specifically inspired by a recent list established by prospect.fyi in response to the COVID19 pandemic. It is a grassroots, community hiring tool designed to help out-of-work talent in the cannabis sector find work during the COVID19 outbreak.

HOW TO USE THE LIST

If you’re currently out of work you can add your profile to the database. You can edit your info anytime.

If you’re an employer and you’re doing layoffs, you can direct your employees to the list as a resource.

If you are hiring, you can leverage the database for active candidates looking for work.

WHO

The “Cannabis Talent Help List” is created by Jeff Ord and Alison McMahon of Cannabis At Work, in partnership with the Business of Cannabis. Inspired by the “Talent Help List” launched by prospect.fyi

Sourcehttps://docs.google.com/spreadsheets/d/e/2PACX-1vSoHLlCztWK3HRvXloU5UHt2PW0tUabH2vCecryR9l8gLHWKEerNmr95lgIGZOjMLD-DzhP-wY5FOJb/pubhtml#

Now… to the list itself

As of 14 May 2020, there are 253 entries with people looking for work.


Sean HockingSean HockingMay 10, 2020
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20min1970

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

The problem IRC §280E presents for the cannabis industry is the result of the gradual evolution of the use of this agricultural commodity by a small portion of the public into a legal industry in multiple jurisdictions. The legal cannabis industry in the U.S. has long contended it is unfairly burdened by IRC §280E’s disallowance of deductions for ordinary and necessary business expenses. Fairness like beauty is in the eye of the beholder. Many industries get tax breaks. Tax breaks are penalties for those who do not receive them. Congress saddled the cannabis industry with a tax penalty because it was deemed criminal activity.

The attitude of Congress toward cannabis appears to be gradually changing, although IRC §280E is not likely to disappear in the immediate future. The distribution of cannabis remains a criminal activity in the eyes of some. Of greater significance for planning purposes, when a change in the income tax treatment of cannabis occurs at the federal level, the change will undoubtedly come with a federal tax cost – most likely a federal excise tax. The truth behind the complaint of the cannabis industry regarding IRC §280E is that this statute makes it more difficult for cannabis businesses to make money without qualified professional advice.

IRC §280E can be utilized as a tool by a well-advised California dispensary to establish a legal, fully tax-compliant business that is more efficient financially than a conventionally operated dispensary. A legal, fully tax-compliant dispensary that takes full advantage of all of the tax-minimization opportunities that are available to such a business is not only more financially efficient than a conventionally operated dispensary, such a dispensary can be competitive with the underground distribution of cannabis as well.

 

Those involved in the underground distribution who unlawfully appropriate a significant amount of money from the movement of cannabis from cultivator to consumer will be replaced by California and local taxing agencies and licensed, tax-paying intermediaries in such an instance. Cultivators, employees, cannabis consumers, and licensed, tax-compliant intermediary businesses will be little impacted by these such changes in dispensary operations. The primary impact of a wide-spread adoption of this operating model for dispensaries will be the collection by California and local taxing agencies of a substantial portion of the funds that presently disappear into the underground.

 

We have explained the principles for the conduct of a financially efficient dispensary in earlier articles. The principles we have explained have not been widely adopted. There are several reasons. The primary reason our articles have not had a significant influence on the structuring of the ownership and operation of cannabis dispensaries is that our opinions differ from conventional cannabis industry wisdom. Also, the implementation of financial efficiency is not easy. Implementation of financial efficiency for a dispensary requires qualified professional assistance.

 

We agree that IRC §280E discriminates against the cannabis industry. We agree that IRC §280E is unfair to the cannabis industry in comparison to other industries based on the consumption of an agricultural commodity. The labels unfair and discriminatory, however, have little persuasive power in Congress when it comes to changing tax laws. Public pressure based on voter influence on those who enact tax laws is required for change. In this regard, the cannabis industry has little political capital.

 

The solution to the IRC §280E problem for a cannabis dispensary is to adopt a structure and operating practice that takes advantage of this discriminatory treatment under federal tax law. The adoption of comprehensive financial record-keeping systems and processes that provide verifiable information is crucial to establish the foundation for securing the financial benefits that flow from the tax-minimization generated by the proper operation of a cannabis dispensary. A conventionally organized and operated dispensary cannot successfully compete in the long-term with a legal, tax-compliant cannabis dispensary that takes full advantage of the opportunity IRC §280E provides for the well-advised.

 

The impact of the depression induced by the COVID-19 crisis on the cannabis industry will increase the interest in the adoption of financially efficient structures for the ownership and operation of legal cannabis businesses, including dispensaries. The cannabis industry is going to be incredibly competitive in the immediate future. Only the financially strong will survive to 2021. A more financially efficient cannabis dispensary is a stronger business. Stronger businesses are more likely to survive this depression.

 

We predicted in 2019 that most legal cannabis businesses in California would struggle to survive 2020. The economic depression induced by the COVID-19 crisis has intensified the financial problems facing legal cannabis businesses. Many cannabis businesses have already given up. Many more will do so in the coming months. We must note the COVID-19 crisis created a temporary boost for California’s underground cannabis industry. This boost will be short-lived.

 

This second article describes how the impact of taxes on a cannabis dispensary can be minimized through the operation of a dispensary as a Cannabis Consumer Cooperative. Knowledgeable accounting and legal assistance is required to establish and implement the systems, processes and practices required to operate a legal, tax-compliant cannabis dispensary as a Cannabis Consumer Cooperative. However, a well-advised cannabis dispensary can be converted into a Cannabis Consumer Cooperative without serious difficulty.

 

In 2019 we published an article that described a technique for reducing the impact of taxes on a dispensary by removing the taxes collected from a consumer at the point of sale from the revenue of the dispensary. We pointed out this technique could be used to reduce the impact of IRC §280E.

 

See IRC Sec. 280E – Escrows. The conceptual foundation for a Cannabis Consumer Cooperative is an extension of the principles we described in the referenced article.

 

The justification for the exclusion of the taxes collected from a consumer at the point of sale from the revenue of a dispensary is based on the treatment of these funds as trust funds that are collected by the dispensary for the benefit of the taxing agencies that are legally entitled to these funds. The extension of this reasoning to eliminate the impact of IRC §280E through operation as a Cannabis Consumer Cooperative is easily explained.

 

A Cannabis Consumer Cooperative conducts business as a consumer membership organization. As a member of the dispensary, the consumer contributes capital to the dispensary to pay the dispensary’s non-deductible IRC §280E expenses. The treatment of a portion of the money paid to the dispensary as a contribution to the capital neutralizes the impact of IRC §280E’s disallowance of any deduction for these costs.

 

Each consumer agrees to become a member of a dispensary operating as a Cannabis Consumer Cooperative as a condition to being allowed to purchase cannabis from the dispensary. Each consumer is required to join the dispensary as a member in order to purchase from the dispensary. If a consumer declines to become a member, the consumer cannot purchase from the dispensary. Such a consumer must purchase elsewhere.

 

A dispensary operating as a Cannabis Consumer Cooperative will require each consumer to contribute to the dispensary all of the taxes imposed at the point of sale. These funds will be held by the dispensary as trust funds. Such a dispensary will also require each consumer to contribute that percentage of the nominal sales price for the cannabis product that represents the operating expenses of the dispensary would be deemed non-deductible pursuant to IRC §280E.

For the purposes of determining the revenue of a dispensary operating as a Cannabis Consumer Cooperative, the taxes collected at the point of sales are excluded from revenue. In addition, the amount of the capital contribution made by the consumer is excluded from the sales revenue received by the dispensary. The amount paid by a consumer to a dispensary operating as a Cannabis Consumer Cooperative for a cannabis product is treated as three separate transfers of money to the dispensary: (1) a deposit of funds for the payment of taxes; (2) a contribution to the capital of the dispensary; and (3) a payment for the cannabis product.

A comparison of a sale by a conventionally operated dispensary with the same sale by a dispensary operating as a Cannabis Consumer Cooperative illustrates the benefits of operating a dispensary in this manner. Suppose a conventionally operated dispensary sells a cannabis product with a COGS of $50.00 for $90.00 – an 80% mark-up. Also, suppose the taxes imposed at the point of sale are $25.87 (28.75% x $90.00). This amount is typical of the amount of taxes collected at the point of sale in California. Also, suppose the dispensary has operating expenses equal to 60% of its mark-up over COGS, which will be $24.00 (60% x $40.00) in the instance of this sale.

The dispensary in both instances will receive $115.87 from the consumer. In the sale by a conventionally operated dispensary the $115.87 consists of: $25.87 of taxes imposed at the point of sale; $50.00 of COGS; and $40.00 of Gross Income from the sale. The profit of the dispensary from this sale will be $16.00 ($40.00 – $24.00 of operating expenses = $16.00) if the taxes are excluded from revenue. As a consequence of IRC §280E, the dispensary will be taxed for federal income tax purposes on $40.00 of Taxable Income. If the dispensary is subject to a federal income tax rate of 35%, the income tax due the IRS will be $14.00, and the after tax income of the dispensary from the sale will be a net $2.00.

If the dispensary is operating as a Cannabis Consumer Cooperative, the same sale for $115.87 will consist of $25.87 of taxes imposed at the point of sale; a $24.00 contribution to the capital of the cooperative that is not included in revenue; $50.00 of COGS; and $16.00 of Gross Income. The Taxable Income of the dispensary will be the same as its Gross Income. If the dispensary’s income is taxed at an income tax rate of 35%, the dispensary will have after tax income of $10.40 ($16.00 – 35% of $16.00 = $10.40) – a fourfold increase in after tax income.

A dispensary operating as a Cannabis Consumer Cooperative should always slightly overestimate the percentage of its mark-up that will constitute non-deductible operating expenses. The excess of the contributions of the members to the capital of the dispensary operating as a Cannabis Consumer Cooperative over the actual operating expenses must be added to the gross income of the dispensary in its income tax returns. This adjustment becomes a simple year-end adjustment on the dispensary’s income tax return.

Whether a particular form of entity can be used to operate a dispensary as a membership organization is a state-specific question. There are a number of forms of organizations that can be utilized in California to operate a dispensary as a membership organization. Most states will have multiple forms of entities that can be operated as Cannabis Consumer Cooperatives. However, the laws of a particular state may be so specific regarding the type of organization that must be utilized for a cannabis dispensary, or so specific regarding the manner in which a dispensary must be operated, that it may not be possible to operate as a Cannabis Consumer Cooperative.

The preceding discussion understates the need for qualified professional assistance in the establishment of a dispensary as a Cannabis Consumer Cooperative. The preceding also suggests the establishment of such a dispensary in California is a fairly simple exercise. It is not. In California there are four variations of Cannabis Consumer Cooperatives. Each of these variations will produce different tax benefits and have different operating requirements.

There are four variations of Cannabis Consumer Cooperatives in California because there are two different tax regimes applicable to cannabis dispensaries as well as at two different regulatory regimes. California cannabis dispensaries can operate as for-profit organizations or as nonprofit organizations. California cannabis dispensaries can operate as medical cannabis dispensaries or as adult-use cannabis dispensaries.

As a consequence of the tax and operating options, a California Cannabis Consumer Cooperative can operate as: (1) a for-profit, adult-use Cannabis Consumer Cooperative; (2) a nonprofit, adult-use Cannabis Consumer Cooperative; (3) a for-profit, medical Cannabis Consumer Cooperative; or (4) a nonprofit, medical Cannabis Consumer Cooperative. Each of these alternatives provides a different set of financial benefits for the owners, operators and consumers.

For those who are not convinced by the preceding that the conversion of the operation of an existing dispensary into a Cannabis Consumer Cooperative should be seriously considered, the changes in the collection of Cannabis Excise Tax (“CET”) proposed by Governor Newsom in his budget proposal for 2020-2021 will mandate such consideration if the budget proposals relating to cannabis are adopted.

See Consolidation of California Cannabis Licensing AuthoritiesHow High? Adjusting California’s Cannabis Taxes; and The 2020-21 Budget; The Governor’s Cannabis-Related Proposals. We will address the Governor’s proposals relating to changes in the regulation and taxation of the cannabis industry in a few weeks.

We are confident the changes proposed by Governor Newsom for the collection of CET will be adopted. California is already losing hundreds of millions of dollars in cannabis tax revenue. One of the primary reasons for this tax loss is an ill-conceived system for collection and remittance of cannabis taxes. The depression induced by COVID-19 has made California’s need for additional tax revenue even more acute. Stopping California’s revenue loss from the CET that is not being collected will be a no-brainer for the Legislature. Governor Newsom’s budget proposals relating to cannabis will be adopted. You read it here first!

 


Sean HockingSean HockingMay 6, 2020
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17min5470

 

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

This is the first of four articles we have been writing while sheltering-in-place.

This first article summarizes our views on the impact of the COVID-19 crisis on the cannabis industry with respect to financial record-keeping and tax reporting issues. More accurately stated, we will address the impact of the economic depression triggered by the COVID-19 crisis on the financial future for the cannabis industry.

As our followers are aware, we have regularly addressed financial record-keeping and tax reporting issues relating to the cannabis industry as well as the impact of tax management on success in this industry. It appears this lesson has not yet been learned by many in the cannabis industry.

See, The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance]

The importance of tax compliance will eventually be learned by everyone involved in the cannabis industry.

On February 28, 2019, we published [Dispensaries Need Accurate Receipts] to describe the financial records a dispensary must prepare and maintain, and the receipts it must issue, in order to establish it complied with its tax responsibilities.

We published [Which Set of Books?] to provide every California dispensary with a guide for the preparation and maintenance of the financial records a dispensary needs to have in order to be prepared for the inevitable tax audit.

Learning the importance of tax compliance will be expensive for some. For a number of players in California this lesson may prove particularly costly. The fall-out from the Grand Jury investigation that is the basis for the Weedmaps subpoena may take-down a number of California cannabis businesses even if all of the targets of this investigation avoid criminal prosecution.

The information secured by the U.S. Attorney through the Weedmaps subpoena will eventually find its way to other governmental agencies for use in civil proceedings, both federal and state. Further, the California Attorney General is very likely already involved in this investigation. Cannabis businesses evade far more in California taxes than in federal taxes.

The cannabis industry was turning downward before the COVID-19 crisis. California’s cannabis industry was facing a dramatic downturn coming into 2020. The depression precipitated by the COVID-19 crisis converted what would have been a substantial market-place adjustment into a chaotic collapse. California’s cannabis boom was the biggest. California’s bust is of comparable dimension.

Our primary interest in cannabis involves California’s industry. Our insights relating to tax management for California’s cannabis industry can be readily adapted by qualified professionals for other jurisdictions. Challenges similar to those that confront California’s cannabis businesses are commonly encountered in other jurisdictions.

Our second article describes “Better Mousetraps” for the ownership and operation of cannabis dispensaries.

Our second article also discusses the difficulties cannabis dispensaries will encounter in adjusting to the post-COVID-19 new normal.

Our third article describes the approaches that will maximize profitability in moving cannabis from cultivator to consumer. Profits for all businesses are maximized through the selection of operating entities, careful financial analysis, and the management of taxes and other financial obligations. Our third article describes those techniques that will maximize profitability for this segment of the cannabis industry post-COVID-19.

Our fourth article addresses the impact of the COVID-19 crisis on “Social Equity” programs in the cannabis industry. Our fourth article will be primarily of interest to individuals involved in California’s cannabis industry. California has been a leader in the effort to utilize Equity Programs to remedy some of the social inequities created by failed governmental policies relating to cannabis.

The COVID-19 induced depression will prove a death knell for those Equity Program businesses that do not adjust. Equity Program businesses that quickly adapt to the new normal will be able to accomplish far more than they would have been able to accomplish in the absence of this crisis. For those Equity Program cannabis businesses that quickly adjust, the financial collapse of the past four months creates opportunities for success that would not have existed in the absence of this collapse.

We have read at least fifty articles in recent weeks offering advice to cannabis businesses relating to the impact of the COVID-19 crisis. Most of these articles accurately address some issues. Most provide some worthwhile thoughts.

However, any article that does not assume the cannabis industry will be dramatically transformed by the COVID-19 induced depression is flawed.

 

The cannabis industry began a downward adjustment in a number of jurisdictions in 2019. California’s cannabis industry in particular was poised for a substantial market-driven adjustment by the end of 2018. The inevitable downturn in California’s cannabis industry was obvious to any astute observer. California growers have produced far more cannabis than Californians consumed since the ‘70s. The combination of an ill-conceived and poorly-drafted amendment to the California Constitution to legalize adult-use cannabis, incompetent implementation of California’s regulation of cannabis, and excessive expansion of this industry, made a precipitous downturn inevitable.

 

The COVID-19 crisis has condensed what would have been a tumultuous restructuring of California’s cannabis industry driven by market forces into a precipitous collapse.

 

The preceding statement should surprise no one. Everyone involved in California’s cannabis industry could see it was in difficulty in 2019. Now the entire United States economy has gone from steady growth to severe depression in a period of weeks. The cannabis bubble in California was the biggest cannabis bubble, and it has popped.

The U.S. economy will recover. California’s economy will recover. Full recovery for both will take years. Of greatest significance for purposes of planning, the new normal will be different. Some industries will be little changed by this depression. For other industries the change will be dramatic and permanent. California’s cannabis industry will rapidly recover. The foundation for a successful cannabis industry in California remains. Long-term success in California’s cannabis industry, however, will require dramatic changes for most businesses.

The days of easy money in California’s cannabis industry will soon disappear. Recovery from this crisis for California’s legal cannabis industry will necessarily take place in a severely depressed economy. Long-term success in California’s legal cannabis industry will require that such businesses become financially competitive with the underground distribution of cannabis. Price-competition and smaller margins will eliminate all cannabis businesses that are not financially efficient.

We are writing this article, and the three that will follow, to describe how climbing out of this depression has created an opportunity for success for some California cannabis businesses.

All commodities that move from cultivators to consumers:grapes, tomatoes, corn, etc, are different.

Cannabis is an agricultural commodity. It is a precious commodity, but it is not the most precious commodity. Saffron is far more precious than cannabis.

We have always preferred to compare cannabis as a commodity to tomatoes. Both of these commodities are easily grown. Both lend themselves readily to backyard cultivation. Cannabis is readily grown in small, valuable quantities on a small scale.

There will always be an underground cannabis market because cannabis is so easily grown in a backyard. Both tomatoes and cannabis also lend themselves to mass production, processing and retail consumption in a wide variety of forms.

Tomatoes are most efficiently grown on large farms where the tomatoes are picked by machines and trucked in massive gondolas to factories for processing into consumer products.

Cannabis on the other hand is most efficiently grown in relatively small quantities by knowledgeable growers. For many years the Emerald Triangle produced a substantial portion of the high-quality cannabis consumed throughout the United States. This phenomenon was the consequence of the many expert growers who settled in California’s Emerald Triangle.

 

 

The “new normal” for California’s cannabis industry will not be the industry most visualized six months ago. While we cannot wholly describe the contours of this new normal, we can describe the business practices that will maximize financial efficiency for the operation of cannabis businesses in this new normal. Those cannabis businesses that are most financially efficient will be far more likely to survive in the long-term than the less financially efficient.

Many features of the new normal can be extrapolated from an examination of the forces that drove the growth of California’s cannabis industry. The lure of financial success was very likely the strongest driver of the bubble that just burst. The real and supposed medical benefits of cannabis use was a significant driving force for some. The increased recognition of the social injustice caused by federal and state prohibitions of cannabis was another significant force. A new source of tax revenue was a critical motivator for many who would otherwise have been inclined toward continued prohibition. The opportunities for success opened by a big new legal industry demanded exploitation by brokers, developers, manufacturers, trade show promoters, and experts of all shapes and sizes. Those who saw profit in building this new industry was a substantial driving force in California and elsewhere.

No doubt there are forces we failed to mention. We may not have accurately interpreted the significance of some forces. Any errors in this regard are of little import.   An understanding how various forces drove the growth of the cannabis bubble in California merely provides a foundation for selecting the courses of action that are most likely to assure success for California cannabis businesses in the new normal. The new normal will require success in a severely depressed economy in a highly competitive, regulated industry with too many participants. It will not be easy.

One of the more interesting aspects of business planning for the cannabis industry is the fact the industry is so heavily impacted by state laws even though cannabis is an easily-grown agricultural commodity. Another interesting aspect of business planning for the cannabis industry is that local jurisdictions, cities and counties, invariably impose local taxes and regulations on the cultivation and sale of this commodity.

 

 

One additional item must be noted as it is likely to have a greater impact on the future of California’s cannabis industry than the COVID-19 induced depression. Governor Newsom’s proposed budget for California for the 2020-2021 fiscal year makes a significant change in the collection of cannabis taxes. If this change in law is adopted, it will dramatically alter the flow of money through California’s cannabis industry.

 

See Governor’s Cannabis-Related Proposals published February 14, 2020.] We will discuss the impact of Governor Newsom’s proposal in the next three articles. [California Gov. Gavin Newsom’s administration on Friday announced plans to simplify the state’s cannabis regulatory and tax systems, which have been blamed for enabling an illicit market to continue to thrive.]

[The proposed changes, which will be in Newsom’s state budget proposal, come in the wake of recommendations by an independent agency that the state overhaul its cannabis tax regime.]

What will be the new normal for California’s cannabis industry? Cannabis trade shows are history. They will not return. Too much production equipment has been sold into the industry to support continued increases in the sales of such equipment. Real estate promoters have created more cannabis investment opportunities than this industry can support.

The lure of financial success in cannabis continues to exist, but easy access to investment capital has ended. The regulatory agencies California established for this industry will not disappear. Administrative agencies are more difficult to eradicate than crabgrass. California continues to expect to collect substantial tax revenue from its cannabis industry. California will figure out how to collect this tax revenue. California will make certain its cannabis industry survives. More than ever before California needs the tax revenue a regulated and taxed industry will generate.

The new normal in California will consist of regulated, tax-paying cannabis businesses that can compete commercially with an underground market. The three succeeding articles will describe how regulated, tax-paying cannabis businesses can survive and prosper in this new normal.

 

 


Sean HockingSean HockingMarch 31, 2020
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8min7330

Authored By: Patrick McKnight.

 

Businesses are on the front lines of the COVID-19 outbreak. Employers must attempt to balance public health concerns, compliance with emergency government orders, employee safety, consumer demand, and financial reality. Many states are enacting restrictions on business activity or even forcing “non-essential” companies to close or transition to a work-from-home policy.

When the crisis began it was not at all clear how the medical marijuana industry would fare. Recent developments suggest the industry has not only escaped closure, but many states have relaxed existing restrictions to encourage greater patient access while containing the spread of the virus.

The United States medical marijuana market is estimated to reach nearly $8 billion in sales in 2020 with annual growth of around 17%. 33 states currently have some type of medical marijuana program with an estimated 3 million total patients across the country. The industry employs 240,000 people.

The onset of the COVID-19 outbreak presents a new arena of legal uncertainty for a rapidly expanding industry known to inhabit a constant state of flux. The Pennsylvania medical marijuana industry reached $500 million in total sales over just its first two years of existence. The Keystone State currently has about 150,000 medical marijuana patients. The New Jersey medical marijuana industry has likewise demonstrated remarkable growth following recent expansions of eligibility.

Mid-Atlantic States Respond to COVID-19

The COVID-19 outbreak is hitting the Mid-Atlantic states harder than many other areas. New Jersey and Pennsylvania have been among the most aggressive in enacting emergency measures to slow the spread of the virus. Many of these executive orders restrict the ability of “non-essential” businesses to operate for the duration of the ongoing emergency.

The ambiguity over which businesses are “essential” or “life-sustaining” has generated confusion amongst business leaders and warranted multiple clarifications from officials. Most states have policies in place allowing businesses to apply for waivers. New York, Connecticut, and New Jersey also enacted statewide shelter in place orders. Pennsylvania currently has a shelter in place order across 22 counties.

On March 19, 2020, Pennsylvania Governor Tom Wolf announced all “non-life-sustaining businesses” would be ordered to close physical locations. New York announced similar restrictions on March 20, 2020. On March 21, 2020, New Jersey Governor Phil Murphy signed Executive Order 107 forcing all “non-essential” retail businesses to close.

Is Medical Marijuana an Essential Business?

Nearly every state with a medical marijuana program has determined the industry should continue operating as an essential business. Under this designation, medical marijuana dispensaries are basically treated like pharmacies providing essential healthcare products.

Not only have states refrained from shutting down businesses engaged in the production and sale of medical marijuana, but many states have also relaxed existing restrictions.

Government promotion of social distancing may be making it easier for medical marijuana dispensaries to operate in Pennsylvania. On March 20, 2020, the Pennsylvania Department of Health announced the temporary suspension of several important restrictions. For the first time, patients and caregivers may pick up medical marijuana at the curb outside of dispensaries. Other loosened regulations in Pennsylvania include:

  • Waiver of limits on how much medical marijuana may be purchased.
  • Elimination of background checks for caregivers.
  • Relaxed restrictions on the number of patients per caregiver.
  • Allowing remote consultations for the renewal of medical marijuana cards.

“In the midst of COVID-19, we need to ensure medical marijuana patients have access to medication,” Secretary of Health Dr. Rachel Levine said in a press release. “Medical marijuana grower/processors and dispensaries are considered life-sustaining businesses under the Governor’s order for nonlife-sustaining businesses to close. We want to be sure cardholders in the medical marijuana program can receive medication for one of 23 serious medical conditions during this difficult time.”

New Jersey also relaxed restrictions on medical marijuana establishments, known as Alternative Treatment Centers (“ATCs”). New Jersey is allowing curbside pickup and reducing fees for caregivers from $100 to $20. On March 24, 2020, the New Jersey Department of Health’s Division of Medical Marijuana released guidance on how ATCs may hire employees during the emergency period. The guidance relaxes restrictions on background checks for “provisional” employees. New Jersey has about 73,000 medical marijuana patients and generated an estimated $100 million in sales in 2019.

The New York Department of Health considers all medical marijuana companies to be “essential businesses” and implemented similar steps to ensure access during the outbreak. Regulations on home-delivery are temporarily relaxed and sales are now permitted at the door of dispensaries.

Like several other states, Connecticut defines “essential businesses” in terms of guidance from the Department of Homeland Security Cybersecurity and Infrastructure Security Agency. The Agency has a list of 16 critical infrastructure sectors. Notwithstanding federal law, Connecticut created an exception from this guidance by placing medical marijuana within the healthcare sector.

Some states are placing additional restrictions on medical marijuana dispensaries as part of their response to COVID-19. Maryland announced rules requiring dispensaries to limit over the counter interactions. The federal Small Business Administration is prohibited from offering disaster relief loans to any cannabis business.

Conclusion

The initial demand for medical marijuana during the COVID-19 outbreak was reported as very strong. Industry analysts estimate demand increased 20% nationwide in mid-March, 2020. Dispensaries in Pennsylvania and New Jersey reported long lines as patients added medical marijuana to their emergency shopping lists. Available data suggests this preliminary spike in demand was followed by a steep, sudden decline.

The long-term legal ramifications of the COVID-19 outbreak are difficult to predict. As the unprecedented public health emergency continues to spread across North America, the medical marijuana industry should continue to monitor the developing legal implications.

 

Patrick McKnight is an Associate in the Klehr Harrison Harvey Branzburg LLP Litigation

Practice Group and member of their COVID-19 Task Force. He can be reached at pmcknight@klehr.com.


Sean HockingSean HockingMarch 30, 2020
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4min3560

Guest post by Hanson Bridgett

On Thursday, March 19, 2020, Governor Gavin Newsom issued a stay at home order to protect the health and well-being of all Californians and to establish a consistent approach across the state to slow the spread of COVID-19. This order went into effect on Thursday, March 19, 2020, and is in place until further notice.

The order identifies certain services as essential, including food, prescriptions, and healthcare. These services can continue despite the stay at home order. Because cannabis is an essential medicine for many residents, the Governor clarified his order on March 22, 2020, by declaring that cannabis retailers are an essential business and workers supporting cannabis retail and dietary supplement retail are an essential worker force. In conjunction with the Governor’s declaration, the California Bureau of Cannabis Control (BCC), the California Department of Public Health (CDPH), and the CalCannabis Cultivation Licensing division of the California Department of Food and Agriculture (CDFA) have issued advisories stating that licensees may continue to operate at this time so long as their operations comply with local rules and regulations.

Any licensee that continues to operate must adopt social distancing and anti-congregating measures and must follow the CDC’s Interim Guidance for Businesses and Employers to Plan and Respond to Coronavirus Disease at all times.

Further, the CDPH’ s advisory states that to continue to ensure the integrity of products, it is important that employees handling cannabis or cannabis products continue to follow good manufacturing practices (GMPs), as required by regulation. GMPs include safe handling practices to prevent contamination, such as washing hands and work surfaces, wearing clean outer clothing, and any precautions necessary to prevent allergen cross-contact or other contamination. CDPH encourages posting the poster below in cannabis manufacturing facilities to highlight these essential routine tasks:

https://www.cdph.ca.gov/Programs/CEH/DFDCS/
MCSB/CDPH%20Document%20Library/COVID-19CannabisProductSafety.pdf

There are no requirements to notify CDPH if one of your employees is subject to quarantine or tests positive for COVID-19. However, CDPH requests that licensees do what they can to limit exposure to other employees, and follow all social distancing and safety instructions provided by your local and state public health departments.

The analysis in this article is limited to current local or state laws and regulations as they relate to the cannabis industry. Readers should note that there is a divergence between Federal law and California’s laws regarding the legality of the production, distribution and sale of cannabis. This article does not address the applicability of Federal law in this area and should not be considered legal advice.

 


Sean HockingSean HockingMarch 30, 2020
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11min4770

Authored By: Arundati Dandapani

According to Vividata’s National Cannabis Consumer Study, 70% of consumers are not sure they know the difference between THC and CBD. Moreover, quality remains the top criterion in selecting a cannabis product for purchase. How are companies setting the standards for quality and how are we researching consumers to understand their experiences with cannabis products accurately and ethically? This post explores the manufacturing and research standards to consider when conducting research studies with cannabis.

Product Quality in Manufacturing

At an HIV Community Cannabis Education event held in Toronto, a cannabis company proudly declared their company had not had a single product recall to date. Product recall happens when a product is defective, damaged or does not meet the customer’s expectations causing the product to be called off the shelf. This “zero recall” standard, the team said, was attributed to the fact that their cannabis product standards with regard to food safety and health was high and involved documentation of over 100 pages.

High product quality relies on a true understanding of the entire supply chain, from seed to sale with sanitized processes and quality checks including the creation of well-detailed preventative control plans that are in place to avoid instances of hazards like contamination or other public safety risks. These are the responsibility of the manufacturer.

Setting Standards for Cannabis Research Studies 

When companies, individuals or groups conduct or commission research of any kind on cannabis product one or more of its various forms (edibles, topicals, beverages, etc.) among human subjects, legal knowledge of the laws outlined the Cannabis Act should be distributed to all participants ahead of time. In fact, it is encouraged that respondents are tested on their knowledge of cannabis to ensure they understand the ins and outs of the product they are being researched for or with.

Respondent experience must be central to the research exercise. With cannabis, every user has a different experience, but the law that applies to everyone is the same. This is also why it’s so challenging to create standards that accommodate for the medical as well as the recreational standards in the conduct of consumer research around cannabis. The guidelines below detail some prime facets to consider in order to maintain high quality control standards in the cannabis research space:

o  Compliance with the Cannabis Act and the MRIA Code of Conduct including referencing the guidelines listed in the Pharmaceutical Research section.

Respondent checks: Age gates are in place to ensure compliance, and if underaged, then medical licenses must be checked.

Product testing: The products have been through rigourous checks and audits by Health Canada and display the legal seal.

Technology powered research: Virtual clinical trials and other accelerated technologies that mix the potential of new technologies with cannabis to create research insights quickly and more accurately, are being classified as Cannabis 3.0, triggering new innovations and improved data quality through better user experiences.

o   Medical conditions: A panel of doctors must be present at the time of any product research to ensure no adverse effects lessen or damage the health of participants.

24-hour follow up: All respondents must be followed up with after a period of 24 hours to see that no negative consequences have occurred since the research.

An individualized approach to research must be adopted when the product is being tested for consumers. With cannabis research studies, companies might appear to follow different standards of benchmarking product quality, making it difficult for customers to judge products without trying them. While the medical legal market has been commercially legal since 2013, the adult-use or recreational market only became legal in October 2018, with the complete legalization of all product forms happening in October 2019.

Some industry insiders and veteran consumers will argue that legal market cannabis has fallen short on expectations with price-point, being 62% more expensive than black market cannabis according to Statistics Canada. Canada’s largest syndicated study of cannabis consumers reveals that price remains a top barrier to legal cannabis consumption.

As legal cannabis is still new in Canada, DIY methods and products are rampant. The gatekeepers of standards are constantly challenged when the market draws a false line between efficiency and quality. For individualized products, standards are new and developing, even as the industry is fast-moving and dependent on an intuitive honour code across the supply chain for effective quality control. An example that best demonstrates the need for quality control is around the lack of information about what cannabis is made of, what its effects and health benefits (where applicable) might be, and how to understand consistency, potency, and dosage in consuming (or trading) medically and recreationally.

Instituting Dialogue and Collaboration

There are differences in standards and best practices between micro-cultivation and commercial growing according to the NACPT Pharma College that advocates for quality and accredited expertise at every point in the supply chain. One of the goals with an industry as fast-moving as cannabis (disproportionate to the pace of information flow) should be to bring both Health Canada and the licensed producers (LPs) in ongoing communication with one another, and this can happen best through an association that works to protect the industry.

Some companies are proud of not having had a single product recall since their setup. This is owed to the intensive process and documentation in place, popularly dubbed “GXP” encompassing the gamut of standards including GMP, GPP, GACP and other international manufacturing and production standards. Others have faced the wrath of their consumers, media, and everyone in their supply chain networks for not complying with Health Canada’s standards and the Cannabis Act. Cannabis brands still have a long way to go as consumers understand the full legal market ecosystem.

Modelling the Future of Cannabis Studies with Care

Cannabis companies have a relatively empty legal canvas to fill, when compared with other industries, and the category’s future success will draw from the gold standards of ancillary industries including (and not limited to) technology, logistics, transportation, data analytics and market intelligence, packaging, and the media among others. A large proportion of new users’ information is gained from the media, posing an important responsibility for online outlets and websites to be posting the most accurate and well-researched cannabis insights for consumers.

 


Arundati Dandapani is Chief Editor of MRIA-ARIM, Canada’s foremost association for marketing research and intelligence professionals, and Founder of Generation1.ca, a cross-sectoral resource for Canada’s newest residents. A well-published researcher and insights storyteller, she advises businesses and non-profits across a range of industries, was named a 2020 AAPOR Burns Bud Roper Fellow and has earned industry honours like the 2020 QRCA Young Professionals Grant, and the Inaugural GRIT Future List Award in 2019. 

Originally published By: https://mria-arim.ca/Blogs/8863343



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