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AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s“

PUBLISHER:  CANNABIS LAW REPORT

On July 17, 2019, we described five critical changes the Bureau of Cannabis Control (“BCC”) must immediately cause to be made in connection with the regulation of cannabis in California. [See Critical Changes] In the introductory paragraph of our July 17^th article we noted the California Department of Finance (“CDF”) recently released a scathing audit report on the enforcement activities of BCC. [See California DOF Audit Report on BCC]

CDF is a financial watchdog for California. CDF’s audit report on BCC covered the period of July 2016 to January 2019. CDF’s report solely focused on BCC’s enforcement activities. As a consequence of CDF’s governmental role, the period covered by the audit, and the focus on enforcement, CDF’s report has almost no bearing on the issues that have made California’s cannabis industry so tumultuous. A bottom-line summary of CDF’s audit report would read, “BCC made some good effort, but the agency should have accomplished more for the amount of money expended.”

CDF’s audit report is undoubtedly useful as a guide for improving administrative efficiencies. But CDF’s report provides no useful guidance for improving California’s regulation of its cannabis industry. CDF’s report confirms our analysis of the critical changes that are required to significantly improve California’s cannabis regulation.

CDF’s report focuses on the enforcement activities of BCC. As our July 17^th article explains, CalCannabis through its actions, and the California Department of Tax and Fee Administration (“CDTFA”) through its inaction with respect to Cannabis Cultivation Tax (“CCT”) and Cannabis Excise Tax (“CET”), are the principal causes of the booming underground cannabis market and the corresponding chaos as regulatory agencies.

We will not let BCC “off the hook.” BCC is 100% responsible for the chaos in California cannabis industry. BCC is 100 % responsible for the booming underground cannabis market. BCC is the lead agency for the regulation of California’s cannabis industry. California Business and Professions Code (“B&P”) §26010.5(d) expressly states BCC “has the power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity as provided” in the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). The grant of the power, duty, purpose, responsibility, and jurisdiction to BCC pursuant to the express language of MAUCRSA applies to all commercial cannabis activity. The statute is clear and unequivocal.

BCC misunderstood, or misconstrued, or was not capable of performing, the role it was given under MAUCRSA. CDF audited the first two and one-half years of BCC’s performance in connection with a part of one function of regulation. CDF’s audit report is an idle exercise as we will explain. CDF’s audit is an idle exercise audits BCC’s performance with respect to a single aspect of BCC’s role under MAUCRSA.

The two paragraphs that follow are the introductory paragraphs of CDF’s audit report,

“In accordance with Business and Professions Code (BPC) Division 10, Chapter 19, section 26191, the California Department of Finance, Office of State Audits and Evaluations, conducted a performance audit of the California Department of Consumer Affairs (DCA), Bureau of Cannabis Control (Bureau). The audit objectives were to:

Determine the effectiveness of the Bureau’s enforcement programs.

Determine the actual costs of the program.

“The Bureau is the lead agency in regulating commercial cannabis licenses for medical and adult-use cannabis in California and is responsible for licensing retailers, distributors, testing laboratories, microbusinesses, and cannabis events. The Bureau’s mission is to protect the public and consumers through various regulatory, licensing, enforcement, and disciplinary activities.”

CDF is an administrative department that is filled with intelligent and talented employees. BCC is a Bureau within the Department of Consumer Affairs (“DCA”). BCC is also filled with intelligent and talented employees. In the absence of leadership and guidance, intelligent and talented employees are rarely productive. BCC failed to critically analyze the law and California’s cannabis industry. BCC also failed to set reasonable and achievable goals before it began developing an administrative framework for cannabis regulation. As a result, BCC brought chaos to the industry rather than effective regulation. [See Chaos Will Continue!, Cannabis Lawyer – Dangerous? , California Chaos Causes, California Uses ACID – Illegal Grows and Colossal Cannabis Fiasco]

CDF followed BCC’s lead. CDF failed to read the law. CDF expended hundreds of hours of time developing analyses and making recommendations relating to changes in administrative practices and policies to add efficiency to BCC’s ineptitude. [link to ineptitude article.] The statement of the objectives of CDF’s audit belies the agency’s understanding of BCC’s role in the regulation of the industry. Of what importance is the effectiveness or cost of BCC’s “enforcement programs”? Perhaps the better question would be, “Who wants to know and why?” An even better question may be, “Who cares?”

The first sentence of the second paragraph quoted above reflects how poorly California’s administrative agencies have regulated the industry. Both of the statements in the first sentence are accurate. Conflating two separate, accurate statements into a single statement makes the sentence false and misleading.

B&P §26012(a)(1) assigns the task of licensing a number of enumerated cannabis business activities to BCC. B&P §26012(a)(2) and (a)(3) assigns the task of licensing cultivation activities and manufacturing activities to the California Department of Food and Agriculture (“CDFA”) and California Department of Public Health (“CDPH”), respectively. As we have noted in other articles, everyone failed to notice Cannabis Cooperative Associations (“CCAs”) need licenses. [link to a 1-2 CCA articles]

Licensing is a foundational function for regulation. In the absence of licensing, the effectiveness of regulation will always be limited. A strong argument can be made that the principal cause of the maladroit roll-out of cannabis regulation in California was the failure of BCC to mandate a state-wide registration process that made it simple, quick and easy for all locally permitted cannabis businesses to secure California licenses.

Think about the situation that has been created by the ineptitude of California’s regulatory agencies. There are more unlicensed cannabis businesses operating in California than licensed businesses. Cannabis businesses that are not State licensed are being established in increasing numbers. Cannabis licenses are annually renewable licenses. Would not California be better served if all of the locally licensed cannabis businesses in California were licensed, taxpayers who were in the process of renewing California licenses?

Consider the first question California will always ask in connection with the renewal of a California business license, “Have all tax returns been filed and all taxes paid?” Filing tax returns and paying taxes will be a condition of renewal. Consider also how simple enforcement against unlicensed businesses will become. “Does the business have a local cannabis business license?” If the business has a local license, licensing at the State level is simple, quick and easy but the business will be fined for its delinquency. If the business does not have a local license, the business can be immediately shuttered as it is conducting business in obvious violation of the law.

We must emphasize a very important aspect of the preceding. The above-described approach to licensing returns the ultimate control over the regulation of commercial cannabis activity with regard to issues relating to land use and public health and safety to local jurisdictions where it belongs.

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Critical Changes – California’s cannabis regulatory agencies have failed miserably.

Every resident of California who bothers thinking about the topic recognizes this failure.

Every Californian from Governor Newsom to the small Humboldt County grower who gave up recognizes how badly these agencies have failed.

[See California government report finds regulators are unable to fully oversee the state’s marijuana market ] We will separately address this report.

Proposition 64 was an ill-conceived, poorly-drafted amendment to California’s Constitution. The black cloud of Proposition 64 has one serious silver lining. Proposition 64 preserved Proposition 215. [ Keeping Proposition 215’s Promise ]

Proposition 64 spawned the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). [See MAUCRSA] In MAUCRSA the Legislature cobbled together a regulatory structure for commercial cannabis activity based on the ill-conceived mandate of Proposition 64. MAUCRSA created a Bureau of Cannabis Control (“BCC”) within the California Department of Consumer Affairs as the lead agency for the regulation of medical and adult-use cannabis industry. Implementation of cannabis regulation through MAUCRSA under the leadership of BCC has brought chaos rather than regulation. [See Chaos Will Continue! and California Chaos Causes ]

While it would be wonderful to have the luxury of starting over again, rebooting is not an option for California. The past cannot be changed. Those who are interested in addressing the chaos in the regulation of California’s cannabis industry must go forward from where we are today. We are writing this article for that reason.

We believe BCC can still establish an effective regulatory structure in California within the framework created by MAUCRSA through an exercise of foresight, judgment and forceful action. The following are five major changes BCC must cause to be made in the regulation of commercial cannabis activity in order to end the chaos and establish order in the industry. We consider all five of these changes to be critical even though we have ordered this list based on subjective opinions regarding relative importance.

Many will have a longer list of changes. We believe many items others may identify are best-considered details in the implementation of the five critical changes we have identified. Of course, we are fallible. We welcome the addition to our list of a sixth or a seventh critical change that BCC must immediately cause to be made.

“All California cannabis businesses must be immediately issued a California license upon completion of all local requirements for engagement in commercial cannabis activity”.

BCC failed to delegate down to local jurisdictions the details of the implementation of MAUCRSA. Issues relating to land use and public health and safety are inherent issues in which local jurisdictions have the determinative interest. MAUCRSA established a statewide regulatory system for cannabis. The proper role of BCC, and all of its subordinate agencies was to educate, guide, assist, and facilitate the implementation of cannabis regulation consistent with state law under the jurisdiction and control of, and with deference to, local governmental agencies. Proposition 64 mandated a two-tier system.  An effective two-tier regulatory system required guidance and assistance at the state-level for uniform state-wide cannabis regulation with complete deference to local requirements.

The critical issues of regulation mandated deference local jurisdictions to make policy determinations within the requirements of state law.   This combination required BCC and its subordinate agencies to provide guidance for the creation of uniform state-wide regulation under local control with respect to land use and public health and safety issues.

“Commerce a serious effort in coordination with local jurisdictions to pressure underground commercial cannabis businesses into withdrawing from business at the earliest possible time”.

Exercises such as the eradication in Anza Valley last month should never occur. Authorities seized 70 tons of pot worth $190 million. Then, they buried it at Beaumont landfill   California’s regulatory agencies, in coordination with local law enforcement, must discourage unlicensed commercial cannabis activity at the earliest possible date. Unlicensed commercial cannabis activity must not be allowed to continue for months, even years before action is taken. Conflicts exist between the interests of the State and the interests of local jurisdictions with respect to these issues. Coordination with local interests presents a difficult problem for BCC, but coordination of local interests with state-wide interests is critical to success in significantly reducing the underground industry.

The California Department of Tax and Fee Administration (“CDTFA”) can be invaluable to BCC in this regard. Nothing will cast a greater cloud over unlicensed commercial cannabis activity than a formal notice from CDTFA that it has noticed business is being conducted that appears to owe tax returns and very likely taxes. Such notice should include references to civil and criminal tax penalties as well as information on how easy it for a locally licensed cannabis business to secure a state license.

“Require CDTFA to overhaul its systems and processes for the collection, reporting, and remission of the two cannabis taxes established by Proposition 64, Cannabis Cultivation Tax (“CCT”) and Cannabis Excise Tax (“CET”), to create effective and readily verified procedures for the administration of these two taxes.”

We have written multiple articles on the extent to which CDTFA is responsible for the chaos in the regulation of California’s cannabis industry. [tax collection and reporting posts[ CDTFA through the Board of Equalization (“BOE”) and the Franchise Tax Board (“FTB”) is more efficient at collecting taxes than the Internal Revenue Service (“IRS”). MAUCRSA delegated responsibility for the administration of CCT and CET to CDTFA. CDTFA botched this task. CDTFA failed to recognize some subtle differences between CCT and CET, and all other taxes administered by CDTFA.

CDTFA has all of the administrative tools to correct the errors that it has made in the administration of CCT and CET. In this regard, it is of critical importance that CDTFA ties the administration of CCT and CET to Sales Tax reporting in order to facilitate electronic analysis. CDTFA could have made a tremendous contribution to the transition of California into a regulated cannabis industry.

Instead, CDTFA has contributed more than its fair share to the chaos. We could argue that CDTFA is more responsible for the chaos than any other single agency. However, we believe that honor falls to CalCannabis.

“Recognize and acknowledge the differences between adult-use cannabis under Proposition 64 and medical cannabis under Proposition 215”.

Proposition 64 [See Implementing Proposition 64- Cannabis Policy in California ] was to a substantial degree driven by the greed of those who saw the legalization of cannabis as an opportunity to make money as well as the greed of governmental agencies that saw legalization cannabis as an easy source of tax revenue. The forces that made California a leader in the legalization of medical cannabis over 20 years ago have faded into the background but medical cannabis will arise again from the ashes like a Phoenix.

There are still some involved in the industry who believe cannabis should be readily available as medicine – even as a self-prescribed medicine – but not available as a drug merely because the consumer has lived for 21 years. Medical cannabis in California will become significant once again as marketplace forces make the industry more competitive, and cultivators and consumers realize the savings that can be achieved in moving medical cannabis from cultivators to patients.

“Establish a rational regulatory pathway for the licensing of Cannabis Cooperative Associations (“CCAs”) upon organization such entities in order to provide small cannabis cultivators with a pathway to take advantage of the benefits the Legislature granted to them in MAUCRSA”.

BCC and CalCannabis completely missed the boat in connection with CCAs. CCAs were created by the Legislature to help small cannabis cultivators survive in a regulated industry. Neither BCC nor CalCannabis understood the enabling legislation for CCAs.

The legislation that enabled CCAs has not been utilized. Many small growers have retired or remained underground. BCC is ultimately responsible as the lead regulatory agency. CalCannabis is the immediately responsible agency. It was tasked with administering the portions of MAUCRSA relating to the cultivation of cannabis. A CCA is a collective of cultivators. CalCannabis’ errors relating to CCAs, however, pale in comparison to the fiasco of CalCannabis’ licensing of cultivators.

BCC was given the “power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity” in MAUCRSA. BCC has not exercised the foresight and judgment required to carry out this mandate and to lead California into a regulated industry. Effective and forceful leadership from BCC is long over-due.

The preceding is our best summary of the five critical changes that must be made in order for California to successfully transition into a regulated cannabis industry. We welcome additions, elaborations, explanations, and even criticism.

If your mother told you life would be easy, she lied.

As our readers are aware, we look at developments in California’s cannabis industry differently than most. AB 97 and SB 97 were signed into law by Governor Newsom on July 1^st. These Bills address expiring provisional licenses and add a new tool for law enforcement to use against unlawful cannabis activities. We applaud the Legislature and the Governor for trying. However, these Bills merely assure that the chaos will continue. These Bills address none of the causes of the chaos in California’s cannabis industry.

As we have previously described, CalCannabis’ actions are some of the principal causes of the chaos. See Carrot and Stick! and California Chaos Causes. CalCannabis is also a major beneficiary of AB 97 and SB 97. These Bills give CalCannabis time to clean-up the mess it has created with the licensing of cannabis cultivation. Unfortunately, CalCannabis is likely to use this additional time to wreak more havoc unless the Bureau of Cannabis Control (“BCC”) exercises control over CalCannabis.

How did CalCannabis go astray? This question is easy. CalCannabis was tasked with the licensing of cultivators in the Medical and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”). CalCannabis decided it should do more.

CalCannabis took upon itself the task of regulating cannabis cultivation at the state-level. CalCannabis usurped the authority of BCC. BCC is expressly tasked in MAUCRSA with “the power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity . . . .” [Business and Professions Code (“B&P”) §26010.5(d)]

CalCannabis was not tasked with the regulation of cannabis cultivation. CalCannabis was assigned two tasks in MAUCRSA. CalCannabis was assigned the task of administering the provisions of MAUCRSA “related to and associated with the cultivation of cannabis . . . .” in the first sentence of B&P §26012(a)(2). CalCannabis was assigned the task of licensing cultivators in the second sentence of §26012(a)(2). Nothing in MAUCRSA grants CalCannabis authority to regulate cannabis cultivation or any other commercial cannabis activity.

CalCannabis usurped BCC’s authority. BCC allowed CalCannabis to usurp its authority. BCC abdicated its “power, duty” and “responsibility” under MAUCRSA to regulate commercial cannabis activity. BCC was derelict in the performance of its responsibilities in allowing CalCannabis to usurp its authority and to create chaos in the licensing of cannabis cultivation.

CalCannabis made licensing a difficult, time-consuming and expensive process instead of a simple and easy process. CalCannabis made the licensing of existing cultivators especially onerous. Such licensing should have been the quickest and easiest. The consequences of the course of action taken by CalCannabis were inevitable. The chaos created by CalCannabis was predicted by all except the most conceited thinkers.

CalCannabis is a governmental agency. Governmental agencies are established to grow and prosper. Growth for a governmental agency means finding more matters to administer and more details to address. An agency with more demands on its resources needs a bigger budget. A bigger budget, of course, fertilizes further growth. The growth of a governmental agency will continue until oversight forces the agency to focus on its objectives instead of its processes.

CalCannabis was assigned the task of licensing cannabis cultivation. CalCannabis should have issued a license to every cultivator with local approval long ago.

BCC is the lead agency for the regulation of cannabis in California. BCC is responsible for the mess CalCannabis created. BCC allowed CalCannabis to run amuck. The mess that CalCannabis created is BCC’s mess to clean-up. The open question that will be answered by the passage of time is whether BCC will be able to clean-up the mess CalCannabis has created. AB 97 and SB 97 provide time to clean-up this mess, but the clean-up requires foresight and judgment. Neither CalCannabis nor BCC have as yet displayed substantial foresight or judgment in connection with the licensing of cannabis cultivation.

Is it reasonable for the Legislature to anticipate BCC will be able to clean-up a mess that the agency failed to prevent from being created? This question reminds me of a rhetorical question an early mentor regularly asked me, “Why is there always enough time to correct an error, but never enough time to prevent the error from being made?”

Let’s look for a moment at the mess instead of the cause of this mess. What does it mean to extend provisional licenses and to allow the renewal of extensions as provided in SB 97 and AB 97? We started over a year ago with applications and temporary licenses. The arrangement morphed into provisional licenses. Provisional licenses can now be extended and these license extensions can be renewed.

Cultivation licenses are annually renewable licenses in which a licensee acquires no property rights. What does it mean to extend and renew provisional licenses that were issued because CalCannabis failed to efficiently issue annually renewable licenses? CalCannabis has already resurrected Milo Minderbinder and Catch-22 in the agency’s licensing of cannabis cultivators. The Legislature has either extended the insanity or given BCC the time necessary to clean-up the mess with AB 97 and SB 97.

The creation of an easy path for cannabis cultivators to legally grow solves only one problem. BCC must also make certain it remains worthwhile for cultivators to legally grow. Worthwhile for cultivators means profitable. BCC must make it reasonably easy for licensed growers to be profitable. An additional law enforcement tool may discourage unlicensed cultivation, but it will not aid in making licensed cultivation profitable.

California will always have a substantial underground cannabis industry. [See Reasonable Rules? ] California should consider its regulation of cannabis is successful when a substantial majority of retail commercial cannabis sales are made through reporting retailers. California does not appear close to achieving such a goal. [See CalCannabis Licensing Debacle?] Both underground cultivation and legal cultivation are expanding at the present date. Both will continue to expand as long as both are profitable.

MAUCRSA created cannabis distributors as a choke-point to control cannabis distribution and to facilitate the collection of Cannabis Cultivation Tax (“CCT”) and Cannabis Excise Tax (“CET”). The California Department of Tax and Fee Administration (“CDTFA”) has discovered the great chasm between hoping something will be so and making something so. Distributors are largely responsible for the black holes into which CCT and CET disappearing.

We have written multiple articles regarding the actions CDTFA must take to improve CCT and CET collection. See [Key to Success for California Cannabis Businesses – Managing Tax Liabilities] and [ It’s the Math]. We communicate regularly with CDTFA. We will continue to do so. Taxes are part of the cost of doing business in the legal market. Prudent business management includes planning for the accurate reporting and payment of taxes. Taxes cause pain when the tax liability comes as a surprise. We specialize in making certain our clients are never subjected to such surprises.

Distributors have proved a barrier to the licensing of cannabis cultivation in addition to being a cause of tax collection slippage. The distributor barrier to the licensing of cultivation has created a dilemma for BCC and CalCannabis. Improved CCT and CET collection by CDTFA will contribute to solving this dilemma, but only slightly. Unlicensed cannabis cultivation is also untaxed cultivation. Avoidance of the payment of taxes is a significant incentive for unlicensed cultivation. The profits that distributors take out of the movement of cannabis from cultivators to consumers increase the disincentive to being a legal grower.

Distributors are using their choke-point control over the flow of cannabis to squeeze greater profits out of licensed growers. The use of choke-point control by distributors to enhance their profits weighs more heavily on smaller growers. Not surprisingly distributors even engage in predatory business practices. The difficulty of operating profitably as a licensed grower because of the choke-point control of distributors has created the dilemma facing BCC and CalCannabis. The more successful distributors are in their operations, the more difficult it becomes to convince independent cultivators to be licensed.

Grower ownership of a vertically integrated cannabis business structure shifts financial power back to the owner-growers. Some growers are trying to move in this direction. Distributors are aware of the financial advantages of integrated business relationships. Most distributors are moving in this direction.

MAUCRSA provides an elegant solution for growers that has not been widely utilized. A vertically integrated cannabis business structure owned by growers through a Cannabis Cooperative Association is financially more efficient than any other integrated cannabis business structure.

We will write more about the use of Cannabis Cooperative Associations on another occasion.

We were prompted to write this article by the juxtaposition of two articles republished by Cannabis Business Executive in its July 4^th Edition. The title of the first article, The Top 5 Most Dangerous Cannabis Contracts in California, caught our eye. We were intrigued by the title. What is a “dangerous” contract?

Dangerous is not an adjective we would use to describe a contract. We regularly describe contracts as ill-conceived or poorly drafted. Such contracts are “dangerous” for the parties. Such contracts expose the parties to financial loss. Even a one-sided contract must be well-conceived and carefully drafted in order to minimize the risk of loss because one party fails to perform.

We will come back to the list of the five most dangerous cannabis contracts. First, we want to briefly comment on What’s a Cannabis Lawyer? The juxtaposition of this article with the above article was surprising. It seems to us the answer to the question “What’s a Cannabis Lawyer?” is “See above.” Isn’t a lawyer who can identify the five most dangerous cannabis contracts a cannabis lawyer?

The title to the second article, like the title to the first article, was eye-catching but misleading. The title “What’s a Cannabis Lawyer?” is a misleading presentation of an issue that plagues California’s cannabis industry. The opening sentence of the article “When compiling the new cannabis law chapter this year, one question loomed largest; what does it mean to be a cannabis lawyer or law firm, and why should cannabis company executives need one?” explains the misleading title.

Asking a single question in two different forms reflects an unjustified conceit. This conceit arises from the idea there is something “special” about cannabis. What is special about a cannabis lawyer? Nothing. What is special about a cannabis business executive? Nothing. Cannabis is not special. Cannabis is an agricultural product with a boatload of historical baggage from marijuana’s place in the War on Drugs.

A business executive involved in the cannabis industry must first ask “Am I qualified to decide what advice and assistance I need in connection with a contractual relationship?” When the first question can be answered with a qualified affirmative, the business executive must then ask, “Who can provide me with the advice and assistance I need in connection with the establishment of an on-going business relationship, and how can I be confident I can rely on the legal advice and assistance I receive?” A business executive involved in any industry should always ask the same questions.

Consider the article “The Top 5 Most Dangerous Cannabis Contracts in California” a five-question pop-quiz. As a business executive with a substantial financial interest in the performance of the parties to each of these types of contracts, what skill and experience should a lawyer have who represents my interests with respect to this type of contract? Does my lawyer have the required skill and experience?

The question business executives involved in California’s cannabis industry should ask with greater frequency is, “Do I know enough about the issues involved in a matter to judge the legal assistance I need?” We have constantly marvel at how many business executives involved in cannabis rely on lawyers whose skill and experience are based in criminal law. Avoiding jail time is no longer a primary concern for most of the individuals involved in California’s cannabis industry.

Making money appears to be the primary concern of most business executives involved in the cannabis industry. Why would the advice of an experienced criminal attorney help you make more money? Experience in commercial transactions and in the negotiation and drafting of business agreements seem far more beneficial. Almost one-half of California dollars spent on cannabis by consumers represent taxes due a governmental agency. Securing quality advice relating to minimizing the tax load on a cannabis business appears important, although as we have observed, many tax advisors involved in the cannabis industry are not well-qualified. [ See Choosing Cannabis Tax Advisors.]

California will have a substantial financial interest in most cannabis business contracts as a consequence of the Cannabis Cultivation Tax (“CCT”) and the Cannabis Excise Tax (“CET”). The most straight-forward business contract is a sale of real property for cash. Every lawyer involved in sales of real estate quickly learns that a sale is not completed until escrow closes and the check clears. The closing of a sale, however, may not be the end for the parties. The parties may become embroiled in litigation. Such litigation may involve others – brokers, lenders, title insurance companies and governmental agencies. Controversies over cannabis business contracts are likely to involve claims by California.

California is also likely to have a regulatory interest in business contracts involving cannabis because all commercial cannabis activity must occur between licensees. Proposition 64 was ill-conceived and poorly-drafted [See Implementing Proposition 64” Marijuana Policy in California and Keeping Proposition 215’s Promise ] California’s regulatory landscape is rapidly evolving. [ See Background – California Cannabis Regulation and Cultivators – Taxes – Licensing Delays ] California’s cannabis regulatory agencies have proved singularly inept. [See California Chaos Causes and California Cannabis Regulation Blunders ] A transaction that is legal today may be illegal tomorrow. A contract that complies with law when executed may be against public policy when litigated.

In order to establish a contract, the parties must reach a meeting of minds. The five types of cannabis business contracts identified as most dangerous involve on-going financial relationships. The meeting of the minds that is required to establish such a contract must continue to exist in the future as the underlying premise for the contract is a meeting of minds. If the premise for a contact fails, the contract will begin to unravel. California has an interest in every contract, but it is unlikely to be a signatory. California’s interests in cannabis business contracts can never be overlooked by the parties.

We would likely identify five different types of contracts as those which should cause the greatest concern for business executives. We have a different perspective on which contracts involve the most risk. We focus on the financial repercussions of the failure of performance pursuant to contracts, including the interests of third-parties.

One of the types of contracts identified as dangerous involves slotting fees. The payment of collection of slotting fees may be a reasonable business practice or it may be criminal conduct depending on the facts and circumstances. California has placed tremendous financial power in the hands of distributors. The power given to distributors by California carries with it a tremendous level of responsibility. As we have pointed out, distributors are primarily responsible for the black holes into which some of California’s cannabis tax revenue is disappearing. [[ When California comes looking for money from a distributor, it is unlikely to care whether the distributor’s contracts are well-drafted. California will follow the money, not necessarily the contract. California did not sign the contract. It simply wants its share of the money.

If you receive tax planning or tax reporting advice from us, we provide the highest-quality advice available in California whether the tax issues relate to sales taxes, income taxes, CCT, CET or local cannabis taxes. When it comes to advisors on matters of law relating to California’s cannabis industry, we must observe it appears there are far more “experts” than there are well-qualified attorneys.

We look forward to discussing how we can assist your cannabis business.