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The Santa Barbara County Grand Jury issued its 2019-2020 Final Report on June 30, 2020. The last section of this report is devoted to the County’s actions relating to the cannabis industry. This last section of the Report is a scathing indictment of the manner in which greed for money and power influenced the governance of Santa Barbara County in its adoption of ordinances relating to cannabis.

The following is an introductory summary of the Report.

“The action taken by the Santa Barbara County Board of Supervisors to certify the development of a robust cannabis industry as the primary objective of the cannabis ordinances has altered the quality of life in Santa Barbara County, perhaps forever.

 “The fulfillment of that objective dictated the actions taken by the Board from the excessive allowance of licenses and acreage, creation of an unverified affidavit system, ignoring widespread odor complaints, not acknowledging the conflict between cannabis cultivation and traditional agriculture, to rejecting the environmentally superior alternatives of limited cannabis development.

 “Instead of a balanced approach carefully evaluating how the cannabis industry would be compatible, both as to amount of acreage and location, the Board simply opened the floodgates. These ordinances must be amended.”

This is the report of a civil grand jury. It is clear, however, that some of the matters discussed in this 26-page Report could well be the subject matter of a criminal grand jury investigation if these same matters were viewed a little differently. In fact, some of the matters described in this Report may well be under consideration by a criminal grand jury.

We are not writing about this Report because we have any particular interest in Santa Barbara County, or because some of the activities described in the Report may be criminal. We are writing about this Report because this Report should be mandatory reading for every member of every Board of Supervisors, City Council, Planning Commission, and Administrative Office that is involved in the considerations of that member’s governed community relating to the involvement of the community with the cannabis industry. This Report should also be mandatory reading for every California legislator and for every executive-level Administrator in any Administrative Department or Agency that has significant involvement with the cannabis industry.

California legalized medical cannabis in 1996 in Proposition 215. California legalized adult-use cannabis almost 20 years later in Proposition 64 – an initiative amendment to the California Constitution. Proposition 64 was ill-conceived and poorly drafted. See Keeping Proposition 215’s Promise. The California Legislature compounded the problems created by Proposition 64 with its attempt to impose regulation and taxation on a well-established industry by force of will. See, See Implementing Proposition 64. The most grievous error of the Legislature, however, is likely its creation of an administrative agency structure filled with intelligent and skilled administrators who were wholly lacking in an understanding of the existing industry as well as in the vision required to guide the conversion of the existing underground industry into a regulated industry. See Background California Cannabis Regulation.

The foundation for the chaos created by the people of California in Proposition 64 and the Legislature was passed on to the Cities and Counties of California much like a dangerous virus. Every City and County received some measure of encouragement, or pressure, from advocates, promoters, advisers, consultants, experts, and voters as well as a host of opportunists. Each had an opinion. Each had an agenda.

None of these individuals had a comprehensive and workable plan for how a particular locality could best fit into California’s regulated cannabis industry. The Legislature failed to design a comprehensive and workable plan for California’s regulated cannabis industry let alone explain how the well-established underground cannabis industry would transition into a regulated industry. As a consequence, most California Cities and Counties have some local version of the chaos that prevails throughout California in its cannabis industry.

Santa Barbara County is different from all other Counties. No other County is likely to have made the same errors as Santa Barbara. Most Cities and Counties, however, have succumbed to a greater or lesser degree to the encouragement, or pressure, that led Santa Barbara County to error so grievously. We recommend those individuals we describe above at least consider those paragraphs of the closing of the Report that follows and how the thoughts of the Santa Barbara County Grand Jury may apply in the locality with which they are involved.

“A more sobering realization for the Jury was that the governance in this matter took the form of some Supervisors aggressively pushing through their own agendas while other Supervisors meekly followed or resigned themselves to the inevitable.

 “Some senior staff in the office of the Santa Barbara County Chief Executive Office and the Santa Barbara County Planning and Development Department became cannabis advocates, losing their objectivity to the point of interfering in the responsibilities of independent agencies and elected officials.”

  “The Board of Supervisors rushed through the cannabis ordinances, ignoring the Santa Barbara County Planning Commission and staff recommendations on verification of applicants claiming eligibility to grow cannabis, to buffer distances for odor, and to not establishing cannabis as a compatible use that would allow for an analysis of compatibility with traditional agriculture. The actions of the Board resulted in the picking of winners and losers.

 “The Board of Supervisors used the mechanism of an Ad Hoc Sub Committee to craft the cannabis ordinances out of public view. These ordinances are now the cautionary tale for other counties in the State of California on what not to do.

 “The Ralph M. Brown Act codified as California Government Code 54950 et seq., declares as follows: 

‘In enacting this chapter, the Legislature finds and declares that the public commissions, boards, and councils and the other public agencies in this State exist to aid in the conduct of the people’s business. It is the intent of the law that their actions be taken openly and that their deliberations be conducted openly.’

The people of this state do not yield their sovereignty to the agencies which serve them. The people in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know. The people insist on remaining informed so that they may retain control over the instruments they have created.’

“The Jury believes the Board of Supervisors, in their hubris, failed the people of Santa Barbara County. Now they must amend the cannabis ordinances to regain the people’s trust.” [Bold added.]

All of the tools exist under the existing laws of the State of California to create a legal cannabis industry that encompasses both medical and adult-use cannabis in which all businesses are in complete compliance with all applicable tax and regulatory responsibilities. The State of California, working with the purported leaders of the cannabis industry, has forcefully demonstrated that it does not know how to produce such a result. This result, if it is to be achieved, will be produced by the thoughtful efforts of the governance of California’s Cities and Counties.

The lesson all local leaders must take from Santa Barbara County is that the decisions each locality makes relating to cannabis must be based on a comprehensive understanding of the interests of the entire community with respect to California’s cannabis industry. Every resident of California is impacted to some degree by California’s cannabis industry. As a consequence, every resident has some interest in California’s cannabis industry. Responsible governance of each locality demands informed and thoughtful compromises relating to the best interests of the entire community in all things, including cannabis.

Cannabis is just another agricultural commodity. As California agricultural commodities go, it is not particularly important from a financial standpoint. As a consequence of greed, this agricultural commodity has received far more attention in recent years than can be justified. For political reasons, this agricultural commodity has long caused injuries to far more California residents than were justified. The legalization of adult-use cannabis in California has raised the financial stakes and imposed a far greater burden on knowledgeable and thoughtful local governance.

The story told in the Report illustrates how difficult it is for local governance to rise to the occasion in view lack of adequate support and guidance from the State. In this regard, some may see a parallel with the States and national leadership in connection with the COVID-19 crisis.

Why is California’s cannabis industry in a state of chaos 2+ years after adult-use sales of cannabis were legalized?  Why did California fail so badly in transforming a stable, lightly-regulated medical cannabis industry into a heavily regulated medical and adult-use cannabis industry?  Why is California’s underground cannabis industry booming while its legal cannabis industry is struggling?  Why do so many self-anointed cannabis experts distribute so much advice of so little value?  Why have the Equity Programs that were expressly created to assist and subsidize economically disadvantaged individuals with start-up cannabis businesses had so little success?

There are hundreds of smart advisors in California’s cannabis industry who can, and will, provide a variety of good answers to each of the preceding questions.  In some instances, many advisors are likely to agree on the best answer to each of these questions.  With respect to some of the preceding questions, we suspect California’s recognized cannabis advisors will have a variety of answers.  Most of these answers, but certainly not all, will be somewhat accurate answers.  Many of these answers will be useful, or helpful.  All will be wrong!

Before we explain why the answers California’s cannabis advisors to our introductory questions will almost universally be wrong, we must address a tangential issue.

This article will solely focus on California’s cannabis industry.  The comments in this article, however, are to some significant degree applicable in every State that has legalized cannabis in some form.  Our comments relating to California’s cannabis industry apply in other States for the same reason the answers of California’s cannabis advisors to our introductory questions will almost always be wrong.

California’s cannabis industry, as an industry that moves an agricultural commodity from grower to consumer, is unique.  The cannabis industry in every other state that has legalized cannabis is unique in the same sense.  In any state that has legalized cannabis, there is no other industry in that State that moves an agricultural commodity from farmer to consumer that is close to being comparable to the cannabis industry of that State.  The cannabis industry of every State that has legalized cannabis is also different in some significant respects from the cannabis industry in every other State.

Please consider how many times have you heard an advisor with respect to some aspect of the conduct of business in the cannabis industry preface an opinion relating to a business issue involving cannabis with a statement, “The opinion that follows must be adjusted for the laws and regulations of the State in which you are operating.”  We submit that such a disclaimer is not made with sufficient frequency if at all.

Federal laws impact the cannabis industry in every State.  Federal law may preempt state law, but in most instances, federal law will not preempt State law.  Every state that legalizes cannabis in some form establishes a body of law specifically applicable to the State’s cannabis industry.  A State’s cannabis businesses will also be subject to the general business laws of the particular State.  The general business laws may be preempted by those laws enacted specifically for the State’s cannabis industry, but in most instances, there will be no preemption.

California’s cannabis industry is not unique because cannabis remains federally illegal as a commodity.  California’s cannabis industry is not unique because trafficking in cannabis is subject to the tax penalty of the Internal Revenue Code (“IRC”) §280E.  Both of these issues are frequently discussed as making the cannabis industry in California unique.  These aspects of the conduct of business in the cannabis industry apply in every state that has legalized cannabis.

California’s cannabis industry moves an agricultural commodity from a cultivator to a consumer.  This industry is at the same time both the simplest form of this type of industry and the most complex form of this type of industry.  In its simplest form, a farmer grows this commodity and sell part of the cannabis crop to her next-door neighbor.  Compare growing cannabis to growing tomatoes.  In the simplest of circumstances, there is no substantive difference between the movement of tomatoes as a commodity from grower to consumer and the movement of cannabis.

Now consider the complexity of a commercial tomato industry that moves millions of tons of tomatoes each year from farmers to consumers.  The conduct of business in California’s cannabis industry is subject to all of the complexities that apply to the conduct of business in California’s tomato industry.  However, California added laws and regulations to most aspects of the conduct of business in the cannabis industry that do not apply to tomatoes or any other commodity-based industry.  Every aspect of the movement of cannabis as a commodity from cultivator to consumer in California is subject to cannabis-specific laws and regulations in addition to those laws and regulations that apply to the movement of all commodities from growers to consumers.

The cannabis industry in every other state that has legalized cannabis is unique in that State from every other commodity-based industry for the same reason that  California’s cannabis industry is unique as a commodity-based industry.  In every state that has legalized cannabis, the movement of cannabis as a commodity from cultivator to consumer will be subject to cannabis-specific laws in addition to those laws that apply to the movement of all commodities.  It is the cannabis-specific laws and regulations that make a State’s cannabis industry unique as a commodity-based industry in the State.

Not only does every State that has legalized cannabis have a unique commodity-based industry, but the cannabis industry of every State will also differ to some extent from the cannabis industry in every other State.  Even if one State adopts a legal cannabis regime that is identical to another State, the cannabis industries in these two States will be different to some degree.  Invariably, there will be some differences in the general laws of each State when you take into account all of the general bodies of law that apply to the conduct of business in a commodity-based industry in a State.  Those bodies of general law applicable to the conduct of business that come immediately to mind include tax law; commercial law; real estate law; securities law; corporate law; transportation law; insurance law government law; and administrative law.

As a consequence of saturation, we have ceased to be offended by articles and webinars that purport to provide solutions to cannabis business issues that are applicable in every State that has legalized cannabis.  While these presentations may provide useful guidance, the answer to any question relating to the conduct of business in a State’s cannabis industry will always involve some State-specific gloss.  In some instances, the gloss will be relatively minor.  In other instances, the best answer to a question relating to the conduct of a cannabis business in one State will be completely different from the answer to the same question with respect to a cannabis business in another State.

The conduct of business in California’s cannabis industry is a circumstance where having only a little information will very likely prove fatal for a cannabis business.  The licensing of cannabis businesses in California provides an illustration.  Hundreds of advisors have assisted thousands of individuals in California in securing cannabis business licenses – frequently at significant cost.  Many individuals successfully secured licenses.  Many did not.  Of the thousands of individuals who secured cannabis business licenses, almost none will establish a successful cannabis business.  Securing a local license for the conduct of a cannabis business is a necessary first step, but it is solely one small step among many on the path to a successful business.

Long-term success in any business function in California’s cannabis industry requires a comprehensive general understanding of the industry as well as a comprehensive understanding of the business niche the particular business fills in this industry.  Such an understanding cannot be achieved without also understanding how that same business function would be conducted in any other commodity-based industry.  Cannabis-specific laws and regulations add a gloss to the general laws and regulations that apply to the conduct of the same business function in other commodity-based industries.

California’s cannabis industry is in a state of chaos at the present time.  This state of chaos exists because so many leaders in the industry, both in the private sector and in the public sector, lack a comprehensive general understanding of this commodity-based industry.  Unfortunately, substantial amounts of money will be lost, and the hopes of many will be dashed, because so many smart people so freely opine without fully understanding the extent to which the unique aspects of California’s cannabis industry make their opinions erroneous to a greater or lesser degree.

The preceding is particularly true in connection with the management of taxes which is our area of expertise.  We have not yet examined a California cannabis business that we considered to be properly managing its tax responsibilities.  Most California cannabis businesses are throwing away money through the failure to properly manage taxes except for those California cannabis businesses that are succeeding with tax management through tax evasion.

Leading cannabis manufacturer in California, Procan Labs, announced its victory in a monumental lawsuit against the state of California. 

The Los Angeles Times reported on February 14th, 2020 that Santa Barbara County law enforcement confiscated over $2.6 million in cannabis oil as well as over $620,000 in cash from Barry Brand, a well-known local businessman, and cannabis operator. Brand is a longtime Gerbera daisy grower and shifted to cannabis. Brand is a prominent advocate in the cannabis community dedicated to helping develop marijuana policy, even hiring lawyers, lobbyists, and communication firms to support his efforts. Brand maintained his position that he was operating legally, but the District Attorney highlighted technical noncompliance problems that ignited the belief that Brand was acting criminally. 

The litigation lasted for three months, and Judge T. Anderele ruled in the state of California that criminal laws such as the state Controlled Substances Act do not apply to licensed commercial cannabis activities, such as Brand’s operation. It was also confirmed that there were no illegal cannabis oils of any kind. All substances and products found on the premises were correctly identified with METRC RFID tags and in the system prior to shipment and seizure. 

John Armstrong representing Horwitz+ Armstrong law firm was lead counsel for Eagle Bay Enterprises (d.b.a. Procan Labs). He said, “With millions of dollars at stake, licensed cannabis operators should not be at risk of losing their business because police mistake lawful cannabis operations for illegal black market activities. California established the Bureau of Cannabis Control (BCC) and empowered it to support and regulate legal cannabis activities, to the exclusion of heavy-handed law enforcement regulating such activities. This decision shows that our courts will side with the cannabis industry when provided evidence of good faith efforts to comply with state regulations. We would like to thank CREC Compliance for its assistance in verifying legal compliance by Procan. CREC’s help was invaluable in securing the eventual positive result.”

Many cannabis brands came to the defense of Procan, namely longtime distribution leader, HARDCAR. “Mark Unterbach, CEO of Procan Labs, remarked, “HARDCAR’s assistance was instrumental in assisting us maneuver through the legal roadblocks that had been placed in the way of our efforts to simply secure the return of our inventory.”

This is a big win for cannabis businesses not only in California but nationwide.