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On August 6^th we published an article that described the financial benefits of the use of a properly organized Cannabis Cooperative Association (“CCA”) to move cannabis as adult-use flower from cultivator to consumer. [See CCA’s Beat Underground ] On August 8^th we published an article that described the financial benefits of moving cannabis as adult-use oil through a CCA. [See CCAs Create Profits ]This article describes the additional financial benefits of moving flower from cultivator to consumer through a CCA as medical cannabis rather than as adult-use cannabis.

The spreadsheet immediately below was the starting point for our August 6^th article. This spreadsheet illustrates the division of the proceeds, including all taxes collected from consumers, of the retail sale of flower as adult-use cannabis through conventionally structured businesses. In this illustration we have assumed a sale of 250 packages of flower for $40 per 8-gram package. The $40 sale price includes the taxes collected from consumers. We have assumed a Local Cannabis Tax rate of 10.0% and a Sales Tax rate of 8.75%. The operating costs and profits of the dispensary, distributor and cultivator we have assumed are as stated in the spreadsheet below.

The $10,000 paid by the consumers for the packages of flower as adult-use cannabis through conventionally structured businesses will be divided among governmental agencies, and the dispensary, distributor and cultivator, as is reflected in the spreadsheet below.

The $10,000 paid by consumers for the flower as adult-use cannabis is divided as follows: (1) governmental agencies for taxes collected, both directly and indirectly, from consumers, 30.2%; (2) dispensary revenue, 27.6%; (3) distributor revenue, 20.4%; and (4) cultivator revenue, 21.8%.

In the spreadsheet immediately below, we have assumed the same 250 8-gram packages of flower are sold as medical cannabis to consumers at a price per package that produces the same gross revenue for the dispensary, excluding the taxes directly collected from consumers, as the sales reflected in the first spreadsheet. We have further assumed that the Local Taxes on sales of medical cannabis are 5.0% instead of 10.0%. Since medical cannabis is not subject to Sales Tax, the sale of the 250 8-gram packages for $8,827 will produce a gross revenue of $7,355 for the dispensary. The $7,355 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 packages of flower for $10,000 as adult-use cannabis.

We have included the spreadsheet immediately above to illustrate the changes in the flow of funds caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis. The sale of the 250 packages of cannabis flower as medical cannabis provides the consumers with a 11+% discount even though the gross revenue of the dispensary, distributor and cultivator remain the same.

 

The basis for both of the preceding illustrations is an assumed sale by a cultivator to a distributor of one kilogram of flower at a price slightly over $1,100 per pound including Cannabis Cultivation Tax (“CCT”). The distributor assumes the CCT. The net to the cultivator is a little over $950 per pound. We assumed the cultivator has production costs of $1,410 per kilogram for the flower. These assumptions produce a before tax profit for the cultivator of $766 per kilogram. We have assumed the distributor has additional costs of $1,278 per kilogram, and a profit of $766 per kilogram. For the dispensary we assumed additional costs of $1,226, and a profit of $1,531, per kilogram. The additional costs and profit for the dispensary are based on 60% mark-up of the wholesale cost from the distributor.

 

The division of the sale proceeds between governmental agencies and the three cannabis businesses changes when the flower is sold as medical cannabis. The sale of the flower as medical cannabis significantly reduces the taxes collected from consumers. The allocation of the sales proceeds of $8,827 is: (1) governmental agencies, 16.7%; (2) dispensary revenue, 31.2%; (3) distributor revenue, 23.1%; and (4) cultivator revenue, 29.0%.

 

The costs, profits and income taxes of the dispensary, distributor and cultivator in the two preceding spreadsheets are the same. The sole difference in the preceding spreadsheets is the reduction in the taxes collected from the consumer when the flower is sold as medical cannabis. In both of the preceding illustrations we have assumed the cultivator and distributor each have a profit before taxes that is one-half of the profit before taxes of the dispensary. We have also assumed a 40% income tax rate is applicable to each of the businesses.

In the spreadsheet below we have assumed the same 250 8-gram packages of flower move from cultivator to consumer as medical cannabis through a fully integrated CCA. We have also assumed the operating costs for the dispensary, distributor and cultivator remain the same with the additional assumption any income tax liability of the dispensary is included in its costs. We have further assumed the profit to the cultivator is doubled through the use of a CCA. We have further assumed the reductions in costs and profits at the distributor and dispensary levels from the use of a CCA are passed on to the consumers.

The shifting of the amounts to which the tax rates are applied through the use of a CCA produces dramatic savings for the consumers. We saw this result with adult-use cannabis. The savings are more dramatic when medical cannabis is sold through a fully integrated CCA. In the preceding spreadsheet a total of $6.989, including Sales Tax and Local Cannabis Tax, is paid by the consumers for the same 250 8-gram packages of flower. The sale of this flower as medical cannabis drops the price per package to the consumers from $40 to $27.95. The total of $6,989 paid by the consumers for the flower as medical cannabis through a fully integrated CCA will be divided: (1) governmental agencies for taxes collected from consumers, 22.1%; (2) dispensary revenue, 17.5%; (3) distributor revenue, 18.3%; and (4) cultivator revenue, 42.1%.

The preceding illustrates why we have been touting CCAs since before this legislation became effective. The same packages of flower that cost consumers $10,000 as adult-use cannabis can be sold to the consumers as medical cannabis through a CCA for less than $7,000. California collects all of its CCT and Cannabis Excise Tax (“CET”), and local governmental agencies collect all local cannabis taxes. Best of all, the cultivators who grow the cannabis make twice as much money. This is the reason the Legislature created CCAs.

The use of a CCA to move extracted oil from cultivator to consumer as medical cannabis produces even more dramatic results than the movement of flower as medical cannabis.   We will shortly publish an article describing the financial benefits of moving oil from cultivator to consumer through a CCA as medical cannabis.

On August 19, 2019, the Supreme Court of California issued a unanimous opinion in Union of Medical Marijuana Patients, Inc. (“UMMP”) v. City of San Diego. Except for the parties and the limited number of individuals who follow litigation involving environmental law, this case has moved through the California court system with little notice.

The real party in interest in the case is the California Coastal Commission. The City of San Diego was not particularly interested in the case even though its zoning actions relating to cannabis were the genesis for the lawsuit. The issue in this case involves the reconciliation of language in two sections of the California Environmental Quality Act (California Public Resources Code (“PRC”) §§21000 et seq. (“CEQA”)).

We decided to write a note on this case because the legal landscape relating to the interplay between CEQA and cannabis law in California has changed dramatically while this case was pending. It seemed to us an opinion by the California Supreme Court reversing a determination by San Diego relating to the impact of CEQA on the licensing of medical cannabis dispensaries must be significant for California’s cannabis industry. We were correct! The premise for writing this article was accurate. We find, however, we have far more questions than answers.

The California Supreme Court summarized the UMMP case as follows:

“In 2014, the City of San Diego (City) adopted an ordinance authorizing the establishment of medical marijuana dispensaries and regulating their location and operation. The central provisions of this ordinance amended various City zoning regulations to specify where the newly established dispensaries may be located. Because the City found that adoption of the ordinance did not constitute a project for purposes of CEQA, it did not conduct any environmental review. Petitioner Union of Medical Marijuana Patients (UMMP) challenged the City’s failure to conduct CEQA review in a petition for writ of mandate, which was denied by the trial court.”

The key word in the California Supreme Court’s explanation of the case before the Court is “project.” CEQA broadly defines “project[1]” and then relieves those who are responsible for developing a “project” from the necessity of the preparation of an Environmental Impact Report through a Negative Declaration. CEQA is an issue for California’s cannabis industry, and the significance of this case extends far beyond California’s cannabis industry, because “project” has a far broader meaning for the purposes of CEQA than the common meaning of the word.

All our readers will agree that building a coliseum or a shopping center is a project. The rehabilitation of a building may or may not be a project in the minds of most of our readers. Most of our readers would agree that whether or not the rehabilitation of a building is a project depends on the size of the building and the extent of the work required for rehabilitation. The word “project” has a far broader meaning for the purposes of CEQA than the meaning of the word in common usage, but questions relating to size, scope and impact discussed at the beginning of this paragraph remain relevant.

The adoption of ordinances and regulations by governmental agencies may fall within the definition of a “project” for the purposes of CEQA. In fact, this was the issue that caused San Diego’s adoption of changes to its zoning ordinances in 2014 to allow a limited number of medical marijuana dispensaries in certain locations to end up before the California Supreme Court. San Diego did not conduct an environmental review in connection with these zoning changes. San Diego erroneously determined that CEQA did not apply to the zoning ordinance changes that it adopted to allow for medical cannabis dispensaries.

UMMP challenged San Diego’s failure to conduct a CEQA review in connection with adoption of the zoning changes. The trial court upheld San Diego’s determination a CEQA review was not required. UMMP appealed to the Court of Appeal The Court of Appeal affirmed the decision of the trial court. UMMP appealed to the California Supreme Court. The California Supreme Court reversed the decision of the Court of Appeal, and remanded the case back to the trial court. The trial court was instructed to conduct further proceedings relating to whether an environmental review was required in connection with San Diego’s changes to its zoning ordinance based on the Court’s refinement of the meaning of “project” for the purposes of CEQA.

We need to address a tangential issue before discussing the application of this case to cannabis. The opinion in the UMMP case involves the definition of “project” for the purposes of CEQA. That the ordinances in issue related to cannabis are incidental. The question before the Court in the UMMP case was whether San Diego had erroneously concluded a CEQA review was not required in connection with changes to its zoning ordinances. Many cities in California are considering amending zoning ordinances in connection with the licensing and regulation of electric scooters. Medical cannabis dispensaries and electric scooters are equivalent for the purposes of the UMMP case.

We are writing about this case in connection with California’s cannabis industry because so much has happened in California’s cannabis industry while this case was pending. It is our understanding San Diego has amended its ordinances relating to cannabis on multiple occasions while the UMMP case was pending. Did San Diego act properly under CEQA in adopting its post-2014 zoning ordinances changes relating to cannabis? We suspect solely the attorneys for San Diego can answer that question. We doubt they have as yet even considered this question. We will boldly suggest that our comments in the balance of this article may be of some modest assistance in answering such a question.

Do the changes in the law relating to cannabis that has occurred while this case was pending render the California Supreme Court’s opinion in the UMMP case irrelevant to California’s cannabis industry? We can readily answer this question. CEQA has not changed significantly over the past five years. California’s cannabis laws have changed significantly. As a consequence, the California Supreme Court’s opinion in the UMMP case cannot be irrelevant to California’s cannabis industry. Any determinations regarding the application of the opinion in the UMMP case to California’s cannabis industry have been made far more difficult as a consequence of the changes in California’s laws relating to cannabis during the past five years.

At least three significant complications to the application of the opinion in the UMMP case as a consequence of the changes that have occurred during the past five years in California law relating to cannabis come immediately to mind.

San Diego changed its zoning ordinances to provide for the licensing of medical marijuana dispensaries. Proposition 64 legalized adult-use cannabis. Proposition 64 also preserved the rights granted to California residents under Proposition 215. The Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) adopted a combined regulatory scheme for medical and adult-use cannabis based on Proposition 64.

Is medical cannabis identical to adult-use cannabis for the purposes of CEQA? Before you attempt to answer this question, consider that medical cannabis and adult-use cannabis are the same in the hands of a cultivator for the purposes of CEQA, but the delivery of medical cannabis through a legal collective may be different from the sale of adult-use cannabis through a dispensary for the same purpose.

As is obvious from the UMMP case, CEQA applies in some instances to the actions of local governmental agencies in their adoption of ordinances and regulations. CEQA also applies to the adoption of regulations by agencies of California. The Bureau of Cannabis Control (“BCC”) avoided the preparation of an Environmental Impact Report through the adoption of a Negative Declaration.

In a very simple sense, the Negative Declaration was justified by the premise that BCC and the other cannabis regulatory agencies would quickly license California’s cannabis industry and the environmental issues would all be properly addressed at a local level. Some of the premises for BCC’s Negative Declaration have proved inaccurate. Of what value is a Negative Declaration if the legislature and the agency regularly adjust the premises?

Many of the actions of local agencies in the last five years relating to cannabis were taken in reliance on an exemption from CEQA that Proposition 64 added in Business and Professions Code (“B&P”) §26055(h). The Legislature extended this provision to July 1, 2021. This provision was originally set to expire July 1, 2019.

The first sentence of B&P §26055(h) states,

“Without limiting any other statutory exemption or categorical exemption, . . . [CEQA] does not apply to the adoption of an ordinance, rule, or regulation by a local jurisdiction that requires discretionary review and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity.”  

By its express terms, B&P §26055(h) is limited to local agency actions.

This exemption is likely far narrower than many have supposed as a consequence of its second sentence. The second sentence of B&P §26055(h) states,

 

“To qualify for this exemption, the discretionary review in any such law, ordinance, rule, or regulation shall include any applicable environmental review pursuant to . . . [CEQA].” [2]

This language appears to describe the error that San Diego made. The California Supreme Court has concluded San Diego made an erroneous decision regarding the “applicable environmental review” required in connection with the amendment of its zoning ordinances.

The UMMP case significantly expanded the opportunities for filing meritorious lawsuits. A number of California cities and counties have amended their zoning ordinances during the past five years in response to pressures from the cannabis industry. Some – perhaps many – of these actions are likely to be open to question-based on the opinion in the UMMP case.

We believe one definite conclusion can be drawn from the opinion in the UMMP case. We believe it is a certainty some members of The State Bar of California will view this opinion as a financial stimulus package. We have a myriad of additional questions. We are confident California lawyers will soon begin asking and answering many of our questions.

[Note – while this isn’t directly relevant to this article, we located a significant number of CEQA related reports and documents that are going list and link merely to provide a location to find them quickly in the future.

• California Environment Quality Act – 2016 Statute and Guidelines

CEQA Exemption Petition, Form BCC-LIC-026

CEQA Project-Specific Information, Form BCC-LIC-025

• 
  CEQA Initial Study And Proposed Negative Declaration
• CEQA Notice Of Intent Initial Study And Proposed Negative Declaration
• CEQA Initial Study and Proposed Negative Declaration – Executive Summary
• CEQA List Of Libraries Initial Study And Proposed Negative Declaration

CEQA Overview Presentation – Bureau of Cannabis Control

Finding of facts

• BCC as Lead Agency Negative Declaration Approval

[1] Sec. 21065

[2]