Update 1/2/2018 4:51 p.m. EST: This story was updated with new comments from Canndescent's Adrian Sedlin.
Jan. 1 was a day for the history books, as legal recreational cannabis sales officially began in California—the most populated state in the nation—under the Medical and Adult Use Cannabis Regulation and Safety Act of 2017 (MAUCRSA).
The state joins Colorado, Washington, Oregon, Alaska and Nevada in implementing legalized and regulated recreational-use cannabis sales. (While Maine and Massachusetts also voted to legalized adult-use marijuana in the November 2016 elections, neither have yet to issue cannabis business licenses and roll out retail sales. Both states are slated to launch recreational sales July 1.)
As seen in other states that have rolled out recreational sales, businesses licensed to retail cannabis saw an influx of customers. “Before dawn Monday, lines began to form outside many of San Diego’s licensed marijuana stores and soon snaked part way around buildings on the first day of recreational cannabis sales in California,” reported the San Diego Union Tribune.
“By noon, Torrey Holistics in Sorrento Valley had served more than 500 people, had another 150 in line, and its shop was at capacity. Urbn Leaf had served more than 350 at its Bay Park location, and was dealing with a line nearly as long,” according to the report. “The store also was busing in customers from a bar in Pacific Beach, and was using 27 drivers to make deliveries throughout San Diego, which is currently the only part of the county where recreational cannabis can be sold.”
While certain California dispensaries became the first to legally sell cannabis to customers without patient licenses, most others were not yet licensed for retail sales.
The state’s two largest cities, San Francisco and Los Angeles, will allow adult-use sales, but no sales began Jan. 1; the cities, along with 90-percent of cities and counties throughout the state (according to Hezekiah D. Allen, executive director of the California Growers Association (CGA)—which represents cannabis cultivators statewide), have not yet established cannabis-business licensing processes.
California’s regulations left open the door to a patchwork of regulations throughout the state, as counties and municipalities can ban cannabis sales or set moratoriums temporarily preventing sales. Some counties have already voted on temporary prohibition to allow more time to develop local policies.
“There are some great people working very hard to get this done in LA and San Francisco,” Allen told Cannabis Business Times. “I’m excited to see what they come up with. I’m less concerned with when they get it done and more concerned with how they get it done,” he added. “I’m paying attention to things like barriers of entry—are there opportunities for cottage, small and mid-sized businesses? Frankly, for the 90 percent, and I represent a lot of those folks, I’m somewhere between frustrated and angry. I encourage folks celebrating to remember that we have a lot of work to do. We can’t leave our community behind. California can do better.”
Statewide, the official start of legalization is bittersweet for some existing cannabis cultivators and retailers; in addition to facing new local bans, ongoing debates have surrounded protecting the state’s tens of thousands of existing small cannabis farms and decades-old dispensaries.
"As of Jan 2, there are roughly 150 stores with medical state licenses and 100 stores licensed for adult use. When the clock struck midnight on December 31, we shattered the previous distribution system and pushed some 3,500 gray market dispensaries into the black market," said Canndescent CEO Adrian Sedlin. "The story of prohibition ending, ironically, is one of decreased access to product in the short term. With the new regulations, the state shattered the vast grey market, and it's going to take a long time for the regulated market to scale to meet previous demand let alone new demand."
A popular provision proposed by the state that protected small-scale cultivators by limiting the number of “small” licenses (farms with less than 1 acre of canopy) to one per applicant also was removed in the final version of the regulations. This means well-funded businesses—mostly those with corporate backing—can circumvent the canopy cap and apply for multiple 1-acre licenses, boosting their canopy allowance to whatever their funding allows.
Potentially high sales taxes, plus excise taxes, in addition to local taxes many municipalities are implementing, also have been enough to prompt many businesses that operated in California’s previously unregulated medical market to shut their doors or continue to operate illegally.
“Today is a day of contrast,” noted Allen in a Jan. 1 email to CGA constituents.
“The real milestone of Prop. 64 was getting people out of jail, and cleaning up people’s records. Prop. 64 was great criminal justice reform legislation,” Allen told Cannabis Business Times. However, he added, “When it comes to commercial activity it’s a mess. Trying to do too much too fast, and most people got left behind. I’m moderately excited; I know some amazing business owners that have worked really hard to open their doors on Jan. 1. And, I know that for a lot of California cannabis business owners, things aren’t getting better.”
Allen said he had “pretty low expectations” for what he called a “mediocre regulatory bill.”
“It’s a modest milestone—one that compels us to redouble our efforts for continued reform,” he said. “California might have passed Prop. 64, but we didn’t get it right.”
Regarding the approximately four dozen retail stores that were reportedly open statewide on Jan. 1, Allen said, “It’s disappointing … especially … that so much focus is on bigger grows, when we have so few retail options. Obviously, we need more. A lot more. And we should all stay focused on that goal. It is going to take collaboration and commitment to [open] the market up.”
A number of cultivators and industry experts Cannabis Business Times’ staff has spoken with voiced concern that with many cultivators and even retailers closing up (legal) shop, it will leave the door open to an expanded black market that will compete with legal sales, hindering the growth of the legal market, related tax revenue and other benefits.
How We Got Here
California was the first state to legalize medical marijuana 22 years ago.
Adult-use legalization was on the state ballot in 2010, under Proposition 19, called the Regulate, Control and Tax Cannabis Act of 2010; it was defeated by a margin of 13 percent (56.5 percent to 43.5 percent), according to CBS News. It wasn’t until November 2016 that California voters approved the legalization and regulation of recreational cannabis cultivation, retail sales and use proposed by Proposition 64, the Adult Use of Marijuana Act.
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“Temporary licenses issued by the Bureau of Cannabis Control for retailers, distributors, microbusinesses, testing laboratories and event organizers are now in effect and businesses can begin operating in California’s newly-legal commercial cannabis market,” according to a press release issued by California’s Bureau of Cannabis Control (BCC). “More than 400 Cannabis operators, from Shasta Lake to the City of San Diego, now hold state licenses in the largest cannabis market in the country. … State licenses for cannabis manufacturers and cultivators have also been issued by the California Department of Public Health and the California Department of Food and Agriculture, respectively.”
These temporary licenses are only being issued to “applicants with a valid license, permit or other authorization from their local jurisdiction,” as stated on the California Department of Food and Agriculture’s CalCannabis program, which is responsible for cultivation-business licensing and oversight.
So Where Does Cannabis Law Reform Go From Here?
“The rest of California needs regulation,” said Allen. “Regional affairs must be a focus for everyone. Access to regulated cannabis in every California city and county is the best way to curb unregulated sales. We need permits in every city and county.”
Allen also noted that tax reform should be top of mind. “The state legislature did a much better job on taxes than Prop. 64. The excise tax rate was lower (than in Prop. 64)—10 percent instead of 15—and the cultivation tax was tiered so smaller producers paid lower tax rates,” he said. “The same way that a tiered tax has help microbrews flourish, we championed tiered tax rates to help craft growers compete.”
Since the initial 15-percent was passed by voters, however, any tax reform (i.e., approving the legislature’s proposed 10-percent rate) would require another public vote. “The most streamlined way would be for the legislature to put the tax on the ballot—which means it could be voted on as soon as November,” explained Allen. “Likely? Probably not. But, if enough people call their representatives in Sacramento and tell them they want lower tax rates and incentives for family farms it just might happen.”
While these issues are significant, Allen said he is also excited “about following up on a few ongoing priorities. Appellations. Organics. In 2018 we are going to focus a lot of attention on events, direct marketing and responsible consumption.”
The Economic View
California’s economy is the sixth-largest in the world, and the revenue of the state’s legal cannabis industry is expected to be quite large by most standards, especially for a fledgling market; it’s projected to “reach $2.8 billion in 2017, and $6.6 billion by 2025, with a compound annual growth rate (CAGR) of 12 percent over the next eight years,” wrote Andrew Martinez, senior analyst with cannabis analyst firm New Frontier Data, in a blog post.
The firm projects that the legal cannabis marketplace nationwide will reach $24.1 billion by 2025, with a compound annual growth rate of 16 percent.
Legal cannabis sales were forecasted to reach nearly $10 billion in North America in 2017 by another cannabis analytics firm, Arcview Market Research, in partnership with BDS Analytics, representing a 33-percent increase over 2016, according to Business Insider.
Medical marijuana sales revenue in California, however, is expected to drop from an estimated $2 billion in 2016 to about $1.4 billion this year, according to a study published in 2017 by the University of California Agricultural Issues Center and reported by Fox Business.
