New Laws Shaping the California Market

By Willis Jacobson
Dec 9, 2020

This is part one in a series on the California legislature. Part two discusses the issues awaiting lawmakers in 2021.

Despite the COVID-19 pandemic, the California legislature passed several new laws this year that will shape the world’s largest legal cannabis market. While the state’s industry is on track to surpass $5B in retail sales this year, up roughly 67% from 2019, it’s still plagued by illicit players and taxes that operators complain are too burdensome, among other issues.

These are among new laws passed by the state legislature in 2020 that are expected to impact the industry. Part 2 of this series discusses potential new legislation in 2021.

A tax break (sort of)

Passed in September, AB 1872 suspended the state’s ability to raise the statewide cultivation tax or the rate upon which the consumer-paid excise tax is calculated, beginning Jan. 1, 2021. 

  • Industry operators endorsed the bill, many arguing that the state’s tax rates benefit illicit players. 
  • The bill pauses markups to the 15% excise tax through July 2021, and prevents inflation-related increases to the cultivation tax through the end of 2021.
  • Lindsay Robinson, executive director of the California Cannabis Industry Association (CCIA), noted the tax freeze was only temporary, but told WeedWeek, “when it comes to taxes, we’ll take any relief we can get.”

Protecting cannabis terroir

Authored by state Sen. Mike McGuire (D-North Coast/North Bay), SB 67 establishes a first of its kind state cannabis appellations program, similar to that used by wine makers in California and elsewhere. It’s designed to enable growers to market unique strains and flavors, among other qualities, from their region. It also prevents others from claiming false origins on labeling or advertising.

  • An appellation is a geographical area, such as a region or county, from which a particular agricultural product is produced. They are commonly used to brand and promote specific regions, such as the Napa Valley American Viticultural Area (AVA).
  • To qualify for an appellation of origin, plants must be grown from the soil and under the sun in that particular region. Plants grown with artificial lights do not qualify, meaning most indoor operations are excluded.
  • The law was hailed as a win for Northern California growers, such as those in the famed Emerald Triangle, in particular. They can now legitimately differentiate their products by terroir within the market.
  • “It will keep California cannabis unique and recognize the heritage,” said Max Mikalonis, a legislative advocate with K Street Consulting.

A little more bank access

Cannabis banking law AB 1525 protects financial institutions that serve clients in the legal cannabis industry by ensuring the state won’t penalize them for doing so. Because the federal prohibition of cannabis remains in place, and most financial institutions are federally insured, it’s unclear how much of an impact the bill will have on the state marketplace. Some have suggested it is mostly symbolic, given that banks could still face federal prosecution.

  • The bill also aims to help financial institutions comply with federal reporting requirements by streamlining some processes. Under the status quo, banks must file federal reports that can be overly costly or burdensome, which effectively discourages them from working with cannabis clients. 
  • The law, set to go into effect on Jan. 1, 2021, also creates a system for state agencies to share regulatory and financial information with banks for the purpose of establishing accounts. (Companies can opt out of the program.)
  • The law got mixed reviews from industry insiders. Some industry groups, like the CCIA and the Southern California Coalition, supported the bill and suggested it would help improve banking access. Others, like the United Cannabis Business Association, opposed it, arguing that it gives local governments and public agencies too much access to sensitive information.

Testing access for cops

SB 1244 authorizes testing laboratories to receive and test cannabis samples from state and local law enforcement and regulatory agencies. It aims to help local agencies crack down on illicit operators by improving the efficiency of criminal investigations.

  • Previously, law enforcement and regulatory agencies used crime labs for evidence-testing purposes, but crime labs are not properly equipped, according to the L.A. City Attorney’s Office, which helped craft the bill.
  • The bill’s sponsors noted that the L.A. Police Department’s forensic science division was incapable, as of this summer, of determining the amount of THC present in a substance. This is necessary to prove that a substance is cannabis. The division is also unable to test for contaminants in cannabis samples. 
  • The bill allows, but does not require, testing laboratories to accept and test samples from law enforcement.
  • The bill was supported by several industry associations and law enforcement groups since it aims to “provide an important deterrent” to people selling illicit and/or untested cannabis by “putting [them] on notice that prosecutors have an efficient means to test … for chemical profile and contaminants,” according to the L.A. City Attorney’s Office.