The Control, Regulate and Tax Adult Use of Marijuana Act of 2016 (AUMA), an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under AUMA to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities. Existing law prohibits an adult-use licensee from selling or transferring cannabis or cannabis products to a person unless the person presents documentation that reasonably appears to be a valid government-issued identification card showing he or she is 21 years of age or older. Existing law authorizes a medicinal cannabis licensee to sell or transfer cannabis or cannabis products to a person who is 18 years of age or older and who has a medicinal cannabis card or a referral from a physician or who is the primary caregiver for a person with a medicinal cannabis card or a referral from a physician. Violation of these provisions may result in a felony charge and the suspension, revocation, or probation of the commercial cannabis license and specified fines.

This bill would make technical, nonsubstantive changes to these provisions.

Date of Hearing: May 1, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 3

Author:(Cooper) – As Amended Ver:March 28, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires cannabis licensing authorities to deposit fine or penalty revenue into a newly created fund that is made available, upon appropriation, to prevent underage individuals from accessing cannabis and cannabis products.

FISCAL EFFECT:

1. Current law appears unclear on whether fine revenue is already meant to be deposited into an existing Cannabis Fines and Penalties Account. Current law does, however, provide that Cannabis Fines and Penalties Account revenue can be used to offset the costs of repayment for loans taken out to fund startup agency regulatory costs for the Bureau of Cannabis Control (Bureau) within the Department of Consumer Affairs, California Department of Food and Agriculture (CDFA) and California Department of Public Health (CDPH).

If the administration interpreted current law to mean fines are to deposited into the Cannabis Fines and Penalties Account and this bill became law, the fine revenue would be unavailable to offset the costs of loan repayment and the agencies may need to increase the application fees, license fees or both. If the administration determines current law instead requires fine revenue be deposited into the GF, diverting the revenue to the newly created Adolescent Cannabis Prevention Fund would instead be a direct GF loss and the agencies may similarly need to increase fees to repay the loan.

The loss to either the special fund or the GF is likely in the millions of dollars or more annually depending on robustness of enforcement and compliance.

1. Additional spending on adolescent cannabis prevention efforts, in an amount commensurate with revenue raised (Adolescent Cannabis Prevention Fund).

COMMENTS:

1. Purpose. This bill seeks to ensure California has a robust youth cannabis education and prevention campaign by earmarking cannabis-related fines and penalty revenue to this purpose.
2. Background. Proposition 64 of 2016, which legalized the recreational use of cannabis, earmarked specified tax revenues for a Youth Education, Prevention, Early Intervention and Treatment Account. Funds in the account are disbursed by the Controller to the Department of Health Care Services for programs for youth substance use disorder education, prevention, early intervention and treatment generally. In contrast, the fund created by this bill is specific to preventing youth from accessing cannabis.
3. Fines. Existing law authorizes the Bureau, CDFA and CDPH to assess fines. According to the bureau’s October 2018 Disciplinary Guidelines, the minimum and maximum fine amounts are based on the tier the licensee falls into on the annual license fee schedule, which is based on gross revenue. Fines range from $1,000 up to $600,000.
4. Discrepancies in Current Law Regarding Fine Revenue Placement. This bill would create the Adolescent Cannabis Prevention Fund, which would be funded by fines and penalties collected by cannabis licensing authorities for violations of Business and Professions Code (BPC) section 26030, which describes general grounds for disciplinary action.

Current law renames the former “Medical Cannabis Fines and Penalties Account”, established in a since-repealed section of law (BPC section 19351), as the “Cannabis Fines and Penalties Account” but, it does not specify that fines for violations shall be deposited in the account.

However, a prior section of law regulating medical cannabis, now deleted, specified cannabis fines and penalties shall be deposited directly into the “Medical Marijuana Fines and Penalties Account,” to be available, upon appropriation by the Legislature to the bureau, for the purposes of funding an enforcement grant program.

Current law also specifies any General Fund or special fund loan that was used to establish and support the regulatory activities of the state licensing entities pursuant to former BPC section 19351 shall be repaid by January 1, 2022, by the initial proceeds from fees collected, Furthermore, it specifies, should the initial proceeds from fees not be sufficient to repay the loan, moneys from the Cannabis Fines and Penalties Account shall be made available to the bureau, by appropriation of the Legislature, to repay the loan.

Analysis Prepared by: Lisa Murawski / APPR. / (916) 319-2081

Date of Hearing: April 23, 2019

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 3

Author:(Cooper) – As Amended Ver:March 28, 2019

SUBJECT: Cannabis: Adolescent Cannabis Prevention Fund.

SUMMARY: Establishes the Adolescent Cannabis Prevention Fund and requires revenue derived from fines or penalties assessed against cannabis licensees as the result of a disciplinary action to be deposited into that fund so that the Legislature may appropriate them to fund programs for preventing underage individuals from accessing cannabis and cannabis products.

EXISTING LAW:

1. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act to provide for a comprehensive regulatory framework for the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis. (Business and Professions Code (BPC) §§ 26000 et al.)
2. Defines an “A-license” as a state license issued for cannabis that may be purchased by customers 21 years of age and older and “M-license” as a state license for cannabis activity involving commercial medicinal cannabis that may be purchased by customers 18 years of age or older who possess a physician’s recommendation. (BPC § 26001)
3. Provides for twenty total types of cannabis licenses including subtypes for cultivation, manufacturing, testing, retail, distribution, and microbusiness; requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (BPC § 26050)
4. Establishes the Bureau of Cannabis Control (BCC) within the Department of Consumer Affairs, previously named the Bureau of Marijuana Control, the Bureau of Medical Cannabis Regulation, and the Bureau of Medical Marijuana Regulation, for purposes of regulating microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products within the state. (BPC § 26010)
5. Provides the Department of Food and Agriculture (CDFA) with responsibility for regulating cannabis cultivators. (BPC § 26060)
6. Provides the Department of Public Health (CDPH) with responsibility for regulating cannabis manufacturers. (BPC § 26130)
7. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state and local laws and intentionally selling cannabis to underage customers. (BPC § 26030)
8. Authorizes each licensing authority to discipline its licensees, including through the issuance of a fine, after proper notice and hearing to the licensee. (BPC § 26031)
9. Subjects cannabis businesses operating without a license to civil penalties of up to three times the amount of the license fee for each violation in addition to any criminal penalties. (BPC § 26038)
10. Expresses that state cannabis laws shall not be interpreted to supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate cannabis businesses. (BPC § 26200)
11. Imposes a 15% excise tax upon purchasers of cannabis or cannabis products sold in this state in addition to the sales and use tax imposed by the state and local governments. (Revenue and Tax Code (RTC) § 34011)
12. Imposes a cultivation tax on all harvested cannabis that enters the commercial market at a rate of $9.25 per dry-weight ounce for cannabis flowers and $2.75 per dry-weight ounce for cannabis leaves. (RTC § 34012)
13. Provides the Department of Tax and Fee Administration (CDTFA) with responsibility for administering and collecting taxes on cannabis businesses. (RTC § 34013)
14. Establishes the California Cannabis Tax Fund (Tax Fund) in the State Treasury wherein cannabis tax revenues are deposited. (RTC § 34018)
15. Specifies that money in the Tax Fund shall be disbursed by the Controller in the following order of funding priority:
    1. Funds sufficient to reimburse departments for any reasonable costs incurred through the implementation of the state’s cannabis laws that are not otherwise reimbursed.
    2. $10 million to a public university in California annually to research and evaluate the implementation and effect of the state’s cannabis laws, including the impact of legal cannabis on public health; the public safety implications of legal cannabis; the effectiveness of certain drug treatment programs; whether additional antitrust protections are needed in the recreational cannabis market; the economic impacts of the state’s cannabis laws; and how to best tax cannabis based on potency, and the structure and function of licensed cannabis businesses; among other topics of study.
    3. $3 million to the Department of the California Highway Patrol annually to establish and adopt protocols to determine whether a driver is operating a vehicle while impaired by the use of cannabis.
    4. $10 million beginning with the 2018-19 fiscal year, then increasing by $10 million each year until reaching $50 million annually, to the Governor’s Office of Business and Economic Development to award community reinvestments grants to local health departments and at least 50% to qualified community-based nonprofit organizations to support job placement, mental health treatment, substance use disorder treatment, system navigation services, legal services to address barriers to reentry, and linkages to medical care for communities disproportionately affected by past federal and state drug policies.
    5. $2 million annually to the University of California San Diego Center for Medicinal Cannabis Research to further its objectives.
    6. Remaining funds deposited into sub-trust accounts as follows:
       1. 60% into the Youth Education, Prevention, Early Intervention and Treatment Account, disbursed to the Department of Health Care Services for programs for youth that are designed to educate about and to prevent substance use disorders and to prevent harm from substance use. The programs shall emphasize accurate education, effective prevention, early intervention, school retention, and timely treatment services for youth, their families, and their caregivers.
       2. 20% into the Environmental Restoration and Protection Account, disbursed to the Department of Fish and Wildlife and the Department of Parks and Recreation to fund activities related to the natural resources and wildlife implications of legal cannabis.
       3. 20% into the State and Local Government Law Enforcement Account, disbursed to the California Highway Patrol to fund education regarding cannabis-impaired driving and to the Board of State and Community Corrections to award grants to local law enforcement to address the health and safety implications of legalized cannabis.

(RTC § 34019)

1. Requires the Controller to periodically audit the Tax Fund to ensure that funds are used and accounted for in a manner consistent with what is required by law. (RTC § 34020)
2. Authorizes the Legislature to enact laws to implement the state’s regulatory scheme for cannabis, provided those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64). (BPC § 26000)

THIS BILL:

1. Establishes the Adolescent Cannabis Prevention Fund within the State Treasury.
2. Requires a licensing authority to deposit any fine or penalty moneys recovered from a licensee following a disciplinary action into the Adolescent Cannabis Prevention Fund.
3. Expressly states that penalties collected from individuals engaged in unlicensed activity shall not be deposited into the newly created Adolescent Cannabis Prevention Fund.
4. Specifies that the Adolescent Cannabis Prevention Fund shall include any interest and dividends earned on moneys in the fund.
5. Provides that moneys in the Adolescent Cannabis Prevention Fund shall be available, upon appropriation by the Legislature, for the purposes of preventing persons under 21 years of age from accessing cannabis and cannabis products, unless those persons are authorized to access cannabis or cannabis products for medicinal use.

FISCAL EFFECT: Unknown; this bill is keyed fiscal by the Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the author. According to the author: “AB 3 establishes the Adolescent Cannabis Prevention Fund to ensure California has a robust youth cannabis education and prevention campaign.”

Background.

Early History of Cannabis Regulation in California. Consumption of cannabis was first made lawful in California in 1996 when voters approved Proposition 215, or the Compassionate Use Act. Proposition 215 protected qualified patients and caregivers from prosecution relating to the possession and cultivation of cannabis for medicinal purposes, if recommended by a physician. The initiative prohibited physicians from being punished or denied any right or privilege for making a medicinal cannabis recommendation to a patient. Proposition 215 also included findings and declarations encouraging the federal and state governments to implement a plan to provide for the safe and affordable distribution of cannabis to patients with medical needs.

The regulatory scheme for medicinal cannabis was further refined by SB 420 (Vasconcellos) in 2003, which established the state’s Medical Marijuana Program (MMP.) Under the MMP, qualified patients were eligible to obtain a voluntary medical marijuana patient card, which could be used to verify that the patient or a caregiver had authorization to cultivate, possess, transport, or use medicinal cannabis. The MPP’s identification cards were intended to help law enforcement officers identify and verify that cardholders were allowed to cultivate, possess, or transport limited amounts of cannabis without being subject to arrest. The MMP also created protections for qualified patients and primary caregivers from prosecution for the formation of collectives and cooperatives for medicinal cannabis cultivation.

Without the adoption of a formal framework to provide for state licensure and regulation of medicinal cannabis, a proliferation of informally regulated cannabis collectives and cooperatives were largely left to the enforcement of local governments. As a result, a patchwork of local regulations was created with little statewide involvement. More restrictive laws and ordinances by cities and counties were ultimately upheld by the California Supreme Court in City of Riverside v. Inland Empire Patients (2013) 56 Cal. 4^th 729, which held that state law did not expressly or implicitly limit the inherent authority of a local jurisdiction, by its own ordinances, to regulate the use of its land, including the authority to provide that facilities for the distribution of medicinal cannabis be prohibited from operating within its borders.

Even after several years of allowable cannabis cultivation and consumption under state law, a lack of a uniform regulatory framework led to persistent problems across the state. Cannabis’s continued illegality under the federal Controlled Substances Act, which classifies cannabis as a Schedule I drug ineligible for prescription, generated periodic enforcement activities by the United States Department of Justice. The constant threat of action by the federal government created apprehension among California’s cannabis community.

A document issued by the United States Attorney General in 2013 known as the “Cole memorandum” indicated that the existence of a strong and effective state regulatory system, and a cannabis operation’s compliance with such a system, could allay the threat of federal enforcement interests. Federal prosecutors were urged under the memo to review cannabis cases on a case-by-case basis and consider whether a cannabis operation was in compliance with a strong and effective state regulatory system prior to prosecution. The memo was followed by Congress’s passage of the Rohrabacher-Farr amendment, which prohibits the United States Department of Justice from interceding in state efforts to implement medicinal cannabis.

MCRSA. After several attempts to improve the state’s regulation of cannabis, the Legislature passed the Medical Marijuana Regulation and Safety Act—subsequently retitled the Medical Cannabis Regulation and Safety Act (MCRSA)—in 2015. MCRSA consisted of a package of legislation: AB 243 (Wood); AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood); and SB 643 (McGuire). MCRSA established, for the first time, a comprehensive statewide licensing and regulatory framework for the cultivation, manufacture, transportation, testing, distribution, and sale of medicinal cannabis to be administered by the newly established BCC within the Department of Consumer Affairs, the CDPH, and the CDFA, with implementation relying on each agency’s area of expertise.

MCRSA vested authority for:

• The BCC to license and regulate dispensaries, distributors, transporters, and (subsequently) testing laboratories, and to provide oversight for the state’s regulatory framework;
• The CDPH to license and regulate manufacturers; and
  
• The CDFA to license and regulate cultivators.

While entrusting state agencies to promulgate extensive regulations governing the implementation of the state’s cannabis laws, MCRSA fully preserved local control. Under MCRSA, local governments may establish their own ordinances to regulate medicinal cannabis activity. Local jurisdictions may also choose to ban cannabis establishments altogether.

AUMA. Not long after the Legislature enacted MCRSA, California voters passed Proposition 64, the Adult Use of Marijuana Act (AUMA). The passage of the AUMA legalized cannabis for non-medicinal adult use in a private home or licensed business; allowed adults 21 and over to possess and give away up to approximately one ounce of cannabis and up to eight grams of concentrate; and permitted the personal cultivation of up to six plants. The law retained prohibitions against smoking in or operating a vehicle while under the effects of cannabis, possessing cannabis at a school or other child oriented facility while kids are present, growing in an unlocked or public place, and providing cannabis to minors.

The proponents of the AUMA sought to make use of much of the regulatory framework and authorities set out by MCRSA while making a few notable changes to the structure still being implemented. In addition, the AUMA approved by the voters adopted the January 1, 2018 deadline for state implementation of non-medicinal cannabis in addition to the regulations required in MCRSA that were scheduled to take effect on the same date. The same agencies given authority under MCRSA remained responsible for implementing regulations for adult use.

Under the AUMA, the BCC within the Department of Consumer Affairs continues to serve as the lead regulatory agency for all cannabis, both medicinal and non-medicinal. The AUMA includes 19 different license types compared to the original 17 in MCRSA, and provides the Department of Consumer Affairs (and the BCC) with exclusive authority to license and regulate the transportation of cannabis. The AUMA also authorizes vertical integration models which allows for the holding of multiple license types, as previously prohibited under MCRSA. Additionally, while MCRSA required both a state and local license to operate, the AUMA only stipulated a state license; however, the state is also directed not to issue a license to an applicant if it would “violate the provisions of any local ordinance or regulation.”

The language of the AUMA allows for legislative modifications that “implement” or “give practical effect” to the law by a majority vote. However, what constitutes “implementing” has been interpreted to be limited. Consequently, proposed changes to the voters’ intent in the AUMA require a two-thirds vote and of those, some may be deemed to require voter approval.

MAUCRSA. In the spring of 2017, SB 94 (Committee on Budget and Fiscal Review) was introduced to reconcile the distinct systems for the regulation, licensing, and enforcement of legal cannabis that had been established under the respective authorities of MCRSA and the AUMA. The single consolidated system established by the bill—known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)—created a unified series of cannabis laws and deleted redundant code sections no longer necessary due to the combination of the two systems. MAUCRSA also clarified a number of components, including but not limited to licensing, local control, taxation, testing, and edibles.

Regulations. On January 16, 2019, the state’s three cannabis licensing authorities—the BCC, the CDPH, and the CDFA—officially announced that the Office of Administrative Law had approved final cannabis regulations promulgated by the three agencies respectively. These final regulations replaced emergency regulations that had previously been in place, and made various changes to earlier requirements following the public rulemaking process. The adoption of final rules provided a sense of finality to the state’s long history in providing for the regulation of lawful cannabis sale and use.

Tax Revenue Allocations. Under MAUCRSA, state excise tax and cultivation tax revenues are deposited into a special fund referred to as the California Cannabis Tax Fund and are then allocated for a variety of purposes in order of priority. After state agency cost reimbursement, Tax Fund revenue is next allocated to fund a series of specific programs designated under Proposition 64. These programs are to be provided with precise amounts of funding totaling $25 million and are to be appropriated annually until the 2028-29 fiscal year.

Once those allocations have been appropriated, any remaining revenue is divided into sub-trust accounts according to a percentage outlined by Proposition 64. 60% of the remaining revenue is deposited in the Youth Education, Prevention, Early Intervention and Treatment Account, and disbursed by the Controller to the Department of Health Care Services for programs for youth that are designed to educate about and to prevent substance use disorders and to prevent harm from substance use.

Fine and Penalty Moneys. Unlike revenue derived from taxes, the revenue obtained from licensees through fines and penalties is not specifically allocated to any programs under MAUCRSA. The BCC’s disciplinary guidelines lay out a “fine formula” for determining how much a licensee is required to pay in a fine. This formula is as follows: Average Daily Sale Amount multiplied by Number of Days of the Suspension = Potential Fine Amount

Fines for specific license types are then capped, with high-revenue cannabis microbusinesses liable for up to $240,000 in fines:

Currently, these revenue derived from these fines are not dedicated to any particular purpose, nor are revenues derived from similar fees assessed by CDFA or CDPH against their licensees. Instead, revenue is simply deposited within the state’s General Fund. The intent of this bill is to set aside and earmark any revenue obtained through fees or penalties assessed through each regulatory authority’s disciplinary activities and leverage that funding through future legislative appropriation to prevent underage access to cannabis. This purpose would largely align with existing program allocations planned for tax revenue deposited in the Youth Education, Prevention, Early Intervention and Treatment Account.

REGISTERED SUPPORT:

None on file.

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Robert Sumner / B. & P. / (916) 319-3301