SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 658 (Bradford) - Cannabis: licensing: cannabis retail business emblem: track and trace

Bill Summary:

Senate Bill 658 would require the Bureau of Cannabis Control, by December 31, 2019, to establish and issue an emblem to cannabis retailers and microbusinesses that must be displayed outside the licensed premises to indicate a business’ valid status. Would require delivery employees to carry the retail business emblem and display it upon request. Would authorize local jurisdictions to receive track and trace system information from cannabis licensing authorities.

Fiscal Impact:

According to the Department of Consumer Affairs:

• Unknown, potentially significant impact. The Bureau would need to create and launch a program by January 1, 2020, for developing, manufacturing, distributing, replacing, and collecting emblems from current and ex-licensees. The bill does not provide much specificity as to the emblem design or material, and could be interpreted to range from a piece of paper to a medallion (like a taxi medallion).
• The Bureau anticipates an increase in enforcement workload to ensure retailers and microbusinesses display the emblem. Additionally, local jurisdictions would be authorized to receive track and trace information, which is likely to result in an increase of requests for information from the more than 500 cities/counties in the state.
• $2,000 in IT costs, which will be absorbed by redirecting existing maintenance resources, to update its license email template, create a new letter and shipping labels for the emblems, create a new emblem, and update its retail application and renewal forms to include a question asking how many employees will be delivering.
• Absorbable costs to develop emergency regulations.

Background:

For many boards under the Department of Consumer Affairs, licensees must conspicuously post individual and establishment license, or face a fine. For the Board of Barbering and Cosmetology, this fine ranges from $50 to $150 for the violation (Title 16, CCR §956). For the Medical Board, its FAQs advise licensees to prominently post the notice in an area that is visible to patients and how the Board expect a “common sense interpretation/application of the regulation.” The Board of Cannabis Control, under Title 16 CCR Division 42 § 5039 requires, upon issuance of any license, the licensee shall prominently display the license on the licensed premises where it can be viewed by state and local agencies. If the licensed premises is open to the public, the license shall be displayed in an area that is within plain sight of the public. (BPC Section 26012, Section 26013).

Proposed Law:

This bill includes the following provisions, among others:

• Requires, by December 31, 2019, the Bureau to establish an emblem to indicate the valid status of a state cannabis retail, microbusiness, or nonprofit license.
• Requires the Bureau to issue an emblem to each retail licensee, microbusiness licensee, and nonprofit licensee, including provisional licensees for those licenses, upon issuance of a license by January 1, 2020.
• Requires an emblem to expire at the same time as the license for which it was issued, and requires the Bureau to renew the emblem and license at the same time.
• Prohibits a cannabis business from operating if the emblem is posted in an unlawful location.
• States that removing the emblem is a violation of this chapter and may result in the suspension or revocation of the license and shall be punishable, as specified.
• Authorizes the Bureau to adopt emergency regulations to implement this bill.
• Declares this bill an urgency statute due to the immediate need to uniformly inform the public as to whether a dispensary has a valid and current commercial cannabis license.

Related Legislation:

1. SB 67 (McGuire, 2019) extends temporary licenses until December 31, 2019 for applicants who submitted an annual application before the expiration date of their temporary license, and authorizes licensing authorities to issue provisional licenses to individuals without a temporary license, as specified.

Staff Comments:

According to the DCA, the Bureau licenses approximately 1,200 retailers and microbusiness licensees that would need at least one emblem. The Bureau is in its first year of issuing annual licenses, and the figure is expected to increase with anticipated industry growth. In addition, those that deliver would need an emblem for each delivery employee, which will vary depending on the size of the business. If the Bureau develops a nonprofit license type, the Bureau also would need to issue emblems to those license holders. To the extent that workload of this bill is substantial, there may need to be resource requests at a later time.

The Governor’s May Revision indicates the cannabis excise tax is forecast to generate $288 million in 2018-19 and $359 million in 2019-20, a reduction of $67 million and $156 million, respectively, from the Governor’s Budget forecast. The Governor’s May Revision proposes to allocate $80.5 million (Cannabis Fund) to subsidize child care for school-age children and income-eligible families, and $21.5 million Proposition 64 for competitive grants to develop youth programs, as specified.

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SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Steven Glazer, Chair

2019 - 2020 Regular

Bill No: SB 658 Hearing Date: April 22, 2019

Subject: Cannabis: licensing: cannabis retail business emblem: track and trace

SUMMARY:

Requires the Bureau of Cannabis Control (Bureau) to establish and distribute a cannabis retail business emblem (emblem) to indicate the valid status of a cannabis retail, microbusiness, or nonprofit license; deletes provisions of law related to the Bureau’s ability to regulate the excessive concentration of cannabis licensees in an area; and clarifies that local jurisdictions may have access to the cannabis track and trace database (database).

Existing law:

1. Establishes the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of both medicinal and adult-use cannabis. (Business and Professions Code (BPC) § 26000)
2. Establishes the Bureau under the Department of Consumer Affairs (DCA) to regulate cannabis with the sole authority to create, issue, deny, renew, discipline, suspend, or revoke licenses for microbusinesses, transportation, storage unrelated to manufacturing activities, distribution, testing, and sale of cannabis and cannabis products within the state. (BPC §§ 26010, 26012 (a)(1))
3. Requires the Bureau to consider if “excessive concentration” will exist in the area where the licensee will operate when granting, denying, or renewing a retail license, as specified. (BPC § 26051(c))
4. Requires all boards and bureaus in DCA to require their licentiates to provide notice to their clients or customers that the practitioners are licensed by the state.
   (BPC § 138)
5. Requires all Bureau licensees to prominently display the license on the licensed premises where it can be viewed by state and local agencies. If the licensed premises is open to the public, the license shall be displayed in an area that is within plain sight of the public. (Title 16, California Code of Regulations § 5039)
6. States that any reference in the BPC to “license” means license, certificate, registration, or other means to engage in a business or profession regulated by this code. (BPC § 23.7)
7. Requires the Bureau to investigate the feasibility of creating one or more classifications of nonprofit licenses by January 1, 2020. (BPC § 26070.5)
8. Establishes civil penalties for unlicensed commercial cannabis activity of up to three times the amount of the license fee for each violation, and authorizes a court to destroy the cannabis. States that each day of operation constitutes a separate violation, and that criminal penalties also apply. (BPC § 26038)
9. Requires the California Department of Food and Agriculture (CDFA), in consultation with the California Department of Tax and Fee Administration (CDTFA), to create a database containing the electronic shipping manifests to facilitate the administration of the track and trace program, which shall include, but not be limited to, the following information:
   1. The variety and quantity or weight of products shipped.
   2. The estimated times of departure and arrival.
   3. The variety and quantity or weight of products received.
   4. The actual time of departure and arrival.
   5. A categorization of the product.
   6. The license number and the unique identifier issued by the licensing authority for all licensees involved in the shipping process, including, but not limited to, cultivators, manufacturers, distributors, and dispensaries. (BPC § 26067 (b)(1))
10. Requires the Bureau to have 24 hour access to the database and the CDTFA to have “read access” for the purpose of taxation and regulation; authorizes CDFA to enter into memoranda of understandings with the cannabis licensing authorities for data sharing purposes; and upon the request of a state or local law enforcement agency, the cannabis licensing authorities shall allow access to or provide information contained within the database to assist law enforcement in their duties and responsibilities. (BPC § 26067 (b)(4-5, 7))

This bill:

1. Deletes provisions of law relating to the Bureau’s ability to grant, deny, or renew a retail or microbusiness license based on an area’s excessive concentration of licensees.
2. Requires the Bureau to establish an emblem to indicate the valid status of a state cannabis retail, microbusiness, or nonprofit license by December 31, 2019.
3. Requires the Bureau to issue an emblem to each retail licensee, microbusiness licensee, and nonprofit licensee, including provisional licensees for those licenses, upon issuance of a license by January 1, 2020.
4. Requires a licensee to post the emblem in the front window of the facility within five feet of the front door or in a display case mounted on the outside front wall of the facility within five feet of the front door and ensure the emblem is clearly visible to the general public and to patrons entering the facility.
5. Requires each licensee to display an emblem if a licensee is operating in the same building or space as a separate licensee, or if a licensee shares a common patron entrance with a separate licensee, or both.
6. Requires an emblem to expire at the same time as the license for which it was issued, and requires the Bureau to renew the emblem and license at the same time.
7. Requires the Bureau to maintain the licensing information upon which the emblem is based and make that information available to the general public and to patrons for review upon request.
8. Prohibits the emblem from being defaced, marred, reproduced, copied, camouflaged, hidden, or removed.
9. Prohibits a cannabis business from operating if the emblem is posted in an unlawful location.
10. States that removing the emblem is a violation of this chapter and may result in the suspension or revocation of the license and shall be punishable, as specified.
11. Authorizes the Bureau to adopt emergency regulations to implement this bill.
12. Requires the licensing authorities to allow access or provide information from the database containing the electronic shipping manifests to a local jurisdiction.
13. Requires all employees of a retailer, microbusiness, or nonprofit delivering cannabis or cannabis products to carry the licensee’s current emblem. The employee shall present the emblem upon request to state and local law enforcement, employees of regulatory authorities, other state and local jurisdictions, and the customer requesting cannabis delivery on and after January 1, 2020.
14. Declares this bill an urgency statute because there is an immediate need for a uniform way to inform the public as to whether a dispensary has a valid and current commercial cannabis license to ensure the safety of consumers and to ensure adequate enforcement of those violating MAUCRSA.

FISCAL EFFECT:

Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

1. Purpose. This bill is sponsored by the City of Los Angeles. According to the Author’s office, “In 2016, California voters overwhelmingly approved Proposition 64, which regulated the sale and use of recreational cannabis in the state. Whereas this provided a licensing structure and pathway for individuals and groups to legally cultivate, distribute and sell cannabis, there are still many operators who fail to enter the legal market. While there are barriers to entry, there are also those who do not see the need to become - or do not want to become - a licensed entity. Currently, there are thousands of unlicensed operators across the state. In order to increase the number of operators participating in the legal, regulated industry and ensure that public safety and health risks are minimized, consumers need to be able to easily identify unlicensed business versus the licensed businesses. To help address this issue, SB 658 requires the Bureau of Cannabis Control to create an emblem program to easily distinguish the licensed operations from the illicit operations.

“Emblem programs work. Scholars have studied the implementation of the restaurant emblem program in Los Angeles County and made a number of striking conclusions. Chief among them, the introduction of the emblem program resulted in a 20% drop in reports of food borne illness in the county. Estimated revenue from restaurants with grades of A or B saw significant increases, while those graded C saw sales decline. This demonstrates customers were able to incorporate and understand new information they then used to change their behavior. In addition, programs implemented in other states and jurisdictions that made restaurant grades available upon request or on a website did not demonstrate an associated drop in reports of food borne illness. This indicates a simple, visual emblem can wield a significant amount of leverage in adjusting consumer behavior. Whereas the cannabis industry is different from the restaurant industry, we cannot draw upon any other comparisons and there is little to no data and not enough research conducted on consumer choice within this space given the regulated cannabis industry is still in its infant stages.”

1. Cannabis Regulatory Background. California first legalized cannabis for medical consumption through Proposition 215, also known as the Compassionate Use Act, in 1996. Proposition 215 protected qualified patients and primary caregivers from prosecution related to the possession and cultivation of cannabis for medicinal purposes.

The Legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) in 2015. 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 Bureau within DCA, the Department of Public Health, and CDFA.

Shortly following the passage of MCRSA in November 2016, California voters passed Proposition 64, the "Control, Regulate and Tax Adult Use of Marijuana Act" (Proposition 64), which legalized adult-use cannabis.

Less than a year later in June 2017, the California State Legislature passed a budget trailer bill, SB 94 (Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2017), that integrated MCRSA with Prop 64 to create MAUCRSA, the current regulatory structure for both medicinal and adult-use cannabis.

1. State Track and Trace Database. In January 2018, CDFA in coordination with the Bureau, launched the database that uses unique identifiers to report the movement of cannabis and cannabis products through the licensed commercial cannabis distribution chain. This bill allows the licensing authorities to give access to, or provide information contained in, this database to a local jurisdiction upon request.

However, it appears local jurisdictions are already authorized access. According to a Frequently Asked Questions document issued by all three licensing authorities, information received and contained in the database may be viewed by any “city, county, or city and county to perform official duties pursuant to MAUCRSA or a local ordinance.” The relevant code states that such information is confidential and “shall not be disclosed pursuant to the California Public Records Act [citations omitted], except as necessary for authorized employees of the State of California or any city, county, or city and county to perform official duties pursuant to this division or a local ordinance.” Thus, it does not appear this bill’s amendment to existing law is strictly necessary, but the amendment may clarify a local jurisdiction’s ability to request access to the data.

1. Overregulation Concerns. The California Cannabis Advisory Committee (Committee) is comprised of 22 appointed members representing California’s cannabis industry, and is charged with advising the licensing authorities in the development of “standards and regulations… that protect public health and safety while ensuring a regulated environment for commercial cannabis activity that does not impose such barriers so as to perpetuate…the illicit market.”

The Committee addressed the significant problem of California’s flourishing unregulated market in its 2018 report:

“The overarching reality after one year of legal cannabis sales is that the regulatory process to licensure insufficiently incentivizes unlicensed businesses to seek licensure and insufficiently de-incentivizes the illegal unlicensed underground market in order to effectively ‘protect public health and safety while ensuring a regulated environment for commercial cannabis activity.’” The Committee noted the following significant factors:

“Small businesses are having difficulty emerging from their historically underground status due to the inability to modify regulations to meet local conditions, the fragmentation of regulations among the different agencies and local jurisdictions, and the amount of upfront capital required to comply with all regulations.

“The dual nature of the licensing process (i.e., state and local) has created a bottleneck in licensing at the local municipal level where unless a local municipality actually issues a license, permit, or other authorization, businesses are not able to apply for a state license.” These comments must be considered against the backdrop that only 161 of California’s 482 municipalities and 24 of the 58 counties have opted to allow commercial cannabis activity of any sort, according to a February 18, 2019 article in Marijuana Business Daily, “Chart: Most California Municipalities ban commercial cannabis activity.”

These compliance costs have a direct impact on what the consumer pays, and consumers can save money by purchasing unregulated products, which are widely available. A March 31, 2019 article in The Daily Press, “The Flourishing Business of Illegal Cannabis” estimated that up to 80% of cannabis products are sold under the table. The article profiles several users who are well aware that the cannabis products they purchase are illegal. “The … retired retail manager from Apple Valley said her daughter orders the ‘life saving’ products for her from an unlicensed delivery service, mostly to save money…My daughter said it’s about 10 to 20 percent cheaper from an unregistered dealer,’ White said. ‘That’s about a $12 savings every month. On my fixed income, every penny helps.’”

Due to obvious price differences between licensed and unlicensed dealers, it seems unlikely that the unregulated market is flourishing because consumers are unaware they are purchasing an illegal product.

1. Enforcement Issues. The Committee’s report also noted the robust state of the illegal market: “Until recently, there were insufficient enforcement efforts by both state and local authorities to support licensed businesses. It should be acknowledged that the state agencies initially took a slower than expected approach to enforcement in an effort to provide opportunity for businesses to come into compliance with licensing regulations.” While noting improvements, the Committee noted that “Enforcement is fragmented and uncoordinated,” which remains true. Popular cannabis advertising platforms like Weedmaps amplify problems by displaying both licensed and unlicensed businesses in consumer search results.

In an effort to improve California’s cannabis market, the Committee made 84 recommendations, including easing barriers to entry, increased and coordinated enforcement at the state and local levels, and educating the public on the need to support legal businesses to ensure safe products. They did not recommend developing an emblem-type program.

1. Related Legislation. SB 67 (McGuire) extends temporary licenses until December 31, 2019 for applicants who submitted an annual application before the expiration date of their temporary license, and authorizes licensing authorities to issue provisional licenses to individuals without a temporary license, as specified.
   (Status: This bill is currently at the Assembly Desk.)

SB 475 (Skinner) authorizes cannabis licensees to designate cannabis and cannabis products as trade samples, and exempts these samples from taxes, as specified. (Status: This bill is pending in the Senate Governance and Finance Committee.)

1. Arguments in Support. The City of Los Angeles writes, “Unfortunately, despite more than a year of state licensing, the illegal cannabis market continues to persist and proliferate, undermining legal businesses that adhere to regulations, while endangering consumers. SB 658 will improve statewide enforcement by creating a retail cannabis business emblem. This emblem will provide licensed retail operators with a valuable tool to display outside of their businesses to clearly and simply communicate to the public and law enforcement that they are legal and sell only safe, laboratory-tested cannabis products. Charging the Bureau of Cannabis Control with the administration of the emblem program will ensure cannabis businesses across California will be able to uniformly display the same emblem that customers will associate with cannabis legality, quality, and safety.”
2. Author’s Amendments. The Author wishes to delete the first section of the bill, which would remove the requirement that the Bureau consider whether an area suffers from an excessive concentration of cannabis businesses when deciding whether to grant, deny, or renew a license. The Author believes leaving these provisions in the bill would be in direct conflict with Proposition 64.

On page 3, delete lines 1-21, and on page 4, delete lines 1-6.

1. Policy Considerations. A primary complaint amongst licensees and industry observers is the significant breadth and depth of regulatory requirements from state and local governments. Regulators should calculate whether an additional requirement to obtain, renew, and properly display a state emblem – likely at extra cost to the licensee and with penalties for violations – is worth adding to the exhaustive list of obligations.

The Author’s argument compares this bill’s emblem proposal to the effectiveness of the County of Los Angeles’ food grade poster system for restaurants. However, the two programs are very different; the restaurant program’s goals were to allow consumers to distinguish quality between already-licensed facilities. Cannabis licensing is binary, and current law already requires a visual indicator of a business’ status. The Author fails to explain how an emblem would communicate more effectively to the public that a business is appropriately licensed than the current requirement to display the actual license.

Moreover, since unregulated entities are already operating with disregard for all current laws, counterfeiting an emblem seems like a low barrier to their continued existence.

This is also an inopportune time to put additional licensing requirements on cannabis authorities. The authorities are already struggling to issue licenses in a timely manner under existing mandates, and it is unclear how they will manage to promulgate emergency regulations, design, and issue the emblem by the end of this year as this urgency measure demands.

Finally, this bill is premised on the idea that the unregulated market is flourishing in part because consumers have difficulty distinguishing between licensed and unlicensed businesses. It is not clear this is the case – analyses of the stunted market indicate multiple causes including lack of enforcement, too few local jurisdictions permitting cannabis businesses, and high compliance costs – which ultimately result in a product that is cheaper to purchase from illegal providers. It is true that consumers may not know how to verify a license online, look for a license displayed in a legitimate retail establishment, or the hazards of ingesting an untested product, but these issues could be addressed by a public education campaign, which the Committee recommended and the Bureau intends to implement this year.

SUPPORT AND OPPOSITION:

Support:

City of Los Angeles (Sponsor)

Americans for Safe Access

California Cannabis Industry Association

MuniServices

Opposition:

None on file as of April 17, 2019.

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