SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 692 (Skinner) - Cannabis: trade samples

Bill Summary:

SB 692 would authorize licensed cannabis distributors and retailers to designate cannabis and cannabis products as trade samples.

Fiscal Impact:

• The Bureau of Cannabis Control (BCC) indicates that it would incur minor and absorbable costs (1) for enforcement, and (2) to promulgate the regulations required by the bill.
• The California Department of Food and Agriculture (CDFA) would incur information technology costs, likely one-time in the low hundreds of thousands of dollars, to update its Track-and-Trace System (California Cannabis Fund).

Background:

Federal law indicates that it is illegal to possess or use cannabis. Nevertheless, California and other states have taken steps to legalize and regulate it in the past few decades. In 1996, California became the first state to legalize cannabis for medical use when voters approved Proposition 215; however, the proposition did not create a statutory framework for regulating or taxing it. Consequently, during the ensuing two decades, regulation and taxation of medical cannabis in California generally occurred at the local level through ordinances and permit requirements. More recently, the Legislature passed a series of laws to provide a statutory framework to regulate medical cannabis. The most significant of these were in 2015: AB 243 (Wood), AB 266 (Bonta), and SB 643, (McGuire).

In November 2016, California voters approved Proposition 64. Under Proposition 64, adults 21 years of age or older can legally grow, possess, and use cannabis for nonmedical purposes, subject to specified restrictions. Since the passage of Proposition 64, the Legislature has passed laws amending the measure, including SB 94 (Committee on Budget and Fiscal Review, 2017), which brought the state’s medical and adult‑use regulatory structures into conformity.

Under Proposition 64, state agencies issue licenses to several types of cannabis businesses, including cultivators, manufacturers, distributors, testing labs, and retailers. To hold a state license, cannabis businesses must pay fees and meet numerous other requirements, including ones related to security protocols, and product testing and labeling. For example, cannabis products must be tested for tetrahydrocannabinol (THC) and cannabidiol (CBD) content before the last distributor transfers the products to the retailer. Additionally, state‑licensed businesses must participate in the state’s Track-and-Trace System by attaching unique identifier tags (similar to bar codes) to each plant and product. These tags allow the state to track the movement of cannabis products through the entire supply chain, from cultivation all the way to retail sale.

Although Proposition 64 and the related legislation built a regulatory structure for cannabis, it did not implement some of the basic business practices available to other industries in California, including addressing the issue of samples between licensed businesses despite multiple requests from both the cannabis industry and the state-appointed Cannabis Advisory Council.

Proposed Law:

This bill would do the following:

• Authorize licensed cannabis distributors and retailers to designate cannabis and cannabis products as trade samples on January 1, 2022, or upon the effective date of BCC regulations defining trade sample.
• Specify that BCC’s regulations include the quantity of cannabis and cannabis products authorized for trade sample designation.
• Require trade samples to (1) undergo quality assurance and testing, (2) be labeled as such, and (3) be entered into the track and trace system.
• Specify that trade samples can only be transported between licensees by an employee of a licensed distributor or microbusiness.
• Prohibit trade samples from being sold or donated by a licensed distributor or retailer, and prohibit cannabis or cannabis products from being given to a retail customer.
• Authorize trade samples to be provided by a licensed distributor or retailer to that licensed distributor or retailer’s employees only for the purposes of educating and informing licensees and employees.

Related Legislation:

SB 475 (Skinner, 2019) is similar to this bill, and is currently pending in the Assembly Appropriations Committee. However, unlike this bill, SB 475 would permit other players in the cannabis industry (such as cultivators and manufacturers) to have similar trade sample authority (subject to the same specified requirements).

Staff Comments:

CDFA’s preliminary analysis of the bill indicates that it would result in one-time implementation costs related to incorporating trade samples into its Track-and-Trace System. These costs would likely be in the low hundreds of thousands of dollars; the precise amount would depend on numerous factors, including the number of licensees participating in the “samples” program.

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SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Steven Glazer, Chair

2019 - 2020 Regular

Bill No: SB 692 Hearing Date: January 13, 2020

Subject: Cannabis: trade samples.

SUMMARY: Authorizes licensed cannabis distributors and retailers to designate cannabis and cannabis products as trade samples.

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 cannabis and adult-use cannabis. (Business and Professions Code (BPC) § 26000 et seq.)
2. Establishes the Bureau of Cannabis Control (Bureau or BCC) 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)
3. Requires the BCC to convene an advisory committee to advise state licensing authorities on the development of standards and regulations for legal cannabis, including best practices and guidelines 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, rather than reduce and eliminate, the illicit market for cannabis. (BPC § 26014)
4. Establishes 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)
5. Prohibits a licensee from giving away any amount of cannabis or cannabis products, or any cannabis accessories, as part of a business promotion or other commercial activity. Specifies that the donation of cannabis or cannabis products by a licensee to a patient or the primary caregiver of a patient is not a business promotion or other commercial activity. (BPC § 26153)
6. Prohibits a licensee from selling any cannabis or cannabis products at less than cost, or giving away any article or product for the purpose of injuring competitors or destroying competition. (BPC § 26052)
7. Provides the Department of Food and Agriculture (CDFA) with responsibility for regulating cannabis cultivators. (BPC § 26060)
8. Provides the Department of Public Health (DPH) with responsibility for regulating cannabis manufacturers. (BPC § 26130)
9. Authorizes the Legislature to, by majority vote, enact laws to implement the state’s regulatory scheme for cannabis if those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Prop 64). (BPC § 26000)

This bill:

1. Authorizes licensed cannabis distributors and retailers to designate cannabis and cannabis products as trade samples on January 1, 2021, or upon the effective date of BCC regulations defining trade sample. Specifies that BCC’s regulation include the quantity of cannabis and cannabis products authorized for trade sample designation.
2. Requires trade samples to undergo quality assurance and testing, requires trade samples to be labeled as such, requires trade samples to be entered into the track and trace system, specifies that trade samples can only be transported between licensees by an employee of a licensed distributor or microbusiness, prohibits trade samples from being sold or donated by a licensed distributor or retailer, and prohibits cannabis or cannabis products from being given to a retail customer.
3. Authorizes trade samples to be provided by a licensed distributor or retailer to that licensed distributor or retailer’s employees only for the purposes of educating and informing licensees and employees.

FISCAL EFFECT: Unknown. This bill is keyed fiscal. A similar version of this measure, SB 475, which was considered in 2019, had negligible cost.

COMMENTS:

1. Purpose. This bill is a reintroduction of the Author’s SB 475 from last year and, like that measure, is jointly sponsored by the California Cannabis Industry Association and Flow Kana. According to the Author, “Prop 64 states cannabis products cannot be given away; however, it is unclear if the proposition intended to prohibit trade samples – a commonly used, noncontroversial business tool. The provision can be reconciled with sections of MAUCRSA, which prohibits unfair business practices – trades samples are very small amounts of product used for education and would not disrupt a fair marketplace. Although Prop 64, and related legislation, built a regulatory structure for cannabis, it still failed to implement some of the basic business practices available to other industries in California, including the alcohol industry. Instead, the legal cannabis industry has to use various workarounds because the state does not have an established process for cannabis trade sampling, despite recommendations from the California Cannabis Advisory Committee.” The Author states that “SB 692 further legitimizes the legal cannabis industry by creating a transparent and accountable cannabis trade sampling process to help educate businesses and their employees. To ensure the process is purposefully used, various safeguards have been included. For example, unlike alcohol, cannabis samples cannot be provided to consumers.”
2. Cannabis Regulatory Background. California first legalized cannabis for medical consumption via 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 three bills in 2015 (AB 243, Wood; AB 266, Bonta and; SB 643 McGuire) that established the Medical Cannabis Regulation and Safety Act (MCRSA). 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, DPH, 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" (AUMA or Prop 64), which authorizes adults 21 or older to legally grow, possess, and use cannabis for nonmedical purposes, with certain restrictions.

Less than a year later in June 2017, the 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 a single consolidated system known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) which created a unified series of cannabis laws, deleted redundant code sections no longer necessary due to the combination of the two systems, and clarified a number of components, including but not limited to licensing, local control, taxation, and testing.

The original provisions of MCRSA in 2015 contained requirements for CDFA to establish a track-and-trace program to report on the movement of medical marijuana items through the distribution chain that utilized a unique identifier. This requirement remains with MAUCRSA and the track-and-trace program is required to be used by all annual and provisional cannabis licensees, including those with licenses for cannabis cultivation, manufacturing, retail, distribution, testing labs, and microbusinesses.

1. California Cannabis Advisory Committee Report and Recommendation. The Advisory Committee is comprised of 22 appointed members from different sectors to represent the diverse backgrounds of California and the cannabis industry. The Advisory Committee is charged with advising the licensing authorities in the development of standards and regulations, including best practices and guidelines that protect public health and safety while ensuring a regulated environment for commercial cannabis activity. The Advisory Committee is required to submit an annual report on its activities, including recommendations the Committee made to the licensing authorities. The 2018 Annual Report was released in January 2019, reflecting the work of the Advisory Committee’s subcommittees that, as the report notes, “adopted recommendations seeking to balance an existing industry without making it too burdensome as to perpetuate the illicit market. The committee took a meaningful look at the 84 recommendations that came forward, adopting 47 of the recommendations, in an effort to address pressing Industry challenges.”

The 2018 Report noted that “California’s overall legal cannabis market projected to grow with retail revenue estimated at $5 billion. The state’s market is projected to produce between 1.55–1.69 million pounds in all segments by 2018. Many in the industry believe in the need to preserve the rich cultural heritage and unique product branding that is unique a variety of well-known California cultivation regions…California faces inherent challenges to regulating an industry that has not been federally decriminalized and has only been newly regulated in other states. The challenge before us is two-fold. First, converting an established industry that had not been comprehensively regulated by the state to a regulatory framework mandated by MAUCRSA. Although MAUCRSA provides guidance on the macro issues, much of the implementation specifics and clarification of terms were left to the discretion of the licensing authorities.

Second, ensuring that the regulations do not create high compliance costs for legitimate California businesses relative to the costs and risks involved in remaining in the illicit drug trade. For perspective, the Bureau’s Standardized Regulatory Impact Analysis (SRIA) prepared in April 2018 found that the proposed regulations, compared to no regulation baseline alternative, would add approximately $408 in compliance costs per pound of marketable dried fower. Most of the added cost is attributable to cannabis testing with other direct quantifiable costs attributed to general regulatory compliance.”

The Advisory Committee’s Subcommittee on Distributors contemplated the issue of samples, issuing the following, which the Advisory Committee adopted:

“Selling Samples (Recommendation #1) — The Bureau should address how, if at all, licensees may provide samples for a nominal fee, both for B to B (Business to Business) and B to C (Business to Consumer) situations.”

BCC did not implement the recommendation, citing “the lead agency does not require cannabis goods to be sold at a specific price therefore, no language change occurred.”

1. Arguments in Support. Supporters note that many industries use samples as a means of promoting sales of their products and that business to business sampling allows business to market products as well as provide market education to retail and business partners. According to supporters, retail sales representatives can offer samples to prospective buyers who need to see, smell and sometimes try a product before making a purchase. Supporters write that cannabis products vary greatly by manufacturer and it is imperative that retailers and their employees have knowledge of the product prior to selling it safely to cannabis patients and consumers. Supporters also note that basic business practices like providing samples are available to other industries in the state.

The California Cannabis Industry Association (CCIA) writes that this bill will create a more cost-effective method for providing cannabis samples, will establish a consistent and lawful method for sharing cannabis samples, will allow for greater exposure for small and emerging cannabis businesses, and will improve customer outcomes. According to CCIA, licensed cannabis businesses are forced to purchase their own products at full price before they can present them to a potential buyer.

According to the Cannabis Distribution Association, existing cannabis regulations do not offer a pathway for issuing trade samples to sales representatives working at a licensed cannabis retailer and that in the absence of legislation or regulatory pathways, distributors are “forced into inefficient and expensive workarounds to get samples into the hands of their state representatives.” The group advises that providing a pathway for issuing trade samples was rated as the top issue, first out of 25, in a survey of members in terms of importance.

Flow Kana notes that in cannabis, there is no substitute for sensory analysis to determine quality and states “this is a major driver of the need for trade samples, as is the need to educate retail employees, distinguish between products and ultimately help consumers make better informed decisions.”

Kiva Confections writes that the bill would link licensee’s needs for a simple process with the state’s current plan to track and regulate cannabis, enabling a simple and far business to business and business to employee samples method that promotes transparency and creates and accountable business practice to the benefit of the entire industry.

1. Technical Amendments are Necessary to Correct Drafting Errors. As noted previously, this bill is a reintroduction of the Author’s SB 475 from 2019 which is pending in the Assembly Committee on Appropriations. This version of the bill authorizes licensees to designate trade samples “On January 1, 2021, or upon the effective date of regulations by the bureau pursuant to subdivision (g), whichever occurs first”. Given that BCC will not be able to promulgate regulations prior to the bill taking effect, and given that the measure does not include an urgency clause and will not take effect until January 1, 2021, the measure should be amended to allow BCC time to develop required regulations to determine the quantity of cannabis and cannabis products that a licensee may designate as trade samples.

On page 3, in line 3, strike “2021” and replace with “2022”.

1. Why Is Trade Sample Authority Limited to Only Two Licensee Types? This bill specifies that only a licensed distributor and licensed retail can designate cannabis and cannabis products as trade samples. While ensuring product efficacy and safety is important, and maintaining a robust track and trace system by including all cannabis and cannabis products along the supply chain is key to supporting a strong regulated system under MAUCRSA, it would be helpful to understand any challenges or barriers to allowing other market players, like cultivators and manufacturers, to similarly have trade sample authority. The Author should continue working with stakeholders and the BCC to determine whether a mechanism exists for other supply chain participants to be able to safely utilize the trade sample authority granted by this bill as a means of ensuring parity. Should the mechanisms by which cannabis companies create awareness about their products, educate employees and market partners about their product, use trade samples for research and development purposes, and grow their economic opportunities in a robust system be limited to only two licensee types?

SUPPORT AND OPPOSITION:

Support:

California Cannabis Industry Association (Sponsor)

Flow Kana (Sponsor)

Berkeley Patients Group

Blackbird Logistics

California Teamsters Public Affairs Council

Cannabis Distribution Association

Consortium Management Group/Caliva

Eaze

Kiva Confections

Natura

Southern California Coalition

United Cannabis Business Association

Opposition:

None on file as of January 9, 2020.

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