The Control, Regulate and Tax Adult Use of Marijuana Act (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. Existing law, 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. MAUCRSA establishes the Department of Cannabis Control within the Business, Consumer Services, and Housing Agency to administer the act, and requires the department to be under the supervision and control of a director.

Existing law requires every sale or transport of cannabis or cannabis products from one licensee to another licensee to be recorded on a sales invoice or receipt and prescribes the information included on those receipts, including the cost to the purchaser. Existing law provides grounds for disciplinary action under MAUCRSA, including failure to comply with the provisions of MAUCRSA or any rule or regulation adopted pursuant to MAUCRSA.

This bill would, except as specified, require a licensee to pay for goods and services sold or transferred by another licensee no later than 15 days following the final date set forth in the invoice. The bill would require a licensee who sold or transferred goods to another licensee and who has not received payment in full 15 days after the final date set forth in the invoice to report the unpaid invoice to the department, as specified. The bill would require the department to notify a licensee of this report, and would require the department to commence a issue a notice of warning, or, in its discretion, issue a citation or take disciplinary action against the licensee if the licensee fails to pay the outstanding invoice in full by 30 days after this notification, as specified. The bill would prohibit the licensee from purchasing goods and services from another licensee on credit until the licensee pays the outstanding invoice in full.

The Control, Regulate and Tax Adult Use of Marijuana Act (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. Existing law, 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. MAUCRSA establishes the Department of Cannabis Control within the Business, Consumer Services, and Housing Agency to administer the act, and requires the department to be under the supervision and control of a director.

Existing law requires every sale or transport of cannabis or cannabis products from one licensee to another licensee to be recorded on a sales invoice or receipt and prescribes the information included on those receipts, including the cost to the purchaser. Existing law provides grounds for disciplinary action under MAUCRSA, including failure to comply with the provisions of MAUCRSA or any rule or regulation adopted pursuant to MAUCRSA.

This bill would, except as specified, require a licensee to pay for goods and services sold or transferred by another licensee no later than 15 days following the final date set forth in the invoice. The bill would require a licensee who sold or transferred goods to another licensee and who has not received payment in full 15 days after the final date set forth in the invoice to report the unpaid invoice to the department, as specified. The bill would require the department to notify a licensee of this report, and would require the department to commence a disciplinary action against the licensee if the licensee fails to pay the outstanding invoice in full by 30 days after this notification, as specified. The bill would prohibit the licensee from purchasing goods and services from another licensee on credit until the licensee pays the outstanding invoice in full.

Date of Hearing: April 17, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 2888

Author:(Chen) – As Amended Ver:April 3, 2024

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

SUMMARY:

This bill requires a cannabis licensee to pay for goods and services of another licensee no later than 15 days after the final date in the invoice, and requires the licensee who has not been paid to report the unpaid invoice to the Department of Cannabis Control (DCC). The bill requires DCC to: (1) notify a licensee of a report of an unpaid invoice and (2) issue a warning or citation, or take other disciplinary action if the licensee fails to pay the invoice in full within 30 days of notification. The bill prohibits the licensee, until they have paid their outstanding invoice in full, from purchasing goods and services from another licensee on credit.

FISCAL EFFECT:

Costs to DCC of an unknown amount, potentially in the millions of dollars annually (Cannabis Control Fund).

Without knowing the number of impacted licensees and how prevalent the issue of nonpayment is, DCC states it was required to make assumptions to arrive at a cost estimate. DCC assumed:

1. Approximately 40%, or 3,800, of the 9,524 active licensee population, will fail to pay an invoice within the specified 15-day timeframe, and half of those licensees will have a second instance of failure to pay within 12 months, totaling 5,700 notices/letter of warnings issued within a 12-month period.
   
2. Approximately 40% of the 5,700 instances of a failure to pay will resolve, and 3,400 instances of noncompliance will have to be addressed through a progressive disciplinary approach ranging from a Notice to Comply, to a license revocation.

As the cases increase in complexity, enforcement will require a significant increase in legal resources. DCC estimates it will need at least $13.2 million for the first year and $12.4 million ongoing for various legal, compliance, and administrative staff to implement this bill (Cannabis Control Fund).

COMMENTS:

1. Purpose. This bill is sponsored by the California Cannabis Industry Association, the California Cannabis Manufacturers Association, and the Cannabis Distribution Association. According to the author:
   

AB 2888 is about fairness, both for the licensees who have played by the rules, and for Californians who agreed to a certain framework when cannabis was first legalized. This measure restores trust in an industry that has suffered because of bad-faith actors who have not held up their end of the bargain. Without ensuring timely payment, California’s legal cannabis industry may never recover, this is a step towards building a marketplace

that was envisioned when the Medicinal and Adult Use Cannabis Regulation and Safety Act which was passed in 2016.

1. Background.
   1. Retail Cannabis Credit. Because commercial cannabis activity is not legal at the federal level, the legal cannabis industry does not have access to the same banking, credit, or financing options available to other industries. Instead, the cannabis industry is mostly cash-based. According to the sponsors, cannabis businesses offer goods on credit to make up for the lack of normal financing options. They also note the credit terms may be extended to 60, 90, 120, or more days for payment. However, because there is no way to verify the creditworthiness of any other cannabis licensee, licensees are at risk of becoming overleveraged, owing more debt than they can pay back. The sponsors state the “debt bubble,” may lead to a destabilization of the industry. This bill is aimed at preventing further overleveraging by requiring licensees to pay within 15 days of the date on the invoice of cannabis products and establishing reporting and disciplinary requirements for licensees who fail to pay. The requirements are loosely based on California “tied-house” restrictions on alcohol manufacturers and the payment timelines between prime contractors and subcontractors.
   2. DCC Asserts a Remedy Already Exists. DCC notes there is a legal system in place for businesses to seek a remedy for contract violations and nonpayment of services, and this bill essentially replicates within DCC the functions of the civil court system for contract violations.
   3. DCC Budget. According to the Legislative Analyst’s Office (LAO), the Governor proposes a total of $171 million for the support of DCC in 2024-25, primarily from the Cannabis Control Fund, which receives revenues largely from cannabis licensing fees. The LAO also reports the Cannabis Control Fund is structurally imbalanced, meaning that its expenditures exceed its revenues. The fund balance has declined 52%, from $169.1 million in 2021-22 to a projected $80.5 million in 2024-25. DCC notes that if this bill increases DCC’s expenditures beyond its current revenues, it will need to revise its license fee structure to implement the bill.
2. Prior Legislation. AB 766 (Ting), of the current legislative session, was substantially similar to this bill and was held in this committee.

Analysis Prepared by: Allegra Kim / APPR. / (916) 319-2081

Date of Hearing: April 2, 2024

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Marc Berman, Chair

ABPCA Bill Id:AB 2888

Author:(Chen) – As Introduced Ver:February 15, 2024

SUBJECT: Cannabis: invoices: payment.

SUMMARY: Requires a commercial cannabis licensee to pay for goods and services sold or transferred by another licensee no later than 15 days after the date set in the invoice, as specified.

EXISTING LAW:

1. Regulates the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis under the Medicinal and Adult-Use Cannabis Regulation and Safety Act and establishes the Department of Cannabis Control (DCC) to administer and enforce the act. (Business and Professions Code (BPC) §§ 26000-26260)
2. Establishes 20 types of cannabis licenses, including subtypes, for cultivation, manufacturing, testing, retail, distribution, and microbusiness and requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (BPC § 26050)
3. Requires every sale or transport of cannabis or cannabis products from one licensee to another licensee to be recorded on a sales invoice or receipt, establishes the procedures for maintaining the invoices and transcripts, and specifies the information required in each invoice or receipt. (BPC § 26161)
4. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state licensing requirements and local laws and ordinances. (BPC § 26030)
5. Regulates the manufacturing, distribution, and sale of alcoholic beverages under the Alcoholic Beverage Control Act. (BPC §§ 23000-23047)
6. Requires an alcoholic beverage manufacturer who sold and delivered alcoholic beverages to a retailer and who did not receive payment for the delivery to, after 42 days from the date of delivery to charge the retailer 1 percent of the unpaid balance for the delivery on the 43rd day from date of delivery and an additional 1 percent for every 30 days thereafter. (BPC § 25509(a))
7. Requires an alcoholic beverage manufacturer who sold and delivered alcoholic beverages to a retailer and who did not receive payment in full after 30 days of the date of delivery to only sell alcoholic beverages to the retailer for cash or by advance payment until all payments are received for the delivery. (BPC § 25509(b))
8. Regulates the business of contract work relating to the modification of land and structures under the Contractors States License Law and establishes the Contractors State License Board to administer and enforce the law. (BPC § 7000–7191)
9. Requires a prime contractor or subcontractor to pay to any subcontractor, no later than seven days after receipt of each progress payment, unless otherwise agreed to in writing, the amount owed to the subcontractor, unless there is a good faith dispute over the amount. (BPC § 7108.5(a))
10. Makes a violation of the timing requirement on the prime contractor a cause for disciplinary action and subjects the licensee to a penalty, payable to the subcontractor, of 2% of the amount due per month for every month that payment is not made. (BPC § 7108.5(b))

THIS BILL:

1. Requires a licensee to pay for goods and services sold or transferred by another licensee no later than 15 days following the final date set forth in the invoice for the cannabis products.
2. Specifies that the 15-day period commences with the day immediately following the due date of the invoice and includes all successive days, including Sundays and holidays. When the 15th day from the due date of the invoice falls on Saturday, Sunday, or a legal holiday, the expiration day is the next business day.
3. Requires a licensee who sold or transferred goods to another licensee and who has not received payment in full 15 days after the final date set forth in the invoice to report the unpaid invoice to the DCC.
4. Requires the report to include all of the following:
   1. The sale or transfer date of the cannabis products.
   2. The invoice due date.
   3. The invoice amount.
   4. The name, address, and license number of the licensee who failed to pay.
5. Requires the DCC to notify a licensee who has been reported.

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

COMMENTS:

Purpose. This bill is sponsored by the California Cannabis Industry Association, the California Cannabis Manufacturers Association, and the Cannabis Distribution Association. According to the author, this bill “is about fairness, both for the licensees who have played by the rules, and for Californians who agreed to a certain framework when cannabis was first legalized. This measure restores trust in an industry that has suffered because of bad-faith actors who have not held up their end of the bargain. Without ensuring timely payment, California’s legal cannabis industry may never recover, this is a step towards building a marketplace that was envisioned when the Medicinal and Adult Use Cannabis Regulation and Safety Act which was passed in 2016.”

Background. The Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which incorporates prior cannabis laws, authorizes a person who obtains a state license under MAUCRSA to engage in commercial adult-use cannabis activity under that license and applicable local ordinances. It is unlawful to operate a cannabis business without a license.

The Department of Cannabis Control (DCC) is the California state agency that licenses and regulates cannabis businesses. DCC regulates the:

• Growing of cannabis plants.
• Manufacture of cannabis products.
• Transportation and tracking of cannabis goods throughout the state.
• Sale of cannabis goods.
• Events where cannabis is sold or used.
• Labeling of goods sold at retail.

Retail Cannabis Credit. While commercial cannabis activity is legal at the state level, it is still not at the federal level. As a result, the legal cannabis industry does not have access to the same banking, credit, or financing options available to other industries. Instead, the cannabis industry is mostly cash-based.

According to the sponsors, cannabis businesses will instead offer goods on credit to make up for the lack of normal financing options. They also note the credit terms may be extended to 60, 90, 120, or more days for payment. However, because there is no way to verify the creditworthiness of any other cannabis licensee, licensees are at risk of becoming overleveraged, owing more debt than they can pay back.

The sponsors state that the current system has led to a “debt bubble,” which may lead to a destabilization of the industry. The sponsors also note that there are “bad actors” who choose not to pay for good provided on credit.

This bill is aimed at preventing further overleveraging and non-payment by requiring licensees to pay within 15 days of the date on the invoice of cannabis products and establishing reporting and disciplinary requirements for licensees who fail to pay. The requirements are loosely based on California “tied-house” restrictions on alcohol manufacturers and the payment timelines between prime contractors and subcontractors.

Prior Related Legislation. AB 766 (Ting) of 2023, which died pending a hearing on the Assembly Appropriations Committee suspense file, was substantially similar to this bill.

ARGUMENTS IN SUPPORT:

The California Cannabis Industry Association, the California Cannabis Manufacturers Association, and the Cannabis Distribution Association (cosponsors) write in support:

Unfortunately, due to the restrictive status of cannabis at the federal level, this massive consumer industry is largely cash-based and extremely capital-limited. As a result of this financial strain, cannabis sales across the supply chain are largely made on credit terms, with licensees agreeing to pay for goods and/or services at a specified later date.

However, California’s cannabis industry does not have the same oversight of sales made on terms that is afforded to other, similar consumer industries. As a result, terms of sale are not honored by some cannabis businesses, with late payment of invoices being commonplace across the supply chain. In some rare instances, licensees refuse to pay invoices altogether. This “culture of nonpayment” that has emerged in California’s cannabis market leaves businesses across the entire industry and supply chain – as well as ancillary businesses that support legal cannabis operators - with outstanding balances and unpaid invoices sometimes totaling hundreds of thousands of dollars. This ballooning debt bubble in the cannabis industry will only continue to grow without proper oversight, putting the entirety of the state’s supply chain at risk of collapse.

Similar to other regulated industries in California, such as construction and alcohol, which have established credit laws to ensure timely payments, AB 2888 seeks to provide similar protections for California’s cannabis industry. By setting maximum terms for payment and empowering the Department of Cannabis Control (DCC) to enforce compliance, this bill aims to facilitate a more secure and transparent flow of good and payment across the supply chain. Other regulated cannabis markets have begun to address the issue of outstanding debts and timely payment, including New York’s Office of Cannabis Management (OCM) and Colorado’s Marijuana Enforcement Division (MED). California’s cannabis licensees deserve similar oversight and protection to ensure a timely flow of goods and payment across the supply chain.

Without such protections, the state's cannabis industry faces continued financial uncertainty as the debt burden escalates.

ARGUMENTS IN OPPOSITION:

None on file

POLICY ISSUES FOR CONSIDERATION:

Tied-House Restrictions. This bill is loosely based on alcohol tied-house restrictions. A tied-house is an alcohol retailer or drinking establishment that has an exclusive contract with a brewery. However, tied-house restrictions were not designed to protect the market from overleveraged retailers but to segregate the market and make it more difficult to sell alcohol.

AMENDMENTS:

To clarify that minor or first-time violations do not necessarily lead to formal disciplinary action against a license, amend the bill as follows:

On page 3, after line 4:

(2) The department shall commence a issue a notice of warning or, in its discretion, issue a citation or take disciplinary action in accordance with Chapter 3 (commencing with Section 26030) against a licensee reported pursuant to subdivision (b) if the licensee fails to pay the outstanding invoice in full by 30 days after the department notified the licensee pursuant to paragraph (1).

REGISTERED SUPPORT:

California Cannabis Industry Association (cosponsor)
California Cannabis Manufacturers Association (cosponsor)
Cannabis Distribution Association (cosponsor)
Kiva Confections

REGISTERED OPPOSITION:

None on file

Analysis Prepared by: Vincent Chee / B. & P. / (916) 319-3301