AUTHORED BY: JORDAN ZOOT

Managing Director & CEO – aBIZinaBOX Inc. – CPA’s 

Accounting, Attest, Tax, Regulatory Compliance and Technology

Evanston HQ [Chicago] – Oakland – New York

CPA.CITP.CISM.CGEIT.CGMA 

Verticals: California Commercial Cannabis Industry, Alt. Investments/Private Equity, Real Estate, Professional Services, IRS Controversy, OPR Practitioner Represenatio and Distressed Assets/Debt 

Technology :

Advanced & High Complexity Cloud Integrator
AICPA PCPS, CAQ, IMTA, CITP
ISACA CGEIT, CISM

Technologies & Platforms – with Certifications and Full Partner Program Members
Google Cloud Partner – G Suite, Education, Chrome, Android
Google Partners – Adwords & Analytics
Microsoft CSP Silver Partner – Office 365, Azure Platform
Amazon Web Services – Consulting Partner, EC2, S3, Dockers
Collab., Sync & Sharing – box.com, Dropbox Business, cloudHQ.net
Enterprise Apps – salesforce.com, Evernote Business, Zendesk
workato.com – Advanced Integration Platform, Fishbowl Inventory & ERP
Financial Apps – Xero Gold Accounting Partner, METRC,

AICPA – PCPS, CAQ Member Firm

State CPA Societies in California, Florida, Illinois, New York and Texas

Members – ICAEW, CIOT, CAANZ, and The Tax Institute in the UK and Australia

Expertise with Regulatory Compliance – US – HIPAA, FINRA, SEC Rule 17(a)(3)/(4), eDiscovery, FINCEN – EU- EBA, ESMA, EIOPA UK – BoE, PRA, FCA

AICPA Member Firm 
– Center for Audit Quality Firm# 2092102
– Private Companies Practice Section Firm# 02092102

California Cannabis Collectives1…The Sky Is Falling.

There is nothing in the world that gets us more “pissed off” than an article crafted in a way to  evoke fear rather than actually conveying useful information.

Whilst we have great respect for California NORML as they are usually one of the “adults” in the room, they recently published an article that either fell into the “clickbait” category, or the writer should have been better informed before putting finger to keyboard.

Specifically, the article California Cannabis Collective Law to Sunset on January 9, 2019 failed to mention several provisions in the existing statute and judicature that prevents the draconian results that the article implies.

More about that later in this piece.

We are going to reproduce a significant portion of the article as it is important to properly understand the context of our comments.

December 19, 2018 – A little-noticed looming deadline will make nonprofit collectives and cooperatives dispensing cannabis to medical patients illegal in California starting on January 9, 2019.

Proposition 215, passed by the voters of California in 1996 and still in effect today, protects only the personal use and cultivation of medical marijuana for patients, or their primary caregivers who cultivate for them. Recognizing the need for systems of distribution, the California legislature passed SB420 in 2004, allowing patients to form nonprofit medical cannabis collectives or cooperatives, under which cultivation and distribution were protected under state law. Hundreds of medical cannabis dispensaries and gardens were established under the legal protection of SB 420.

Newer legislation, three bills collectively called the Medical Cannabis Regulation and Safety Act, were enacted together in 2015. These established a Bureau to regulate cannabis commerce, requiring new state and local licenses for all commercial operations. The law grandfathered in locally licensed SB420 collectives until one year after the Bureau posted a notice on its website that licenses have commenced being issued. Proposition 64 (AUMA), and the subsequent legislation MAUCRSA, blending both medical and recreational cannabis laws, upheld this requirement.

The Bureau of Cannabis Control published its licensing notice on 1/9/2018, meaning H&SC 11362.775 protecting collective operations is repealed on January 9, 2019. By that date all cannabis collectives must be licensed under the new state laws, except for individual patient and caregiver gardens serving no more than five patients. The caregiver for these gardens cannot receive remuneration other than for actual expenses. (B&P section 26033(b), H&S Code section 11362.765(c).)

The state Health and Safety Code limits the amount of cannabis a patient or caregiver can possess or grow; however these limits were thrown out in the Kelly decision, in which the California Supreme Court ruled that a patient or caregiver may possess or grow an amount reasonably related to their medical needs.

Many cities and counties limit how much and where medical gardens can be grown, and the courts have upheld their right to ban medical marijuana gardens under local ordinances, despite state law. Locals must permit six plants per residence under AUMA, but may “reasonably regulate” how those plants are grown, including forcing them indoors.

Under Prop. 64, the BCC was required to issue a report on nonprofit collectives by January 1, 2018. However subsequent legislation pushed that date back to 1/1/2020, leaving nonprofit operations that supply cannabis to low-income patients and all collectives in limbo throughout 2019.

The preceding paragraphs describe one view of “gloom and doom” in black and white.

Now, let’s revisit several important provisions that have evolved from Proposition 215 and People v. Kelly2.

The Kelly case was decided in January 2010 by the California Supreme Court.

In the Kelly case, the Court held the State of California cannot, through the legislative process, impose a state limit on medical cannabis that is more restrictive than what is allowed under Proposition 215.

The Kelly case also limits the extent to which California’s initiative process is protected against legislative tampering.

The language that appeared on the ballot stated:

Exempts patients and defined caregivers who possess or cultivate cannabis for medical treatment recommended by a physician from criminal laws which otherwise prohibit possession or cultivation of cannabis.

Provides that physicians who recommend the use of cannabis for medical treatment shall not be punished or denied any right or privilege for making such a recommendation.

Declares that the measure is not be construed to supersede prohibitions of conduct endangering others or to condone the diversion of cannabis for non-medical purposes.

In addition, Proposition 215 contains a severability clause. The exact language of Proposition 215 added §11362.5 to the Health & Safety Code and is contained in Endnote [1].Thus, the people of California choose to amend the state Constitution to preclude restrictions on access to their fellow citizens for medical use.

All of which means that:

The cities, municipalities, and counties of California need to cease and desist immediately from any and all efforts to create local impediments to the local retail sale or delivery of medical cannabis to anyone in California, as it is an exercise in FUTILITY as ultimately any such legislation should be declared unconstitutional in California.

The cities, municipalities, and counties of California need to cease and desist immediately from any and all efforts to impose local sales, gross receipts or license fees on medical cannabis as it is an exercise in FUTILITY as ultimately any such legislation should be declared unconstitutional in California.

  • Then we have a gem that was essentially buried in the guts of SB 94 which involves the creation of “Cannabis Collective Associations” or “CCA’s”. The short version of what a CCA3 is
  • California law in changed in 2018 to create a new form of corporation for the express purpose of allowing small outdoor growers to organize the equivalent of farmers’ purchasing and marketing cooperatives – Cannabis Cooperative Associations (CCAs”).
  • CCA’s are an excellent vehicle for small, craft-oriented California cannabis cultivators [CalCannabis Cultivation Type 1, 1B, 2 or 2B] to increase their operating efficiency and lower the cost of doing business.
  • CCA’s are an organization that is owned and controlled by licensed cultivators to grow, harvest and move cannabis products into the marketplace. Cannabis cooperatives share in a common purpose of assisting small cultivators in establishing thriving and sustainable cannabis cultivation businesses that are resilient and that readily adapt to member’s changing needs. Self-reliance and self-help are the features of cooperatives.
  • The new statute specifies that certain license types may pool their resources for cannabis farming of no more than four acres total and all Members of the Association must be disclosed to the licensing agencies.
  • Specifically, the cooperatives must include three or more Members (that have not been licensed to operate a cannabis business in another state or country) who form an Association for the purpose of:
    • The cultivation, marketing, or selling of the cannabis products of its Members.
    • The growing, harvesting, curing, drying, trimming, packing, grading, storing, or handling of any product of its Members.
    • The manufacturing, selling, or supplying to its Members of machinery, equipment, or supplies.
  • CCAs can engage in all of the functions that take place in the movement of cannabis from the cultivator to consumer – processing, extracting, packaging, transportation, etc.
  • A CCA that engages in other functions must have licenses for such businesses, but if such business is conducted through entities that are wholly owned by the CCA, all of the business is deemed conducted by the cooperative association.

The conversion of an existing not-for-profit collective to a CCA has been written up any number of times4. Under MARCRSA, three (3) or more natural persons, who are engaged in the cultivation of any cannabis product, may form an association pursuant to this chapter for the purpose of engaging in any activity in connection with any of the following:

  • The cultivation, marketing, or selling of the cannabis products of its members.
  • The growing, harvesting, curing, drying, trimming, packing, grading, storing, or handling of any product of its members.
  • The manufacturing, selling, or supplying to its members of machinery, equipment, or supplies.
  • The financing of the activities that are specified by this section.

However, Members of a Cooperative Association must be disclosed to the licensing authority before the application is processed..

1 Existing law permits 3 or more natural persons, a majority of whom are residents of this state, who are engaged in the production of certain products, including agricultural and farm products, to form a nonprofit cooperative Association for specified purposes. Existing law imposes various requirements on the formation, reorganization, operation, and dissolution on the Associations. This bill would authorize 3 or more natural persons, who are engaged in the cultivation of any cannabis product, to form an Association, defined as a cannabis cooperative for specified purposes. The bill would impose similar requirements on the formation, reorganization, operation, and dissolution on these Associations

2 People vs Kelly –  Proposition 215 wrote the right to access medical cannabis into the law in California? California Proposition 215, also known as the Medical Use of Marijuana Initiative or the Compassionate Use Act, was on the November 5, 1996, general election ballot in California as an initiated state statute, where it was approved.

The passage of Proposition 215 is considered a significant victory for medical marijuana. It exempts patients and defined caregivers who possess or cultivate marijuana for medical treatment recommended by a physician from criminal laws which otherwise prohibit possession or cultivation of marijuana. Because of Proposition 215, California is one of the fourteen states that allow marijuana for medical uses.

In 2008, twelve years after Proposition 215 passed, the medical marijuana group “Americans for Safe Access” estimated that California had more than 200,000 doctor-qualified medical cannabis users.

In May 2009, the U.S. Supreme Court declined to hear an appeal of a California state appellate ruling from 2008 that upheld Proposition 215 and concluded that California can decide whether to eliminate its own criminal penalties for medical marijuana regardless of federal law. The appellate ruling came about because of a lawsuit against Proposition 215 filed by San Diego and San Bernardino counties. These counties objected to Proposition 215 on the grounds that it requires them, in their view, to condone drug use that is illegal under federal law. They also challenged a law that requires counties to issue identification cards to medical marijuana patients so these patients can identify themselves to law enforcement officials as legally entitled to possess small amounts of marijuana.

There was substantial litigation relating to this issue. People vs Kelly [47 Cal.4th 1008 (2010), [103 Cal. Rptr. 3d 733, 222 P.3d 186] was decided on January 21, 2010, by the California Supreme Court. The decision invalidated a law passed in 2003 by the California State Legislature on the grounds that the law imposed stricter standards on medical marijuana than is allowed under Proposition 215. Under the ruling, the State of California cannot to impose arbitrary limits on the amount of marijuana that medical marijuana users can grow or possess.

The 2003 law limited medical marijuana users to 8 ounces of dried marijuana and six mature or 12 immature marijuana plants.

The basis for the court’s ruling in People v. Kelly is that the 2003 legislation amounted to an amendment to Proposition 215 and that the California Constitution prohibits legislative tampering with ballot initiatives approved by voters. The defendant in the case was Patrick Kevin Kelly, a user of medical marijuana.

We see the Cannabis Cooperative Association structure as a tremendous opportunity for both small craft cultivators and not-for-profit collectives which need to make a change due to the sunsetting of the not-for-profit structure. The opportunity to own distribution and extraction operations within the same legal entity that is a grower provides a substantial tax benefit to the CCA and it is exempt from California securities laws. We intend to continue working with and expanding our relationship with the small cultivators. The CCA represents the best avenue for them to survive and even flourish in a highly regulated California market that it going to experience significant attrition in 2019.

 

3 You can find a longer version at Cannabis Cooperative Associations An Introduction, Regulatory – Tax Agency Guidance – CCA,

and

4 See “How to Convert a Non-Profit Marijuana Collective to a regular for-profit” and Can I Change My Non-Profit Collective to a For-Profit Cannabis Business?