Governor Signs Budget Trailer Bill on Cannabis

Wed, 07/6/2022

Wednesday night, the Legislature approved, with nearly unanimous bi-partisan support, AB 195 (Budget Committee), the budget trailer bill on cannabis. The governor signed the measure late yesterday, allowing it to take effect today.

AB 195 includes relief measures aimed at reducing tax burdens on legal cannabis operators, streamlining, and simplifying tax collection, bolstering enforcement, providing tax credits and other incentives to high-road cannabis retailers and social equity applicants and operators, while protecting funding for youth programs, childcare, environmental protection, and local law enforcement. Click below for a detailed summary of the legislation.

Provides Tax Relief for Legal Cannabis Businesses

General Tax Relief

>>Suspends the cultivation tax indefinitely, effective July 1, 2022.
>>Maintains a 15 percent cannabis excise tax, as required by Proposition 64, for three fiscal years until June 30, 2025.

Excise Tax Collection

>>Moves collection of the excise tax from the distributor to the point-of-sale, beginning January 1, 2023, so that the excise tax is imposed upon purchasers of cannabis by retailers.
>>Shifts the responsibility of collecting and remitting the excise tax from the distributor to the retailer and specifies the manner in which the retailer must present the excise tax to the purchaser of cannabis at the time of sale.

Relief for Equity Retailers

>>Allows equity cannabis retailers who have received an equity fee waiver from the Department of Cannabis Control to retain 20 percent of the excise tax they collect, beginning January 1, 2023, until December 31, 2025.

Tax Credits for High-Road Cannabis Employers ($20 million)

>>Allows certain cannabis employers, as defined, to claim tax credits of up to $250,000 for qualified expenditures, as defined, beginning in the 2023 taxable year, for a program total of $20 million.

Tax Credits for Equity Operators ($20 million)

>>Establishes the Cannabis Equity Tax Credit.
>>Allows cannabis equity operators to claim tax credits of up to $10,000 beginning in the 2023 taxable year, for a program total of $20 million.
>>Applies to tax years 2023 through 2027 and is repealed on December 1, 2028.

Keeps Cannabis Tax Fund Recipients Whole and Improves Cannabis Tax Fund Transparency

Revenue Neutral Excise Tax Adjustment

>>Directs the CDTFA, beginning July 1, 2025, to adjust the excise tax by an amount of revenue equivalent to what would have been collected from the cultivation tax in the previous calendar year.

Preserves Funding for Cannabis Tax Fund Beneficiaries (Allocation 3)

>>Sets the baseline of new cannabis tax revenue for Allocation 3 beneficiaries at $670 million in fiscal years 2022-23, 2023-24 and 2024-25, which will be satisfied with cannabis tax revenues, or a General Fund backfill, if needed.

Incorporates New Tax Accountability Measures and Analysis

>>Requires the DCC to develop and submit a report to the Legislature on the condition of the cannabis industry by March 1, 2025.

Bolsters Enforcement Against the Unlicensed Market

Adds additional enforcement tools against the illicit cannabis market, modeled after legislation introduced in the Assembly, as follows:

>>Unlicensed Cannabis Facilities. Provides that a person who knowingly rents, leases, or makes available for use, with or without compensation, the property, building, room, space, or enclosure for the purpose of unlawfully cultivating, manufacturing, selling, storing, or distributing cannabis is subject to civil penalties of up to $10,000 per day for each violation. Provides those civil penalties may be brought forward exclusively by the Attorney General on behalf of the DCC, or other appropriate state agency. This is modeled after AB 2102 (Jones-Sawyer). [BPC §26038 (a)(3)]
>>Illegal Water Diversion. Authorizes a county counsel to file a civil action relating to unlawful water pollution and unauthorized water diversions due to unlicensed cannabis cultivation on behalf of the state. Imposes a penalty up to $3,500 for each day in which the unauthorized diversion or use for unlicensed cannabis cultivation occurs. This is modeled after AB 2421 (Rubio). [WC §1052]

Establishes New Regulatory Oversight

Tax Enforcement

>>Allows the CDTFA to revoke an operator’s tax permit if they fail to comply with the cannabis tax provisions.
>>Makes illicit cannabis operators liable for the cultivation and excise tax they would have had to pay if they were operating in the legal market, based upon information obtained by the CDTFA, adding to the tax a penalty of 25 percent of the amount of tax owed or $500, whichever is greater, unless circumstances indicate reasonable cause.
>>Makes liable any officer, member, manager, partner, or other person having control or supervision of a cannabis business personally liable for any unpaid taxes, interest, and penalties that they willfully failed to pay upon termination, dissolution, or abandonment of that business.
>>Specifies that said individuals are liable only during the period where they had control of the business.
>>Defines “willfully fails to pay or to cause to be paid” as a failure that was the result of an intentional, conscious, voluntary course of action.

Track and Trace
Adds to track and trace requirements the date of retail sale to a customer and whether the sale is conducted on the retail sales premises or by delivery.

Cannabis Delivery. Adds delivery information to track and trace by January 1, 2023, by requiring each delivery to have a unique “trip” number assigned in the track and trace system, which will be linked to the California Law Enforcement Tracking System for law enforcement to verify the legitimacy of a delivery. [BPC §26067(a)], BPC §26090(c)]

Task Force
Establishes a task force on state and local entity regulation of commercial cannabis activity to promote communication between state and local entities engaged in the regulation of commercial cannabis activity and facilitate cooperation to enforce applicable state and local laws.

Enhances Worker Protection Provisions

Labor Peace Agreement Enforcement

>>Lowers the threshold required to enter into a labor peace agreement from 20 employees to 10 employees, beginning July 1, 2024.
>>Provides that compliance with the labor peace agreement requirements is a condition of licensure and prohibits the DCC from renewing a license for a licensee who fails to meet these requirements.
>>Defines what constitutes a bona fide labor organization and establishes a process whereby a labor organization or employee may file a complaint with the Agricultural Labor Relations Board for non-compliance.

Other Cannabis Related Funding Included in the 2022 Budget

In addition to AB 195, the 2022 Budget Act includes funding for cannabis related programming. Highlights are provided below:

DUI-Drug Impairment Research. The 2022-23 Budget also includes $2 million for the Center for Medicinal Cannabis Research at the San Diego Campus, in partnership with the California Highway Patrol, to study the impairment effect cannabis products have on driving capabilities and improve public safety methods related to cannabis impairment.

Cannabis Local Jurisdiction Retail Access Grant

>>Funds a cannabis local jurisdiction retail access grant program in the amount of $20 million, which will provide funding to eligible local jurisdictions that do not have an existing local cannabis retailer license program to assist in developing and implementing such a program, as follows:
>>By June 20, 2023, up to $10 million will be awarded to eligible local jurisdictions. Grants will be award proportionally to population size served, with priority given to programs that include a social equity component and/or programs in which consumption of cannabis exceeds its proportional retail share of legal commercial cannabis market, as determined by the DCC.
>>On or after June 30, 2023, funding will be awarded to eligible jurisdictions based on the number of permits issued with additional funding for eligible jurisdictions that issue permits to equity applications, not to exceed $2 million.
>>Establishes allowable uses for funding to include, but are not limited to, staff salaries and benefits, support for equity applicants and licensees, environmental reviews, and permitting expenses.
>>Funding will be available for encumbrance until 2026 and the DCC will annually report to the Legislature on or before March 1 of each year information on the amount of funds allocated, how local jurisdictions plan to utilize the funds, the number of applicants in progress or permitted, including the number of equity licensees operating pursuant to this program.

Read the full AB 195 Summary here.