Counties Prepare for Cannabis

Upcoming legalization raises questions about local law, businesses

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California will undergo sweeping legal changes come Jan. 1 to join Colorado, Washington and Oregon among the ranks of states embracing regulation and taxation of recreational cannabis.

While many of California’s 58 counties are scrambling to adapt their local ordinances to Proposition 64, which fully legalizes the use and possession of cannabis for people age 21 and over, the Santa Cruz County Board of Supervisors voted unanimously last week to approve recreational cannabis sales beginning Jan. 1.

Proposition 64, which passed in last year’s November election, sets up a regulatory and licensing framework to govern cannabis sales. It also implements standards for product testing and land, water and pesticide use in commercial cannabis cultivation.

Because of the current lack of regulatory framework, the work needed to adapt to Proposition 64 by January is complicated and creates several difficult questions about its social and commercial impact.

“It’s a whole new territory. Even though other states have done it, everybody is still trying to figure this out,” said Santa Cruz senior city planner Katherine Donovan. “It’s a balancing act.”

Proposition 64 allows both counties and incorporated cities to set their own regulations. Cities and counties are not required to allow the commercial sale and cultivation of cannabis, but personal use and cultivation may not be prohibited, only “reasonably regulated,” Donovan said.

Donovan also said many cities and counties don’t have existing ordinances governing cannabis, and a majority of the ordinances being drafted throughout the state ban recreational cannabis sales.

Santa Cruz County, however, has been at the forefront of regulating the medical cannabis industry and already has an ordinance regulating it. The only change that had to be made to the existing ordinance was the removal of the word “medical,” said county communications manager Jason Hoppin.

Twelve dispensaries in unincorporated Santa Cruz County areas will have licenses for recreational sales. The county does not currently plan to distribute additional licenses for sales or cultivation, in order to keep the industry from expanding too rapidly within county lines.

The city of Santa Cruz will have a total of five dispensaries licensed to sell recreational cannabis, though that cap may be increased or removed in the future, Donovan said.

Santa Cruz County moved to change the cultivation limit from a hard cap of 99 plants per licensed commercial grower to an acreage-based system. This is part of a larger effort to bring in unlicensed growers in the county under the regulatory umbrella. About 700-800 growers have already registered with the county.

“What our board has always said is that we want to protect the neighborhoods while allowing the cultivation of cannabis,” Hoppin said. “We had started down this path prior to legalization. […] This day has been a long time coming.”

The proposed cultivation ordinances for Santa Cruz County are still being reviewed and are likely to pass in early 2018.

However, only some of the currently registered growers will ultimately become county-sanctioned cultivators, Hoppin said. This is because many growers won’t be able to meet the new standards, especially those relating to zoning and water and land use on cannabis farms.

The current medical cannabis industry in California has far fewer state regulations than the recreational industry would. Pesticide use in medical cannabis, for example, is widespread throughout the industry and is not regulated at all, said CannaCruz dispensary CEO Grant Palmer. Product testing requirements for cannabis are also nonexistent. In effect, it isn’t obvious to the average consumer whether medical cannabis is or isn’t contaminated.

“People think that bad cannabis is going to be in some brick form and it’s going to look all brown and gross,” Palmer said. “No, some of the worst cannabis, the most poisonous cannabis out there, is also the best looking. It’s more complicated than people understand.”

While many cannabis business owners in Santa Cruz, such as Palmer, are supportive of the legalization bill, they are concerned about the delay between state legalization and implementation of local ordinances, as well as the impact the new regulations may have on their supply chain.

“It’s going to be a disaster […] I don’t think anybody else around here is ready for it,” Palmer said. “They have no idea that all their vendors are about to go away. […] There’s only a couple companies in this whole state that can provide clean product to a dispensary.”

Palmer also said the new taxes that would be placed on his business were unreasonably high. In addition to corporate taxes, sales taxes and the current local tax of 7 percent, Proposition 64 imposes a 15 percent state tax on cannabis and a wholesale tax of $9.25 per ounce of flowers and $2.75 per ounce of trim. For comparison, the state imposes a total of $3.30 per gallon tax on spirits.

This comes to a total of roughly 39 percent cumulative tax on cannabis. Unlike nearly all other kinds of businesses, dispensaries and other cannabis businesses cannot file for a variety of tax deductions, such as employee payroll.

Between steep taxes and a tightening supply chain, legal cannabis may end up too expensive for many would-be consumers.

“The tax on the black market is zero percent,” Palmer said. “The black market cannabis, which is where all the dirty cannabis is going to go, is going to be almost 40 percent cheaper. […] When it comes down to it, when you ask people if they want to save 40 percent on something, they almost always say yes.”