A brief history of the distributor in CA's cannabis regulations

Recently the Public Policy Institute of California released a report entitled “Regulating Marijuana in California.” This report was a timely reminder of the a basic challenge that has shaped our work over the last few years: mainstream California wants a highly controlled marketplace. There is a low level of public trust in our industry. The report concludes that “Of course, a highly regulated legal market would be accompanied by a robust illegal market.”

In other words, they don’t care if we are still criminals as long as “legal” sales are highly controlled.

 

This thinking was a leading legislative proposal in 2014. SB 1262 (Correa) featured the following language “The public welfare and public safety require that there be a limitation on the number of premises licensed for the cultivation of marijuana to prevent the diversion of marijuana for nonmedical purposes.” This provision galvanized the grassroots community of small and independent growers because they saw that this provided no future for our communities or farms.

Successfully opposing the legislation that contained this provisions did not change the underlying reality: many stakeholders and policy makers believe that “control” is a critical. It became clear in mid-2014 that our work grower’s association was to develop a regulatory framework that struck a better balance between control and opportunity for participation. That is exactly what we did in 2015 as we negotiated the MMRSA.

The balance was struck using a third-tier distributor, similar to alcohol distributors. State law requires: "All licensees holding cultivation or manufacturing licenses shall send all medical cannabis and medical cannabis products cultivated or manufactured to a distributor, as defined in Section 19300.5, for quality assurance and inspection by the Type 11 licensee and for a batch testing by a Type 8 licensee prior to distribution to a dispensary."

Our imperative in 2014 was to prevent license caps from becoming state law. Our work in 2015 was more challenging. We proposed an alternative proposal: limit the size of each specific cultivation site. We quickly established our basic principles: a tiered licensing structure that limited the size of the operation rather than number of operations. This provided adequate controls on the overall production. However, this did not address the need to streamline audits and reduce tax evasion.

Tax evasion is rampant in the "legal" cannabis industry in California. The Board of Equalization is never shy to remind us that compliance is somewhere around 20 to 30 percent. From a policy perspective “changing the point at which the tax is assessed and collected. Collecting the tax at a higher point in the distribution chain reduces the number of entities responsible for remitting the tax, which permits more thorough audits without increasing auditing resources.”*

Unfortunately, this doesn’t translate to California’s cannabis marketplace because moving further up the supply chain means there are more entities, not less. In the interests of accountability there is a need to reduce the number of entities. So again, we found more momentum for a proposal to limit the number of cultivation licenses to achieve this reduction in the number of entities. The distributor solves this problem. 

Contrary to claims that the distributor was passed “in the dark of night,” we started exploring the model formally in February of 2015 and refined it over several months. We worked closely with legislative staff, Board of Equalization staff, and other stakeholders to understand the challenge, to find common ground, and to support the best possible solution.  We continue to work on the model to this day and are actively negotiating several further refinements that will provide increase market access and flexibility for small growers.

A winner take all advocacy campaign to abolish distribution is just as out of touch now as it was for the last several years. Let's not forget that the California legislature failed to regulate for 19 years, with active clashes in both chambers for the last 5 years. As the regulatory vacuum continued, the negative impacts to our communities and our watershed continued to increase in severity. 

This balance was struck by mandating a third-tier distributor. As challenging and disruptive as the distributor is, it also the cornerstone of the compromise that made it possible for growers to be regulated by the Department of Food and Agriculture, the compromise that provided specific licenses for small growers, and ensured that license caps were no longer part of the conversation. It was part of the compromise that was passed and signed. 

 

The policy challenge in California is unique. There is no other state that has similar conditions. The challenge can be described simply: how can we achieve the levels of control without leaving tens of thousands of growers without a license.

Those who claim that the distributor is the biggest threat to small growers are out of touch with the political reality or they are disingenuously preying on the legitimate fears and concerns of small growers to achieve their own political ends. License caps are an existential threat to small growers. While the distributor model will be very disruptive and challenging it is the fulcrum that allows for a robust and diverse community of cultivators while still achieving the levels of control and accountability required for California to move forward with regulations.

Making the distributor voluntary is unacceptable from our perspective, because it will greatly increase political pressure to reduce, limit, and cap the number of licensed cultivators that will be allowed in the marketplace.

Our members have a simple goal: to be licensed. To not have to be afraid, ashamed, or to be dishonest about what we do for a living. We want to build businesses and brands. To add value, not just to our products, but also to our communities and our watersheds. We can’t if they limit the number of licenses to achieve control. And they don’t care if we remain criminal, as long as legal sales are highly controlled. While it was a challenging compromise to make, the mandatory distribution model is a critical component of our regulated future.  

 * Denison, D. V., & Eger, R. J.. (2000). Tax Evasion from a Policy Perspective: The Case of the Motor Fuels Tax. Public Administration Review60(2), 163–172. 


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