The Challenges of the Evolving Marijuana Industry: Reconciling State Legislation with Federal Prohibition

Decriminalization and the Rise of the Medical Marijuana Industry in California²

In 1996, California voters approved Proposition 215, the Compassionate Use Act, which, in pertinent part, decriminalized the cultivation and use of marijuana by seriously ill medical patients.³

In 2004, Senate Bill 420 (SB 420), the Medical Marijuana Program Act, became law. Among other things, SB 420 (1) required the California Department of Public Health to establish and maintain a statewide medical marijuana identification card program; (2) established possession and cultivation limitations and guidelines for qualified patients and their primary caregivers; and (3) extended decriminalization so qualified patients, persons with valid medical marijuana identification cards, and appropriate primary caregivers, may associate collectively or cooperatively within California on a non-profit basis only to cultivate marijuana for medical purposes.⁴

Following the passage of SB 420, certain local governments created ordinances authorizing medical marijuana dispensary permits. In 2007, the California Board of Equalization issued a Special Notice clarifying that medical marijuana sales were generally subject to sales tax, and businesses engaged in such transactions needed to possess a seller’s permit.⁵ Then, in 2008, the California Attorney General issued guidelines for “a properly organized and operated collective or cooperative that dispenses medical marijuana through a storefront….”⁶

The Medical Marijuana Regulation and Safety Act (the MMRSA) became law January 1, 2016. The MMRSA is comprised of three pieces of legislation: Assembly Bill 243, Assembly Bill 266, and Senate Bill 643. Among other things, the MMRSA:

1. Establishes a dual licensing system in which medical marijuana enterprises will need an annual license issued by the state in addition to a local permit, license, or entitlement. Creates 12 general categories of license types for various enterprises involved in the production, distribution, testing, and sale of medical marijuana. Provides restrictions on vertical integration.
2. Establishes penalties for medical marijuana enterprises violating the MMRSA’s licensing and recordkeeping requirements.
3. Creates a new Bureau of Medical Marijuana Regulation (the Bureau) within the California Department of Consumer Affairs with the sole authority to regulate licenses for the transportation, storage, distribution and sale of medical marijuana within the state and to collect fees in connection with such activities.

The Bureau and Local Jurisdiction

Before the new statewide system can operate and issue licenses, certain agencies, including the newly created Bureau, must establish rules and regulations. On February 4, 2016, Governor Jerry Brown appointed Lori Ajax, former Chief Deputy Director of the California Department of Alcoholic Beverage Control, to head the Bureau. Chief Ajax’s immediate undertakings are to staff the Bureau and develop agency rules and regulations. Regarding the latter, Chief Ajax anticipates holding stakeholder meetings in the coming months for the purpose of gathering stakeholder input that the Bureau intends to use to draft its rules and regulations, which will be circulated for public comment before finalization.⁷ The Bureau and other licensing agencies, as well as industry stakeholders, are also in the unique position of designing regulations based on lessons learned from other states, such as Colorado and Washington, which have previously established their own licensing regimes. The Bureau anticipates developing regulations sometime before January 1, 2018.⁸

In the meantime, local governments are creating their own medical marijuana policies and regulations pertaining to whether and what type of commercial activities will be permitted within their jurisdictions. For the time being, local jurisdictions wield significant power over medical marijuana enterprises wishing to establish or expand their businesses. Businesses should be aware that once the various state agencies start issuing licenses, licenses will be prioritized for any facility or entity that can demonstrate that it was in operation and in good standing with the local jurisdiction in which its operates before January 1, 2016.⁹

Download: The Challenges of the Evolving Marijuana Industry: Reconciling State Legislation with Federal Prohibition

1. 21 U.S.C. § 801 et seq.
2. In a sense, California has not “legalized” medical marijuana. Instead, the state is exercising its reserved powers to not punish certain marijuana offenses under state law when a physician has recommended marijuana use to a qualified medical patient. Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use, Edmund G. Brown, Jr., Attorney General, Department of Justice, State of California, August 2008, p. 3.
3. Cal. Health & Safety Code § 11362.5.
4. Cal. Health & Safety Code §§ 11362.765, 11362.775.
5. Important Information for Sellers of Medical Marijuana, California State Board of Equalization, February 2007.
6. Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use, Edmund G. Brown, Jr., Attorney General, Department of Justice, State of California, August 2008, pp. 8-11.
7. LA Times, Q&A (with Lori Ajax), Patrick McGreevy, April 7, 2016, available at: http://www.latimes.com/politics/la-pol-ca-lori-ajax-marijuana-regulator-20160408-htmlstory.html.
8. Bureau of Medical Marijuana Regulation FAQ’s
9. Cal. Bus. & Prof. Code § 19321(c).