State of The CA Cannabis Industry | The Legal Lunch Byte | Episode 21

State of The CA Cannabis Industry | The Legal Lunch Byte | Episode 21 – YouTube

Transcript:
(00:03) Griffin great to have you today on the legal lunch bite uh I don’t know if we’ve had you on here yet but uh I always appreciate a chance to catch up with you and talk about California Cannabis especially um there’s been a lot going on in the US as well so why don’t we start with you giving us a little bit of background on yourself professionally how you got into the industry and and then some Trends what you’ve been seeing lately sure thanks and it’s nice to be here too I um I’m a lawyer and our firm
(00:31) and partner and I’ve been practicing law since 2015 uh joined the firm in 2018 and just sort of happened to be at the right place at the right time um when when I joined in 2018 the Cannabis industry in California was really just starting to take off because licensing it opened earlier that year and so there wasn’t final regulations we had temporary emergency regulations and proposed sets various sets of proposed regulations on the table um and I got to help businesses get licensed and then get operational and you know everything
(01:05) else from that point on so I I just came in at the right time and you know I tell people now when I had started you know we would get I don’t know five or six questions a day but just random business things you know can I have cameras stored off site uh under the regulations can I uh can my delivery driver leave the facility at 5:45 in the morning even though deliveries are only permitted from
(01:30) 6: a.m. to 10: p.m. and things things like that and what we would have to do is just go look at the temporary emergency regulations and and say well here’s what they say here’s what the proposed regulations say which could become law in the near future uh here’s what the local law says and you know if anything and by doing that you know we really gained a lot of knowledge about what the regulations look like as they were being made and how they they ended up um being codified at the end of the day and you know over the years we’ve
(01:57) helped I don’t know hundreds of businesses from from every stage I mean so Proprietors just starting and getting licens through some of the biggest public companies in the world selling businesses and buying businesses um in just massive transactions so we really run the gamut of work we do here on a day-to-day basis you know I’m I’m doing license agreements I’m helping people right now probably three or four different acquisition or sales of business transactions a lot of leasing um you know just the gamut of reg
(02:27) regulatory advice and everyday corporate governance andru furing needs how do you describe the say this the change of the industry from the time you’ve been into now and you feel like it’s it’s gone through a a maturation process is is it really more uh more advanced than when you started or is it I’m just curious what you’ve seen because I I in my own practice I describe it as certain way to people and I I don’t want to give you uh my answers I want to hear what you have to say about
(02:54) that well I mean the industry back when I started there was just an seemingly endless pile of money being poured in right because people thought this is the green rush and I’m going to make millions of dollars if I put in you know a couple hundred thousand I’m G to come out a millionaire and that just didn’t turn out to be the case a lot of businesses raised funds with the understanding or hope really that Federal legalization was right around the corner and you know a lot of the tax problems that are based on federal
(03:25) illegality would just go away and that didn’t happen right it’s been six years you also have lot of other problems which we’ll probably get into in a few minutes that just made it really tough to make money and so you know back then I mean we would help people who were considering investing in you know cannabis businesses vet the company that they were looking at and in a lot of cases we would say this is a this is a very risky in I mean they’re all risky Investments of course but some of them
(03:52) more so than others and you know a lot of people would just be like well you know let’s see what happens and that that eventually stopped happening right people became very cautious about the industry as it wasn’t go doing so well um and if anything we would see more infusions of capital via debt right where people were taking less of a risk than just buying a piece of the business uh and that sort of increased for a while now you know I think uh as the law seems like it’s going to change soon that that will probably change but the
(04:21) last couple of years have been tight for a lot of people and the lot of cannabis businesses in the state I mean Countrywide have just closed their doors so what do you see is coming down the pipe in California particularly and then we’ll move on to to Federal changes sure so I I would encourage everybody to join a webinar I’m doing on uh June 26 at new Pacific you can you can sign up for it if you just Google it um it’s called can the Cannabis California sorry can the California Cannabis industry be saved um and I’m
(04:52) co-presenting with a guy named H Jane uh who is sort of a Powerhouse in the industry and he I have crossed paths many times we’re going to be talking about all the problems the industry is facing and there are many I write about them all the time in the canal La blog from excessive state taxes to zero enforcement against the massive I truly massive illegal industry that that is just festering um to all kinds of other stuff that’s you know making the industry tough um so I don’t see a lot of changes
(05:26) of the state side coming up I mean there’s some but I don’t think they’re going to have a lot of impact compared to the federal law change which you know everyone probably realizes right now you know the DEA recently issued a notice of proposed ruem to reschedule cannabis from schedule one to schedule three you know unless you’re a cannabis attorney you probably don’t understand exactly what that means but basically what that means is you know you have a hierarchy of schedules on the Controlled
(05:54) Substances Act One which is where cannabis is is for you know the most dangerous and least useful drugs like heroin uh and every schedule you go down becomes less um I don’t want to say less legal but less regulated to some degree and the problem with schedule one is that when something’s on it it it truly just cannot be uh the Physicians can’t prescribe it it can only be researched under very tight protocol anywhere else it becomes sort of open to a degree it’s not now it’s not going to mean it’s
(06:29) really not going to make any difference for the average Joe who’s caught you know on a federal property possessing marijuana but what it’s going to do for cannabis businesses eliminate um something called 280e of the Internal Revenue code which prevents businesses from making most standard deductions on their federal taxes so overnight I mean on a perspective basis for sure it’s going to it’s going to open up a lot of potential investment by people who are not going to be as scared of you know
(06:58) these extremely owner taxes I think the one problem though is that states may try to fill the Gap a little bit or at least be disincentivized from trying to make their their own state taxes less um onerous for lack of a better term that’s really interesting I had realized that the moving from schedule one to schedule three I’ve been keeping an eye on one eye on the on our internal cannabis discussion threads um but I didn’t realize that moving it schedule three would have the effect of of letting these businesses take advantage
(07:28) of or or at least not not run into 28 anymore does that happen uh just by virtue of it being moved on the schedule or were there accompanying regs that that specifically said that well 28 itself if you read it it’s it’s pretty short it’s like a paragraph it says it applies only to people who trafficking schedule one or two narcotics and so uh we had we’ve known for a while that Thea was going to make a recommendation uh or I’m I’m sorry we didn’t know for a while we knew for a while that the uh a s had made a
(08:00) recommendation regarding rescheduling to DEA and initially people were concerned that they might just put it on schedule two if anything which wouldn’t have changed that but this is the real big change of rescheduling um you know a lot of people out there are saying oh this is just legalization it’s it’s really not all the state legal markets are not going to be legal overnight um there there’s some concern that by virtue of being placed on schedule 3 you know DEA and FDA regulations are now suddenly
(08:29) going to and be enforced I kind of have a hard time believing that because why would the federal government go from effectively ignoring what was on schedule one to putting it on schedule three only to then you know issue some sort of prohibitive enforcement against it it just doesn’t make a lot of sense to me to spend all this money to do that um what I think is more likely to happen is that we’ll get something like um the Cole memo which was a 2013 memo under the Obama Administration in the Department of
(09:00) Justice saying basically that the federal government would take a hands-off approach to the state legal Market if a few certain metrics were achieved and so I think we’ll we’ll see something like that in the near future although you know again it’s it’s it’s anyone’s guess at this point what that would look like right and then it’s been a while since I read 28 I remember thinking it was probably the shortest provision of the tax code I’ve ever read um it was interesting to look at it and and just
(09:28) understand it a bit and so now uh with the reschedule that has the effect of letting canabas businesses take advantage of uh of deducting uh money spent on the cost of goods sold right isn’t that the isn’t that the foundational issue so they couldn’t deduct it before which means that they had uh you know fewer deductions means less bottom line um you know bottom line revenue and so this had does have the effect of increasing that that overall pot for them but like you said what what’s a typical like in California I
(09:55) know you you practice a little bit in uh Washington as well what a typical state tax uh percentage uh that’s affixed to all of these all these Goods as they’re sold I mean is it is it 20% is there more than 20 I can’t even remember now so just a little correction on 28 I mean what it did it says basically no deductions shall be made but cost to get sold in some cases can be deducted um and you know you’ve seen a lot of insane business orc charts over the years in in efforts to try to get around 28 and I
(10:27) think like one of the big things is that sort of thing doesn’t really need to happen anymore a lot of the problem with the Cannabis industry is you get these hyper complicated transaction structures just in general for a lot of reasons and you know that the more complicated something is and the more complicated a hierarchy corporate structuring is it’s just more chances of disputes and things failing um at the state level in California we we had two taxes for a while there was a tax on cultivation and
(10:56) an excise tax that got streamlined last year and so now there’s a 15% excise tax on retail sales which is a lot I mean it’s it’s not nothing and the the big complaint is when the tax system here was changed up um it effectively allows for taxation on taxation because you also have local tax too so cities here you have licenses in California at the state level and at the the local level the local level generally has a gross receipts tax so it’s 1% or 5% of gross receips hurt as much as 10% which is
(11:32) truly crazy um and then coupled with a 15% excise tax it it just makes doing business really hard the excise tax also is going up to 19% next year and like you know my thought is that what you know there obviously a lot of lobbying against that but what incentive does the state have now that the federal government is eliminated 2 ad I can see them just saying hey you know you’re getting tax relief elsewhere we need this money so sorry we’re just going of leave things as they as they uh as they stand and so I mean it’s we have a
(12:05) pretty bad tax situation here at the state and local level that’s very interesting and and I know you’ve looked at other states a bit too would you say that California tends to be harder to do business for cannabis businesses than than other states I mean it’s it’s interesting because every state is so different in how it’s regulated um some states you know will have well you know I think Utah had maybe eight retail licenses or something in the entire State uh and and they have caps California didn’t do a
(12:36) cap on on any type of licenses at the state level but what what ended up happening is when we legalized cannabis back in 2016 the voter initiative said that cities can basically decide to ban or limit cannabis activity and a majority of cities decided not to allow retail and so what what’s what’s ended up happening and you know even in the ones that they might a lot of them might say we’ll have you know two or three businesses becomes highly competitive um you know hundreds of thousands of dollars can be poured into
(13:09) a competitive application and you know you might be up against 30 people for two licenses but the the real problem here is that there’s essentially deserts of of retail so you know a lot of those retail dispensaries are concentrated in places like La San Francisco San Diego big cities right uh and there ‘s a huge amount of cultivation distribution manufacturing that is in excess of what these places have capacity to serve so had the city had the state allowed retail sales or forced localities to adopt it um Statewide I think the things
(13:45) would be a lot less extreme but you know we have over Supply at the cultivation level and then under Supply at retail so makes it tough we also have a mass I mean a massive illegal Market back in uh 2019 when I started writing about that there was an estimate about 300 3,000 illegal businesses um today I’m sure it’s more I’ve heard something like two to three times the size of the legal market and I I analyze you know every quarter of the state puts out enforcement data and they try to sort of tool it in a way that makes it look like
(14:18) they’re doing a lot um and I analyze it on our blog I mean that you can see the numbers in in most fields are going down I think the last quarter they did 21 Statewide search Warr in a 3-month period uh which is considering the size of the illegal Market is is literally a drop in the bucket not exaggerating here so we have a lot of unique issues I mean if you go to other states they’re actively enforcing against the illegal Market while trying to make the legal Market easier here it seems like they’re
(14:49) not enforcing and at the same time they’re not making it easier to get into the legal market so you know you got to do one or the other I think and and the state’s not really wrapped a Ted around that yet that’s great super interesting well we’re at our 15 minutes I want to thank you for spending the time I I think people be very interested tuning into your webinar uh at the end of the month um and definitely we’ll catch up again as things continue to progress sure