California Marijuana Distribution: Licensing & Retail Regulations

California is home to the largest legal marijuana market in the world. In 2019, the cannabis business in the Golden State is set to rake in $3.1 billion, a significant increase from the previous year's $2.5 billion in legal sales. Naturally, entrepreneurs may feel drawn to this booming business. However, prospective cannabis business owners should know that opening a marijuana retail shop in California is not simple.

Before getting into this business, entrepreneurs should understand the licensing process and laws regarding selling marijuana in California.

Although cannabis business endeavors have unique requirements, marijuana entrepreneurs also must go through the same steps as all other retailers and growers. For example, newcomers to the cannabis business need to decide whether to form a limited liability corporation or incorporate their business. The new business may need an Employer Identification Number, or EIN; a fictitious business name or Doing Business As filing; and a state sales tax permit.

New businesses of any kind must also earn general business licenses from the city or county in which they want to operate. It's important to note that this is different from the licenses that businesses need in order to sell cannabis. First, owners must gain general business licenses, then they can obtain the additional marijuana licenses.

The first step in getting licensed for a cannabis business is to get the proper approval from the city and/or county in which the business will operate. Some jurisdictions outright ban cannabis businesses, while others limit the number of permits they allow. Still more zone only certain areas for marijuana businesses.

For example, many cities and counties do not allow cannabis dispensaries to be within specific distances of churches, schools, daycares and rehabilitation centers. Furthermore, a city may deny a cannabis distribution license if there are already several such businesses in the area. If prospective business owners run up against these obstacles, they may need to find different locations for their operations.

Before someone can apply for a statewide cultivation or distribution license, they must first have all the licenses that their local governments require. The owner must also have paperwork that proves ownership or a lease of a space in which the business will operate. That space must be zoned for the type of marijuana business the owner intends to operate.

California provides several types of cannabis business licenses and subtypes within those categories. It's important for a business owner to get the right type of license for her new company. In general, the state requires just one person in the business to hold these licenses, and that person should be the owner.

In general, California offers separate licenses for these cannabis activities:

• Cultivating.
• Manufacturing.
• Retail selling.
• Event organizing.
• Laboratory testing.
• Operating a microbusiness.

Some of these groups contain several subtypes of licenses, including the retail license. Furthermore, the state grants temporary licenses in each of these categories, which allows businesses to operate until their official licenses come through.

Read More: California Cannabis Industry: Advertising Restrictions

The type of marijuana license an entrepreneur needs depends on the type of customer to whom they want to sell and the type of store they will operate. An M-license allows retailers to sell medical marijuana to people with prescriptions. An A-license allows a business to sell cannabis to users age 21 and over.

Each place from which cannabis is sold needs a separate license. If a business is a storefront and will also deliver cannabis to customers, the company needs a Type 10 license. Sellers who do not have storefronts and only deliver to their customers need a Type 9 license. A distributor license is a Type 11, and a transport-only license is Type 13.

A business may qualify for a Type 12 microbusiness license if it conducts three of these business activities:

• Sells cannabis in retail outlets.
• Distributes marijuana to retailers.
• Manufactures cannabis, including packaging, extraction, infusion and labeling.
• Grows marijuana on fewer than 100,000 square feet of land.

People who organize temporary cannabis events, such as festivals and pop-up shops, need Type 14 licenses; other permits come in A-licenses and M-licenses. Laboratory licenses do not need such classifications. Instead, these are simply Type 8.

California has three agencies that are involved in the licensing process:

• CalCannabis Cultivation Licensing (CalCannabis).
• Manufactured Cannabis Safety Branch (MCSB).
• Bureau of Cannabis Control (BCC)

Each of these agencies issues different types of licenses. CalCannabis is part of the California Department of Food and Agriculture. It issues licenses A and M for cultivation only. The MCSB is part of the California Department of Public Health and oversees manufacturing licenses for both medicinal and adult use.

The BCC oversees other cannabis permits, including retail, laboratory and distribution licenses. Microbusinesses also need BCC licenses, even though they may also cultivate and manufacture.

In order to qualify for a state license to cultivate, manufacture, distribute or sell cannabis products, applicants must prove that they own the business in question and that they have received all of the applicable local permits. Furthermore, some applicants may be disqualified based on their criminal history.

California may deny a cannabis business license if the applicant has any of these felony convictions on his record:

• Drug trafficking with enhancements, as defined in California Health and Safety Code Sections 11370.4 and  11379.8.
• Crimes that California Penal Code Section 667.5 defines as violent.
• Crimes involving selling or giving drugs to a minor.
• Crimes involving using a minor in the sale or furnishing of drugs.
• Crimes that California Penal Code Section 1192.7 defines as serious, including many sex crimes.
• Embezzlement, deceit or fraud.

While such felonies may cause the state to automatically reject applications, other crimes do not. For example, someone may have a simple possession felony on their record and still qualify for a cannabis business license.

Applicants who meet all of the local qualifications and do not have any disqualifying felonies can visit the appropriate state agency website and find out how to apply for the license in question. Business owners should beware that the application to sell cannabis products is lengthy. The applicant needs to be ready to provide:

• Business information in general, including name and EIN.
• Name of anyone who holds a financial interest in the company.
• Location of the business.
• A map and diagram of the premises.
• Formal operating procedures.

In addition to this basic information, owners should prepare to produce evidence of a surety bond that is payable to the State of California. This bond should be worth at least $5,000 and cover the cost of the possible destruction of cannabis products. The applicant should also provide proof of:

• A valid license or permit from the county or city.
• The location being at least 600 feet from any school.
• Legal rights to sell cannabis in the location.

The temporary licenses that allow businesses to run while the official paperwork is processing cost nothing. However, California's various agencies charge fees for each application. For example, all BCC licenses cost $1,000. Furthermore, if owners need to file paperwork regarding the modification of the premises from boundary and business layout diagrams previously filed with the BCC, it costs $500.

Cultivation licensing fees vary depending on the size and type of facility the person intends to operate. For example, a specialty "cottage" outdoor cultivation business, which is relatively small, costs just $135 per license. However, growers must pay $8,655 for the license for a medium-sized indoor facility.

The licensing fee for cannabis manufacturing businesses changes depending on the annual revenue of the company and the subtype of the license it needs. The first year costs $500;, after which companies pay based on their revenue. Tier I businesses that gross up to $100,000 per year pay $2,000, and businesses that make over $10 million must pay $75,000 annually.

It can take time for cannabis business license applications to go through the system. As such, California allows entrepreneurs to run their businesses with a temporary license that is good for 120 days. If someone has completed an application and still does not have the license, they can apply for a 90-day extension of the temporary license.

Someone with a temporary license must follow the same laws and regulations as someone with a permanent license. After that, an applicant must operate under an annual license, which is good for one year.

Marijuana business owners must renew their licenses each year. The renewal process is similar to the initial application process, but exact fees and procedures vary among agencies. It's important to renew these licenses with plenty of time to spare. Operating a cannabis business without a valid license is illegal.

Once a cannabis business owner has all the proper licensing, it's time to open up. It's important for shop owners to know and abide by all the regulations for selling cannabis products. Under state law, marijuana can be sold only between 6 a.m. and 10 p.m.

Furthermore, retailers should ensure that they allow only people who are legally allowed to purchase their products onto the property. Stores with M-licenses can allow anyone over the age of 18 with a prescription. A-license facilities can only admit people over the age of 21.

Retailers must also sell only cannabis products with proper labels and that are within the expiration limit. Delivery services must not carry more than $5,000 worth of cannabis goods at a time and can only sell to legal users. Delivery drivers should carry delivery requests with them.

While many California cannabis retailers follow state laws to the letter, there remains an inherent risk in the marijuana business. Consuming, selling, growing, transporting and distributing cannabis remain illegal under federal law. In fact, the substance is a Schedule I drug.

Under the Obama administration, the federal government had an official policy that it would not target people who operated cannabis businesses or used marijuana in accordance with their state laws. However, Trump administration officials got rid of this rule. Instead, federal prosecutors have discretion over whether or not to prosecute people in the state's cannabis business.

As of 2019, federal prosecutors in California have not shown any interest in shutting down dispensaries or other cannabis businesses in the state. However, the risk remains. Selling less than 50 kg of marijuana is a felony and carries a penalty of five years in prison and a fine of $250,000.

Anyone hoping to open a marijuana business in California should connect with a skilled lawyer. These professionals can help entrepreneurs get the correct licenses and navigate tricky legal waters.