California Marijuana Distribution: Pricing Rules

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As of January 1st, 2018, fully legal retail stores selling adult use recreational marijuana opened their doors in the Golden State. While medical marijuana has long been legal in California, this broader legalization was accompanied by a whirlwind of new legislation, a body of laws that will continue to grow.

In terms of the retail distribution of marijuana, the Bureau of Cannabis Control’s (BCC) Text of Regulations serves as the most crucial legal document. These 138 pages of detailed legislation cover everything from licensure to mycotoxin testing to which kinds of labels stores are allowed to use, but the state does not enforce explicit, on-the-label pricing rules for marijuana products. However, the BCC does offer plenty of laws that financially impact retailers and distributors, as well as a bevy of pricing-related retail cannabis regulations.

Free Cannabis Goods

While the Bureau of Cannabis Control’s massive catalog of cannabis regulations doesn’t directly affect the price tag of marijuana products sold by distributors or retailers in California, they do chime in on at least one very important pricing-related factor: Licensed retailers cannot provide cannabis goods for free.

There is an exception here, though. Retailers with an M-Retailer license, M-Retailer Non-storefront license or M-Microbusiness license – in which the “m” stands for “medical” – may provide free medical cannabis goods to some medical cannabis patients and primary caregivers. That free marijuana is subject to the usual regulations (such as lab testing, entry into a track-and-trace system) and counts toward the customer’s daily purchase limits.

Additionally, cannabis retailers cannot advertise free cannabis goods or giveaways of any types of products, whether they’re weed-related or not. More than that, marijuana retailers are not legally allowed to run promotions such as buy-one-get-one-free sales, offer free products with a donation or hold contests, sweepstakes or raffles for cannabis products.

On a related note, retailers can accept returns of cannabis goods that were previously sold, but they cannot re-sell returned marijuana products.

Retail and Medical Marijuana Taxes

To the dismay of recreational adult-use cannabis enthusiasts, one very important part of California’s cannabis law heavily affects its price at retail – the sales taxes determined by the California Department of Tax and Fee Administration and collected by the state, which increased on January 1st, 2020.

While medical marijuana users with their state-issued medical cannabis ID cards in hand are exempt from paying sales taxes on medical marijuana products, it’s a radically different story for recreational users. In addition to paying the standard California state sales and use tax – which ranges from 7.5 to 9.25 percent – every retail sale of cannabis comes with an additional 15 percent excise tax.

These taxes actually start with growers, who must pay a cultivation tax of $9.65 for every ounce of cannabis flowers they cultivate and $2.87 for every ounce of leaf or $1.35 for every ounce of fresh marijuana plant material.

Distribution and Retail Fees: Applications

As of 2019, the temporary licenses allowing retailers to engage in commercial cannabis activity gave way to yearly retail and distribution licenses. Every company selling or distributing commercial weed needs a license from the California BCC. Each type of license caters to a different type of company and comes with a different application fee as well as a separate license fee on top of that.

Here’s how those application fees break down, at 2020 rates:

  • All annual retail licenses: $1,000 per application.
  • Cannabis event organizer license: $1,000 per application.
  • Temporary cannabis event license: $1,000 per application.
  • Physical modification of premises for cannabis retailer: $500 per application.

Plus, all license applicants must provide proof of having obtained a surety bond valued at a minimum of $5,000 payable to the State of California.

License Fees: Labs and Distributors

The initial application fee and surety bond are just the tip of the expense iceberg for cannabis distributors in California. Annual license fees vary widely – from as little as $1,500 to as much as $240,000, at 2020 rates – depending on two factors: the type of license and the gross revenue of the business.

The fee pricing rules straight from the BCC are:

  • Testing laboratories: $3,000 (gross revenue up to $160,000); $6,000 (gross revenue of over $160,00‒$320,000); $8,000 (gross revenue of over $320,000‒$480,000); $13,000 (gross revenue of over $480,000‒$800,000); $20,000 (gross revenue of over $800,000‒$1.2 million); $32,000 (gross revenue of over $1.2 million to $2 million); $48,000 (gross revenue of over $2 million to $2.8 million); $72,000 (gross revenue of over $2.8 million to $4.4 million); $112,000 (gross revenue of over $4.4 million).
  • Distributors (other than transport-only self-distribution): $1,500 (gross revenue up to $1 million); $6,000 (gross revenue of over $1 million to $2.5 million); $11,250 (gross revenue of over $2.5 million to $5 million); $22,500 (gross revenue of over $5 million to $10 million); $45,000 (gross revenue of over $10 million to $20 million); $75,000 (gross revenue of over $20 million to $30 million); $120,000 (gross revenue of over $30 million to $50 million); $180,000 (gross revenue of over $50 million to $70 million); $240,000 (gross revenue of over $70 million).
  • Distributors (engaged in transport-only self-distribution): $200 (gross revenue up to $1,000); $500 (gross revenue of over $1,000‒$3,000); $1,000 (gross revenue of over $3,000).

License Fees: Cannabis Retailers

Like distributors, cannabis retailers are subject to a sliding price scale of license fees, per the Bureau of Cannabis Control:

  • Retailers: $2,500 (gross revenue up to $500,000); $5,500 (gross revenue of over $500,000‒$750,000); $7,500 (gross revenue of over $750,000‒$1 million); $11,000 (gross revenue of over $1 million to $1.5 million); $14,500 (gross revenue of over $1.5 million‒$2 million); $22,500 (gross revenue of over $2 million‒$3 million); $30,500 (gross revenue of over $3 million‒$4 million); $38,500 (gross revenue of over $4 million‒$5 million); $46,500 (gross revenue of over $5 million‒$6 million); $57,000 (gross revenue of over $6 million‒$7.5 million); $96,000 (gross revenue of over $7.5 million).
  • Microbusinesses: $5,000 (gross revenue up to $1 million); $12,000 (gross revenue of over $1 million‒$2 million); $20,000 (gross revenue of over $2 million‒$3 million); $32,000 (gross revenue of over $3 million‒$4 million); $45,000 (gross revenue of over $4 million‒$6 million); $60,000 (gross revenue of over $6 million‒$7 million); $80,000 (gross revenue of over $7 million‒$10 million); $100,000 (gross revenue of over $10 million‒$20 million); $120,000 (gross revenue of over $20 million‒$30 million); $140,000 (gross revenue of over $30 million‒$40 million); $160,000 (gross revenue of over $40 million‒$50 million); $180,000 (gross revenue of over $50 million‒$60 million); $220,000 (gross revenue of over $60 million‒$80 million); $300,000 (gross revenue of over $80 million).

Similarly, cannabis event organizers who plan to engage in up to five events annually must pay $3,000 per license. That license fee goes up to $5,000 for six to 10 events, $9,000 for 11 to 20 events or $20,000 for more than 20 events in a year.

Across all distributors, labs and retailers, all fees are nonrefundable, and they may be paid to the BCC by cash, check, money order, debit card or credit card via the Bureau’s online licensing system. Failure to pay may result in penalties of up to 50 percent of the relevant licensing fee.

Cannabis Regulations: Insurance Requirements

Another type of price tag the BCC imposes is minimum insurance requirements for all commercial cannabis license applicants. At all times, a cannabis distributor licensee must carry an active commercial general liability policy of at least $2 million and in an amount of no less than $1 million for each loss.

The distributor’s insurer or risk retention group must also have proof of capitalization of no less than $10 million.

Value-Related Rules for Cannabis Delivery

In section 5418 of its Text of Regulations, the Bureau of Cannabis Control details a few value-related rules for delivery vehicles engaged in distributing cannabis goods for licensed retailers.

In the state of California, delivery employees are not allowed to carry marijuana goods valued at more than $5,000 in the delivery vehicle at any one time.

On top of that, if the vehicle keeps a stock of cannabis goods for delivery orders that have not yet been received or processed, that stock may not exceed a total value of $3,000. Both of these values are based on the current retail price of the cannabis goods in question.

Cannabis Inventory Requirements

Among the regulations created by the BCC for cannabis retailers is the required use of track-and-trace software. This software logs tons of information on marijuana products making their way from cultivation all the way through the retail system, including details on purchase, sale, testing, packaging, transfer, return and disposal.

Information is tracked and recorded by the California Cannabis Track-and-Trace system (CCTT). It’s powered by Metrc software, which may be viewed by retail licensees and authorized employees of the state of California, as well as by some county and city officials.

Among the info collected by track-and-trace systems, legislation adopted by the California Department of Tax and Fee Administration in January of 2019 (specifically, emergency Regulation 3702) requires that cannabis distributors and retailers enter the wholesale cost of cannabis and cannabis products into the CCTT system in all arm’s-length transactions. The wholesale cost is determined by the average market price of the product, which equals the retailer’s wholesale cost plus markup. Retailers must also enter the retail sale price of cannabis and cannabis products into the CCTT system.

On a related note, the BCC imposes another price-related rule: As part of the accurate inventory records licensed retailers are required to maintain, the price the retailer paid for all cannabis goods – including taxes, delivery costs and additional costs – must be recorded.

Average Marijuana Prices in California

Just because the law doesn’t exercise sway over marijuana prices in California doesn’t mean average prices don’t exist. According to data pulled from the crowd-sourced priceofweed.com and the Oxford Treatment Center and reported by The Sacramento Bee in May of 2019, Californians pay an average of about $207 per ounce for medium-quality marijuana, or roughly $4.84 per joint. For high-quality cannabis, those figures jump to about $257 or $5.97, respectively.

It’s important to keep in mind that, especially on the recreational level, much of cannabis retail and distribution legislation is new territory – price regulations may not be part of the early picture, but that may change as legislation continues to evolve.

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About the Author

As a freelance writer and small business owner with a decade of experience, Dan has contributed legal- and finance-oriented content to diverse sources including Chron, Fortune, Zacks.com, Motley Fool and MSN Money, among others.