California cannabis businesses are some of the most, if not the most, regulated businesses in the state. Cannabis businesses are subject to the scrutiny of the usual suspects like the California Department of Tax and Fee Administration (“CDTFA”) and the Employment Development Department but are also subject to industry specific regulations imposed and implemented by the Bureau of Cannabis Control (“BCC”).
Cannabis Businesses – Packaging and Labeling Compliance
The new regulations bring a flurry of packaging and labeling requirements for each type of cannabis business on the supply chain. During the transition period from January 1, 2018 to July 1, 2018, there is some leniency for compliance. However, cannabis businesses should start looking to the future and preparing for the “full blown” packing and labeling rules that will be required in four short months.
Cultivators must ensure that the cannabis is labeled, placed in a resealable tamper-evident, child resistant packaging. The cannabis label must also provide the appropriate government warning, net weight of the cannabis per package, list of active ingredients, information associated with the unique identifier issued by the State Department and other various information.
The manufacturing regulations provide the most guidance, and as a result the most rules, regarding packing and labeling of manufactured products. The regulations require primary and secondary information panels which must include various information including the net weight or volume of the contents of the package, the THC and CBD content of the package expressed in milligrams, government warning statements, product’s manufacture date, list of product ingredients, and other information. The regulations also provide for specific packaging and labeling rules for edible products which provide significantly more information about the product to the consumer.
Distributors may package, label, re-package, and re-label flower for retail sale but only for cannabis flower, and not for manufactured products. The only exception to the rule is that distributors can re-package a manufactured product if the amount of THC per package or serving was initially labeled incorrectly.
All packaging and labeling requirements must be satisfied before the product or flower reaches the retailer. Retailers are responsible for providing opaque exit packaging for which all products purchased from the retailer will leave the premises in.
Conducting an internal compliance review of your cannabis business’ packaging and labeling is crucial to ensure and maintain compliance, while allowing your business to address issues before the BCC takes its own action.
Cannabis Businesses – Right of Access for Inspection, Investigation, Review or Audit
The BCC does NOT have to give prior notice of an inspection, investigation, review or audit of licensee and the inspections or audits can be conducted at any time the licensee is exercising its privileges under the license. In fact, the BCC has already begun unannounced “surprise” visits to cannabis operators in the local area to assess compliance. During these inspections, the BCC is authorized to have full access to and inspect any licensed premises, to test any of the licensee’s equipment or vehicles, to test any cannabis goods or products, and copy any licensee’s materials, books, or records.
Cannabis Businesses – Record Retention
The BCC has the right to examine and copy the books and records of any licensee as it deems necessary. Personnel records, training records, cannabis contracts, permits licensees, and security records all must also be kept for 7 years. The records must be kept in a way that allows them to be produced for the BCC at the licensed premises in either hard copy or electronic form.
Cannabis Businesses – Tax Audits
The new regulated world of cannabis also brings several new types of taxes imposed at the state and local levels. The CDTFA (formerly the Board of Equalization – BOE) is anxiously waiting to audit cannabis businesses to ensure compliance. These new taxes are extremely nuanced, and the mechanics of these new taxes will be saved for another post. However, all cannabis businesses along the supply chain should have a general understanding of each of the taxes and know how to be prepared for an audit.
The first new tax is the cultivation tax which is imposed on cannabis cultivators. The cultivation tax rates are $9.25 per dry-weight ounce of cannabis flowers, $2.75 per dry-weight ounce of cannabis leaves, and $1.29 per ounce of fresh cannabis plant. Cultivators are required to pay the cultivation tax to the distributor or manufacturer, depending upon the nature of the transaction. The cultivator will receive a receipt from the manufacturer or distributor showing the amount of tax paid, relieving the cultivator of the liability for the tax.
The 15% excise tax is imposed upon purchasers of cannabis and cannabis products and the retailers are responsible for collection of the tax from the purchaser based on the average market price of any retail sale and paying it to their cannabis distributor.
Although not a new tax, the sales and use tax imposed on sales at the local level can be tricky for cannabis businesses since medicinal cannabis and medicinal cannabis products may be exempt from the tax. In order to qualify for the sales and use tax exemption, retailers must properly claim the exemption and must maintain specific records to justify the exemption. Retailers must maintain the purchaser’s nine-digit ID number and expiration date on their qualified patient’s or primary caregiver’s valid MMIC and the related sales invoice or other original record of sale.
The CDTFA requires that good books and records are kept to track sales and purchases. The receipts and records mentioned above must be kept for at least 4 years, unless the CDTFA directs otherwise. However, the BCC requires that that financial records like bank statements, sales invoices, receipts, tax records and all records required by the CDTFA be kept and maintained for at least 7 years. Thus, we recommend that cannabis businesses keep and maintain all pertinent tax documentation for at least 7 years.
Contact the Santa Rosa cannabis attorneys at CannaLegal today to ensure your cannabis business is in compliance with the new regulations and is as prepared as it can be for an imminent inspection or audit.