With passage of the Medical Cannabis Regulation and Safety Act (“MCRSA”) in 2015, California took a huge step towards comprehensively regulating its medical cannabis industry after more than 20 years of little to no such state government oversight under Proposition 215. Under the MCRSA, California medical cannabis businesses can expect a bevy of regulations spanning packaging and labeling requirements, mandatory quality assurance testing, advertising, seed to sale tracking, environmental impact restrictions, plant canopy and potency limitations, and financing and ownership restrictions. The same level of regulation and government oversight can also be expected under the Control, Regulate, and Tax Adult Use of Cannabis Act (“AUMA”), California’s legalization of recreational marijuana initiative that passed in 2016.

Other states that legalized and regulated both medical and recreational cannabis have taken a variety of approaches to handling these two somewhat different industries, ranging from dual regulation and licensing to essentially snuffing out medical cannabis by forcing patients to visit recreational stores. California is now confronting how it will deal with its parallel licensing and regulatory systems for medical and adult use cannabis. Though the AUMA and MCRSA are similar, there are distinct differences between them that will impact how licenses are obtained and how businesses are run and operated. Among other things, the AUMA and MRCSA differ on licensing timelines; priority licensing; mandatory distributorships; license categories and types; local approval prior to licensure by the state; ownership restrictions; residency requirements; and traceability systems. In addition, the MCRSA limits vertical integration of licensees, generally allowing cannabis licensees to hold licenses in no more than two separate categories and only in certain combinations while the AUMA has no such vertical integration restrictions.

In response to these conflicts, California Governor Jerry Brown recently proposed a technical fix in a Budget Trailer Bill. The fact sheet attached to that Bill states that “[a]s the state moves forward with the regulation of both medicinal cannabis and adult use, one regulatory structure for cannabis activities across California is needed to maximize public and consumer safety.” Ultimately, Brown’s Bill seeks to avoid confusion among regulating agencies and to harmonize the MCRSA and the AUMA into one master regulatory structure with two separate licensing tracks for medical and adult use cannabis operators.

Overall, Governor Brown’s 79-page proposal favors the more liberal regulatory standards set out in the AUMA, and it would specifically:

1. Change the name of the AUMA to the Medicinal and Adult-Use Cannabis Regulation and Safety Act;
2. Mandate anyone seeking to operate an adult use cannabis business apply for “A-Licenses,” and those seeking to open a medical cannabis business will apply for “M-Licenses.” You can apply for both kinds of licenses and operate both kinds of businesses, but you cannot co-locate those businesses on the same premises;
3. Remove AUMA’s requirement of “continuous residency” in California from at least January 1, 2015;
4. Hybridize the process for local approval prior to licensure by allowing licensees to submit proof of local approval to the state, but leaving it up to local governments to ensure the license applicant is in compliance with local laws;
5. Keep AUMA’s near total vertical integration of licenses except for testing labs, which must be independent of other licensees;
6. Allow AUMA’s open distributor model for both medical and adult use cannabis businesses by allowing “a business to hold multiple licenses including a distribution license … [to] make it easier for businesses to enter the market, encourage innovation, and strengthen compliance with state law”;
7. Define “applicant” as “an owner applying for a state license,” and define “owner” as any person having at least 20 percent ownership, or any person who participates in the “direction, control, or management” of the business;
8. Require each cannabis business owner to pass a Department of Justice fingerprinting and criminal background check and each applicant to disclose “every person with a financial interest in the person applying for the license as required by the licensing authority”;
9. Support the AUMA’s more liberal allowance for cultivation licenses;
10. Add a new cultivation license — Type 1C, identified as “specialty cottage” — which will mean California will have 20 types of cannabis business licenses;
11. Require microbusinesses (licenses only available under the AUMA) secure regulatory approval from the Bureau of Cannabis Control and the Departments of Food and Agriculture and Public Health;
12. Mandate the AUMA and MCRSA have the same environmental protections and restrictions on licensees; and
13. Task California’s Department of Food and Agriculture, not its Bureau of Cannabis Control, to create California’s cannabis appellation standards by January 1, 2020.

The Legislature must approve Governor Brown’s legislation by a two-thirds vote, and that is expected to occur this summer.

If California implements effective regulations under the MCRSA and AUMA in line with Brown’s technical fix bill (assuming it passes), its cannabis legalization experiment will no doubt have a major impact on how other states — and the country — regulate and tax cannabis.