California dreamin’…

It was surprising to note on my recent trip to California that I only once encountered anyone smoking up on cannabis, and that was in a car parked at a lookout on the Sunset Cliffs in San Diego. The only other evidence of the legalized business was a billboard in North Hollywood announcing that a business had received permission to deliver the product to your home if you lived in LA. Rather low key, compared to the hype occurring now during the great ganja gold rush leading up to its legalization in the Great White North this coming 17 October.

That has prompted me to look into what California is doing to govern this field, and how it compares and contrasts to the approach we are taking. Note that this focuses on the recreational use of it, and the rules governing medical use are totally separate.

California

The California Department of Tax and Fee Administration has a very useful guide explaining the various requirements. The State also has a centralized web portal that covers all aspects of the business and how it's regulated there.

The State requires the holding of various tax permits and commercial licences that depend on the activity being undertaken:

Activity	Seller’s permit	Cannabis tax permit	Type of licence	Issuing agency
Collective/cooperative	Yes (Refer to Collectives and Cooperatives Fact Sheet for further details)
Cultivator	Yes		Cultivator	California Department of Food and Agriculture
Distributor	Yes	Yes	Distributor	Bureau of Cannabis Control, California Department of Consumer Affairs
Manufacturer	Yes		Manufacturer	California Department of Public Health
Microbusiness (ie, a combined business that is engaged in cultivation, manufacturing, distribution and retail sales)	Yes	Yes	Microbusiness	BCC/CDCA
Nursery	Yes		Cultivator	CDFA
Processor	Yes		Cultivator	CDFA
Retailer/dispensary	Yes		Retail	BCC/CDCA
Testing facility	Maybe (Although not allowed to sell cannabis or cannabis products, they must hold a permit if they wish to sell any other types of tangible personal property, such as testing kits)		Testing laboratory	BCC/CDCA

However, a seller's permit is not required if no tangible personal property is sold in California, but the commercial licensing rules require that a certification letter must be issued by the CDTFA to the relevant licensing agency to confirm that that is truly the case.

In addition, the tax structure consists of an excise tax and a cultivation tax.

• The excise tax is on retail purchasers of cannabis and cannabis products, and is 15%, based on the average retail price being realized. In an arm's-length transaction, that is the price charged at the cash register. in a non-arm's-length transaction, a markup would be applied to arrive at what would otherwise be the retail price. California sales and use tax is charged on the selling price including excise tax.
• The cultivation tax is imposed on the category and weight of cannabis that is sold or transferred to a manufacturer or distributor:

Category	USD/oz	USD/g	Equivalent CAD/g
Cannabis flowers (including dry cannabis plant)	9.25	0.326284	0.429322
Cannabis leaves	2.75	0.097003	0.127636
Fresh cannabis plant (weighed within two hours of harvesting)	1.29	0.045503	0.059873

I've presumed an exchange of CAD 1.00 = USD 0.76 in the above calculations.

Canada

Health Canada has established classes of licences for the following:

Licence	Activity	Allowing for
Standard cultivation	Growing in an area greater than 200 m2	Plants (dried or fresh); seeds
Micro-cultivation	Growing in an area less than 200 m2	Plants (dried or fresh); seeds
Nursery	Growing for starting material (ie, plants and seeds)	In areas up to 50 m2
Standard processing	Making cannabis products on a large scale (ie, greater than 600kg/year of dried cannabis)	Manufacturing
Micro-processing	Making cannabis products on a lesser scale	Manufacturing
Sale for medical purposes	Selling cannabis for medical purposes	Selling to registered clients
Analytical testing	Testing of cannabis	Any type of testing
Research	Research of cannabis	Research and development

In conjunction with this, there will be a Cannabis Licensing and Tracking System in effect, that will track all balances of, and changes to, inventories of licence holders, together with transaction counts and quantities by province and territory. The monthly reporting looks rather daunting, and I hope they will accept flat file transfers for that purpose. Manual entry would be brutal!

In addition, the Canada Revenue Agency has a separate registration framework for collecting the following excise duties:

• a flat-rate duty imposed at the time of packaging
• an ad valorem duty of 2.5% imposed at the time of delivery; and
• an additional duty (expected to be 7.5%) on delivery that will be remitted to participating provinces

The various rates of flat-rate duty are:

Cannabis product	Flat rate duty (CAD)	Flat rate + additional duties (CAD)
Flowering material (flower) included in the cannabis product or used in the production of the cannabis product	0.25/g	1.00/g
Non-flowering material (trim) included in the cannabis product or used in the production of the cannabis product (this includes flowering material that is industrial hemp by-product)	0.075/g	0.30/g
Seed included in the cannabis product or used in the production of the cannabis product	0.25 per viable seed	1.00 per viable seed
Plants included in the cannabis product or used in the production of the cannabis product	0.25 per vegetative cannabis plant	1.00 per vegetative cannabis plant

The actual liability will be the higher of the flat-rate duty or the total of the ad valorem duties. Of course, GST/HST is chargeable on the total selling price including excise duty.

Registration will be required from all commercial producers, and packagers will also have to secure an additional registration in order to receive excise stamps for application to their manufactured product. Particulars of both schemes can be found here and here. It should be noted that the required documentation to support the producer registration is quite extensive, incorporating detailed background of all directors, officers, other key personnel and the various facilities connected to the operation. The Health Canada applications also require this, as well as security clearances of all personnel concerned.

Summary

It appears that California has found more tax room to exploit in this field, compared to what current Canadian initiatives have gone towards, and there appears to have been little controversy as a result. Could this mean that we have underpriced the market here, or does this mean that producers will be getting profits that are unduly high? This merits further study, given the frenzy that venture capitalists have been in this year to get into the field. Stay tuned.