Los Angeles Proposition M

By: Bryan Bergman

On March 7, 2017, Los Angeles will have a golden—or better yet, green—opportunity to vote on two competing ordinances that will shape the cannabis industry’s footprint in one of the largest markets in the world. With the recent passage of the Medical Cannabis Regulation and Safety Act by the state legislature, as well as voters’ approval of the Adult Use of Marijuana Act in the past year and a half, the California cannabis industry is entering a new regulatory world— one in which every county and city in California must provide permission for a cannabis business to operate before a state license can be received. This has resulted in cities and counties throughout California determining whether to ban or regulate commercial medical and recreational cannabis activity, and if such activity is allowed, how to tax and control the industry within their jurisdiction.

For those cities that take the regulatory approach, a key concern is determining how to create an open and diversified market that benefits the citizenry, while being flexible enough to assist in the destruction of the so-called “black market,” by not over-regulating to the point it is easier and cheaper to seek less legal alternatives. On the one hand, the nascent regulated cannabis industry is at an exciting time, where opportunity abounds and cities see the revenue as a means of creating new financial opportunities to support the local economy. However, given that commercial cannabis activity is still federally illegal, cannabis businesses face much higher scrutiny, barriers to entry and taxation consequences in comparison to other industries. Many cannabis businesses can pay as much as 70% of their net taxable income to the federal government, and still must pay state taxes and regulatory fees as well. Add in the high (sometimes double to triple the market) rental rates, as well as local taxes and fees, and these businesses are forced to make uncomfortable decisions to ensure profitability. Los Angeles has chosen a somewhat unique approach to addressing this issue: creating an open dialogue with supporters and detractors alike, while also working closely with those affected most—the business owners.

Since 2007, Los Angeles has banned new cannabis businesses from setting up shop via an Interim Control Ordinance, or ICO. In 2013, voters enacted what is popularly referred to as “Prop D.” Prop D confirmed the ICO ban, but also allowed those collectives that were in operation prior to the ICO being enacted (i.e. Pre-ICO) “limited immunity” to continue to operate their business activities, provided they met certain guidelines. Prop D’s language made it clear it was only meant to be a temporary fix, and not a long-term solution. If Prop D were to remain in effect, and with local approval an essential prerequisite to businesses receiving a state license, Los Angeles has found itself in a position of being the largest cannabis market in the state with no way of providing any business a means of legally operation..

In response, City Council and other key officials held neighborhood meetings to hear citizen concerns and meet with industry trade organizations, business owners and other interested parties. The result of the discussions and meetings, Proposition M, made it clear that of utmost priority was ensuring there was a robust, diverse, and properly regulated cannabis industry in Los Angeles that will be sustainable. Prop M crucially includes proposing a reasonable tax structure that will not overburden businesses, and provide for clear enforcement guidelines that will put an end to unlicensed rogue operations. While some have criticized that Proposition M does not provide the framework for how licenses will be awarded, the initiative will empower the City Council to continue to work with the various stakeholders and citizens of Los Angeles to create regulations that, if the enforcement and taxation language is any indication, will be progressive and inclusive.

Indeed, when considering the local taxes, Proposition M’s tax rates call for medical cannabis businesses to only pay 5% for every $1,000 earned. Recreational businesses would pay tax based upon the type of business with taxes mostly in the range of 1-2% per $1,000 earned for most businesses, including cultivators and manufacturers, and 10% per $1,000 for dispensaries.  This structure is low enough to allow businesses to succeed, which will create a steadier stream of taxes for the city. The Proposition also allows businesses to pay their taxes in cash until better banking solutions can be achieved. Proposition M also addresses a common misunderstanding that many businesses under Prop D have encountered by making it clear that while taxes must be paid, simply paying taxes does not mean the business is “licensed” to operate.

As the taxation compromises and structure of Proposition M show, cannabis businesses want to be properly regulated. Just as the industry supports fair regulations, if businesses are going to undertake the burden and expense of complying with regulations and taxation, it is also necessary to ensure that businesses not in compliance can be shut down. Proposition M provides the City of Los Angeles with the clear ability to enforce its regulations, including banning all unlicensed operations as of January 1, 2018 and permitting robust penalties against not only the culprit businesses and individuals operating without a license, but also by including penalties for landowners who permit such activity. In addition, Proposition M will provide penalties for displaying improper, unauthorized tax and license certificates, and empower the Department of Water and Power to shut down utility services if a business or individual is in violation of the ordinance. Proposition M will also provide training and assistance for local law enforcement to better regulate the industry.

Given the impressive results of negotiations so far, it is likely City Council will also ensure the licensing regulations be fair and inclusive, yet consider citizen concerns and safety—assuming voters vote Yes on March 7, 2017. Proposition M requires City Council to have licensing regulations in place by September 30, 2017 (if not sooner), and explicitly provides that City Council will work with the various stakeholders of the industry, as well as civic organizations, law enforcement, schools and parent organizations, chambers of commerce and other interested parties. After meeting with such groups, City Council will be able to provide regulations that will consider their concerns when determining the qualifications for obtaining licenses; penalties for violating the regulations; land use and zoning concerns, including how close such businesses can be located, in regards to locations such as schools and parks; preventing over-concentration of businesses in a particular area; prevention of minors having easy access to cannabis; and ensuring a socially just and equitable industry where owners of all nationalities, races and gender can have fair access to ensure a robust and diversified market.

Lastly, Proposition M recognizes that existing businesses who have been operating compliantly with Los Angeles’ existing laws deserve their due as well, after having navigated what can best be described as a difficult and volatile environment. The initiative will repeal Proposition D as of January 1, 2018, determined by a majority vote of Council; it recognizes that those Pre-ICO businesses will be allowed to operate at one location they have registered and pay taxes for while their license applications are reviewed. These businesses will be provided priority on their application review, as long as they apply within the first sixty days of Los Angeles accepting license applications.

Los Angeles has always been a unique and diverse marketplace and a major influence on the State of California. By accepting this industry and working together to reach compromises, while also hearing the concerns of the citizens, Los Angeles has an excellent opportunity to create an example of how a municipality and an oft-maligned industry can work together. If the voters agree to enact Proposition M, Los Angeles will have the chance to create a regulatory environment that could have a long lasting and positive impact on the industry as a whole.

Bryan Bergman is a Los Angeles Based attorney, specializing in cannabis businesses.  Bryan also speaks at 420 College seminars in Pasadena.Proposition M Los Angeles

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