The California Department of Cannabis Control (DCC) sparked tremors in the industry late last week when it asked the California State Attorney General to render an opinion on whether interstate cannabis commerce posed a legal risk to the state of California.
The letter should be memorialized in the “Asked and Answered” file. On one hand, the DCC asked: “Whether state law authorization … for medicinal or adult-use commercial cannabis activity, or both, between out-of-state licensees and California licensees, will result in significant legal risk to the State of California under the federal Controlled Substances Act.” DCC subsequently provided its own seven-page opinion delineating exactly why California would not be in any more legal peril for interstate trade than it is currently for its licensed, intrastate medical and adult use cannabis market.
The main thrust of the DCC’s position rests on the following:
Each section argues existing law does not prohibit California from engaging in interstate trade and cites cases to prove each point.
Reactions to the DCC letter ran the gamut from those who enthusiastically embraced the arguments to those who see armageddon for multi-state operators (MSOs) and state cannabis markets where cultivation is expensive or impractical. Others pointed to regulatory issues with systems like METRC and different state regulatory regimes. In fact, states with very expensive cannabis are already under the gun due to crashing wholesale prices, robust illicit markets, and proximity to other legal states. In short, competition within states and between states has already begun.
To get a better understanding of the genesis of the DCC letter, Cannabis Benchmarks spoke to DCC General Counsel Mathew Lee. According to Lee, his letter to the State Attorney General “exactly reflects what SB 1326 contemplates.” He emphasized that DCC “as a department will continue to implement SB 1326” and he considers the law “in the best interests of the State of California.”
SB 1326, which became effective January 1, 2023, would allow legal California cannabis operations to engage in business with licensees in other states if such activity “will not result in significant legal risk to the State of California under the Controlled Substances Act.”
Lee reasoned, “there isn’t any other context in which we expect states to be self-contained economic entities.” He pointed out that in other contexts this would not be possible under the Dormant Commerce Clause of the U.S. Constitution and offered the example of not allowing Michigan to sell cars outside of Michigan. He also noted “courts have increasingly taken the view, in at least certain contexts – the Maine residency requirement the First Circuit considered, for instance – that the Dormant Commerce Clause does apply to cannabis.”
When asked about next steps, Lee emphasized that California is “at the beginning of a long process – an exciting step, but just a first step – that I think has a real path forward to interstate commerce.” He is committed to “respect the process ahead – which, for now, means giving the Attorney General’s Office all the time and space they need.” Lee does not know how long that process will take. Looking further ahead, he said that there are still many additional things that would need to happen even if the Attorney General’s Office issues an opinion that would allow an agreement to move forward; for example, California would “still have to find one or more states that want to engage in the process” of interstate commerce.
At the end of the day, DCC General Counsel Lee is working to implement SB 1326 by taking up one of the four possible circumstances that would allow California to expand its cannabis industry beyond the state’s borders. It’s safe to say the DCC’s letter to the state Attorney General took care to cover all the bases and offer evidence in support of its contentions. Now California waits as high-level government officials steer the process that could pull the state’s cannabis industry out of its tailspin.
For additional perspective on the DCC’s letter, Cannabis Benchmarks also spoke with Adam Smith, Founder and President of the Alliance for Sensible Markets, whose first goal is “open regulated [cannabis] commerce between consenting states.” Smith is an experienced cannabis industry lawyer and has written cannabis legislation for both California and Oregon; in fact, he was a contributor to the initial interstate cannabis law that evolved into SB 1326.
Asked about the “California Letter,” Smith said he believes the Department of Cannabis Control will be successful in obtaining an opinion that supports interstate trade from the State Attorney General’s office. He characterized the situation as “a really big deal.”
Smith is convinced the DCC’s letter is the first substantial step toward interstate trade for the U.S. cannabis industry. His view is that the California Attorney General will say interstate trade does not put the state in legal peril. Smith noted interstate cannabis commerce “doesn’t break any additional law” and pointed out that “growing cannabis in Santa Barbara and shipping it to Los Angeles is legally no different than shipping cannabis to South Carolina (for instance).” In short, California is already breaking federal law with its intrastate market and will not be in any additional legal jeopardy if it were to engage in interstate cannabis commerce.
Smith noted that U.S. Attorney General Merrick Garland has said he would not prioritize cannabis prosecutions in states where cannabis is legally available. However, Smith admitted it would be “easier to get people to sign off on interstate trade if the [U.S. Department of Justice] makes clear they won’t prosecute” those engaging in interstate cannabis commerce.
In response to the notion of federal legalization, Smith’s opinion is “waiting for Congress to fix cannabis policy has never been a winning strategy.” That’s not to say he doesn’t support any federal efforts; he expressed support for the SAFE Banking Act and “getting rid of 280E,” the IRS rule that disallows normal business deductions for the cannabis industry.
Smith agreed with the DCC’s Lee that once California gets the nod from the state Attorney General’s office, “they need to find a client state, a willing partner.” Before that can happen, Smith sees perhaps a year passing before the California Attorney General responds to the DCC letter. The letter is a sign of progress, potentially the first step in a long road. Assuming California’s Attorney General agrees with DCC, it will take additional time for all the issues necessary to facilitate interstate commerce to be sorted out – not the least of which is aligning regulations between states. Smith remains firmly optimistic about interstate trade, seeing the benefits to his state and the industry as a foregone conclusion. Stay tuned.
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