Imagine standing at the forefront of an industry full of potential, with the power to shape its future – this is the thrilling reality of being a cannabis dispensary owner in California. As pioneers in the ever-evolving cannabis landscape, understanding the complexities of starting and operating a business is critical to your success.
But it’s not just about the paperwork. It’s also about creating an engaging customer experience. One way to do this is by investing in custom cases to display your cannabis – a tool that can make your dispensary stand out and speak volumes about your brand. We can discuss more about it later. But first, let’s dive in and explore all you need to open a dispensary in California and take it from good to great.
Understanding the Legal Landscape
Federal vs. State Laws on Cannabis
Despite the growing acceptance and legalization of cannabis at the state level, cannabis remains classified as a Schedule I substance under the Controlled Substances Act at the federal level, indicating a high potential for dependency and no recognized medical use.
Other substances in this category include ecstasy, heroin, and LSD, highlighting the seriousness of federal restrictions.
Distribution of a Schedule I substance is a federal offense. Notably, the 2014 and 2018 Farm Bills removed hemp from Schedule I, allowing states to establish industrial hemp programs and leading to a surge in CBD products. However, the legal status of these products remains complex and often misunderstood.
The contradiction between state and federal law creates significant challenges, particularly in the financial sector. Since banks are federally regulated, providing banking services to state-licensed cannabis businesses could expose these institutions to criminal and civil liability and regulatory sanctions.
Despite some attempts at legislative solutions, such as the proposed Secure and Fair Enforcement Banking Act of 2021, these legal conflicts have significantly curtailed the ability of cannabis businesses to access essential financial services.
Overview of California Cannabis Laws
California was the first state to legalize medicinal cannabis use in 1996 and has since legalized its recreational use. The state regulates the cannabis industry rigorously to ensure business safety, product quality, and the prevention of underage use. Statutes, regulations, and ordinances all work together to set rules for businesses and consumers in the state.
The Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)
MAUCRSA is the main statute governing cannabis businesses in California. It establishes a basic licensing, oversight, and enforcement framework for cannabis businesses. In addition to cannabis-specific laws, companies must adhere to general business rules in California, such as those related to waste disposal, environmental protection, vehicle registration, and tax payment.
There are also specific rules for cannabis users in California. For instance, the state has implemented measures to prevent people under 21 from obtaining cannabis, placed limits on the amount of cannabis a person can carry at one time, and set requirements for medical cannabis.
Local Laws and Regulations
Local ordinances set specific rules for communities, determining the time, place, and manner of business operations. These rules can be more specific than state statutes or regulations but cannot contradict them. Therefore, cannabis businesses must comply with state laws and local ordinances.
Local ordinances can also contribute to promoting social equity. Some jurisdictions in California have implemented equity programs designed to assist those negatively affected by the War on Drugs. These initiatives may provide benefits such as expedited application processes, assistance during licensing, operational support, and direct financial aid.
Starting Your Cannabis Dispensary Business
As you embark on the journey of starting a cannabis dispensary business, there are several important steps you need to take to ensure your business is established correctly and legally. Here are some of the critical steps:
Choose an Entity Type & Business Name
The first step is to choose an entity type for your business. This involves deciding whether your dispensary will be a sole proprietorship, a partnership, a corporation, or a Limited Liability Company (LLC). Each business entity has its own set of advantages and disadvantages regarding liability, taxation, and management structure, so choosing the one that best fits your business plan is essential.
After deciding on the entity type, you need to choose a business name. This is an essential step because the name will represent your brand to your customers. The name should be unique, easy to remember, and not currently used by another business. You can check the availability of your chosen business name through the California Secretary of State’s business name search tool. If the name is available, you can reserve it for 60 days by filing a Name Reservation Request form with the California Secretary of State’s office and paying the applicable fee.
Register Your Business with the Secretary of State
Once you’ve chosen a business name, the next step is to register your business with the California Secretary of State. The registration process varies depending on the type of business entity you’ve chosen:
- You do not need to register with the Secretary of State for a sole proprietorship. Still, you must file a Fictitious Business Name Statement with the county clerk’s office if your business name differs from yours.
- For a partnership, you will need to file a Statement of Partnership Authority with the Secretary of State, and you may also need to file a Fictitious Business Name Statement with the county clerk’s office.
- For a corporation, you will need to file Articles of Incorporation with the Secretary of State, and you may also need to file a Statement of Information and other required documents.
- For an LLC, you must file Articles of Organization and a Statement of Information with the Secretary of State.
Register a Fictitious Business Name (If Necessary)
Suppose you’re operating your business under a name different from your own (for a sole proprietorship or a partnership) or from the name registered with the Secretary of State (for a corporation or an LLC). In that case, you must register a fictitious business name, a “doing business as” (DBA) name. In California, this is done at the county level.
For example, you must file a Fictitious Business Name Statement with the Los Angeles County Registrar-Recorder/County Clerk’s office to register a fictitious business name in Los Angeles County. The statement must include:
- The fictitious business name.
- The street address of your principal place of business.
- The names and residence addresses of the business owner(s).
After filing the statement, you’ll need to publish it in a newspaper of general circulation in the county where the statement was filed for four consecutive weeks.
Licenses, Permits, and Registrations
Starting and operating a business often requires obtaining various licenses, permits, and registrations. These may be required at the local (city and/or county), state, and federal levels, depending on the nature of the business, the goods or services sold, and the specific regulations of the location where the company is based.
Obtain Required City and/or County License, Permit, or Other Authorization
In many locations, a business operating license is required to do business within the city or county.
To start, form your business entity. Your business name will be required when applying for a business license. Common legal structures for small businesses include sole proprietorship, general partnership, limited liability company (LLC), corporation, and nonprofit corporation. Depending on your state, you may need to file a “doing business as” (DBA) statement with your state or at the local level if you choose to operate under a name different from your legally registered business name.
Next, apply for an Employer Tax Identification Number. Depending on how your state processes business licenses, you may need to include your federal tax ID number on your business license application. Sole proprietors without employees can use their Social Security Numbers instead of a tax ID number. Still, all other businesses will require a Federal Employer Identification Number (FEIN).
Finally, determine which licenses you need. This may involve consulting with your state’s Secretary of State office, Department of Revenue, or similar agency that issues business licenses. You may also find it helpful to use resources available through your local Small Business Administration office or to work with a business lawyer to determine and file the necessary licenses and paperwork.
You can then apply for your business license. This can often be done online through the appropriate agency’s website. The time it takes to receive approval for your business operating license or a sales tax permit can vary. Remember to renew your business license as required, for example, annually or every five years.
Types of Cannabis Licenses in California
Retailer License
In California, businesses can obtain a retail license to directly sell cannabis goods to customers. There are two types of retailer licenses available:
- The Type 9 license is for non-storefront retailers that operate solely through delivery services without a physical location.
- The Type 10 license is for storefront retailers with a physical location where customers can purchase cannabis goods.
- Type 10 retailers can provide delivery services alongside their in-store sales.
Distributor License
Distributor licenses play a crucial role in the cannabis supply chain as they are responsible for the movement and storage of cannabis and cannabis products. In California, there are two types of distributor licenses available. The Type 11 license allows distributors to transport cannabis and cannabis products between cultivation, manufacturing, or distribution premises. They can also arrange to test cannabis goods and deliver finished products to retail locations. On the other hand, the Type 13 license is specifically for transport-only distributors who focus primarily on transporting goods between different premises. This license type offers reduced fees for distributors whose main activity is transporting the products they cultivate or manufacture.
Testing Laboratory License
Testing laboratory licenses are required for laboratories that test cannabis goods before they are made available for sale at retail locations. To obtain and maintain this license, laboratories must acquire ISO/IEC 17025 accreditation. While undergoing the accreditation process, labs can use an interim testing license to continue their operations and testing activities.
Microbusiness License
The microbusiness license is designed for businesses that wish to engage in multiple cannabis activities at a single location. To qualify for this license, the business must perform at least three of the following activities: cultivation (within an area of up to 10,000 square feet), manufacturing (using methods such as non-volatile solvent extraction, mechanical extraction, or infusion), distribution or distribution transport-only (moving cannabis and cannabis products between different premises), and retail (selling cannabis goods through a physical storefront or delivery services).
Event License
Cannabis event licenses are required for individuals or organizations planning to host California-related events. There are two types of event licenses available. First, the event organizer license is necessary for individuals or entities responsible for organizing and overseeing the cannabis event. Second, the temporary cannabis event license is specifically for the event itself and allows for the temporary sale and consumption of cannabis products during the event. However, the temporary event license can only be obtained by individuals or entities that hold an event organizer license.
Manufacturing License
Manufacturing licenses are issued to businesses involved in the production of cannabis products. There are several types of manufacturing licenses available. The Type 7 license permits manufacturers to use volatile solvents for extraction or post-extraction processing, as well as non-volatile solvents and mechanical methods. They are also authorized to make cannabis products through infusion and handle packaging and labeling. The Type 6 license is for manufacturers who use non-volatile solvents or mechanical methods for extraction. They can also make cannabis products through infusion and handle packaging and labeling.
Type N manufacturers specialize in making cannabis products through infusion, while Type P licenses are specifically for businesses engaged in the packaging and labeling cannabis products. Finally, Type S manufacturers operate within shared-use facilities, where multiple manufacturers share space and equipment. They can extract cannabis using various methods, make products through infusion, and handle packaging and labeling.
How to Apply for a Cannabis Business License
To apply for a cannabis business license in California, follow these steps:
- Complete local permitting processes: Many cities and counties have rules and permits for cannabis businesses. Ensure your business is set up in an area that allows commercial cannabis activity and complete any local permitting requirements.
- Learn the state regulations for cannabis businesses: The Department of Cannabis Control (DCC) has standard operating procedures, employee training, and facility setup requirements.
- Gather your application information and documents: The DCC provides resources to help create the necessary documents for the licensing process.
- Create a licensing system account: The DCC has three licensing systems depending on the license type you’re applying for. Create an account in the relevant system.
- Complete your application: Fill in the required fields in the licensing system and upload any needed documents. Disclose all your business’s owners and financial interest holders.
- Pay your application fee and submit your application: The DCC cannot process your application until you pay your application fee.
- Answer any emails from the licensing team: Respond to any queries or requests for additional information from the DCC licensing team.
- Pay your license fee: If your application is approved, you’ll receive an email with instructions on paying your license fee. Your license will be issued once the DCC receives your payment.
- Post your license: Post it at your place of business after receiving it.
Documentation Required
The specific documentation required for your application varies depending on your local jurisdiction and the type of business you’re operating. However, typically you will need to submit a detailed business plan, a detailed description of your intended operation, proof of local approval, and any relevant criminal history. This documentation is then reviewed by the DCC. You’ll have approximately two weeks to submit all necessary documentation after you’ve initiated the application process.
Fees and Costs
The fees for a cannabis business license in California depend on the type of license you’re applying for. There are two types of costs: the application fee, due when you submit your application, and the license fee, due when your application is approved. The license fee is also due each year when you renew the license.
The fees are often calculated based on your business’s gross annual revenue and differ between license types such as cultivation, manufacturing, distribution, testing laboratories, retail, and microbusiness. For instance, the application fee for a small indoor cultivation license is $3,935, and the license fee is $35,410. For a manufacturing business with gross annual revenue less than or equal to $100,000, both the application and license fees are $1,000.
Renewing Your License
Renewal of your cannabis business license can begin up to 60 days before it expires. You’ll receive an automated email with instructions when your renewal window opens. To renew, review and update your information in the DCC licensing system, ensure your documents are current, and update any necessary information, such as gross annual revenue and ownership details. Pay your license fee and submit your renewal application, then post your updated license at your place of business.
Understanding Employer Responsibilities [IRS, FTB, EDD]
As a dispensary owner in California, it is vital that you understand and fulfill your responsibilities as an employer. These responsibilities include obligations under federal law with the Internal Revenue Service (IRS), as well as state regulations with the Franchise Tax Board (FTB) and the Employment Development Department (EDD). Here are the key points you need to consider:
- Tax Obligations: As an employer, you must withhold income tax, social security, and Medicare from your employees’ wages. You’re responsible for making regular deposits of these withheld amounts and your share of social security and Medicare taxes to the IRS. On the state level, you must also comply with the tax obligations set by the FTB.
- Unemployment Insurance Tax: In California, employers must pay Unemployment Insurance (UI) tax to the EDD. This tax is used to provide temporary payments to individuals who are unemployed through no fault of their own.
- Employee Rights and Labor Laws: Employers must adhere to state and federal labor laws, which protect the rights of employees. This includes providing a safe and healthy work environment, paying at least the minimum wage, and adhering to overtime laws.
- Workers’ Compensation: Under California law, employers must have workers’ compensation insurance to cover work-related injuries or illnesses.
- Payroll Taxes: Employers are responsible for withholding, depositing, reporting, and paying employment taxes. You must furnish wage and tax statements to your employees.
Additionally, it’s important to note that in California, all cannabis businesses must have a labor peace agreement if they have 20 or more employees. A labor peace agreement between the business and a bona fide labor organization protects the state’s proprietary interests by prohibiting labor organizations and members from engaging in picketing, work stoppages, boycotts, and any other economic interference with the applicant’s business. This is something to keep in mind while hiring staff for your dispensary.
Understanding Tax Obligations [FTB, EDD, CDTFA, IRS]
When opening a dispensary in California, understanding tax obligations is crucial to staying compliant with state and federal laws. Taxes play a significant role in the cannabis industry, and there are multiple entities that cannabis businesses need to be aware of.
The California Department of Tax and Fee Administration (CDTFA) oversees the taxation of cannabis in California. There are two specific taxes related to cannabis:
- Cannabis Excise Tax: This tax is 15% based on the average market price of the cannabis or cannabis products sold at retail. The distributor collects this tax from retailers, who will typically pass this cost on to consumers.
- Cannabis Cultivation Tax: This tax is imposed on all harvested cannabis that enters the commercial market. It’s based on the weight and category of the cannabis. Distributors or manufacturers are responsible for paying this tax to the CDTFA.
The Franchise Tax Board (FTB) and Employment Development Department (EDD) also have roles. The FTB is in charge of the state income tax, which applies to cannabis businesses like any other. The EDD, on the other hand, manages employment taxes for businesses with employees.
At the federal level, cannabis businesses have tax obligations to the Internal Revenue Service (IRS), just like any other business. However, there are unique considerations for cannabis businesses due to the federal illegality of cannabis. It’s advisable to work with a tax professional or attorney familiar with the cannabis industry to ensure compliance.
How to Stay Compliant with Tax Requirements
Staying compliant with tax requirements is a continuous process that involves accurate record-keeping, timely tax payments, and understanding the changing regulatory landscape. Here are some steps to help you stay compliant:
- Understand your tax obligations: As outlined above, several taxes are specific to the cannabis industry and regular business taxes. Make sure you understand what taxes you owe, how they are calculated, and when they are due.
- Keep accurate records: Good record-keeping is essential for tax compliance. You should keep track of all sales, expenses, and taxes. This information will be necessary for filing your taxes and can be crucial if you are audited.
- File and pay your taxes on time: Late payments can result in penalties and interest. Filing and paying your taxes on time is important to avoid these additional costs.
- Work with a tax professional: Tax laws can be complex, especially in the cannabis industry. A tax professional can help ensure you meet your tax obligations and advise on optimizing your tax situation.
Remember, this information is not comprehensive and is meant to be a starting point. Tax laws can be complex and change frequently. Working with a professional is essential to fully comply with all tax obligations.
Conclusion
Navigating the cannabis business landscape, especially in California, requires understanding intricate federal, state, and local laws. Despite challenges posed by legal contradictions, California provides a well-regulated platform for cannabis businesses, with regulations ensuring safety, quality, and fairness.
While starting a cannabis business involves considerable planning, compliance, and investment, it also opens up an avenue to a rapidly expanding and increasingly accepted industry. With the right guidance and resources, you can navigate the complexities and set your business up for success.
Investing in a custom cannabis display case can significantly elevate your cannabis dispensary, showcasing your products professionally, securely, and visually appealingly. It not only enhances the customer experience but also helps comply with regulations for product storage and display.
Our experts at Seattle Products, a leading designer, manufacturer, and distributor of retail display cases, are dedicated to helping you create the perfect cannabis dispensary.
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