Cannabis Manufacturing Regulations in California

By February 28, 2020 July 23rd, 2020 Cannabis, Manufacturing and Distribution, Tax
Cannabis Manufacturing

Cannabis continues to be one of the hottest topics across the United States. As more states move toward legalizing recreational marijuana and well over half already have legalized medicinal marijuana, the industry shows little signs of slowing down.

Despite the issues with banking, some tax codes, and federal bankruptcy protections, the future of marijuana (and its recently legalized counterpart, hemp) remains bright.

As the popularity (and profitability) of cannabis continues to grow, cannabis manufacturing companies, regulations, and practices have grown as well.

What is cannabis manufacturing?

The cannabis industry is like any other, just a little greener. Like other consumer products, there are cohesive supply and operations chains that turn the leafy green plants into the wide range of edibles, oils, tinctures and other items found on the organized shelves and product tables at dispensaries like MedMen.

Throughout the process, one of the most important cogs in the machine is the manufacturer. Cannabis manufacturers generally include companies that create, infuse and make products or extracts.

More officially, California’s Department of Public Health (CDPH) defines “manufacturing” or “manufacturing operations” as “all aspects of the extraction process, infusion process, and packaging and labeling processes, including processing, preparing, holding, and storing of cannabis products. Manufacturing also includes any processing, preparing, holding or storing of components and ingredients.”

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How has cannabis manufacturing grown in recent years?

In 2018, experts projected revenue from both legal recreational and medical cannabis in the United States to be between $8.6 billion and $10 billion. In Colorado alone, where recreational cannabis was legalized in 2014, total state revenue from marijuana grew from $67.6 million in 2014 to $111.6 million in 2019.

The California market boasted returns of $2.5 billion in 2018 – the first year recreational marijuana was available for purchase. Clearly, there is money to be made in cannabis. This holds true for every part of the supply chain, not just the dispensaries and cultivators. In fact, cannabis manufacturing companies have become some of the largest entities in the entire industry.

According to recent reports, there more than two-thirds cannabis manufacturing licenses come out of California. Furthermore, research revealed that Oklahoma and California comprised 86% of the 2,498 manufacturing licenses issued in 2019. More exactly, Oklahoma received 1,141 licenses and California received 992.

Recently, we have also seen the introduction of states issuing manufacturing licenses for the first time. For example, in January 2020 the Missouri Department of Health and Senior Services (MDHSS) started awarding medical cannabis manufacturing licenses throughout the state.

The manufacturing plants will be able to manufacture cannabis-infused products such as edibles, tinctures and concentrates. Of the 373 total applicants, only 86 received licenses to begin manufacturing.

Similarly, in September 2019, the Pittsburgh City Council approved the city’s first cannabis manufacturing plant. The company planned to manufacture medical and recreational marijuana. More specifically, they accept raw materials, including THC and CBD, to process, package and ship as products to approved retailers.

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What are the licensing regulations for manufacturing cannabis in California?

As one of the leading states in cannabis manufacturing, California implemented a number of rules and regulations to ensure the use of safe and consistent processes.

The regulations affirm that any individual or business who manufactures cannabis products must obtain and maintain a valid manufacturer license from the California Department of Public Health.

In addition, they must receive a license for each separate manufacturing premise.

The state of California currently has three cannabis licensing authorities:

  1. The Bureau of Cannabis Control regulates commercial cannabis licenses for medical and adult-use cannabis in California, dealing primarily with retailers, distributors, testing labs, microbusinesses, and temporary events.
  2. CalCannabis Cultivation Licensing is a division of the California Department of Food and Agriculture. They are responsible for licensing cultivators of medicinal and recreational cannabis and implementing a track-and-trace system to record the movement of cannabis throughout the supply chain.
  3. The most important authority for our discussion is the Manufactured Cannabis Safety Branch (MCSB), a division of the CDPH. This body is responsible for regulating and licensing all commercial cannabis manufacturing in California.

The MCSB aims to protect public health and safety in California by ensuring commercial cannabis manufacturers operate safe, sanitary workplaces and follow good manufacturing practices to produce contaminant-free products, meet product guidelines and properly package and label all consumer products.

In order to apply for an annual manufacturing license in California, you must apply online through the CDPH’s Manufactured Cannabis Licensing System (MCLS).

The application calls for information regarding the business, owners and financial interest holders and operating premises, as well as descriptions of procedures for waste disposal, inventory and quality control, transportation and security. Any individual applying for license must operate in compliance with city or county ordinances.

California Cannabis Manufacturing Licenses Infographic

As of 2020, there are five unique types of cannabis manufacturing licenses available in California, including:

1. Type 7 licenses are for manufacturers using volatile solvents, such as butane, hexane or propane. Any Type 7 license holder may also conduct Type 6, N or P activities.

2. Type 6 licenses are for manufacturers using nonvolatile solvents, such as carbon dioxide, ethanol, water, butter or oil, or performing extraction using mechanical methods. These license holders may also conduct Type N or P activities.

3. Type N licenses allow manufacturers to perform infusions. License holders are restricted to Type N activities only.

4. Type P licenses permit manufacturers to package or label cannabis products. License holders are restricted to only Type P activities.

5. Type S licenses are necessary for manufacturers operating on a registered shared-use facility.

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What are some of the current California cannabis manufacturing regulations?

In January 2019, the CDPH officially adopted regulations for cannabis manufacturing. The regulations implement the mandates of the Medicinal and Adult-Use Cannabis Regulations and Safety Act (MAUCRSA) and outline the statewide standards and licensing requirements for commercial cannabis manufacturing and packaging and labeling of both cannabis and cannabis products.

Packing and Labeling

Per the MAUCRSA and CDPH regulations, there are clear packing and labeling stipulations for cannabis and cannabis products. The intent behind these requirements is to ensure consumers understand what they are purchasing and to prevent unintended use.

Currently, labeling requirements fall into two categories, depending on package placement:

  1. The primary panel is the portion of the label will likely be most visible to the consumer at retail.
  2. The informational panel is any part of the label that is not the primary panel.

Cannabis and cannabis product packaging must be tamper evident and resealable if the product has multiple uses. It cannot imitate packaging used for products typically marketed to children.

In addition, packaging for edibles must be opaque. Also, as of January 1, 2020, all cannabis and cannabis products must be child-resistant. The CDPH’s packaging checklist can be found here.

Labeling for the products must not be attractive for children, make health claims or use the word “organic” in violation with federal and state laws. Cannabis products must include the universal symbol for marijuana. The official CDPH labeling requirements are here.

Track-and-Trace System

All licensees operating in the commercial cannabis market must track cannabis as it moves through the supply chain from seed to sale. As businesses obtain annual or provisional licenses, they also receive credentials and access to the California Cannabis Track-and-Trace program.

The laws require cannabis manufacturers to track inventory and movement of cannabis as it is transferred between licenses and, for vertically-integrated businesses, between license types.

Manufacturing Operations

Manufacturers must develop and use Standard Operation Procedures (SOPs) to detail the procedures which ensure quality and consistency throughout the manufacturing process. These procedures include inventory control, quality control, transportation, security and cannabis waste disposal. SOPs are a necessary element of the initial license application process.

Additionally, businesses must follow Good Manufacturing Practices (GMPs) to verify production occurs in a sanitary and hazard-free environment, cannabis products are contaminant free and THC levels are consistent and within required limits.

Record Keeping

Efficient record keeping is essential to both maintaining regulatory compliance and facilitating smooth business operations. Business owners must maintain particular documents such as current standard operating procedures, premises diagrams, shipping manifests, personnel records and sales invoices and receipts.

In addition to these documents, cannabis manufacturers must also maintain documentation associated with their GMPs. These include:

  • Product Quality Plan – This is an assessment of the overall manufacturing process that identifies potential risks to product quality, including biological, chemical or physical hazards or process failures; preventative measures to mitigate risks; and methods for evaluating and monitoring effectiveness of the preventative measures. Businesses must provide a product quality plan for each product.
  • Master Manufacturing Protocol – The laws require a master manufacturing protocol for each formulation and batch size. It lists step-by-step instructions for creating the finished product.
  • Batch Production Records – For each batch produced, the manufacturer must provide detailed documentation of the production and control.

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Do other states have similar laws?

Cannabis is also available for medical and recreational purposes in other parts of the United States. However, as this is on a state-by-state basis, the laws and guidelines are also on a state-by-state basis.

One of the most common regulations in each state regards packaging and labeling. In 2019, Colorado instituted a rule requiring all cannabis packaging in the state to use the universal THC symbol on the label.

In addition, all medical products must carry the same THC label and infused products must carry an additional symbol alongside it. As the Executive Director of the Colorado Department of Public Health and Environment explained, “Whether it’s used on retail or medical marijuana products, the universal symbol helps both consumers and non-consumers easily identify that a product contains THC and avoid unintentional ingestion.”

The Washington State Liquor and Cannabis Board also recently addressed concerns over packaging and labeling. They put new rules into effect on January 1, 2020 and have allowed all licensees until July 1, 2020 to bring all product packaging and labeling into compliance.

Like California and Colorado, the cannabis products must feature the universal marijuana symbol on their label, as well as the Not for Kids symbol. All packaging must be resealable and all solids must be in plastic that is two millimeters or greater in thickness and heat sealed without an easy-open opening.

Each state with some form of cannabis legalization has put forth the relevant regulations and guidelines to facilitate proper manufacturing techniques.

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How can Squar Milner help?

Squar Milner takes pride in being one of the leading accounting firms working closely with clients in the cannabis industry. Our Cannabis Industry practice is comprised of experienced professionals well-versed in the unique challenges facing companies within the sector.

Combine our expertise in handling cannabis-related accounting concerns with the experience of our Manufacturing & Distribution group and you have a team with an abundance of knowledge for your specific cannabis manufacturing challenges.

We emphasize collaboration between our groups and our clients in order to create tailored accounting solutions for your business. You do not have to navigate the volatile rules and regulations of the industry landscape all on your own, Squar Milner is ready to guide you through it.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

Our Cannabis Tax, Audit & Consulting Services

Our Cannabis CPAs are able to offer services to all involved in the industry including retailers, cultivators, distributors, cultivation suppliers, equipment, security, waste management, delivery, insurance, cannabis accessories, and hemp products.

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