With the 60-day clock ticking for medical cannabis businesses to register with the DEA, California has proposed emergency rules to allow licensees to hold separate adult-use and medical-use licenses. It is one state that is reacting quickly to the administration’s order to move marijuana to Schedule III.
Following up with President Donald Trump’s executive order officially filed April 28, the DEA announced days later that dispensaries can apply for DEA registration. Then it opened up registration for manufacturers, distributors and labs. But registration is only for state-licensed medical marijuana businesses, not adult use. The DEA said they would accept applications for 60 days, to be approved within six months.
In response, California, an adult-use state, issued guidance on how businesses can modify their licenses from adult use or dual use to medical use. Then on May 18, the Department of Cannabis Control announced a Notice of Emergency Regulatory Action to allow businesses to hold both types of licenses separately, if they keep separate books and operations. A public comment period ended May 31, and the rules could become effective by June 5.
DCC Director Clint Kellum said department officials have requested a meeting with the DEA to get clarification on “how federal implementation will unfold.” But the DEA said it wants to hold briefings for everyone, rather than state by state.
“We recognize this creates uncertainty for our licensees, given the size and complex structure of our medicinal and adult-use markets,” Kellum said in a May 18 licensee update.
“Our focus, for now, is on removing state level barriers for those who choose to pursue registration, without disrupting business operations or the core structure of California’s regulatory framework,” said DCC spokesman Jordan Traverso in an email to CRB Monitor News. “Our goal is to stay responsive without getting in the way of, or projecting certainty onto, a process that remains outside state control.”
California quickly making cultivation modifications
Immediately after Trump signed the order on April 24, the DCC started receiving applications to modify licenses.
As of May 18, the DCC had already processed 10 designation changes to medical (M) and another 196 to add medical to an adult-use designation (AM), Traverso told CRB Monitor News. Another 12 were pending to change to medical and 179 to add medical. Most of those have been for cultivation.
The DCC believes approximately 1,600 licensees can apply for separate licenses under the proposed regulations.
New rules would allow separate retail businesses
It’s unclear whether the federal government will allow a medical license holder to also sell recreational marijuana. They asked the question on the application, though. One of the biggest benefits to DEA registration is that the 280E tax restriction, which prevents cannabis businesses from deducting ordinary expenses from their income taxes, would no longer apply.
“Under current regulations, cannabis licensees are concerned that they face an impossible choice: either convert their operations to medicinal only to allow registration and forgo existing adult use sales that are needed for their business survival; or decline to register and forgo the advantages of federal legal status,” the DCC said in the proposed rule.
Under existing rules, dual-use businesses may change their license to medical only, while adult-use may add medical.
The proposed rule would allow dual-use operators to hold separate licenses. They may also allow a separate entity to hold a medical license. But the licensees would have to pay additional fees, and the business must maintain existing inventory under the current adult-use license.
“Once established, the newly issued M-License will be required to properly obtain inventory under that license instead of simply transferring existing inventory from the existing A-License,” the proposed rule says.
Julie Mercer-Ingram, founder and president of Santa Rosa, Calif.-based Proof Extracts, said in a LinkedIn post that she’s concerned the application window for the license transfer would be too tight to meet the DEA registration deadline. Proof Extracts holds both wholesale/distribution and manufacture/processor licenses.
She said cons include having to run two separate sets of books and two Metrc track-and-trace accounts. And she wondered if data entered to either the M-entity or the A-entity would satisfy federal “closed loop” inspectors.
“We would be forced to physically and digitally separate on-site operations,” she wrote. “Double the costs for everything: insurance, permits, payroll, just to name a few.”
Yet, the DCC said, “However, many of these costs are likely to be absorbed by current operating costs attributable to the single-dual designation license, resulting in a near net zero cost to businesses per year.”
The proposed rules would also require the business to get proper local approvals before operating under the new license designation.
“This DEA registration presents a challenge — do we choose compliance, or do we wait and see what happens after the federal hearings? I’m very curious what other operators are planning on doing,” she wrote.
The DEA has scheduled an administrative hearing to reschedule marijuana completely for June 29. The American Trade Association for Cannabis and Hemp, multi-state operator Nabis, and the prohibitionist lobbying group Smart Approaches for Marijuana are among the organizations that have asked to testify at the hearing.
DCC will monitor market impacts
Traverso said that under current law, DCC won’t restrict M-licensed cultivators from moving supply to adult use or AM-licensed retailers. However, medical retailers can only sell to medical marijuana patients.
“With that said, it’s not clear, at this point, whether the DEA will require more distinct separation between adult use and medical supply chains,” he added. “As more information about federal requirements becomes available, DCC will continue to solicit feedback from operators and make necessary changes at the state level to facilitate compliance.”
He said the DCC is monitoring the federal rollout, but more information is needed to understand potential market impacts. The proposed rules were designed to give business owners flexibility while preserving the existing framework and safeguards.
“The goal is to support federal registration opportunities while maintaining overall market and operational stability,” he said.
The DCC recognizes the impact the federal action could have on the state’s leading role in the licensed cannabis market. Medical-only states could have an advantage in the DEA’s approval process. Oklahoma, second to California in active licensed businesses, told its medical licensees on May 8 they are required to get a federal Schedule III registration.
“Supporting licensees who wish to register federally will support the growth and fiscal viability of the California regulated medical cannabis market, which could eventually result in additional revenue to the State, and to the programs identified for support under Proposition 64,” the DCC said in the proposed rule. “California has the largest regulated cannabis market in the world, and risks losing competitive ground if California businesses are unable to secure DEA registration while businesses in other states quickly secure DEA registration.”
The California Office of Administrative Law (OAL) posted the proposed rule on May 27. The OAL has 10 days to review a proposed rule and file an approval with the Secretary of State, at which point it would become immediately effective.
