California pot shops about to be on the hook for steep state fees, background checks

California sought to jump-start its marijuana industry in January by giving businesses temporary, 120-day permits that briefly waived big fees and other costly requirements, but that grace period is ending and many say the expense and red tape of getting a regular license is a headache.

Some pot shops face fees of $73,000 before they can get a regular annual license from the state Bureau of Cannabis Control. Costly upgrades to security and product testing also kick in soon, and sellers and growers will have to pass a background check that could disqualify anyone with serious criminal records.

Although the grace period technically ends Tuesday for those who received temporary licenses Jan. 1, the state bureau is allowing businesses that apply for annual licenses to continue operating with 90-day extensions while their applications are being processed.

“It’s all a bit of a hardship right now,” said Nicole Neubert, a San Francisco attorney who represents state-licensed cannabis businesses. “All of these costs of becoming regulated are hard for these businesses to incur, especially at a time when the market is so strange.”

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The state began licensing the growing, testing, transportation and retail sale of marijuana for medical and recreational use on Jan. 1. Voters approved Proposition 64 in 2016.

The bureau decided to issue temporary permits without fees and other costly requirements to allow cannabis businesses to get established and reduce the amount of marijuana being purchased on the illicit market.

So far, the bureau has issued just over 1,100 temporary licenses to sellers, distributors and testers, while there have been more than 120 applications for annual licenses for those operations. The state agriculture agency has separately issued 3,412 temporary licenses and has so far received more than two dozen requests for annual permits.

Some firms received temporary licenses after Jan. 1 so their temporary permits are not expiring this week.

“As long as their application is being processed, they may receive an extension of the temporary license,” said Alex Traverso, a spokesman for the bureau.

Holders of temporary licenses have not been required to prepackage and label their product and buy it from a licensed distributor. Those are mandates for annual license holders and kick in on July 1.

Another big change is a requirement for license applicants to go through background checks that could disqualify some people if they have serious criminal records.

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In addition, cities and counties have been slower to give the required local permission for cannabis businesses, which can result in the state delaying approval of annual permits, said Hezekiah Allen, director of the California Growers Assn.

“The agencies have done a solid job processing through several thousand temporary applications, and have set themselves up for success,” Allen said. “Still, our members are definitely feeling some anxiety about the transition and are bracing for challenges.”

The challenges include additional costs.

All businesses must pay a $1,000 application fee as well as license fees based on the value of marijuana products they expect to sell this year. In future years, the fees will be based on what actual sales were in the previous year.

The annual license fee ranges from $4,000 for a retailer expecting to handle pot worth up to $500,000. The highest fee is $72,000 for those handling more than $4.5 million in cannabis in the year.

Fees for distributors range from $1,200 to $125,000 based on the value of pot they expect to handle.

Other new costs for the industry include setting up a tracking and trace system for each marijuana plant, training for employees, heightened testing standards and additional security requirements.

“It’s killing us,” Joseph Tintari, owner of the Greenlight Discount Pharmacy in Sylmar, said of the costs and red tape. He said he needed to hire an attorney to help him comply with all of the new regulations.

Tintari also had to pay $34,000 in fees for a license to the city of Los Angeles. He recently had to lay off a friend who was his shop’s manager because costs are high and demand is lower than expected.

The costs of regulation are on top of steep fees charged to distributors and a 15% state excise tax charged to customers.

“The patients rebel against the tax and they’ll go to an illegal shop that isn’t charging the tax, one that is at least 33 to 40 percent cheaper than I am, and I’m in the sort of neighborhood where $5 matters,” Tintari said.

The Black Oak Gallery in Oakland expects to pay $73,000 in license fees, while the cost of upgrading systems to meet other license requirements may exceed $60,000, according to Arturo Sanchez, vice president of compliance at Terra Tech, which operates several cannabis businesses in California.

In addition to the state tax, Oakland charges a 10% tax on recreational marijuana sales.

Black market growers and sellers who don’t get state licenses have a competitive advantage, Sanchez said.

“The industry is feeling the financial pressure of the regulatory environment,” he said. “Combined with the tax rate’s impact on prices, which may be leading to a decrease in customers, we are seeing numbers trending down when compared to the same time last year. The regulated market is hurting.”

The tougher testing standards, which also begin July 1, could see a reduction in supply and more costs for distributors, according to William Waldrop, co-founder and CEO of EVIO, a firm providing cannabis testing and scientific research for the regulated market.

And he fears that when those costs are passed on to customers, they might just seek alternatives or buy elsewhere.

patrick.mcgreevy@latimes.com

Twitter: @mcgreevy99