INTRODUCTION
The Department of Cannabis Control (“Department” or “DCC”) is responsible for administering and enforcing the provisions of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA,” Bus. & Prof. Code § 26000 et seq.). The Department was created in 2021 through the consolidation of the three former commercial cannabis licensing agencies: the Bureau of Cannabis Control under the Department of Consumer Affairs, the Manufactured Cannabis Safety Branch under the California Department of Public Health, and CalCannabis under the California Department of Food and Agriculture (“CDFA”). One of DCC’s first actions was to consolidate the three former agencies’ existing regulations into one body of law, which was relocated to California Code of Regulations (“CCR”), title 4, division 19. The Department is proposing to modify these regulations for the reasons described below.
PROBLEM STATEMENT
The California Cannabis Track and Trace (“CCTT”) system is an electronic seed-to-sale tracking system that records the movement of cannabis throughout the commercial supply chain. This is accomplished through detailed reporting requirements and the use of unique identifiers (“UIDs”). All cannabis plants are assigned a unique code that allows for reference to the specific plant and any cannabis or cannabis products derived or manufactured from the plant. DCC licensees are required to use the CCTT system to record all commercial cannabis activities, including cultivation, harvesting, processing, manufacturing, distributing, testing, and sales. The purpose of the CCTT system is to protect public health and safety by facilitating the tracking of adulterated products, preventing the diversion or inversion of cannabis from or to the legal supply chain, ensuring accurate recordkeeping and reporting, and identifying and tracing cannabis goods associated with recalls and embargoes.
The CCTT system has several mechanisms by which potential inversion and diversion can be monitored and identified, and the Department is consistently evaluating the system for additional safeguards that could be implemented to prevent the diversion of cannabis to the illicit market through fraudulent transactions entered in the CCTT system. Under the current system, when a licensee initiates an electronic transfer with another licensee in the CCTT system, the intended recipient has no opportunity to review the incoming transfer before it is created electronically in CCTT. This is not a concern with respect to good faith actors. However, the Department has determined that some licensees have found ways to use incomplete outgoing and incoming transfers to corrupt CCTT transaction records and conceal the location of cannabis enabling diversion of cannabis to the illicit market. System enhancements and related regulatory changes are needed to ensure all transactions entered into CCTT are bona fide.
A crucial component of the CCTT system is ensuring that all legally cultivated cannabis and products derived therefrom pass regulatory compliance testing prior to being transferred from a distributor’s licensed premises and sold at retail. Testing ensures that cannabis is labeled with accurate cannabinoid potency and does not contain harmful heavy metals, microbial impurities, mycotoxins, pesticides, residual solvents, or processing chemicals. As currently configured, the CCTT system allows distributors to create multiple test samples from a single batch, a capability that allows distributors to engage in “lab shopping:” sending samples from one batch to multiple testing laboratories and selecting the most favorable test results for use in the supply chain, such as the results with the highest THC potency or results that are below the action level for all analytes. These practices circumvent MAUCRSA and threaten public health and safety by exposing consumers to misbranded and/or potentially adulterated cannabis goods.
Cannabis must be packaged in final form and pass regulatory compliance testing prior to sale at retail. Laboratories are required to produce a Certificate of Analysis (COA) for each sample tested. The COA contains detailed information about the results of the analyses and the analytical methods used by the lab. After testing, labs are required to upload the COA to the CCTT system, which makes it available to subsequent licensees who possess the tested cannabis as well as the Department. However, there is no requirement to provide COAs to retail customers, who may wish to consider COAs when making purchasing decisions. The law does not prohibit retailers from voluntarily making COAs available to customers, and while some are already doing so, many are not. This leaves consumers with limited information about the cannabis they choose to purchase and consume.
Additional CCTT system changes and related regulatory amendments are needed to ensure that data is entered into the CCTT system correctly and consistently and that records of commercial cannabis activities are accurate. System data is rendered inaccurate when a licensee records intended future activity in the CCTT system but doesn’t actually conduct or complete that activity by or on the date entered in the system. Data entry errors also occur when originating and recipient licensees record transfers using different units of measurement (e.g., a transaction record shows 10 pounds of cannabis sent and 10 ounces of cannabis received). Whether these significant outliers in transfer data are due to licensee error or attempted inversion or diversion of cannabis is difficult and needlessly time-consuming to investigate.
Lastly, the way sales records are entered in the CCTT system by licensed retailers allows for variation, which makes it difficult to determine the actual sale price for a cannabis good, the amount of taxes applied, and whether any discounts were included. These are existing fields in the CCTT system; however, use of these fields is currently optional. Resulting disparities in how licensees record sales interfere with accurate and consistent recordkeeping.
ANTICIPATED BENEFITS
The proposed regulatory changes will help strengthen California’s regulated cannabis industry and protect public health and safety by preventing distributor diversion of cannabis to the illicit market, preventing lab shopping and potency inflation, improving the accuracy and quality of data entered in the CCTT system by licensees, and giving consumers access to cannabis test results.
Requiring transporters and recipient licensees to approve or deny incoming transfer requests will remove the ability of an originating licensee to electronically create fake transfers in CCTT for the purposes of hiding and diverting cannabis to the illicit market. It will also prevent unwitting licensees from being overwhelmed with potentially fraudulent transfers, and distributors’ license information from being used without their knowledge on a transfer. The changes will strengthen the integrity of the legal cannabis supply chain and reduce diversion that undercuts the legal market and unfairly disadvantages legal operators.
The option to enable automatic approval of incoming transfers will allow recipient and distributor licensees with an established business relationship with the initiating licensee to bypass manual approval of individual transfers under specified conditions, ensuring businesses can continue to operate smoothly without interruption to their normal business practices.
Changes to how cannabis test samples are collected and recorded in CCTT will improve the accuracy and transparency of test results, reduce potency inflation, and prevent adulterated and misbranded cannabis from going to retail sale.
Potency inflation and lab shopping hurt good actors, defraud consumers, and threaten the public health and safety of Californians. The changes proposed in this package will reduce the ability of distributors to shop around for their preferred lab results and prevent them from severing unwanted test results.
The proposed changes will improve recordkeeping and the quality of market data by requiring retailers to record the retail sale price of each cannabis good, state and local taxes, discounts, and the transaction subtotal in separate fields. This will provide consumers with more transparent receipt information, including a clear price breakdown. This will also benefit other state agencies that rely on CCTT data to carry out their mission, like the California Department of Tax and Fee Administration, which relies on accurate sales data to ensure that retailers are collecting and reporting taxes appropriately. The changes proposed in this rulemaking package will reduce the need for CDTFA staff to conduct burdensome, time-consuming audits of retailers who improperly recorded sales in CCTT.
Additional data entry safeguards, like prohibiting future dating and requiring originating and recipient licensees to transact using the same units of measurement will support accurate data entry and mitigate data entry discrepancies that can inadvertently or maliciously conceal illegal inversion or diversion of cannabis. This will also improve licensee recordkeeping by facilitating entry, evaluation, and tracking of accurate and meaningful data. These efforts will support more efficient use of staff time and will protect the integrity of the legal market.
Lastly, the changes proposed in this regulatory package will increase consumer access to official regulatory compliance test results, allowing consumers to make informed purchase decisions and increasing consumer confidence in the legal market.
SPECIFIC PURPOSE OF, AND RATIONALE FOR, EACH PROPOSED AMENDMENT
Global Amendments
Use of “shall.”
This word runs afoul of several basic principles of good drafting. The first is that a word used repeatedly in a given context is presumed to bear the same meaning throughout. (Shall commonly shifts its meaning even in midsentence.) The second principle is strongly allied with the first: when a word takes on too many senses and cannot be confined to one sense in a given document, it becomes useless to the drafter. (Shall has as many as eight senses in drafted documents.) The third principle has been recognized in the literature on legal drafting since the mid-19th century: good drafting generally ought to be in the present tense, not the future. (Shall is commonly used as a future-tense modal verb.) In fact, the selfsame quality in shall—the fact that it is a chameleon-hued word—causes it to violate each of those principles.
(Garner, Garner on Language and Writing (2009) p. 174.)
The Department is removing the word “shall” from its regulations where it is overused for the reasons described above and to eliminate any potential for misinterpretation due to inconsistent or incautious drafting. These are non-substantive changes under CCR, title 1, section 100(a)(4). In every instance of its usage to indicate or impose a mandatory requirement, “shall” is being replaced with “must.” In every instance of its usage to disallow or prohibit an action, “shall not” is being replaced with “may not.” The meaning of each provision being amended as described is not being altered by the change in verbiage. In other words, existing mandatory provisions are not being made permissive or optional, and existing prohibitions remain in effect.
Subsection reorganization
Where existing subsection numbering is affected by adoption of one or more new subsections (e.g., new subsection (a)(2) is being inserted between existing subsections (a)(1) and (a)(2), forcing the latter to shift downward in the existing hierarchy), all affected provisions are renumbered without substantive effect unless otherwise stated.
Chapter 1. All Licensees
Article 6. Track and Trace Requirements.
Amend §15047.1. Definitions.
Existing subsection (a) is amended to be harmonized with section 15000(vvv), which defines “Unique identifier” or “UID” to mean “…an alphanumeric code or designation….” Since UIDs are composed of alphanumeric characters, the word “number” is inaccurate and must be deleted. This conforming change correctly aligns the language with the stated definition.
Existing subsection (b), which defines “package tag,” is amended to clarify that package tags are also attached to representative samples of cannabis. While a package tag has always been required to be affixed to a representative sample for laboratory testing, that requirement was only implied by the existing regulation. This amendment is necessary to eliminate confusion by expressly requiring package tags to be attached to batches as well as samples obtained for testing. This subsection is also amended to delete the word “number” for the same purpose and reason described above regarding subsection (a).
Amend §15049. Track and Trace Reporting.
Existing subsection (b) is amended to require licensees to record certain activities in the CCTT system within 24 hours after their occurrence. Currently, licensees are required to record the specified activities within 24 hours “of occurrence.” This has resulted in confusion among licensees, some of whom record activities up to 24 hours before the activity is expected to occur. This amendment is necessary to clarify that licensees must record the activity within 24 hours after the activity occurs. If a licensee records an activity they intend to do in the future before it happens, the licensee’s records will not accurately reflect the current status of the activity, especially if the activity occurs differently than how it was previously entered in the system. Further, if the expected activity does not occur, the licensee’s records are inaccurate, which is a violation of regulatory recordkeeping requirements.
Existing subsection (b)(5) is amended to expressly exclude destruction of immature and mature cannabis plants as activities required to be recorded in the track and trace system within 24 hours after occurrence. This change is necessary to resolve a conflict with existing section 15049.1(a)(3), which properly allows cultivation licensees three days to record the destruction or disposal of immature or mature cannabis plants in the track and trace system.
Existing subsection (b)(6) is amended to remove the phrase “, except that cultivation licensees shall comply with section 15049.1(b)(5).” This is necessary to avoid confusion, as section 15049.1(b)(5) does not exist.
New subsection (c)(2)(A) requires a recipient licensee to accept a transfer of cannabis using the same unit of measurement that was used by the initiating licensee. The Department often discovers instances of a licensee accepting a transfer using a different unit of measurement than was used by the initiating licensee, causing significant data discrepancies. For example, a licensee might send 10 pounds of cannabis, but the recipient might accidentally enter it as 10 grams. This provision will not prevent a recipient licensee from repackaging the cannabis or cannabis products using a different unit of measurement if they wish to do so after accepting cannabis or cannabis products into their inventory. This change is necessary to ensure accurate recording of commercial cannabis activity and meaningful, accurate, data.
Lastly, the Reference note is amended to correctly cite Business and Professions Code (BPC) section 26069 rather than BPC section 26169. The existing citation includes a typo; BPC section 26169 does not exist. Section 15049 has always been intended to implement BPC section 26069, as section 26069 establishes requirements related to the track and trace system.
Amend §15049.2. Recording Transfers of Cannabis and Cannabis Products.
Section 15049.2(a) establishes what information must be recorded on a shipping manifest by a licensee initiating a transfer. Existing subsection (a)(2) is amended to replace the word “distributor” with the word “licensee.” Subsection (a)(2) currently requires the licensee initiating the transfer to record the name and license number of the distributor transporting the cannabis and cannabis products. While a distributor license is generally required to transport cannabis between licensed premises, licensed testing laboratories can also transport samples of cannabis and cannabis products collected for regulatory compliance testing pursuant to existing section 15709. Changing “distributor” to “licensee” is necessary to accurately capture instances where a testing laboratory’s information must be entered on the shipping manifest rather than a distributor’s information because the testing laboratory will be transporting the cannabis or cannabis products.
Existing subsection (a)(3) is amended to add the word “recipient” in front of “licensee.” This change is necessary to distinguish actions that must be taken by a licensee initiating a transfer from actions that must be taken by a licensee in receipt of a transfer. This clarifying change also aligns with the terminology used in new subsections (b)-(e).
Existing subsection (a)(4) is amended to resolve minor technical and grammatical issues. Section 15000, subsection (vvv), defines “Unique identifier” or “UID” to mean “…an alphanumeric code or designation….” Since UIDs are composed of alphanumeric characters, the word “numbers” is inaccurate and must be deleted. This conforming change correctly aligns the language with the stated definition. Further, changing “all” to “each” is necessary because “UID” is singular, and a UID cannot be assigned to more than one item. This change renders the provision accurate and grammatically correct.
New subsection (b) requires a licensee initiating a transfer to obtain approval through the CCTT system from both the recipient licensee and the transporting distributor licensee before generating a shipping manifest or transferring the shipment. Under existing regulations, licensees are required to use the CCTT system to record the transfer of cannabis from one licensee to another. The Department has determined that some unscrupulous actors have found ways to use incomplete outgoing and incomplete incoming transfers in the CCTT system to divert cannabis to the illicit market under the guise of compliance.
In some instances, a distributor will create a shipping manifest in the CCTT system to ostensibly transfer cannabis to one or more random licensees, with whom they have no business relationship and with no intention of actually transferring any cannabis. The distributor making the transfer in the CCTT system will claim that they transported it to the recipient, and the recipient will deny possession of the cannabis because it was never physically received. Since the transfer is incomplete, the cannabis is not associated electronically in the CCTT system with either the initiating distributor or the recipient licensee and instead remains associated with the incomplete shipping manifest. Even if the manifest is rejected by the recipient licensee, the cannabis on the manifest will not show up in the distributor’s inventory unless the distributor accepts it back in, which these bad actors do not. The distributor can then divert the subject cannabis to the illicit market, using the shipping manifest to falsely legitimize the transport should they encounter law enforcement personnel while in transit.
In other instances, a licensee will initiate a transfer of cannabis to a distributor. The distributor will physically receive the cannabis but will not accept the manifest electronically in the CCTT system. Again, this results in the cannabis not being associated with either licensee’s inventory. The distributor can then claim they never physically received the cannabis, even though they did receive it, and can then divert the cannabis to the illicit market.
New subsection (b) requires the recipient licensee to approve a transfer request sent by an initiating licensee before the cannabis can be placed on a shipping manifest or electronically removed from the initiating licensee’s inventory in the CCTT system. This will give recipient licensees an opportunity to review the cannabis and cannabis products proposed to be transferred and decide whether to approve or deny the transfer request. If a recipient licensee rejects the transfer request, then the cannabis will remain in the initiating licensee’s CCTT inventory and cannot be placed on a manifest until a transfer approval has been accepted. This will prevent licensees from being able to initiate transfers with other licensees without their consent, which will eliminate the ability of bad actors to perpetuate the fraudulent activity described above and protect licensees acting in good faith, as well as the integrity of the legal market.
Furthermore, this change will prevent licensees from being able to physically receive transferred cannabis without accepting the shipping manifest electronically in the CCTT system. A licensee’s approval of a transfer request can be used as evidence by DCC during an investigation if that licensee later denies receipt of the transfer. If a recipient licensee approves a transfer request, then the subject cannabis will be clearly labeled with an “in-transit” status in the CCTT system until the licensee accepts the subject cannabis into their inventory.
In addition to preventing incomplete transfers from being used to divert cannabis to the illicit market, transporter approvals will also prevent an initiating licensee from fraudulently using another licensee’s license information on a transfer manifest in the CCTT system. Currently, when initiating a transfer of cannabis, the initiating licensee is required to record the license name and number of the distributor who will perform the transportation on the shipping manifest. If the licensee is not a distributor or does not hold a license that allows them to engage in transportation, but they do not want to utilize a licensed distributor to transport their cannabis, then the licensee might record a random distributor’s license information on the shipping manifest and illegally transport the cannabis themselves. Meanwhile, the distributor whose license information was falsely recorded on the shipping manifest is not aware that their information is being used to conduct illegal activity. Requiring transporting distributors to consent to participate in a transfer will ensure that their license information is not used without their knowledge.
New subsection (b)(1) explains that by approving a transfer, the recipient licensee is confirming that all relevant information provided on the shipping manifest is accurate and that they expect to receive the items. This disclaimer is necessary to help prevent cannabis and cannabis products from unintentionally being placed on a manifest and ensure that recipient licensees understand what they are agreeing to receive before they approve a transfer request and cannabis is electronically moved to their inventory in the CCTT system.
New subsection (b)(2) explains that by approving a transfer, the distributor licensee is confirming that all relevant information provided on the shipping manifest is accurate and that they agree to transport the items. This disclaimer is necessary to help prevent cannabis and cannabis products from unintentionally being placed on a manifest and ensure that distributor licensees understand what they are agreeing to transport before they approve a transfer request. This provision is also necessary to provide distributors an opportunity to correct shipping manifest errors and prevent distributors’ licenses from being associated with a transfer without their consent.
New subsection (c) introduces the optional automatic approval (“auto-approval”) function, which may be utilized by recipient and distributor licensees. DCC recognizes that some licensees perform a very high volume of transfers daily. Auto-approval will allow recipient and distributor licensees with an established business relationship with the initiating licensee to bypass manual approval of individual transfers under specified conditions. This is necessary to allow businesses that commonly engage in transfers with each other to continue operate without interruption of normal business practices.
New subsection (c)(1) defines when a transfer auto-approval agreement between licensees exists. This is necessary to clearly explain that only downstream licensees (i.e., not initiating licensees) have the ability to use the auto-approval function, that the function exists only within the CCTT system, and that these agreements have an effective period.
New subsection (c)(2) describes how a recipient or distributor licensee may enter into a transfer auto-approval agreement in the CCTT system with an initiating licensee. The CCTT system is robust and complex, so it is necessary to specify exactly where the option to utilize the auto-approval function is located to avoid any user confusion. This subsection also requires that the recipient or distributor licensee must have previously approved and completed at least one manual transfer with the initiating licensee before a transfer auto-approval agreement can be formed.
Requiring two licensees to have previously approved and completed a transfer before they can enter into a transfer auto-approval agreement is necessary to ensure that they have an existing business relationship. If there was no requirement that two licensees have an existing business relationship, a licensee could enter into transfer auto-approval agreements with all other licensees, defeating the purpose of the transfer approval requirements and undermining all of the goals described above regarding the adoption of subsection (b). The transfer approval process and the formation of transfer auto-approval agreements holds licensees accountable for their actions and provides DCC with valuable administrative and enforcement tools to use when determining which licensee is or was last in possession of cannabis or cannabis products, and efficiently identifying and analyzing unusual transfer patterns and other irregularities.
New subsection (c)(3) establishes the operative life of transfer auto-approval agreements. Limiting the length of auto-approval agreements is necessary to further increase accountability by requiring licensees to periodically reevaluate whether a good business relationship with another licensee still exists and should continue. The Department believes that one year is a reasonable effective period, balancing a brief, infrequent interruption of mutually beneficial business operations between licensees on one side and mitigation of complacent, disproportionate, or bad-faith business practices on the other. It is also necessary to provide downstream licensees with unfettered discretion to cancel agreements or reject transfers. The commercial cannabis industry is dynamic and fast-paced, and licensees must be able to interrupt year-long automatic transfer approvals if unforeseen circumstances arise, such as the souring of a business relationship, supply and demand issues, or diminished product quality.
New subsection (c)(4) identifies the circumstances under which the Department will exercise its enforcement power by revoking a licensee’s auto-approval privileges and cancelling all auto-approval agreements to which the licensee is a party. These circumstances involve issuance of a Notice to Comply or citation for a violation of various commercial cannabis transfer-related statutes or regulations. The Department has a significant interest in preventing the recipient of a transfer-related citation or Notice to Comply from automatically approving all incoming transfers while the licensee is still coming into compliance. This subsection is necessary to protect compliant licensees from inadvertently continuing to do business with non-compliant licensees based on existing auto-approval agreements. Compliant licensees are still free to do business with non-compliant licensees if they so choose, but each transfer will have to be manually reviewed and approved until the downstream licensee’s auto-approval privileges are reinstated by the Department in accordance with subsections (c)(5) and (c)(6).
New subsection (c)(5) governs reinstatement of auto-approval privileges revoked due to issuance of a Notice to Comply. The Department finds it necessary to automatically reinstate a licensee’s lost auto-approval privileges when that licensee corrects the problem that led to issuance of a Notice to Comply as a show of good faith and to encourage licensees to resolve issues efficiently and responsibly so that they may return to normal business practices. However, the Department is declining to automatically restore cancelled agreements for a number of reasons.
Practically, it is simpler and more efficient for licensees to enter into fresh agreements than for the Department to determine how to calculate the remaining duration of a restored agreement that, for example, technically reached its one-year expiration during the time it was cancelled. Perhaps more importantly, for the other parties to these cancelled agreements, whether to continue working with a licensee whose privileges were lost is a business decision that would be inappropriate for the Department to make on their behalf. It is equally possible that after reevaluating their business practices and relationships, a licensee whose auto-approval privileges are being reinstated determines that they do not wish to restore one or more cancelled agreements. The Department believes that the fairest and most reasonable policy is to establish the cancellation of an agreement as an opportunity for each party to pause, consider the current circumstances, and independently choose the best path forward for their business.
New subsection (c)(6) governs reinstatement of auto-approval privileges revoked due to issuance of a citation and is being adopted for the same reasons provided above regarding the adoption of subsection (c)(5).
New subsection (d) requires licensees to provide a reason for rejecting a transfer request in the CCTT system. This is necessary to ensure that initiating licensees are made aware of why their cannabis or cannabis products are not being accepted by a downstream licensee, which is valuable information in terms of maintaining good business relationships and product quality. This is also necessary to improve recordkeeping practices, ensuring important information is readily available to Department staff when performing investigations.
New subsection (d) additionally provides that transfer requests will be automatically cancelled if not approved or rejected within 72 hours of creation. When an item is electronically placed on a transfer request that is then sent to a downstream licensee, that item will have a status of “in-transit” in the CCTT system. While that item will remain associated with the initiating licensee’s inventory, the Department has a strong enforcement interest in ensuring that cannabis and cannabis products do not remain in an “in-transit” status indefinitely. Allowing 72 hours to elapse before cancelling unapproved transfer requests provides downstream licensees sufficient time to review and approve or reject incoming transfers, while also facilitating accurate inventory accounting and preventing items from remaining “in-transit” for an unreasonably and unnecessarily long period of time. This will aid the Department in performing investigations and quickly locating cannabis and cannabis products at any point in time, which is a function crucial to overseeing the cannabis industry.
New subsection (e) provides an important exception to the proposed transfer approval requirements that applies to licensed testing laboratory employees collecting representative samples from distributors for regulatory compliance testing. Transfer approval is not necessary under these circumstances because after a laboratory employee obtains samples at a distributor’s licensed premises, that employee also transports those samples back to the licensed laboratory premises. If required to comply with subsection (b), a licensed laboratory would have to request – and provide – their own approval to transfer a sample they collected back to their premises. This exception is being adopted to avoid that unnecessary and absurd practice.
Existing subsection (b) is renumbered to subsection (f) and amended to replace the word “distributor” with “licensee” for the same purposes and reasons as the proposed amendments to subsection (a)(2), described above.
Existing subsection (c) is renumbered to subsection (g) and amended to insert the word “recipient” for the same purposes and reasons as the proposed amendments to subsection (a)(3), described above.
Existing subsection (d) is renumbered to subsection (h) and amended to insert the word “recipient” for the same purposes and reasons as the proposed amendments to subsection (a)(3), described above.
Adopt §15049.4. Track and Trace Requirements for Retail.
The California Department of Tax and Fee Administration (CDTFA) is responsible for administering California’s cannabis tax programs, including the cannabis excise tax program. Pursuant to authority granted by Assembly Bill (AB) 195 (Stats. 2022, Ch. 56), CDTFA requires commercial cannabis retailers to file either monthly or quarterly returns for purposes of reporting gross receipts on sales of all commercial cannabis goods. CDTFA has “read” access to the CCTT system under BPC section 26067, subdivision (b)(4), and since mid-2022, CDTFA has used sales data recorded by retailers in the CCTT system in specific fields to verify the accuracy of gross receipts reported on quarterly tax returns. These nine “tax” fields (Invoice Number, Price, Excise Tax, City Tax, County Tax, Municipal Tax, Discount Amount, SubTotal, and Sales Tax) were designed to segregate the relevant price and tax components of each retail sale to allow for efficient comparison and auditing of tax returns.
Unfortunately, sales data recorded in the CCTT system has so far been unreliable. Without implementing regulations to mandate use of the tax fields, provide user instructions and clear guidance to retailers, and create enforcement mechanisms for CDTFA, sales data has only been recorded voluntarily by a handful of retailers and is often inaccurate. According to CDTFA, gross receipts sometimes vary by as much as 30% from the sales figures recorded in the CCTT system because the retailer entered excise or sales taxes incorrectly. CDTFA investigates these discrepancies by conducting a full audit to determine whether the retailer reported inaccurate information on their tax report (and potentially under- or overpaid on their taxes) or simply entered sales differently into the CCTT system. Due to the widespread nature of this issue, CDTFA is constantly having to perform these time-consuming and resource-intensive audits.
The Department has sole regulatory authority under BPC section 26067 to establish and modify the CCTT system. Pursuant to CDTFA’s request, the Department is adopting new section 15049.4 to clarify the requirements of the nine existing tax fields in the CCTT system and make recording of all information regarding retail sales of cannabis goods mandatory. The regulatory text of section 15049.4 was developed by CDTFA in consultation with the Department. New subsection (a) establishes the mandatory recording requirement, which is the cornerstone of CDTFA’s review process and also provides the Department with the ability to enforce the mandate. New subsections (a)(1) through (a)(9) track and elaborate on the existing fields in the CCTT system and provide users with clarifying guidance to facilitate accurate and consistent recordkeeping. Invoice numbers (subsection (a)(1)) are valuable tools used by CDTFA to trace transactions completed by retailers who utilize invoices in addition to regular sales receipts. The other components of a cannabis good’s total price paid by a retail customer (subsections (a)(2) through (a)(9)) are necessary to segregate and record so that CDTFA can determine whether licensees are reporting gross receipts correctly, since gross receipts reported for any given reporting period are simply the sum of the total prices for all goods sold by the retailer during that quarter. The accuracy of a given licensee-calculated total price can only be verified by CDTFA if the base retail price of the good, all excise, sales, and local business taxes and discounts applied to the good, and the subtotal are recorded to enable CDTFA to double-check the licensee’s calculations.
Chapter 2. Distributors.
Amend §15304. Testing Arrangements.
The Department is aware that some distributors are interpreting use of the word “a” in section 15304 as establishing a minimum standard: one that does not expressly prohibit distributors from arranging for multiple laboratories to test the same batch. Further exacerbating this problem is the fact that the CCTT system does not presently limit the number of test sample packages that may be created from a batch, and some distributors are abusing this lack of a “hard stop” in the system by asking multiple laboratories to sample the same batch and informally provide test results before taking any further action. When all testing is complete, the distributor will select their preferred test results and have that laboratory accept the manifest and upload the results in the CCTT system. The distributor will then render the additional manifests void to prevent the other labs from uploading their test results.
This process is known colloquially as “lab shopping” and harms consumers and undermines both the integrity of laboratory testing and confidence in the legal cannabis market. Accurate cannabis testing is a crucial element of protecting public health and safety and ensuring that cannabis goods adulterated with deleterious substances are not sold at retail. Lab shopping pits laboratories against each other to return the most favorable results, creating perverse incentives to inflate cannabinoid potency levels and alter test methods to ensure that cannabis goods do not fail compliance testing. Laboratories that do not engage in these harmful and illegal practices are disadvantaged in the marketplace and losing business to the laboratories that do.
Considering the above, the Department is amending this section to clearly state that after taking physical possession of a batch of cannabis or cannabis products, a licensed distributor must arrange for “only one” licensed testing laboratory to obtain “one” sample of that batch. Other minor changes to the text of section 15304 are being made for brevity. In addition, related CCTT system changes will be implemented to prevent users from creating more than one test sample package from a batch under any circumstances other than for Department-approved retesting as permitted under existing section 15705(g). These changes are necessary to eliminate ambiguities and close loopholes, which the Department believes, in combination with other amendments to chapter two described below, will effectively eliminate the practice of lab shopping.
Amend §15305. Testing Sample.
New subsection (f) requires each licensed distributor to record sampling of a batch for regulatory compliance testing in the track and trace system before the laboratory employee who collected the sample leaves the distributor’s licensed premises. Existing section 15049(b)(1) allows distributors 24 hours to record batch sampling, but as described above, one of the main objectives of this regulatory package is to prevent distributors from lab shopping by providing test samples from one batch to multiple laboratories and then selecting the most favorable results. Some laboratories operate 24 hours per day, year-round, and are therefore able to return preliminary test results to distributors before the end of the 24-hour period in which the sampling must be recorded in the CCTT system. Requiring distributors to record sampling in the CCTT system before laboratory employees leave the premises with samples is necessary to close this loophole. This new requirement, combined with sampling restrictions described below, will effectively eliminate the practice of lab shopping.
Adopt §15305.1. Sampling Restrictions.
New section 15305.1 provides that once a representative sample has been obtained from a batch for regulatory compliance testing, the licensed distributor in possession of the batch is prohibited from creating additional test samples or arranging for further testing other than in accordance with existing section 15705(g). Prohibiting distributors from allowing multiple lab test samples to taken from a single batch is necessary to prevent distributors from lab shopping, the practice and dangers of which are described in detail above. Section 15705(g), cross-referenced for the reader’s convenience, allows a distributor who requests and obtains Department approval to have a batch re-sampled and tested by another licensed laboratory if the first laboratory is unable to competently complete the regulatory compliance testing.
Amend §15306. Regulatory Compliance Testing Results.
New subsection (b) prohibits licensed distributors from physically or electronically repackaging a batch that has been submitted for or is undergoing regulatory compliance testing. This is necessary to prevent distributors from being able to sever the link between a specific cannabis batch and its test results in the CCTT system. If a distributor is unhappy with test results uploaded to the CCTT system by a licensed laboratory, or has been informed by a laboratory that they anticipate a sample will not pass or will possess a lower cannabinoid potency than desired, the CCTT system does not prohibit that distributor from electronically repackaging the batch that was tested into a “production batch.” When a batch is repackaged into a production batch, the prior test results for the first batch are disassociated from the new production batch, which the CCTT system will identify as “Not Submitted” for testing. The distributor can arrange for the “new” batch to be re-sampled and re-tested by a different laboratory, usually one willing to falsify more favorable test results, and then move the cannabis forward in the supply chain with the false test results.
The language of existing subsection (b) is non-substantively shifted to subsection (c). Existing subsection (c) is substantively unchanged.
Existing subsection (d) is amended to prohibit a distributor from electronically creating a new production batch from a failed batch. As explained above regarding similar prohibitions for batches that have been submitted for, are undergoing, or have passed testing, this change is necessary to prevent distributors from hiding unwanted test results and arranging for retesting of a failed batch by a laboratory willing to falsify passing results. CCTT system changes will accompany this regulatory change to prevent a distributor from taking the action described. This change will not affect the ability of a manufacturer to repackage a failed batch into a production batch as part of an approved remediation plan pursuant to section 17305.
Amend §15307. Quality-Assurance Review.
Existing section 15307 is amended to revise the subsection numbering. The first paragraph of the section is now listed as subsection (a) and the following subsections are renumbered accordingly. These non-substantive changes are made to facilitate accurate citing or cross-referencing of the opening paragraph, when necessary.
New subsection (a)(2) requires a distributor performing a quality assurance review to verify that if a manufactured cannabis product includes a production batch number in the track and trace system, that number is the same as the production batch number included on the product’s COA and printed on the product’s physical label. Existing section 15726(e)(5) requires the COA to include the same production batch number that is on a packaged product’s label, but sometimes the batch number in the CCTT system differs, which can cause transfer bottlenecks and delay Department investigations. Incorporating this new step into distributors’ current quality assurance procedures is a simple way to mitigate these issues.
Chapter 3. Retailers
Adopt §15404.1. Providing COAs to Customers.
New section 15404.1 requires retailers, upon request from a customer, to provide that customer with a copy of the COA for any cannabis goods being offered for sale. The COA provides the complete test results for all analytes and the specific cannabinoid potency levels reported by the testing laboratory. Retail licensees have access to COAs in the CCTT system but are not required by law to provide COAs to retail customers, and while some retailers already voluntarily make COAs available to their customers, many do not. This leaves consumers with limited information about the cannabis they purchase and consume. Requiring retail licensees to make COAs available to customers will increase confidence in the legal market, aid customers in making informed purchasing decisions, and increase transparency of product quality and safety information.
Chapter 6. Testing Laboratories
Article 3. Sampling Cannabis and Cannabis Products
Amend §15710. Laboratory Receipt of Samples Obtained from a Distributor or Microbusiness for Regulatory Compliance Testing.
Existing section 15710 is amended to add “for Regulatory Compliance Testing” to the end of the section title. This is necessary to clarify that section 15710 applies to regulatory compliance testing rather than optional quality assurance or research and development testing that occurs prior to official regulatory compliance testing.
Existing subsection (a) is repealed because it unnecessarily rephrases, without adding anything to, the testing prerequisite in existing subsection (c)(1).
New subsection (a) establishes a clear deadline for testing laboratories to record representative sample transfer activity in the track and trace system. Laboratories are already required to record receipt or rejection of samples within 24 hours of occurrence under existing section 15049, subsections (b)(1) and (b)(2), respectively, but “occurrence” is ambiguous in this specific context due to the inherent uniqueness of the sampling process. Representative sample transfers are different from all other transfers because each sample is transported back to the laboratory premises by the laboratory employee who obtained the sample, not by a distributor.
It is common practice for laboratory employees to collect samples from multiple distributors during one trip, which may take many hours and involve traveling for hundreds of miles. For instance, an employee of a laboratory located in southern California who leaves one morning to collect samples from multiple distributors in northern California may not return to the laboratory until the following day. If “occurrence” is interpreted to mean the moment at which the employee obtains a sample from a distributor, then the laboratory in this example might end up being out of compliance with the 24-hour recording requirement before their employee even returns to the laboratory premises. If instead, “occurrence” means “arrival” of a sample, in the care and possession of the laboratory’s employee, at the laboratory’s licensed premises, then the duration of the sampling trip is no longer relevant and parity exists between laboratories and all other recipient licensees because everyone has 24 hours from arrival of a shipment at their premises to record receipt or rejection of the shipment in the track and trace system.
Existing subsection (b) is repealed because it unnecessarily restates, without adding anything to, existing section 15706, subsections (b)(2), (b)(11), and (c).
Existing subsection (c) is renumbered to subsection (b) and amended to clearly indicate that this subsection is an exception to the procedural mandate in existing section 15705, subsection (f), which states that once a representative sample has been obtained by a laboratory for regulatory testing, that sample must be tested by the laboratory. Although the Department is unaware of any internal or external confusion over this inconsistency, it is necessary to include this clarifying disclaimer in order to harmonize these rules and avoid any future compliance or enforcement issues.
Renumbered subsections (b)(1), (b)(2), and (b)(3) are amended to replace language about receipt of samples with language about arrival of samples. This is necessary to align these existing provisions with changes being made to subsection (a), which are described above.
STANDARDIZED REGULATORY IMPACT ANALYSIS
The Standardized Regulatory Impact Analysis for this proposed action was performed by ERA Economics, LLC and is included as Attachment 1 to this statement of reasons.
CONSIDERATION OF ALTERNATIVES
Alternative 1: Require transfer approvals but do not allow licensees to set up auto-approvals, licensees must manually approve all transfer requests
This alternative was rejected because it would unnecessarily burden licensees without providing significant benefit to the Department. Large cannabis businesses engage in a very high volume of transfers. Requiring transfer approvals without the ability of licensees to enter into auto-approval agreements with other businesses they commonly transact with could significantly increase costs and slow down the movement of cannabis throughout the supply chain.
Alternative 2: Require transfer approvals but licensees must accept or reject a transfer within 24 hours instead of 72
This alternative was rejected because requiring the acceptance or rejection of transfers within 24 hours would likely require additional employee time to check for transfers outside of normal business hours (i.e., weekends), and could result in transfers being automatically rejected before the recipient or distributor licensee had the opportunity to review and approve or reject the transfer themselves.