Taking a Year Off the Farm: As Prices Drop, Some Cannabis Cultivators Are Putting a Pause on Growing–Here’s What You Need to Know

Planting season is coming and, as prices plummeted, some farmers are considering taking a break from growing. [Image from the California State Fair Website]

There’s been much talk and consideration for taking a year off among canna-businesses. Here’s a snapshot of fallowing considerations that may help you assess this year’s trajectory. Big shout out to right livelihood and the dedication our industry exhibits. As the seasons roll and businesses are assessing timelines and profitability, we’ve heard many considering a year off. We support your decisions, and encourage you to speak with legal counsel and other trusted advisors if a fallow year is something you are considering. County Considerations Humboldt County offers tax relief with declared square footage reduction with the use of their Cannabis Cultivation Declaration Form, which must be notarized and submitted to the cannabis planning office prior to May 15, 2022. A reduction in square footage or lighting change does not inactivate or otherwise change the permit, whether an interim or full entitlement permit. Up to 100% square footage reduction, or a partial reduction is possible Mixed-light operations may also reduce lighting to zero and pay outdoor tax rate ($1/Sf as opposed to $2/Sf) The county allowed for retro-notifications for 2021, but that is not guaranteed. Activities of permittees are monitored by planning staff via aerial surveillance throughout the year, so there is ability to verify declarations, and proof, or inspections may be requested by county staff. The square footage tax [changed] this year in Humboldt County. (See here for details). Making business decisions in an ever-shifting political and regulatory climate presents challenges, at local, state and federal levels. In this and in all things, business owners are well advised to assume nothing will change…, watch for changes, and speak to your needs as business owners and citizens. Continued permittee responsibilities Progress and completion of permit conditions of approval must be pursued, and an extension of conditions due date may be sought. Keep in mind the intention of conditions is to ensure permitted activities are followed through and in compliance with the permitted land use. Mendocino County has two paths, depending on the status of the permit: application pending, or fully approved. An applicant may file a Notice of Application Stay (NAS) for the purpose of preventing the denial of an application for a Phase One Permit based on inactivity by the applicant for up to a one-year period. Applicants may stay once. For properties with permits granted, a Notice of Non-Cultivation, also ceasing cultivation activities for up to one year. Permittees may file a Notice of Non-Cultivation once during a five year period. During a noticed stay, no commercial cultivation may occur, and the property remains open to inspection. County staff will notify the State of California (DCC) that there is no local authorization to cultivate for the period notified; it is not stated if ancillary allowance (for example, transport licensing), would also be prohibited, or if sales from past year’s crops would be allowed (ie, storage and transfers). Because the local jurisdiction is not revoking authorization, the county informing the state of the stay may be in lue of: §15035. Notification of Criminal Acts, Civil Judgments, Violations of Labor Standards, and Revocation of a Local License, Permit, or Other Authorization After Licensure. (d) A licensee shall ensure that the Department is notified in writing of the revocation of a local license, permit, or other authorization, either by mail or electronic mail, within 48 hours of receiving notice of the revocation. The written notification shall include the name of the local agency involved, a written explanation of the proceeding or enforcement action, and the specific violation(s) that led to revocation. (e) For any notification required under this section, licensees shall use and submit to the Department the Licensee Notification and Request Form, Notifications and Requests to Modify a License, DCC-LIC-027 (Amended 9/21), which is incorporated herein by reference. We encourage anyone taking this path to communicate with the state agency as well, especially if you wish to retain your state license while fallowing. The limitation of notifications of stays may feel restrictive; land use review for development projects typically require “vesting” a project, ie, continuation of application, conditions completion, and continuance of operations. This is true of many planning projects, so that the property is being put to the “most productive” and approved/proposed use. It is unclear at this time if taking a year off could occur outside these limitations, with fees or taxes may not stayed, to make responsible land and water use decisions. For forms and to file either notice, contact Mendocino Cannabis Program (707)234-6680 / cannabisprogram@mendocinocounty.org. State Considerations Option 1: Retain Active License Taking a year off of cultivating does not mean you must terminate, or let expire your active license. Keeping an active license requires paying renewal fees. We’ll discuss the equity fee waiver request for applicants and license holders below. Continued Active License Responsibilities Active licenses are subject to the same regulations no matter what the activities conducted within the premise. This includes conducting monthly inventory reconciliations, and being open for inspections during stated open hours (a minimum of 2 hours a day M-F per state regulation). There is no longer a requirement, or option, to alert the agency of a “temporary closure” of over 30 days. Benefits of License Retention Without Cultivation Retaining Genetics Keeping your license active, even if not growing for the season, will allow you to keep your inventory, including maintaining nursery stock and seeds. This is a huge consideration for farms that started off with legacy seed inventory and plants, especially if you are a single license holder. Once a license is terminated, there is no path to enter your commercially held genetics into a license. The time of allowing pre-existing seed and inventory stock to be entered into METRC is over, and all genetics must now be purchased from a nursery, or transferred from one of the same entity’s other cultivation licenses. Transfer of plants or seeds from cultivation to cultivation not licensed by the same entity is prohibited. This means you cannot transfer your genetics to a neighbor to hold for you into a future license, regardless if they hold a cultivation, nursery, distribution or transfer license. For multi license holders, an option to move all plants / seeds to one of your own licenses may assist with retention of genetics and lower your overall license cost if surrendering or not renewing a license. Retaining Inventory Inventory may also be retained, rather than needing to clear out prior to license termination or expiration. There is no way to discuss this with any certainty as to what the market is going to do in 2022, and the impact that has on business decisions. However, it may be in your interest to keep possession of your inventory, and make sales decisions and oversee quality control with your product in your own control. Eligibility for Equity Programs Humboldt County’s Trellis Program and other grant funding may be available to qualifying applicants, which may not be available to those without an active license. The state’s equity fee waiver program is open to license holders as well as those applying for licenses. The funding is limited to $3 million statewide, on a first come, first served basis, and open to all license types. Continuation of Licensure for Provisional Licensees Provisional license holders’ ability to renew will come with more oversight, and new licenses will require significant CEQA compliance, starting in June 2022. On March 31, 2022, the DCC will take their last applications that would be reviewed as provisional, and by the end of June, contiguous licenses will be limited by size for cultivators. Timeline with more details can be found here. This will make it increasingly difficult to acquire a new license with any of the required land/water use documentation pending. While here, we may remind folks that CDFW, DCC and Humboldt have authority to limit cultivation within impacted watersheds. Holding a license may retain value in the work done to get you this far, and allow for pivot as you see fit. More information can be found in this DCC fact sheet. Option 2: Termination of Licensure  A license can be surrendered, with email notice to DCC at [email protected]. The agency will send instructions for surrendering the license, including directions for clearing out METRC. Alternatively, a license can expire. Without renewal, after 30 days this has the same effect as surrendering. Requires Reapplication to Grow Again A new license application and approval would be required prior to resuming cultivation. Consider lead time to get through a new application process, and the subsequent buffer of 60 days to pay for an approved license before it is considered abandoned. §15012. Incomplete and Abandoned Applications. (c) If the applicant fails to submit payment of the license fee within 60 calendar days from the date of the request for payment of the license fee, the application shall be deemed abandoned. New applications take at least 4 months to process, based on review timelines of each stage, but could (and have been) taking much longer. At this time, we would anticipate 8 months. This timing will also kick out reviews past the provisional allowance time frame, likely making the review more complex (which is also true for provisional renewals after July, but that will be explored later). All Inventory Must Be Cleared Out Commercially produced cannabis must remain in the supply chain; when a license is no longer active for commercial activities, the cannabis can no longer be in the possession of a non-licensed person or premise. There are exceptions to this in regulations, one is under disaster relief, when the location is noticed to the DCC and approved, requiring the location to be limited access and open to DCC inspections. The second exception is in §15024.1, which allows a distributor to apply to acquire ALL inventory in a terminated license within 14 days of expiration. It is unclear at the time of writing if product would be allowed to return to a license if it became active again (within 30 days of expiration, with the payment of penalty and full license fee), or to a new license on the same premise held by the same owner/entity. It is unlikely, based on the agency interpretation of premise and owner and license (all which prohibit cross over in most instances, including not being able to hang drying plants in the “wrong” premise on the same property). The agency has not responded to requests for further information at this time. All that said, product sales can continue through distribution, and payments can be made to the source entity/person. Receiving payment for product that entered the commercial supply chain by the business/individual who produced the product, is more clearly allowed. This would mean retaining other authorization to do business within California and the local jurisdiction. Continued Record Retention Records are inspectable by DCC for up to 7 years, regardless of license status. We have been told that records must remain on the premise, and we asked: what if there is no longer a premise, or access to it (in the case of property sales)? Oddly, again the agency seemed a bit unclear what to advise, but reiterated that records are subject to inspection. Like any business, other agencies may also request to audit or inspect records, so hold on to them. If you would like to review what records are or may be subject to inspection or audit, our On-Site Binder Workbook or review service is available. Other Reporting and Upkeep Considerations The following fees and reporting are among some of the items which remain the business’s responsibility unless they are also terminated. Speak with your advisors in each area to determine what might be the best course of action for your business. Water boards: yearly mitigation, monitoring and reporting, yearly fees CDFW: yearly mitigation, monitoring and reporting, renewal and fees if applicable Taxes: reporting and payment Business license: renewal and fee Entity renewals: renewals as applicable Business considerations Yearly minimum state franchise tax board is due for all registered corporation, LLC’s and limited partnerships in California; the minimum franchise tax is $800 at the time of this writing. Making product donations is a way to ensure cannabis does not go to waste (literally), and support the long history of medical access in California, with no cultivation tax liability if marked by the farm before transfer. Thank you again, Margo Associates, for collaborating on the Quick Guide to Compassionate Use Donations. If you are interested and not sure where to donate, we are collecting contacts for donation programs. We should note that the above are considerations for taking a temporary furlough.  If you are considering cancelling a license and/or permit, there are a number of other considerations to work through, including loss of land value, inability to apply for permit in certain zones or watersheds (at the time of this writing). There is also the deep consideration of your skills, lifestyle, and the love of the plant. The work is taxing, the taxes are grueling, and there is nothing quite like working with this healing plant, and working with the land. Our Resources Oxalis’s “Unwinding” check list is available to work through the filings to cancel and records to retain, should you choose to take another path and divest from commercial cannabis cultivation. Oxalis is available to assist with taking the year off, we’ve created a checklist for unwinding a project, and can work with folks to complete divesting. We also have experience in transitioning ownership, and are available in tandem with you and your legal support on various paths, depending on your needs and goals. We are happy to talk this out to assess complexity and compliance considerations. Your friends at Oxalis, Holly, Ali, Stephen and Kimberly

Focus on the Land A year off may bring the time and space to focus on the land with mitigation and environmental protections that are best practices and often requirements of permitting and licensing. Sanctuary Forest continues to lead for our ecosystems and land stewardship. Check out these great resources written in support of the land: Land Stewardship Booklet Written by Kyle Keegan, Technical Drawings by Evan Walbridge, produced by Sanctuary Forest with funding from the California Department of Fish & Wildlife’s Fisheries Restoration Grant Program. Water Stewardship Booklet Written by Sanctuary Forest with conservation gardening techniques by Kyle Keegan, produced by Sanctuary Forest with funding from the California Department of Fish & Wildlife’s Fisheries Restoration Grant Program.

Oxalis Integrative Support Services is dedicated to helping the Emerald Triangle’s legacy sun-grown farms, microbusinesses, and family enterprises thrive in the legal cannabis marketplace. We help you to meet your cannabis compliance business needs, create operational efficiencies, and stay abreast of regulation and other important updates. Together we got this!