When California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) was passed last year, marijuana licensees were given the go ahead to vertically integrate cultivation, distribution, and sales. As Hilary Bricken of Above the Law pointed out, distributors in California’s medical and adult-use marijuana industry wouldn’t be acting in the distributor role most people are familiar with from other regulated industries, such as alcohol. It’s this change that had people wondering in late-2017 whether the passing of MAUCRSA would bring significantly more distributor licenses to California in 2018.

To be clear, distribution under MAUCRSA refers to the procurement, sale, and transport of cannabis goods between licensees. Only licensed distributors can transport marijuana from one licensee to another. MAUCRSA established that distributors would also be responsible for arranging testing, packaging quality control, and labeling quality control as well as collecting and remitting taxes on behalf of cultivators and retailers.

When MAUCRSA was passed, many people wondered if there would be a sudden rush by cultivators, manufacturers, and retailers to obtain distribution licenses. After all, why pay a distributor to move your cannabis goods through the supply chain if you can do it yourself? MAUCRSA made a transport-only distribution license available to applicants who only want to transport cannabis goods between licensed cultivators, manufacturers, and distributors. This license does not give the license holder permission to transport cannabis goods to retailers except for immature, live plants and seeds that are being transported from a licensed nursery.

On the other hand, a full-service distribution license under MAUCRSA allows for the transportation of cannabis goods to other license holders, arranging for lab testing, conducting quality assurance to verify cannabis products comply with labeling and packaging requirements, and storing cannabis goods. That means acquiring a transport-only distribution license doesn’t enable a license holder to cut out working with a full-service distributor and incurring the added expenses and delays associated with a more complex supply chain.

Bottom-line, MAUCRSA leaves a lot of confusion and problems in the law that need to be addressed in order for California’s marijuana economy to thrive as effectively as it can.

Looking at the Numbers

“Prior to the introduction of MAUCRSA, the cannabis distribution model in California was largely informal,” explains Cannabiz Media Senior Data Analyst Jason Kikel. “Cultivators and manufacturers were able to move product (flower or concentrates/edibles respectively) to dispensaries and throughout the state without much oversight.”

According to the Cannabiz Media Licensing Database, there are approximately 430 distributor licenses in California spanning medical and adult-use. Many license holders have both M (medical) and A (adult-use) licenses, and 32 of these licenses are for transportation only.

Interestingly, the California Growers Association released a report in February outlining the barriers to entry in California’s cannabis industry, and distribution was listed as a primary concern. At the time, the report approximated that there were 200 licensed distributors in the state. In total, 192 of them were full-service distribution licenses, and only 59 of them were controlled by a business that appeared to be focused solely on distribution (although the California Growers Association estimated that the number could be even lower).

The report points out that for the state’s approximately 1,100 licensed cultivators, 500 licensed manufacturers, and 380 licensed retailers that the California Growers Association could identify at the time the research was collected, there were only 59 distributors in California that could arrange for lab testing (through only 22 licensed testing labs in the state), packaging control, and labeling control.

As the data from the Cannabiz Media Database shows, the number of distributor licenses has gone up since the California Growers Association conducted its research, but problems still exist with transport-only licenses. In the California Growers Association report, it was discovered that 28% of full-service distribution licenses were controlled by a manufacturer, 25% by a dispensary, 9% by a cultivator, 3% by a delivery service, and 4% by businesses that held multiple types of permits and licenses. Typically, businesses that have vertically integrated and hold multiple kinds of licenses focus on transporting only their own cannabis goods.

The problem with transport-only licenses according to the California Growers Association is that they’re too restrictive and expensive for small businesses. For example, transport-only licenses are required to hold $2 million in insurance – the same as a full-service distributor. They’re also required to have a separate premise for the transport-only license than any other cannabis business. However, transportation-only licensees are not allowed to store cannabis and have no reason to have a physical location. Furthermore, transport-only license holders are required to have video surveillance and alarm systems on their premises, but again, they’re not allowed to store cannabis. These restrictions should be lifted so small businesses don’t have to invest in premises and security they don’t need and won’t use.

“The changes laid out under MAUCRSA seem like a half step in the right direction,” shares Kikel. “If I’m a grower in the Emerald Triangle, and I want to make a personal delivery to Los Angeles ASAP, I can do so with a transport-only license. Under the MAUCRSA rules, I’ll have to have testing and a QA check done by a distributor, which shifts the risk for delays and backlog onto two companies: a distributor and the distributor’s testing lab of choice.”

The California Growers Association report explains that under the current system of regulations, cannabis goods are required to pass through five to 10 separate licensed businesses, and at each step in the supply chain, the goods must be transported by a licensed distributor. While a shortage of distributors could break the supply chain, the current system creates another problem – cost. At each stop along the chain, distributors add fees that trickle down to consumers in the form of higher prices.

Addressing MAUCRSA’s Challenges for Distributors

The effects of MAUCRSA are far-reaching, and already, consumers are seeing those effects in the form of high marijuana product prices. For distributors, smaller players are being forced out of the market entirely despite the fact that MAUCRSA was intended to give small businesses an opportunity to enter and compete effectively in the state’s combined medical and adult-use cannabis market. The California Growers Association included dozens of recommendations in its report that could help solve some of the problems of MAUCRSA. Only time will tell if any of those recommendations are considered and implemented.

Originally published 8/11/2017. Updated 3/2/18.

Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.