Crossing The Line: California Looks to Permit Interest Transfer and Distribution of CannabisRead Time: 4 mins
Under current California law, cannabis licensees are not permitted to “transport or distribute, or cause to be transported or distributed, cannabis or cannabis products outside the state, unless authorized by federal law.”  Federal law, of course, also does not permit interstate transfer of cannabis. As the judge told Johnny Depp’s character in the movie Blow: “[u]nfortunately for you, the line you crossed was real and the plants you brought with you were illegal, so your bail is twenty thousand dollars.” California is working to eradicate that real line with proposed Senate Bill (SB) 1326 and a bill filed last week titled Small Homestead Independent Producers (SHIP) Act.
SB 1326 would provide an exception to the prohibition on interstate transport or distribution of cannabis in California by permitting the Governor to enter into an agreement with another state or states that also authorize medicinal or adult-use commercial cannabis activity, and between California-licensed entities and those licensed under the laws of the other state (provided that all of the entities’ commercial cannabis activities are lawful). Notably, this proposed bill allows the state of California to enter into such interstate agreements; not individual licensees. This means that, once interstate transportation is permitted by the state, it would be up to individual licensees to enter into contracts with other business for the actual import, export, or distribution of cannabis across state lines.
Under SB 1326, the state contracting with California would have to agree that its own cannabis licensees will be bound by California law, including being required to comply with: (1) California’s public health and safety laws, (2) California’s cannabis-specific rules for tracking, tracing, testing, packaging and labeling, among other regulations, (3) advertising, marketing, or sale restrictions that, at minimum, meet California’s laws; and (4) California’s taxes. The bill’s text, however, prohibits the state from entering into any such agreements until “among other things, federal law is amended to allow for, or the United States Department of Justice issues an opinion or memorandum allowing or tolerating, interstate transfer of cannabis or cannabis products between authorized commercial cannabis businesses.” . This is notable because similar other bills in California (see, SHIP Act) and other states (see, Oregon Senate Bill 582) make these permissions contingent upon the amendment of federal law. California’s SB 1326, on the other hand, seems to suggest that even a DOJ memorandum – think: the Cole Memo of 2013 – which “tolerates” interstate transfer of cannabis would be sufficient for California operators to begin exporting their products across state lines under the proposed law.
The SHIP Act, filed on September 14, 2022, seeks to also provide authority for “small cultivators of marijuana and small cultivators of marijuana products” to ship marijuana in the mail directly to consumers located in California or another state where the possession of marijuana or the marijuana product is lawful by that individual. Small cannabis companies currently struggle in the face of high tax liabilities, limited or no access to banks or capital, and multi-state operators whose resources and infrastructure to acquire smaller businesses threaten to further consolidate the market and rob the state of taxes it presently enjoys – challenges which will surely multiply when federal legalization opens the floodgates.
The SHIP Act’s co-sponsor, Representative Jared Huffman, explained, “we want to make sure that the smaller operations have a chance to compete and succeed.” However, the bill is made expressly contingent upon federal legalization, and if passed, would not take effect until the date on which “marijuana is removed from the list of scheduled substances under the Controlled Substances Act and Federal criminal penalties for an individual who manufactures, distributes, or possesses marijuana, are eliminated,” which would require a complete overhaul of existing federal drug laws. With that overhaul unlikely to be accomplished in the near future, the SHIP Act does not at the present time, in practice, afford relief to the small, legitimate California operations the bill seeks to provide.
California is not the only state seeking to expand the authority of local and state-compliant cannabis companies to export and transport marijuana across state lines. In 2019, the state of Oregon’s legislature passed and the Governor signed into law Senate Bill 582, which – similar to California’s SB 1326 – authorizes the Governor to enter into agreements with other states for the purposes of “cross jurisdictional delivery of marijuana items.” However, like the SHIP Act, the law will not become operative unless and until the seemingly far-off prospect that “Federal law is amended to allow for the interstate transfer of marijuana items between authorized marijuana-related businesses” or the ”United States Department of Justice issues an opinion or memorandum allowing or tolerating the interstate transfer of marijuana items between authorized marijuana-related businesses” is realized.
While SB 1326 and the SHIP Act have stirred excitement in both California-licensed cannabis companies as well as consumers living in states with regulated marijuana industries, these bills do not address the serious risk caused by the elephant still lurking in the room: the federal prohibition on cannabis. While the federal government and the Department of Justice have not prioritized prosecuting criminal cases against companies legally operating under state law in recent years, the transport of cannabis across state lines may cause them to reconsider. In fact, the federal government made clear in the now-rescinded Cole Memorandum that the federal government was most likely to pursue criminal prosecution if a state fails to implement “strong and effective regulatory and enforcement systems to control the […] distribution […] of marijuana” in order to prevent the “diversion of marijuana from states where it is legal under state law in some form to other states.” In other words, an individual state’s attempts to allow their legal marijuana businesses to engage in the interstate transportation of cannabis may land that state’s legitimate cannabis industry back in the federal government’s crosshairs.
With the risk of federal criminal prosecution still hanging over operators’ heads, unless and until the federal government explicitly changes its position on marijuana, or at a minimum, its position on the narrow issue of interstate transfer or distribution of cannabis among so-called “legal states,” nothing will come of the SHIP Act for the time being, and nothing much may come of SB 1326. However, that multiple states are now proposing, or have already passed, such legislation granting their operators permission to engage in interstate transportation foreshadows what the future of the cannabis industry will look like once the federal prohibition of marijuana is lifted.