Complying with California’s New Rules for Cannabis Trade Samples
By Lauren Mendelsohn
February 20, 2022
It’s a common practice for wholesale sellers to provide product samples to wholesale buyers for marketing purposes. Until recently however, there was no way for cannabis businesses in California to accurately record this in the state’s track-and-trace system, and anything provided from one licensee to another as a trade sample was still subject to the taxes that apply to cannabis goods intended for sale to the public.
Enter Assembly Bill 141, adopted in 2021, which added new language to the Business and Professions Code as well as the Revenue and Taxation Code to create a process for tax-free business-to-business trade samples. In particular, AB 141 added Section 26153.1 to the Business and Professions Code, which reads as follows:
(a) The Department of Cannabis Control shall adopt regulations to establish a process authorizing licensees to designate cannabis or cannabis products as a trade sample at any time while the cannabis or cannabis product is in the possession of the licensee.
(b) The department shall adopt regulations to establish a definition of trade sample, the quantity of cannabis and cannabis products that may be designated as trade samples, the amount of trade samples that may be provided to a licensee, and any other provisions necessary to implement this section.
(c) Cannabis or cannabis products designated as trade samples shall be subject to quality assurance and testing pursuant to Section 26110, and may be returned to cultivators and manufacturers following quality assurance and testing pursuant to Section 26110.
(d) Cannabis or cannabis products designated as trade samples shall be recorded into the track and trace program established pursuant to Section 26067.
(e) Cannabis or cannabis products designated as trade samples shall be labeled with the following: “TRADE SAMPLE. NOT FOR RESALE OR DONATION.”
(f) Cannabis or cannabis products designated as trade samples shall only be given for targeted advertising to licensees about new or existing cannabis or cannabis products. The department may adopt regulations specifying additional purposes of trade samples.
(g) Cannabis or cannabis products designated as trade samples may be transported between any two licensees by an employee of a licensed distributor or microbusiness authorized to engage in distribution, or by a licensee authorized to engage in transportation of cannabis, including a distributor transport-only licensee as established by the department in regulation. Employees transporting trade samples pursuant to this subdivision but outside of a registered vehicle of the licensed distributor or microbusiness shall be subject to possession limits established in Section 11357 of the Health and Safety Code.
(h) Cannabis and cannabis products designated as trade samples shall not be provided for any form of payment, consideration, cost, or compensation.
(i) Except as otherwise provided in this section, cannabis and cannabis products designated as trade samples shall comply with all applicable requirements for cultivation, manufacturing, distribution, processing, storing, laboratory testing, quality assurance, packaging, or labeling under this division.
(j) This section shall become effective upon adoption of regulations by the department and no later than January 1, 2023.
(k) Notwithstanding any other law, the department may adopt and readopt emergency regulations to implement this section. The provisions of Section 26013 shall be applicable to emergency regulations adopted or readopted pursuant to this section. The emergency regulations authorized by this section shall be deemed an emergency and necessary for the immediate preservation of public peace, health, safety or general welfare.
In addition, AB 141 amended Section 34011 of the Revenue and Taxation Code, which deals with the cannabis excise tax, to add the following provision (§34011(h)(1)):
Nothing in this section shall be construed to impose an excise tax upon cannabis or cannabis products designated as a trade sample pursuant to Section 26153.1 of the Business and Professions Code.
AB 141 also added Section 34012.2 to the Revenue and Taxation Code, which exempts cannabis goods designated as trade samples from the cultivation tax. That section says:
(a) On and after January 1, 2022, there is exempt from the cultivation tax imposed pursuant to Section 34012 the cultivation of all harvested cannabis that will be, or has been, designated a trade sample pursuant to Section 26153.1 of the Business and Professions Code and all harvested cannabis that is used to manufacture a cannabis product that is designated a trade sample pursuant to Section 26153.1 of the Business and Professions Code.
(b) The department shall adopt regulations prescribing the procedures for how the exemption provided in subdivision (a) shall be implemented.
(c) A person licensed under Division 10 (commencing with Section 26000) of the Business and Professions Code that sells cannabis exempt from the cultivation tax pursuant to subdivision (a) or sells any cannabis product that is manufactured with cannabis exempt from the cultivation tax pursuant to subdivision (a) shall be liable for the cultivation tax imposed by Section 34012 as if the person were a cultivator of the cannabis at the time of sale.
(d) Notwithstanding any other law, the department may adopt and readopt emergency regulations to implement this section. The provisions of this section shall be applicable to emergency regulations adopted or readopted pursuant to this section. The emergency regulations authorized by this section shall be deemed an emergency and necessary for the immediate preservation of public peace, health, safety or general welfare.
Following adoption of Assembly Bill 141, the California Department of Cannabis Control (DCC) issued the following regulations regarding trade samples:
- 4 Cal. Code of Regulations §15041.2 – Trade Samples
- 4 Cal. Code of Regulations §15041.3 – Designating Trade Samples
- 4 Cal. Code of Regulations §15041.4 – Providing Trade Samples
- 4 Cal. Code of Regulations §15041.5 – Requirements for Trade Samples
- 4 Cal. Code of Regulations §15041.6 – Consumption of Trade Samples
- 4 Cal. Code of Regulations §15041.7 – Trade Sample Limits
These regulations set forth specific rules in terms of which licensees can provide cannabis goods as trade samples (some can give and receive them, some can only receive them, and some can neither give nor receive them); how trade samples should be properly designated and tracked in METRC (failure to properly track can have consequences); proper packaging and labeling of trade samples (hint: they must comply with normal packaging and labeling rules as well as include the phrase “TRADE SAMPLE. NOT FOR RESALE OR DONATION”); how many trade samples can be provided by each licensee (yes, there are limits); and more.
As mentioned above, if the proper procedure is followed, cannabis provided as a trade sample is not subject to the cannabis excise or cultivation tax. The California Department of Tax and Fee Administration (CDTFA) published this special notice regarding cannabis trade samples explaining this. CDTFA also created a special Cannabis Tax Exemption Certificate which can be used (Form CDTFA-230-CD) by a licensee to show that particular goods were given or used as trade samples and thus exempt from cannabis taxes. Importantly, if cannabis goods that have been designated as trade samples are subsequently sold by another licensee, the licensee that sold those goods is liable for the taxes on those goods. Other penalties apply for failure to pay such tax when it is due.
For a more in-depth discussion of the current law surrounding cannabis trade samples in California, check out the slides or video from our recent presentation on this topic. For specific questions regarding how these rules impact your business, please contact our office to speak with an attorney.
This information has been provided as a public educational service and is not intended as legal advice. For specific questions regarding cannabis trade samples or other topics related to California or New York cannabis, hemp, or psychedelics law, contact the Law Offices of Omar Figueroa at info@omarfigueroa.com or 707-829-0215 to schedule a confidential legal consultation.
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