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Legal weed in Washington turns 10 this week. What challenges lie ahead in the next decade?

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When a couple of hundred enthusiasts and activists gathered at the Space Needle 10 years ago to celebrate Washington’s decriminalization of marijuana (and flout the law prohibiting public consumption), there was underlying anxiety over whether the federal government was going to come and shut everything down.

Today, with 21 states and counting allowing the possession and sale of cannabis to adults, industry attention has shifted to the real possibility that the walls built around Washington’s market could soon come tumbling down with federal legalization.

“We are at the 10-year anniversary, and I thought, coming up to this, we were at a juncture,” said David Postman, chair of the state’s Liquor and Cannabis Board, in an interview last month. “What (does) the future of cannabis look like?”

The Liquor Cannabis Board, itself renamed as part of its authority expanding to cover the industry, oversees a market that has reported retail sales exceeding $1 billion in each of the past four years. An explosion of sales during the COVID-19 pandemic has raised more than $500 million in each of the past two years for Washington state. Department of Revenue statistics show cannabis has become a larger source of state revenue than alcohol and tobacco as sources of “sin tax” revenue over the past five years, raising more than $2 billion for the state even before local sales taxes are calculated.

That’s in large part due to the 37% excise tax rate at the point of sale, the highest of any state that has legalized the drug.

Those numbers don’t come as a shock to Chris Marr, the former state lawmaker from Spokane who took a job with the board to help set up the recreational market. Today, he’s a consultant and lobbyist for the industry.

“I think a lot of us thought a billion dollars a year was attainable,” Marr said in an interview last week.

Postman said the agency has found itself defending a public law that was set up to protect farmers, processors and retail sellers in Washington state, including with controversial measures targeting new types of cannabis formed from hemp plants and fighting in court to protect a provision preventing out-of-state business interests from investing in Washington companies. The agency has received mixed reviews for its work, and some trade groups have pushed in recent years to change the makeup of the Liquor Cannabis Board over concern about their enforcement decisions.

“They don’t always agree with us,” Postman said. “They take us to court and we fight about these things.

“(The industry) doesn’t like me sometimes. But they’re an active player in creating overall what I believe is a responsible market.”

Hemp arrives, and so does a power struggle

Jeremy Moberg, owner of CannaSol Farms in Riverside, Washington, and a member of the Washington Sun and Craft Growers Association, a trade group representing small and outdoor growing farmers, listed many concerns about how the board has governed the no-longer-fledgling industry. He said his group has had to advocate heavily for the board to step in on issues they were granted the authority to oversee, and inconsistent enforcement of restrictions on how much cannabis a single business could grow – referred to as “canopy size” – has created a market in which small farmers are struggling to keep the lights on.

Moberg said that defies the spirit of Initiative 502, which envisioned an industry full of small businesses and a fair shake at attracting clientele that were either leaving the black market or trying cannabis for the first time.

“They need to change the power dynamic,” Moberg said.

Moberg’s group was an adamant early critic of the arrival of the hemp-made products in Washington’s market. Edibles and other products containing delta-8 THC, a form of the psychoactive element present in cannabis that could be made from hemp, are being sold in gas stations and convenience stores, a practice both state regulators and legal industry members want to end.

At least one company operating in Washington’s legal market was converting hemp to products sold in cannabis retailers, an issue that split industry members and lawmakers earlier this year. The cultivation and transportation of hemp was made legal by passage of the 2018 Farm Bill, which permitted production and sale of the plant that is genetically similar to the cannabis plant but defined in state law as possessing less than 0.3% THC.

Such a system gave processors in the state cheaper material to produce retail products than cannabis grown in Washington state, which requires stringent labeling and tracking, as well as additional security measures that all add cost to the producer. The state law prohibits products from outside Washington state being sold in legal retailers. Moberg said it took a lot of lobbying from his group to get the board to pay attention to the issue and realize the threat it posed to growers who’d been following the rules.

Regulators at first responded that they didn’t want to get in the way of innovation, or pick who could profit from the system, Moberg said. Then they sought a legislative fix Moberg said they didn’t need.

“They don’t need any legislation. It was never in doubt that it was illegal,” Moberg said.

Postman pointed to a legal settlement in September between the board and Unicorn Brands, one of the companies investigated for using the importation practice, as a definitive statement from the state regulator that the practice was prohibited.

“It’s not exactly as if we had a piece of legislation,” Postman said. “But our existing authority stood the test of that investigation, and we think we got a really good control over that piece of it.”

The cannabis board plans to introduce legislation this session, after its previous attempt to rein in the hemp-derived products, specifically targeting sales in places other than regulated stores. They have agreement on that point with the Washington CannaBusiness Association, another industry trade group representing state-licensed cannabis businesses, as well as hemp firms, that pushed for a different bill that would have permitted hemp-derived products in stores. Both their bill, and one the board backed banning the practice, failed last year in the Legislature.

Aaron Pickus, a spokesman for the Washington CannaBusiness Association, said he doesn’t anticipate their group revisiting the issue next year. What they are concerned about is access to capital, and for that reason are enthusiastic about the potential passage of federal legislation that would allow state-licensed cannabis businesses access to banks. That financing avenue has been cut off because the drug remains illegal under federal law.

“It’s been the top priority at the federal level for years,” he said.

Pickus also pointed to a legal case before a federal judge in Western Washington that could overturn the requirement that someone who has at least partial ownership of a Washington cannabis business live in the state for at least six months. Proponents say removing that requirement would allow further investment in Washington’s companies, money they could use to compete on a national scale if federal legalization occurs.

“There will be a continued push on that level, even as we await a ruling from the federal courts,” Pickus said.

In that case, an Idaho man has sued the state cannabis for permission to be included as the beneficiary in the will of the owner of a state licensed retailer. Todd Brinkmeyer has argued in court that Washington’s law prohibiting residents of other states to own licenses violates portions of the U.S. Constitution, including sections of the 14th Amendment.

The cannabis board has argued in court filings that federal law prohibits an interstate market for cannabis, and that the agency has a duty to uphold the law approved by voters that prohibited out-of-state ownership of businesses.

State market contends with effects of potential legalization nationwide

Justin Peterson, who owns three “Cinder” retail locations in Spokane and recently opened a fourth in New Mexico, said he understood concerns about outside money coming in to the state, after using his own 401(k) and other cash to start his company.

“I think there’s a lot of fear. Change is scary,” Peterson said. “At the same time, with federal legalization potentially on the line, and other states having this in effect, it’s unfortunately a reality.”

Peterson said his decision to open in New Mexico was driven by friendlier laws to producers, processors and retail stores. The large tax receipts in Washington are driven not only by growing sales, but also an excise tax rate that is nearly triple what Peterson has to charge at his other store. He’s also allowed to sell “clones,” plant starts that can be taken home and cultivated by the consumer, a practice that remains outlawed in Washington.

“It’s hard to make money in this state in the cannabis industry, especially for growers and processors,” Peterson said.

Moberg said his group would lobby for a kind of trigger law, already in effect in some other states, that would enable Washington producers and processors to sell across state lines in the event of federal legalization. That would avoid businesses that have been operating for a decade in Washington state from being hamstrung to sell within the borders while other companies from outside the state could sell here.

Postman said in an interview he’s open to the idea, but doesn’t see legalization as happening quickly.

“I don’t think we want to make moves in our marketplace today, as if there’s federal legalization, because there may not be in the next two or three years,” Postman said.

Moberg was also not optimistic in the near-term, but noted Washington’s neighbors have passed such bills and are in a better position if it happens.

“Oregon and California are going to be able to move on day one,” Moberg said.

He said legalization could come as soon as the current legislative session in Congress before the new year – the House of Representatives passed a bill in April decriminalizing marijuana and a similar measure has been introduced in the Senate – though he admits the prospects are unlikely.

What’s more likely is that federal lawmakers representing the states that have set up legal markets will resist efforts to nationalize the market, voting against decriminalization not because of a moral stand, but because of a business one, Moberg said.

“It is going to get harder and harder to get the senator votes, and the representative votes,” he said. “They’re going to be lobbied by the people in their state to protect their industry.”

Other recent efforts in Washington state have been aimed at addressing the decades of enforcement of marijuana laws that targeted the poor and people of color. A draft report from the Washington Social Equity in Cannabis Task Force found that, during the 2000s, Blacks, Latinos and Native Americans made up 14% of the state’s population, but 25% of the state’s arrests for possession of marijuana.

The task force is set to make final recommendations to the board later this month on ways they could expand business opportunities to those previously incarcerated for drug crimes and who had been shut out of the licensing process. In addition, the state Legislature in 2020 passed a bill intended to redistribute licenses that had otherwise been revoked or canceled by state regulators to applicants from those marginalized communities. The Liquor Control Board in November finalized rules for distributing those 41 licenses to applicants for the program.

But Paula Sardinas, a former member of the Washington State Legislative Task Force on Social Equity in Cannabis, stepped away from the process because she believes it’s an “utter disappointment” and gives inadequate reprieve to potential entrepreneurs shut out of the industry. The rules are likely to face a legal challenge from those who were already vetted to own a business, she said, and most of the few licenses that are available are in areas with local laws prohibiting cannabis businesses.

“No one is happy with the (board),” Sardinas said.

Falling behind?

Should federal legalization come, both Moberg and Aaron Juhl, owner of Funky Farms in Deer Park, said they were concerned the market would be flooded with out-of-state cannabis. While Washington continues to employ a three-tiered system that caps a grower’s canopy space, no such restriction is likely in federal legislation.

Juhl said his biggest regret when starting his company at the beginning of the legal market was that he didn’t establish himself as a large-scale grower under the tiered system. He applied for a Tier 1 license, the smallest possible under state law.

“My intentions are to be able to wholesale enough cannabis to be able to pay the bills, and keep the lights on,” Juhl said of the possibility of outside money coming into the market. “Right now, that is my focus.”

Crystal Oliver sold her ownership of a Deer Park producer license in summer 2020. A combination of factors led to her leaving the industry and moving out of the area, she said, including the same power struggle that Moberg and Juhl described.

“While Washington was the first to legalize recreational cannabis, the rules or laws haven’t really evolved,” Oliver said. “Washington’s really fallen behind other states.”

With possible federal legalization on the horizon, whether through an act of Congress or otherwise, Postman said state regulators are hoping to get ahead of future innovations in the market and avoid being behind the changes occurring that could render existing state laws, now for the most part 10 years old, ineffective. The work group is seeking those with experience in toxicology, pharmacology, organic chemistry and cannabis research to advise regulators on advances in understanding how cannabis affects the brain. That includes new products with high concentrations of THC, and their effect on young consumers.

“Part of the problem is, tomorrow it will be a new product, something none of us have ever heard of,” Postman said. “The industry has a lot more time and money and personnel looking at what the next thing will be than we do. So we need to try to keep up as best we can.”

Marr said he agrees that Washington’s laws could use an update. But that’s not all on the Liquor Control Board, he said. The Legislature could also be working to make sure the state’s in a better position if federal legalization occurs, and the original law had to be written to ensure that it could appease enough people to pass.

“The problem with being the first mover is that everyone after you gets to learn from your mistakes,” he said.

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