The Rauner Administration yesterday announced the recipients of licenses under Illinois Medical Cannabis Pilot Program. The announcement came late in the day from Governor Rauner’s general counsel but there has still been no announcement on the official website of the Medical Cannabis Pilot Program at the time of this writing.

The announcement came as a surprise to most of us here in Illinois. A week earlier, the Rauner Administration released some documents under a Freedom of Information Act filing and also issued a statement that his administration would “. . . conduct a thorough legal review of the process used by the Quinn administration . . .”  Most believed that the thorough review would take weeks, if not months. No explanation for the efficient legal review was volunteered on Monday.

The announcement on Monday covered 18 cultivation licenses and 52 dispensary licenses. The procedure for scoring the licenses has not been completed and closed, as the law creating the Program authorized 22 cultivation licenses and 60 dispensary licenses. Some licenses are still on hold. Three cultivation center applicants and 5 dispensary applicants are still undergoing further review.

The announcement by Governor Rauner’s general counsel clarified some issues that arose a week earlier about the scoring done by state agencies during the Quinn Administration. Though the applications were scored through a blind review process, without the applicant’s identity being known, the state agencies subsequently carried out a character and fitness review that disqualified some applicants that had otherwise done well in the blind scoring. The Rauner Administration had doubts about the legality of the disqualifications and plans to allow the disqualified applicants to be heard. We see this as a good thing.

All of this means that patients in Illinois prescribed medical marijuana have at least some reason to be optimistic for the first time in months. It will still be a while before they have their medication in hand, however. It will take about six months for the cultivation centers to grow the plants after operations are constructed. A more important issue to watch in the coming weeks will be how many Illinois residents will qualify for a medical marijuana card. So far, only 650 patients have been confirmed. Certainly, more than this number will be necessary to support a vibrant MMJ industry in Illinois.

But at least we have begun.

Though some are already proclaiming the imminent death of all or nearly all existing cannabis businesses, believing it inevitable that national legalization will lead to all of them being crushed or swallowed by big pharma, big tobacco, and/or big pharmacy chains, we vehemently disagree.

Here’s why.

A recent Bloomberg article rightly contends that it will be a long time before pharmacies and multinational companies get into the marijuana business. The article notes that these big, mostly publicly traded companies are just not going to be willing to risk their DEA registrations and national banking relationships by getting into marijuana. We agree. Our agreement is based on the simple fact that some of these companies have retained us to “discuss” or “monitor” cannabis, but all of them have made it very clear that they are not close to acting, nor will they, until there are big changes on a federal level.

It also bears noting that just last week, the Nevada Gaming Control Board held that its license holders (Nevada casinos) cannot participate in Nevada’s medical marijuana scheme until marijuana is legal under federal law. The Gaming Control Board’s rationale would hold true if/when Nevada legalizes recreational marijuana. Score that as a loss for big casinos.

And while big canna is effectively being blocked from participating in the green rush, “small canna” will be out there growing not just in individual states, but in multiple states through the use of licensing and management agreements. For one example of how cannabis businesses are going national, check out Take Your Marijuana Business Nationwide With Brand Licensing.

As small canna gets bigger and bigger, that growth will create a barrier to entry for the “bigs” when they are actually ready to jump into the industry. We are confident that by the time the “bigs” are ready to make their move, there will be dozens of well-established cannabis companies, with strong brand names and strong reputations in multiple states. If you have happily been doing business with a company for years, will you just up and leave them because Walgreens or Pfizer is now in a similar space?

We are not saying that “the bigs” will never take their place in the cannabis industry. On the contrary, we believe that they will.  But by that time, so many of the small cannabis businesses will be both experienced and large that we think their first mover advantage will give them an edge for decades to come.

 

 

We are going to find out over the next couple of years whether businesses that studiously follow state and federal tax rules can survive and thrive as real businesses. We have blogged before about I.R.C. 280E, and how challenging it makes operating a marijuana business. We can talk your ear off about how difficult the taxes are to comply with in theory, but in this post I am going to dive into the numbers to actually show how burdensome the current state and federal tax systems can be.

Imagine that you are a retail cannabis operator in Washington State, and you buy a packaged gram of marijuana at wholesale for $5.00, including the 25% excise tax at that level (which is a price that the producers/processors will not be thrilled to accept.) You turn around and sell it for $10.00, plus the 25% excise tax, making a total of $12.50. Of that $12.50, you keep $5.00. Well, you do not actually keep it, as that $5.00 is needed to pay your rent, your electric bill, your employees, your accountant, your lawyer, your security company, etc. The real kicker, though, is that your federal tax is not based on the $5.00 you actually received, minus your costs. It isn’t even based on a total of $5.00. The IRS will claim that your income after cost of goods sold was $7.50, as they will include the excise tax as part of your income, and they will not let you deduct even that! The IRS will treat the money that you received only to hand off to state tax authorities as taxable income.

So, going back to our example, if your average tax rate is 30% and the taxable income is $7.50, we are looking at an additional tax expense of $2.25 taken from your $5.00. This means that you will be left with only $2.75 out of every $12.50 (not including sales tax) that the customer gives you. In other words, from every $12.50 sale that you make, you will have only $2.75 left over  to pay all of your expenses. Obviously very little to nothing at all is left over as profit.

So, what do you do? You jack up the prices. $10.00 per gram is yesterday’s news; let’s make the new price $15.00 or $22.00 per gram. Every time retailers crank that lever, however, the black market thrives. As cities and counties pass pro-black market bans on legal marijuana businesses — some of them downright hypocritical — illegal competitors will remain entrenched. If cannabis businesses do not get tax relief from either the state or federal government while this market develops, we may find that we do not have a legal market for very long.

At 8:30 a.m. today, Oregon entrepreneurs were finally able to apply online with the Oregon Health Authority for a license to run a dispensary or grow facility under House Bill 3460. Similar to other strict marijuana regimes, marijuana businesses in Oregon will now face footage requirements from sensitive uses and from each other, business registration requirements with the State, residency requirements, and other regulatory mandates relating to security and traceability. Specifically, applicants will need to submit a security plan and an inventory control system plan to the Health Authority to be eligible for a license. Having worked with hundreds of cannabis businesses in states outside of Oregon on such plans, we can tell you that they can be very complicated.

Right now Oregon is estimated to have around two hundred dispensaries operating the states old marijuana regime and it is expected that most of these dispensaries will be registering with the state under its new regime.  Oregon’s Health Authority has two employees assigned to process applications, which will be handled on a first-come, first-served basis. There is no firm deadline on how long it will take the state to process these applications. Two state inspectors have been assigned to visit each of the dispensaries within the first six months after they are registered.

Despite Oregon’s efforts to clean up its marijuana program, just like in Washington (and elsewhere), entrepreneurs are sure to face at least two major hurdles during the licensing process: 1. locating themselves in state-compliant areas (away from schools, etc.) and 2. wading through local law regulations.

It is up to applicants to ensure that they are not located near a school. Having done this drill in Washington with many of our clients, we suggest that you retain a qualified surveyor to ensure that your proposed location is not next to any schools. Oregon has its own school tracker map, but it has made clear that not every school is on it. The state has also made clear that if a school opens up within 1,000 feet of a dispensary after that dispensary has already started operating, the dispensary is the one that has to move.

Even if you do find that sweet spot not near any schools, some cities and counties in Oregon still are refusing to allow marijuana in their jurisdictions and are doing all they can to keep their bans in place. This is why you should also be sure to check in with your city or county council to ensure that your proposed dispensary will be in a location where you can actually open your doors once you get the dispensary license. Oregon state law also limits marijuana facilities to areas zoned commercial, industrial, mixed use or agricultural, so do not even try to locate your dispensary in a residential or a commercial zone unless you want to waste time and money.

Based on our licensing experience in other states, we also feel compelled to warn you to expect multiple rule changes from both Health Authority and your local cities and counties as medical cannabis licensing in Oregon progresses.

The Washington State Liquor Control Board just reversed course on what it considers a proper application for a cannabis license for cultivation and for retail sale.

As early as last month, the Board was saying that any application that listed a location within 1,000 feet of a venue frequented by minors would be immediately disqualified. According to the Board, those improper applicants would be receiving disqualification letters.

But today’s Seattle Times makes clear that no such letters have gone out, nor will they. The Seattle Times article, entitled, State gives pot applicants more time to find business locations, explains:

Instead, the board has reversed what appeared to be its firm position last month. It is now allowing applicants 30 days from the time they receive notice from the board to secure a legal address. Notifications started going out about two weeks ago.

The board is allowing entrepreneurs who applied with an illegal location … to change to a legal one.

Canna Law Blog’s own Robert McVay provided the following bit of legal analysis for the Times article:

For others, the changes are more nuanced, said Robert McVay, an attorney at the Canna Law Group, which represents about 100 applicants.

While the changes are maddening to some of his clients, McVay said, for others they‘re welcome relief — and that includes some who thought they had locked up legal locations only to hit a snag.

“The bigger concern,” he said, “is we’re halfway through the process and it still feels like rules are being changed on the fly, ad hoc.”

Anyone applying for a cannabis license anywhere should take away the following from what has just happened here in Washington:

1. The rules are always changing, even up until the last minute. This is because legal marijuana is new and no state has a clear path on exactly what it is going to do, or even on what it wants to do.

2. The rules are always changing, even up until the last minute. This means you must be prepared for delays. This latest Washington State rule change is expected to delay already sluggish initial licensing by at least thirty days.

3. The rules are always changing, even up until the last minute. Therefore, you must constantly stay abreast of the rules and not listen to someone quoting the rules. Every single day we get multiple calls from our clients and from potential clients quoting last weeks’ rules as though they are this weeks’ rules. Every day we have to tell someone that they just wasted a lot of money doing something under an old rule or a under rumored rule that makes no sense under the existing rules.

4. The rules are always changing, even up until the last minute. As a result, you must act strategically in what you do. Does it make sense to form a legal entity now when you do not know what sort of legal entity is going to be required in your state? Probably yes, because forming a legal entity is not very expensive and it is usually the first step towards securing your license. Also, a qualified cannabis business attorney will be able to make an educated assessment as to the type of legal entity that will be required in your state. Does it make sense to sign a long term property lease without a proper escape clause? Probably not. You are going to have to make all sorts of these strategic decisions, both big and small, along the way towards securing your cannabis license.

5. The rules are always changing. Or not. As the Seattle Times article makes clear, not all of the rules are going to change and certain application mistakes are fatal. The article talks of how those who applied with an improper location are back in the retail licensing hunt, but those who applied for the wrong license cannot now change their application to make it for the right license. The article gave as an example a baker who applied for a retail license when those who make baked goods must apply for a processing license. In other words, the rules are going to change, but you still must strive to get everything right on your application the first time. Right now, much of our work is dealing with trying to fix licensing applications for applicants who did NOT use us for their application. And fixing problems is virtually always more expensive and less effective than doing something right the first time.

Did we tell you that the rules for cannabis businesses are always changing?

Be prepared!

Our own cannabis business lawyer extraordinaire, Hilary Bricken, will be appearing live today on MSNBC at 1:30 p.m. PT, 4:30 p.m. ET. Hilary has been asked to appear on Disrupt with Karen Finney to discuss “the politics of pot legalization” right before the start of the Super Bowl. We also expect Hilary to opine on marijuana in the workplace, including in the NFL.

We urge you to watch Hilary give a rousing talk on national TV on the virtues of cannabis.

UPDATE: Hilary spoke mostly on how the states that have legalized marijuana or plan to legalize marijuana, must do so in such a way so as to favor legal cannabis businesses over illegal cannabis businesses. This means giving legal marijuana businesses access to banking and to reasonable taxation and regulatory systems.

Click here to watch the whole thing.

Here we go again….

Just as is true just about everywhere cannabis is legalized, we hear from the politicians who want to protect women and children from the evil scourges of having a marijuana growing or dispensing facility anywhere near anyone. And let’s add some taxes into the mix while we are at it.

The Chicago Tribune recently did a story, entitled, Chicago aldermen mull medical marijuana rules, making clear that Chicago is not immune from over-protective politicians.  Continue Reading Marijuana In Chicago. When Does Over-Regulation Become A Ban?

Business Week Magazine (which has been doing a really good job of late in covering the cannabis industry), in an article, entitled, Legal Pot Businesses Get One Step Closer to Bank Accounts, wrote today of how the federal government appears to be easing its restrictions against cannabis banking.

The article starts out by nicely defining the problem legal pot businesses are facing on the banking front:

As things stand now banks won’t take pot businesses as customers because marijuana is still illegal under federal law, but as Colorado and Washington open up their legal markets for recreational pot and other states allow more medical usage, that cash-only existence is becoming untenable. The problem has proven intractable enough that a state lawmaker in Washington wants to start a state-run bank for pot businesses so they don’t need to depend on cash.

It then notes how in a recent speech, Attorney General Eric Holder said the Justice Department “will soon provide official guidance to allow marijuana banking.” The New York Times does not think the new “rules” will “give banks a green light to accept deposits and provide other service” to legalized marijuana businesses, but it “would tell prosecutors not to prioritize cases involving legal marijuana businesses that use banks.”  Business Week says this “thread-the-needle approach echoes what the Justice Department said about criminal prosecutions” in the Cole Memo.

Yes, but.   Continue Reading Cannabis Banking. Here At Last?

As cannabis businesses begin competing with one another for customers, communicating their superior quality and value becomes key. Companies that understand the need to differentiate their businesses from their competitor’s businesses come to us asking us what they should be doing to enhance and protect their brands.

To greatly simplify, the goal of branding is to efficiently communicate something about your product. Maybe your cannabis products or strains are cool. Maybe they’re highly potent. Maybe they’re cheap as dirt. The point is that you want to tell customers that products with your brand name will consistently offer whatever it is that you offer. You want consumers to know what you offer simply by virtue of seeing your brand name.

You certainly don’t want other businesses to use your brand names, especially since they may use your brands in a way that damages your reputation or leeches business away from you. Continue Reading How To Protect Your Cannabis Brand

An unusual but positive thing for cannabis retailers just happened. Anti-tax crusader Grover Norquist and Democrat Congressman Earl Blumenauer (from Oregon) agreed that 280e needs an exception for State-licensed cannabis businesses. The two joined Congressional Representative Dana Rohrabacher (from California) to push legislation that would cut taxes for owners of legal cannabis dispensaries by allowing them to deduct the same business expenses as all other small businesses.

Back in the spring of 2012, we blogged about 280e and its negative effects on those in the cannabis industry. The backstory is that, in 1982, Continue Reading Cannabis Taxes: Will 280e End Soon?