WSLCB - Board Meeting
(May 22, 2024)

Here are some observations from the Wednesday May 22nd Washington State Liquor and Cannabis Board (WSLCB) Board Meeting.

My top 4 takeaways:

• Policy and Rules Coordinator Denise Laflamme presented a recommendation against accepting a rulemaking petition on banning single use vapor products (audio - 7m, video - WSLCB, video - TVW).
  • Laflamme immediately established that her team would be advising denying the petition from a “concerned producer and processor who wishes to remain anonymous” owing to a “fear of backlash and being blacklisted by retailers in retaliation." The petitioner raised concerns over “the release of harmful chemicals and heavy metals into the soil and groundwater” from disposal of the devices, she said, before outlining several challenges to implementing the petition in rule.
    • Laflamme stated WSLCB authority in RCW 69.50.342 centered on packaging and labeling (PAL) as well as product quality standards.
    • Laflamme noted disposable vapor devices hadn’t been designed for easy removal of lithium ion batteries, and “household hazardous waste facilities in Washington do not currently accept cannabis vape devices.”
    • She indicated some components of the devices were imported making regulating devices impractical.
    • HB 2826—a 2020 law passed in a wake of a series of electronic vapor associated lung injuries (EVALI) cases in the state in late 2019—allowed for prohibition of any kind of vapor product device, explained Laflamme. But this required that devices themselves “may pose a risk to public health or youth access,” she told the board.
  • “We consulted with the Departments of Health [DOH] and Ecology [DOE] to get their input…and the information they provided is included as appendices in the petition response,” said Laflamme. DOH staff had communicated to Laflamme that “disposable products [were] commonly used by youth due to their inconspicuous design, there [was] a history of youth transitioning to other products that are available when a product is removed from the market.” However, the “complicated nature of the regulation of different vape products…makes it difficult to help people dispose of these in a safe way.” For instance, DOE counterparts had informed the agency that their department couldn’t ban vapor products altogether. Different regulations covered vapor products containing nicotine, she added, and DOH and DOE representatives were working with WSLCB officials “to address proper vapor disposal options.” Laflamme reported that DOE staff wanted more done to communicate to the public about not throwing out the devices in “household and curbside trash and recycling due to the fire risk from the battery.”
    • Without an approach to disposal for these items “which would not violate state and federal laws [the vapor products would be] improperly discarded and most end up in landfills illegally,” the petition stated.
  • “While there are a variety of environmental health issues associated with the use of disposable vapor devices containing lithium ion batteries,” acknowledged Laflamme, “at this time…they do not necessitate immediate actions to protect public health” and staff “recommends that the board deny the petition for rulemaking to ban disposable cannabis vape devices containing lithium ion batteries.”
  • With Board Chair David Postman not present, Acting Chair Jim Vollendroff and Board Member Ollie Garrett voted in agreement with the staff recommendation and denied the petition (audio - <1m, video - WSLCB, video - TVW)

• Policy and Rules Coordinator Daniel Jacobs then talked about the complexities of another petition regarding Employee Stock Ownership Plans (ESOP, audio - 16m, video - WSLCB, video - TVW)
  • Jacobs told board members that the petition had been received by the agency on March 26th “from the Washington CannaBusiness Association [WACA] regarding the use of employee stock ownership plans.” He emphasized that accepting the petition didn’t mean the agency would allow ESOPs, only that they’d engage in rulemaking to consider it. Jacobs also stressed that he was not providing legal interpretation for any cannabis licensee, and those with “questions about their business structure and the tax implications thereof, should contact an attorney.” He explained that his presentation used “stock and share interchangeably; however, really, what we're talking about here are shares as opposed to stocks.”
    • Jacobs also called attention to his comments on the petition from the board caucus a day earlier (audio - 11m, video - TVW, video - WSLCB).
  • The petition sought to amend true party of interest (TPI) rules in WAC 314-55-035, said Jacobs, who referred to SB 5096, a 2023 law that provided a definition of ESOP as well as referencing federal rules and including “statements indicating that from a general policy perspective, the legislature intends to support employee ownership structures for businesses in Washington.” ESOPs were a “de facto retirement plan for employees while also providing tax benefits for businesses,” he said, adding, “how it works is that a business will create a trust and uses money typically from a loan to buy shares of itself and place those shares in the trust as the loan used to fund the trust is paid down annually.” This was particularly beneficial for long-time employees, Jacobs added, who get “a greater return when they leave the company.”
    • Learn more about the legislative history of ESOPs from a 2003 Congressional Research Service report and a 2022 article by ESOP Partners.
  • “Advocates for ESOPs say that it serves to motivate and encourage employee retention and creates goodwill for employees because they know that their employer isn't, for example, owned by some multinational conglomerate,” he explained. Tax benefits of the plans had been beneficial to various cannabis companies, Jacobs told board members. “As most folks that filed taxes know how tax deductions work,” he said, “when a cannabis business is an ESOP, it doesn't owe any taxes to begin with…the fact that it can't deduct any business expenses from it doesn't really matter, because there's no underlying federal income tax liability that anything can get deducted from.”
  • A concern from Licensing division staff was ensuring no one controlled more than five cannabis licenses, he remarked, as well as the resources needed for WSLCB to vet every employee-owner. Jacobs had also heard from Education and Enforcement representatives that an ESOP could hide owners. Typically, an ESOP was run by a trust, and Jacobs said “employees have to have a certain degree of control over the trust.” This meant a trust would “have control over the business,” but he commented this “sort of [was] considered by some to be a legal fiction” around “the degree to which the employees have control over the trust.” Getting every employee through the TPI vetting process would likely be “cumbersome,” he added.
  • While no Washington state cannabis business had used an ESOP to date, Jacobs noted Theory Wellness became the first company to use the structure in Massachusetts in 2023. He mentioned there’d been licensees who’d reached out to WSLCB staff about ESOPs “over the past several years,” but none had proposed a structure for the plans until now. Although there were internal “concerns about approval of such a structure…regarding the true party of interest vetting in order to qualify as an ESOP,” he said that agency leaders could study the approach. The petitioner had also requested changes to the “TPI rule to state that an ESOP- that an employee doesn't need to be vetted for a true party of interest…solely by virtue of participating in an ESOP,” while offering “other suggested rule language about who in the ESOP does need to be vetted.”
  • Having acknowledged the concerns about vetting or an ESOP having control over more than five licenses which had been raised by staff, Jacobs said “the Director's Office thinks that the best way to flush out these concerns” was by approving the petition and engaging in an “open and thorough process” which “doesn't mean that we necessarily are going to end up changing the rule.” He cautioned that “complex financial entity analysis isn't necessarily our forté…there will need to be a lot of coordination with the Department of Revenue, because they're the ones who—per the bill that I earlier mentioned—have the statutory definition of an ESOP.”
  • Since mentioning the petition in caucus, Jacobs shared that he’d already received comments in support as well as opposition of the idea owing to “concerns about the potential impact it could have on social equity,” which had been “framed in a similar way to Licensing and Enforcement and Education [staff]'s concerns about allowing non-residents or other other entities or individuals to have controlling interest in cannabis licensees.” Despite the differing views and complexity, “the Director's Office is recommending approval of the petition,” he concluded.
  • Vollendroff thanked Jacobs for his “in depth analysis and recommendations” (audio - <1m, video - WSLCB, video - TVW) before calling for a vote. The petition was accepted and Vollendroff provided a “reminder that this is not saying that we are agreeing to do this, that we are looking at this as an option…and want to hear more about the concerns that are raised…for social equity in particular” (audio - 1m, video - WSLCB, video - TVW)
  • During public comments, Zips Cannabis Owner Scott Atkison was similarly grateful for the presentation by Jacobs, as he’d been looking into the history of ESOPs and argued they were “rooted in a desire by Congress to address income inequality.” He suggested economists had concluded businesses that were “100% employee owned, that that can lead to better outcomes and, and reduce the income inequality gap that we have in America” (audio - 3m, video - WSLCB, video - TVW).
    • Atkison offered Winco Foods, Bob's Red Mill and Schweitzer Engineering Laboratories as Washington companies which had benefited from ESOPs.
    • “ESOPs are also subject to additional regulatory burden by the Department of Labor,” which Atkison insisted was part of the “heightened sense of oversight of these companies.” He appreciated the need to study concerns around TPI and social equity impacts, and was “thankful that there's an opportunity to go into a rulemaking on this because I think this has potential to create widespread ownership in this industry.”
    • News articles and research on ESOP impacts on inequality include:
      • Employee Ownership a Win-Win for Workers and Companies (2018)
      • Building the Assets of Low and Moderate Income Workers and their Families The Role of Employee Ownership (2019)
      • The case for employee ownership: Why philanthropy and government should invest in this powerful business model (2020)
      • The Big Benefits of Employee Ownership (2021)
      • Toward Shared Prosperity: The Promise of Employee Stock Ownership Plans (2023)

• A CR-101 to open up a rulemaking project to implement SB 5376 related to cannabis waste material was accepted by the board (audio - 3m, video - WSLCB, video - TVW, Rulemaking Project).
  • Policy and Rules Coordinator Jeff Kildahl introduced the proposal for rulemaking, stating SB 5376 “permit[ted] licensed cannabis producers and licensed cannabis processors to sell cannabis waste to people who are not cannabis licensees under certain conditions.” Signed into law on March 25th, Kildahl outlined the conditions which needed to be met when selling cannabis waste, and some added definitions in the law, specifically differentiating waste material from hemp crops. He made reference to existing regulations on hazardous waste in WAC 314-55-097.
  • With board approval, Kildahl said a public comment period on the project would be open “until July 6, 2024.” A CR-102 with proposed changes was planned for July 17th, and he indicated that the public hearing was scheduled for August 28th. Under this timeline, Kildahl reported that final rule language would be put before the board on September 11th, which “would have the final rule taking effect on October 12, 2024.”
  • The board voted to approve the CR-101 with no additional remarks (audio - <1m, video - WSLCB, video - TVW).

• Public comments came from those inside and outside the cannabis industry, and involved clarifying excise tax exemption recordkeeping requirements, allegations of discriminatory behavior by agency officials, and the social equity program.
  • Brooke Davies, WACA Deputy Director, thanked the board for accepting the ESOP petition and pledged to offer input as the project moved forward. She was also appreciative of WSLCB communication on HB 1453, a law passed in 2024 that exempted DOH registered medical cannabis patients from paying a 37% cannabis excise tax which agency leaders were also responsible for implementing. Davies commented that WACA members wanted "clear and consistent communication, and to work with WSLCB so that HB 1453 was implemented "in a responsible way.” She urged more guidance for retailers from an auditing perspective before the law took effect on June 6th, specifically on what recordkeeping was needed to reduce the risk on those businesses (audio - 2m, video - WSLCB, video - TVW).
  • Christopher King alleged staff had unfairly reduced public speaking time during the May 8th board meeting, wanting to know “when was the last time, if any, that you reduced time for speakers?” When Vollendroff responded that the board didn’t have to respond to speaker questions, King pointed out that board members had regularly responded to commenters, but “you pick and choose when you're going to decide to answer people,” a type of “content-based, viewpoint-based discrimination” (audio - 5m, video - WSLCB, video - TVW).
    • King brought up the 2015 medical cannabis law SB 5052, arguing WSLCB “also cut out Black and Brown, you try to do it now, too, with certificate holders.” He viewed this as “predicate offenses that date back to the point, when Arthur West sued y'all successfully” over “those clandestine meetings you're having down in the south end to run us out of business.” Since this predated SB 5052, King believed it was evidence “you're going to put more Whites in front of that.”
  • Paul Brice, Happy Trees Owner and former Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF) advisory member, also felt the four minute speaking limit was “not enough.” Mentioning his experience as someone with a cannabis felony conviction, he brought up agency rulemaking on a social equity law and specifically a draft scoring rubric for applicants for which he’d given feedback on May 15th. He felt that advocates for social equity were “hoping to find friends here that will understand…things that are coming our way. And yet, it still seems like plotting, planning to undermine, to pull the rug out” from under them. Brice called the rubric “flawed,” and said it amounted to “a Trojan horse to, to lead in…without even knowing any harm that…letting title cert[ificate]s out” could cause. He claimed that all title certificate holders “once this thing gets signed, they'll be up and running. Already finding locations. How does that help social equity people?” Brice mentioned that he’d reached out to former WA SECTF members about the rulemaking, “I know we're all going to be 90% of all in alliance that there's no help coming this way.” He concluded WSLCB staff conveying an attitude that “we know nothing and we're just pioneers and we just made the mistake and we let this all happen and we cannot reverse everything that we just did, is just crap” (audio - 3m, video - WSLCB, video - TVW).
  • Peter Manning, Black Excellence in Cannabis (BEC) President, talked about knowing there were going to be equity challenges back in “2011/2012, I have a lot of White well-to-do dispensary owners that were telling me basically that the way it was going that they were going to dominate the market.” He stated that “I  don't think the LCB[‘s] true intent is to really resolve the issue,” and that the draft rubric had moved away from the "targeted area" of the equity program. Manning hadn’t perceived there to be any support for their revised rubric during the May 15th focus group, and argued the document was “not going in the right direction.” He said “75% of the target audience” for the program had been selected in or around Seattle, “but you choose to move away from that.” He promised BEC members would press the issue in court, the media, and with elected leaders. “We're not going to let this go. Either we get it right. Or we get rid of this agency over cannabis,” added Manning (audio - 4m, video - WSLCB, video - TVW).
  • Mike Asai, Emerald City Collective Gardens Founder and BEC Vice President, asserted that BEC as an organization was against ESOPs, as a “backdoor for out of state ownership." He felt it wasn’t a  “genuine" way to help equity businesses, "especially coming from the petitioner" (audio - 4m, video - WSLCB, video - TVW).
    • Asai agreed with Manning that the scoring rubric draft was going in the wrong direction, and permitting title certificate holders to get licenses under the program was "kind of a hijacking” and “those who [were] pushing for it were actually getting paid by certificate holders to push for them to be in social equity.” 
    • Mentioning cannabis convictions as a key criterion for equity applicants, he wanted the rubric to remain focused despite difficulties some had reported in proving a conviction was cannabis related. He pushed back on the argument that patient dispensaries had been “illicit” prior to cannabis legalization, “I wouldn't have got the letter I got from Department of Revenue” about paying sales tax on cannabis.
      • Asai was among many patients and advocates to discuss problems with the DOH medical cannabis program with department representatives in a Medical Cannabis Town Hall hosted by the Cannabis Alliance in December 2023.
    • Asai believed that “pioneers who built this industry, built it to where that the State said, ‘You know what, let's legalize it.’” Asai said WSLCB had removed “merit based language” so former dispensary owners “couldn't come back” through the equity program. He called for more rubric points to “prioritize pioneers.”
      • In 2015, SB 5052 required the closure of medical cannabis collective gardens which had operated as dispensaries. It also mandated a merging of that sector with the licensed adult use cannabis market with a “merit-based application process” meant to prioritize former collective owners and operators.