WACA - Spring Meeting - 2022 - WA Legislature Engagement
(June 15, 2022)

Here are some observations from the Wednesday June 15th Washington CannaBusiness Association (WACA) 2022 Spring Meeting.

My top 5 takeaways:

• WACA members also heard from regulators about cannabis and hemp programs and possible policy changes in the near future.
  • At the start of the day, Washington State Liquor and Cannabis Board (WSLCB) Chair David Postman provided the opening keynote. Washington State Department of Agriculture (WSDA) Hemp Program Manager Trecia Ehrlich reviewed that department’s role in regulating hemp and certifying hemp products.
  • During breakout sessions, designated groups of attendees rotated between tables where small groups of lawmakers could hear attendee comments and respond to questions directly. Cannabis Observer Founder Gregory Foster joined the ‘blue group’ during the legislative and WSLCB engagement.
    • The WACA 2021 Fall Policy Conference featured a legislative leadership panel.

• The first group of legislators heard attendee concerns about tax rates, interstate commerce, advertising, and hemp processing. 
  • Two Democratic representatives and a Republican senator made up the first table:
    • Representative Shelley Kloba, the Washington State House Commerce and Gaming Committee (WA House COG) Chair, also noted her role as a member of the Washington State House Rural Development, Agriculture, and Natural Resources Committee (WA House RDAN) had raised her awareness of cannabis as “an agricultural product, even though it—in certain realms—is not defined as such.”
    • Representative Larry Springer added that he was on the WA House RDAN as well, along with being a member of the Democratic Caucus leadership.
    • Senator Perry Dozier, Deputy Whip for the Senate Republican Caucus, described himself as “pinch-hitting” for Senator Ann Rivers, there to listen as he wasn’t “on any of the committees that have dealt with this.”
  • Yung Tan, MFUSED Co-Founder, started off by relaying that “if Washington cannabis businesses do not have a more friendly tax structure and regulatory framework” that allowed for vertical integration, “you’re not going to see half of us next year.” He was confident that no one in the cannabis industry was “getting rich off this right now” and wanted help from elected officials.
    • Tan’s was concerned about “inconsistent enforcement of rules that allow certain groups to have de-facto vertical integration and others not to,” alleging that some licensees had been able to gain ownership in both cannabis production/processing and retailing. Jeff Freeman Jr., MFUSED Co-Founder, added that retailers represented “a bottleneck” for their products as stores “dictat[ed] the price of the product” without consideration for “quality,” “equity,” or “fairness.” With cannabis prices “artificially below a sustainable rate,” Freeman claimed this imbalance made the Washington market particularly tough on producers/processors like them.
    • Kloba had heard from producers of “every other product” that they were “price takers, not price makers.” She felt retail control of what they’d sell a commodity for sounded “exactly like every other product that you would grow" and wondered what regulatory or legal pressure producers and processors wanted applied to the market. Tan responded that direct sales to consumers was his top suggestion since point of sale was “where all the leverage comes from” and other crops had farm stands or markets to facilitate this. A farmer himself, Dozier appreciated the limitations of being a “price taker” and confirmed there were no farmers market equivalents for cannabis. A participant commented that when direct sales had been proposed, “there’s blowback from, like, retail.”
  • Reid O'Donnell, a member of CANNAPAKUSA LLC, highlighted “adequate advertising” as another challenge, feeling that brand recognition could help a product not be “undercut” by a competitor. Joseph DuPuis, Doc and Yeti Urban Farms Owner and WACA Trustee, believed this problem dovetailed with “severe” limits on vendor sampling that he said kept budtenders from “knowing what they’re selling.”
  • Jim Makoso, Lucid Lab Group Director and a Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF) Co-chair as of June 28th, observed that the 37% excise tax on cannabis along with local sales tax amounted to “a huge piece of pressure, downward, on pricing.” With state cannabis taxation higher than other jurisdictions, he suggested policies in those places produced better margins. Foster mentioned that federal legalization would likely come with new taxes on products and local taxes were being considered in Seattle, which led him to wonder how to create legislative pressure to lower state taxes on cannabis, something that “doesn’t happen, usually, but it kind of has to happen in Washington state.”
    • Kloba had been focused on relieving the tax burden on patients as she believed cannabis for medical use should be untaxed “exactly like any other medicine.” She pointed to a 2022 legislative attempt to temporarily exempt patients from the excise tax that failed to pass. Nonetheless, she had spoken to a republican legislator and felt that “can start” a discussion on lower cannabis tax rates
    • Tan quickly observed that such a move didn’t “help our business” as medically compliant products were “a sliver” of the market. Springer agreed that legislation had been focused on helping patients, not licensees.
  • Jordan Zager, Dewey Cannabis Co. and Dewey Scientific Owner and CEO, noted taxes on cannabis could be much lower elsewhere and that while Washington was one of the first adult-use cannabis states “we might be the first state to go extinct” if left to compete in a national cannabis market without changes at the state level.
    • Agriculturally, DuPuis felt Washington was a great place to cultivate cannabis en masse, but he asserted “local state rules” would hinder market participation on “a national level” resulting in exporting their quality plant material at best - or ceasing production altogether at worst.
    • Tan said there was no “homegrown Washington cannabis company…that is successful nationally,” and others agreed that the situation wouldn't change without significant legal and regulatory reforms.
    • While not included in WSDA information on top crop commodities in the state, a report released in November 2021 from Leafly found cannabis to be the 4th most valuable crop in Washington, and the 5th most valuable nationally.
  • Zager pointed out how “alcohol companies can throw a party and get people to sample their product,” something that had been proposed, but wasn’t currently allowed under laws and rules.
    • Dozier wondered if they meant consumer sampling at a retailer or a producer facility, similar to wineries and distilleries. Attendees responded that they were receptive to either system, though Tan stated on-site sampling allowed for producers and processors to better showcase their business and brand to consumers. But even this, the group broadly agreed, had challenges around “visitor rules,” security, “contamination issues,” and other barriers.
    • DuPuis felt there were a lot of parallels between the existing cannabis market and previous growth in popularity of Washington wineries.
  • Tan added something he thought “affects all of us” was the lack of “outside investment” due to the “beyond archaic” true party of interest (TPI) rules. This left cannabis business owners to “self finance our own business in the lowest margin state in the whole country” under oppressive regulations.
    • The legislators acknowledged frequently introduced legislation to allow for out-of-state ownership, and agreed there hadn’t been enough momentum behind the proposal. DuPuis suggested cannabis businesses were the most regulated, and at this point they’d settle for being the “second most regulated…can we at least get down to that?”
    • Tan felt other state cannabis officials had learned from Washington and were “far more pro-business, and business friendly.” Meanwhile, Washington businesses were relegated to “ten-years-ago-land.” Freeman said this was why MFUSED had moved their “business and brand” to be “based out of the southwest, Arizona and California” rather than Washington.
  • As they wrapped up, Dozier asked for attendee impressions of the Oregon cannabis sector. Group members stressed “full vertical integration allowed,” lower taxes, less regulations and restrictive TPI, and concluded the neighboring state was “way better.”
  • As the “largest processor in the state,” Tan added that they wanted to know “what we can do to help you help us,” mentioning campaign donations or being “more active” in the lawmaking process. Dozier acknowledged that legal changes were a lengthy process, and expected more conversations between licensees and legislators.

• With two members of the social equity task force at the next table of lawmakers, that subject along with enforcement inconsistencies, studying social acceptance of cannabis, and consumer demand in the retail market were discussed.
  • Present at the table were a Democratic representative and senator joined by a Republican representative:
    • Democratic Representative Sharon Wylie mentioned extensive experience in the Washington and Oregon legislatures, as well as a family member in the cannabis sector.
      • Tan was curious how Wylie’s family member was doing in the cannabis space. Wylie answered, “it's complicated.” She indicated this family member had invested heavily “and it’s doing OK” but he was “less interested than he was at the beginning.” This made sense to Tan, who believed the entire industry was “struggling,” and that state leaders “squandered” their advantage as a cannabis pioneer.
    • Republican Representative Kelly Chambers served with Wylie as a member of WA House COG. She said she’d learned a lot about cannabis since joining WA House COG and claimed she passed up an opportunity for a “leadership” position on a different committee since she didn’t want her newfound expertise to “go to waste.”
    • Senator Rebecca Saldaña, appointed to WA SECTF along with Chambers, stated her view that “equity is a superior growth model” for the cannabis sector and that she expected progress on equity licensing “this year.”
  • A PurForm Labs representative said that companies and brands in other states were “out” of the Washington market due to “where the [profit] margins are.” When the issue of enforcement consistency was raised, he remarked that “no one knows what canopy limits are” and the regulatory environment was “nearly impossible” to perform consistently in.
  • DuPuis saw newer adult use states had generally learned “from Washington failures” and “Colorado challenges.” He asserted the climate and agricultural expertise of Washington producers could “supply most of the United states with quality cannabis.” A participant added that “we produce 90% of the world’s hops.”
  • Chambers asked about a plan by northeastern states to align their taxes on cannabis. Zager claimed a “tri-state agreement” would match the cannabis sales taxes of New Jersey, New York, and Connecticut as a way to minimize “border to border transactions.”
  • Saldaña referenced a previous group that raised the question of what attendees wanted to see in five years.
    • Wylie suggested looking at Initiative 502 (I-502) as “a management consultant,” a role she held before being elected to the legislature, noting that “we were constrained because we were supposed to build it on the alcohol system” which had been completely changed shortly before I-502. She said the initiative language had been structured “to protect our people from big pharma and big tobacco, that was perceived as the threat.” Wylie knew adult use cannabis systems would look different “if we were designing it today, knowing everything that we know” and indicated an openness to fundamental changes.
    • DuPuis wanted to know what the cannabis industry could do “to help you be successful to change the initiative.” Wylie asked for “a laundry list of all the…irritants, that place you in a bad place for the future,” including immediate problems their businesses faced along with problems that will be “serious threats when national laws change.” Zager summed up concerns as “taxation, it’s advertising, and it’s investment equity stake.” Vertical integration was also mentioned.
    • Wylie wanted to educate both “local leaders” still opposed to the cannabis sector and get “a bipartisan effort” in the legislature, but understood doing either would be difficult. DuPuis warned “serious folks who care” were in an “outflow,” leaving the state’s cannabis sphere “and making other states more successful.”
  • Chambers remarked after I-502 “there were studies being done” around the public’s “tolerance level” or “appetite in Washington” for cannabis. She felt a decade was enough time to see how much “social acceptance” of cannabis there was among the electorate, finding that “many of the fears that people had we haven’t seen come true” and there might be more acceptance of additional licenses or “less regulation.”
    • Saldaña agreed, mentioning how her legislative attempt to adjust suggested cannabis appropriations during the 2022 session had been modified into a study which would “hopefully help you guys tell the story of the ways that the cannabis industry is contributing to the well being…and our communities.” When she first joined the legislature, Saldaña’s constituents told her “they’re not contributing back to my community” and encouraged fewer stores in the unincorporated portions of her district. But she perceived a change towards seeing cannabis companies as “a viable business” and now her constituents wanted to participate in the sector. Besides difficulty getting licensed, disparate enforcement of cannabis prohibition had impacted people wanting to “even get a job or housing,” Saldaña added. She expressed skepticism about a local tax for equity funding under consideration by members of the Seattle City Council, instead hoping officials there and elsewhere would open up local zoning so cannabis licenses could be more easily sited within city limits.
    • Chambers opposed most WA SECTF recommendations regarding new licensing opportunities, voting against or abstaining from all motions on April 26th.
    • The Joint Legislative Audit and Review Committee (JLARC) was tasked with reviewing “the appropriation and expenditure of cannabis revenues and report to the appropriate legislative committees by July 1, 2023.”

• A pair of legislators heard comments about preparing for a national cannabis market, as well as taxation and advertising concerns.
  • The next lawmakers to hear from the group were:
    • Democratic Senator Derek Stanford, a member of the Washington State Senate Labor, Commerce, and Tribal Affairs Committee (WA Senate LCTA), who noted he’d worked on cannabis issues as a former WA House COG chair and in the senate.
    • Republican Representative Eric Robertson, Assistant Ranking Minority Member of WA House COG, previously served in the legislature from 1995-98. Winning re-election again in 2020, he claimed to have “cannabis training wheels on” and was there to listen and learn from stakeholders.
  • Stanford began the confab with the question of “potentially getting national legalization” and preparing for that.
    • Zager pointed to themes that had emerged at previous tables, namely taxation and advertising. The representative of PurForm Labs agreed, comparing it with gas stations where the brands or services they carried were clearly marked in their window where it was “nothing but advertising across all the brands that they carried.” As cannabis producers and processors couldn’t do this in retail shops, consumers “don’t know who we are,” he said, and would search “store to store” to find any one grower. With federal legalization consumers would “look for that from state to state,” he argued, and licensees had no way to familiarize consumers with their brand beyond a “vendor day” where their staff set up a table at a retailer “but it really doesn’t move the customer.”
    • Tan also considered this a result of the prohibition on vertical integration for licensees.
    • Zager reiterated the need to lower cannabis taxes which were a “pressure on price” they could get from retailers, with another person saying their businesses were “all dead” in the event a federal tax was added to the state’s already high tax rate.
  • Foster expected some level of federal action was possible, even if it wasn’t full legalization. He mentioned a 2019 Oregon law to prepare for interstate cannabis commerce, SB 582, which had a “sort of trigger condition” contingent upon a change in the federal status of cannabis. A comparable law in Washington would show the state was “ready to be a net exporter state,” he argued. Another alternative would be seeking non-binding guidance from federal officials over whether they could “start doing interstate commerce” before such a law was in place, presuming there were “strict rules” and some tax or revenue normalization around exportation and importation between states. Tan noted a similar measure was introduced in the California Senate on February 18th.
    • The Alliance for Sensible Markets, an Oregon trade group, advocated for similar proposals in legal cannabis states. 
  • Another area Tan said the state was behind was “around payments,” particularly “allowing electronic movements” of money for cannabis as well as overall “access to capital” and “outdated” TPI standards.
    • Robertson said he’d been an advocate of increased access to capital, appreciating that it could bring money and job opportunities to the state. However, the largest pushback he’d seen to the concept came from other licensees “saying ‘we don’t want that capital to come in’” as it would increase their competition. The group was quizzical over how their competitors would say that, but Robertson also felt that sentiment may have “changed over the last few years.”
    • Zager considered a “small step” might be allowing someone from out-of-state to have equity in a cannabis license “but leave controlling interest in the hands of those people that are already here in the state.” This arrangement would infuse businesses with some capital, he commented, “and then have conversations after that on whether” there need to be more TPI changes. Zager reiterated the need for vertical integration, the absence of which he called “a massive problem for us.” 
  • Having encountered no one in their group who was “making money” from cannabis, Zager found the conversation around increasing social equity confounding. “If nobody here is making money,” including someone like himself that hadn’t been “disproportionately affected,” any legislation for social equity “was an immediate failure…it’s a nonstarter.” He felt social equity programs could only “be functional” once existing licenses were stable enough that such a program “works for everybody.” DuPuis made the case that the state was prime real estate for cannabis cultivation if regulation didn’t strangle their success.
  • Foster brought up the debate around hemp production for cannabinoid conversion and “complicated questions” around their regulation. He felt this ignored other “facets” of hemp’s commercial value such as “fiber, building materials” which were still viable uses for hemp crops that were overlooked in Washington because “there’s no processing infrastructure for it.” Foster wondered if the state could promote processing and commercial uses of hemp so there was less of a focus on cannabinoid conversion.
    • Stanford replied that “identifying that gap” in processing could be remedied by outreach by Washington State Department of Commerce officials who might be able to promote partnerships with “companies that do that.” If there was evidence that could sustain their hemp sector he was amenable to it, but cannabinoid conversion had clearly been profitable for some businesses. Stanford wasn’t even certain a bill was needed, “just basically getting some folks in the” department of commerce engaged with “what are the possibilities” for incentivizing that kind of infrastructure.
  • Robertson observed that some rules in the cannabis industry, “principally, the taxation piece,” were “empowering the black market” which he wanted to avoid. Tan felt that was a “hot button” argument, and he doubted its relevance as “a real issue.”

• The last table of lawmakers included leaders of the Washington State Senate Labor, Commerce, and Tribal Affairs Committee (WA Senate LCTA) and addressed the subjects of tax rates, interstate compacts, and vertical integration.
  • Two democrats were joined by a republican to hear attendee input.
    • Democratic Senator Karen Keiser, the Chair of WA Senate LCTA, said her committee endeavored to approach cannabis policy as “non-ideological.”
    • Democratic Representative Monica Jurado Stonier had found participation so far very informative for her as floor leader “because oftentimes our caucus members could use some information” on topics before voting on them.
    • Republican Senator Curtis King, WA Senate LCTA Ranking Minority Member and WA SECTF appointee, briefly introduced himself.
  • Zager ran through themes the group had honed at previous tables, listing taxation pressures, advertising limitations, out-of-state investment, and vertical integration. “If you look at California and the companies that are doing really well,” they could sell directly as well as grow their own product, he suggested. Interested to hear the legislators “vision” around cannabis policy, DuPuis wanted to know what they wished “to see our industry develop into.”
  • Keiser broached the topic of interstate compacts in the face of the “federal government’s refusal to do anything” on cannabis. The blue group was in full support of beginning talks with other states about cannabis commerce. Keiser knew it was “tough stuff” and might take more than a single bill, but she recognized that attendee priorities were “the kinds of issues” that could be addressed while arranging interstate compacts. She described the motivation of lawmakers when I-502 passed being to “keep things small, keep things local, keep things under control,” but now she felt concerns “by parents and by police” were at a “transition point” where new models for businesses could be seriously entertained. 
  • King asked what an acceptable state tax rate would be. One attendee suggested 15% though Zager noted Oregon’s cannabis tax rate was 25% and a percentage of that went to local governments.
  • The representative from PurForm Labs repeated his concern over the “outflow” of talent and intellectual property from the state market, and the long term drain that trend could have on revenue for the state if businesses started to close. Stonier remarked that lawmakers liked “a strong economy” with a competitive and “grown up” industry. Keiser wasn’t aware of statistics showing businesses were closing in Washington to move to other legal cannabis states, which prompted Zager to note a list of active retail licenses were “publicly available online” from WSLCB. Keiser reported that she hadn’t known any processors to leave the state when Tan and Freeman commented that they were doing more business in California and other states even though they hadn’t formally left the Washington market. Keiser asked if WACA leaders could “combine that information” to present to legislators. Zager, DuPuis, and others were receptive to the idea, noting a prior economic impact analysis the organization had supported. Stonier felt WSLCB data would be more representative of any licensee migration from the state.
  • Zager said there’d been no revenue information “since December of last year” owing to the transition to the Cannabis Central Reporting System (CCRS) so “nobody knows how dire” the drop in the market had been for months. 
    • Keiser promised to investigate, as she’d understood that WA Senate LCTA was still getting “quarterly reports” on cannabis sales in the state. Zager pointed to pricing trend reporting by data firm Headset in arguing that “there’s a 30% drop that’s occurred year-over-year” and he thought Washington’s “trendline was in a staggering drop” as other markets were improving. There was some debate on whether this trend showed declining revenue for the state, but Keiser had seen “huge increases” in revenue during the coronavirus pandemic.
      • High-level cannabis retail sales data had previously been available on the WSLCB website until early March. Cannabis Observer inquired with agency officials and obtained a spreadsheet with cannabis sales data through April 2022. WSLCB Chief Financial Officer Jim Morgan reported that sales data had been removed from the agency website “at the request of industry.  With the recent spate of robberies, it was thought that it may contribute to emphasizing how much cash might be on hand.  While we are no longer posting the information, it is still available through public records requests.”
      • The Washington State Economic and Revenue Forecasting Council released an economic review for June 2022 which featured information on cannabis revenues in addition to updated excise tax and license fee estimates.
      • A June 22nd CCRS update by WSLCB staff suggested that more detailed analysis of reporting data would resume soon.
  • The PurForm Lab member said he had more people contacting him about “fire sales” on their crop in order to pay their employees than reaching out “to grow their business.” DuPuis had seen a significant increase in the number of producer and processor licenses for sale, growing from five or ten available years earlier but now “you can go onto any site, there’s a hundred to a hundred and fifty” available to buy. Keiser acknowledged the situation sounded like a “crisis” calling for intervention by lawmakers, and asked about growth in other jurisdictions. Zager insisted there’d been recent “growth in every other segment in every other state” except for Washington and Oregon.
  • Foster asked if there was any way to support Keiser pursuing interstate compact discussions with the leaders of other states. She was still contemplating how it might be approached but felt it was a different timeline than the “immediate crisis” presented by the businesses at the conference.