WSLCB - Executive Management Team
(May 12, 2021)

Here are some observations from the Wednesday May 12th Washington State Liquor and Cannabis Board (WSLCB) Executive Management Team (EMT) meeting.

My top 3 takeaways:

• Director Rick Garza touched on several topics in his update, including a new chief information officer promoted from within, collaboration with the Office of Equity, and a staff presentation to New Mexico officials.
  • Garza mentioned the new WSLCB Chief Information Officer (CIO), George Williams, who had been serving in the position on an interim basis. He said it was “great to have George join us as...our lead now in IT” upgrading his role from Senior Information Technology (IT) Manager. He indicated that Williams was a “25 year veteran of the Army” and one of the people hired by the agency under the YesVets program maintained by the Washington State Employment Security Division (ESD). “We’ve been fortunate to be able to be really active” with the program, Garza commented (audio - 1m).
    • WSLCB was recognized by ESD for their participation in YesVets. ESD Local Veterans Employment Representative Steven Severson gave a presentation to the board honoring their involvement with the program in 2019, a “thank you for hiring our nation’s heroes” (audio - 3m).
    • Former CIO Mary Mueller departed the agency at the end of March 2021 to join Gordon Thomas Honeywell Governmental Affairs as Director of Procurement to perform “Public sector market development and procurement consulting specializing in Washington State technology procurements.” From 2015 until her departure, she led implementation of technology projects at the agency and endured the transition of traceability vendor relationships from BioTrackTHC to MJ Freeway through an interim transition period where the agency itself was responsible for gathering data about transactions within the state cannabis marketplace. She helped co-lead the Traceability 2.0 work group and, in a parting gift just before leaving, achieved board approval on a road map towards ending the contractual relationship with MJ Freeway by June 2022.
  • “I also had the opportunity to meet Karen Johnson,” Garza said, “the new Equity Director of the office that the governor created through legislation last year.” He indicated that she’d begun working with WSLCB and other state agencies on a “five year strategic plan for DEI,” (diversity, equity, and inclusion). Johnson would be coordinating with Claris Nnanabu, WSLCB Director of Human Resources, to bring “all the parts of DEI into our agency,” he stated, adding that interviews would begin the following day for a dedicated DEI Manager at WSLCB (audio - 1m). 
    • Johnson had served on the DEI Council at the Washington State Office of Financial Management (OFM).
    • Johnson visited with members of the Washington State Commission on African American Affairs (CAAA) on March 19th.
  • Garza also talked about meeting with representatives from “one of the new adult-use states for cannabis,” New Mexico. He noted “five or six of our staff" provided an overview of the Washington approach and addressed some specifically requested topics “not unsimilar [sic] to what other states have had.” Garza acknowledged the leadership of Linda Trujillo, Superintendent of the New Mexico Licensing and Regulation Department which includes the Cannabis Control Division (audio - 1m).

• Director of Licensing Becky Smith briefed on the status of her division, mentioning online cannabis license applications and confusion caused by “pending” licenses.
  • Smith described work with the Washington State Department of Revenue Business Licensing Service after hearing “from our cannabis side...that we need to get some of our applications online and be able” to have them “not just in paper.” She said the process was underway headed by Customer Service and Support Manager Beth Lehman and Cannabis Licensing Manager Kevin Milovac. Smith described how “cannabis licensees will be able to do a change of location or an assumption, so somebody that wants to buy the business, electronically” (audio - 6m).
    • In December 2020 during public comment at a board meeting, Ammon Ford requested the licensing process be made “more efficient for everyone involved” with dedicated forms run through “electronic systems.”
  • Smith also spoke to 44 allegedly “unissued” producer/processor licenses, a topic raised during public comment on April 28th. She assured the board “that’s not the case” as the 44 licenses were “pending change of location and assumption applications.” Although marked as “pending,” Smith explained, “this is the type of application that generates...a new [Unified Business Identifier] UBI number in our system which makes it appear as a new application.” She stressed that “we have no outstanding new applications that have never been issued for producer/processor.”
    • Board Chair David Postman asked Smith about the ability to “flag that somehow in the system going forward so people know what that is?” Smith answered that her department was “working with IT” and communications staff “to see how that can be...flagged differently or shown differently,” indicating Williams would now be able to “help us do that” (audio - 2m).
    • Review the last 30 days of WSLCB licensing activity on the agency New License Applications, Approvals, and Discontinuances screen.

• Director of Communications Brian Smith gave an overview of his division's efforts, including helping field an inquiry from the U.S. Internal Revenue Service (IRS) on cannabis taxation in Washington state.
  • Smith was helping prepare a presentation for staff from the IRS that had reached out “to the [Washington State] Department of Revenue about a month ago,” whose officials subsequently “reached out to us” (audio - 7m).
    • Smith told the group that an IRS “regional office” in Colorado asked for a presentation on “what’s going on with the cannabis industry, particularly with regards to taxation, how that whole thing works.” He’d be part of a “joint presentation with Revenue” staff, along with Garza and WSLCB Chief Financial Officer Jim Morgan. Smith remarked the event was scheduled for June 7th.
    • While IRS representatives didn’t specify the reason for their interest, “I think that they just think that it’s time that they take a look at state systems, kind of, overall,” Smith posited. He’d known that agency officials “briefed them in the early days of setting up the system,” though he wasn’t involved at the time. Smith expected a “fairly large audience of people that are auditors and others.”
  • Postman wondered if the federal agency could “be looking ahead to possible national action on, you know, legalization or delisting” of cannabis from the federal schedules of controlled substances. Smith agreed it was a possibility.
    • Owing to its status as a Schedule I controlled substance, federal law prevents tax deductions related to operating a business which handles marijuana via §280E of the Internal Revenue Code.
      • A December 2014 memorandum from the IRS explained, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” The memo goes on to say §280E “even disallows a deduction for expenses that are not illegal per se (e.g., salaries; rent; telephone).”
      • MJBizDaily tracked the impacts of §280E in a special series on the subject which featured a primer on relevant terminology and hundreds of pages of documents:
        • IRS Compliance Initiative Project supporting documents
        • IRS Participant Guide for Marijuana Companies
        • Training presentations on marijuana companies and 280E
        • 280E and marijuana industry reference document for IRS agents
      • Take a look at an April 2015 white paper on the problems posed by §280E from the National Cannabis Industry Association (NCIA).
    • It is possible that IRS official interest has more to do with auditing than legalization as a March 2020 report, “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance” from the U.S. Treasury Inspector General for Tax Administration (TIGTA) foreshadowed increased interest by federal authorities in the taxation of cannabis companies.
    • The IRS was one of many federal agencies WSLCB partnered with during a federal enforcement action on April 7th at locations throughout Western Washington which board members discussed the following week. 

Here are some observations from the Wednesday May 12th Washington State Liquor and Cannabis Board (WSLCB) Executive Management Team (EMT) meeting.

My top 3 takeaways:

• Director of Legislative Affairs Chris Thompson discussed a new law expanding the state social equity in cannabis task force, and what agency staff were doing to prepare for implementing and administering a social equity program (audio - 5m).
  • Thompson brought up HB 1443, signed into law on May 3rd, noting it was sponsored by Representative Melanie Morgan, Co-Chair of the Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF). He then went over the “modifications” made by the bill, which would take effect on July 25th.
  • Technical Assistance Grant Program - The Washington State Department of Commerce would administer a program to “provide grants to social equity applicants,” Thompson established. The department would welcome additional “categories of applicants,” he said, as “producers and processors became eligible” for the assistance grants “as well as anyone issued a cannabis license between June 20th, 2020 and July 25th, 2021.” He noted grant money could help eligible applicants “to successfully launch and sustain their businesses” and there would be more activities the money could go towards as well, including “helping an applicant with their social equity plan.” Finally, he indicated the bill “authorizes commerce to create a roster of mentors that would be available to support applicants.”
  • Social Equity Program - One eligibility option for a social equity applicant had been residing in a Disproportionate Impact Area (DIA) “for five of the previous ten years,” Thompson told the group. WA SECTF members had found this system “problematic” due to “gentrification” which led to “changes in residential patterns,” he said. Instead, the “period of time, in question, that could establish eligibility will be determined by the LCB” following required “consultation provisions.” Furthermore, HB 1443 authorized “the LCB to create additional criteria by which someone could become eligible,” Thompson explained, adding “it’s unspecified what that could be.”
  • WA SECTF - Thompson explained that changes to the task force “membership, its duration, and some of its ‘to do list’” had changed. The final report from that group to the agency, governor, and lawmakers was now required “by December of 2022,” with WA SECTF appointees looking at the “social equity issues interfacing with” personal cultivation of cannabis and looking at “potentially shifting primary regulation” for cannabis production to the Washington State Department of Agriculture (WSDA). Section 3(9) of the HB 1443 session law outlined the new recommendation topics:
    • (c) The social equity impact of altering residential cannabis agriculture regulations;
      • Legislation around residential agriculture, sometimes known as home growing, has been proposed for several years. At publication time, HB 1019 ("Allowing residential marijuana agriculture") remained active legislation that could be taken up during the 2022 legislative session, or a special legislative session.
    • (d) The social equity impact of shifting primary regulation of cannabis production from the board to the department of agriculture, including potential impacts to the employment rights of workers;
    • (e) The social equity impact of removing nonviolent cannabis related felonies and misdemeanors from the existing point system used to determine if a person qualifies for obtaining or renewing a cannabis license;
      • In 2019, two cannabis-specific conviction reforms were enacted: Governor Jay Inslee’s Marijuana Justice Initiative and SB 5605 allowing vacating of cannabis misdemeanor convictions. It’s Cannabis Observer’s understanding that neither program has been used extensively.
    • (f) Whether to create workforce training opportunities for underserved communities to increase employment opportunities in the cannabis industry;
    • (g) The social equity impact of creating new cannabis license types; and
      • Some license types that have been proposed are craft cannabis licenses for smaller growers with direct sales privileges as well as cannabis lounges and events.
    • (h) Recommendations for the cannabis social equity technical assistance grant program created under RCW 43.330.540.

• Board Member Ollie Garrett summarized the work of the social equity task force and agency leaders described WSLCB staff participation and support.
  • Garrett, WA SECTF appointee for the agency, described the task force which was "supposed to have its first meeting" in July 2020, but didn’t initially convene until October of that year. She acknowledged initial work centered on “electing the...co-chairs and adopting the by-laws” and subsequently adopting operating principles that emphasized “anti-Black racism” and “bold action” (audio - 5m).  
    • On January 25th, members passed a motion calling for “the legislators to modify eligibility for the existing grant program,” she said, and that “with the LCB in mind, the task force also recommended changes to the underlying criteria for social equity applicants from one solely based on place to one that allows...specific prioritization based on race.”
    • Garrett commented that five more meetings of the task force had been scheduled “from May 25th through December the 14th.” She then identified the three active work groups at the time:
      • Disproportionately Impacted Communities (WA SECTF - Work Group - Disproportionately Impacted Communities): Garrett reported that this group had “met three times” (technically four) and had more meetings scheduled. The group focused on identifying disproportionately impacted geographic units that were “manageable in size” using census data “initially” to identify “census blocks to try to prioritize applicants.” Garrett noted that the definition of who counted as an applicant’s family member was also something the group was considering.
        • The Disproportionately Impacted Communities work group received a briefing on other states’ efforts to define who qualified as an applicant.
      • Licensing (WA SECTF - Work Group - Licensing): Garrett explained that she was a member of this work group, which had “five more meetings scheduled from June to early November.” The group would weigh “lessons learned from other states/cities social equity programs” and seek “to avoid unintentional consequences in licensing people from the populations intended to get benefits from the program.” 
      • Technical Assistance and Mentorship (WA SECTF - Work Group - TA and Mentorship): Garrett mentioned work group members first met on May 11th and “had five more scheduled through November.” Members were developing “guidance to the Department of Commerce” on the grant program. Garrett added that HB 1443 authorized Commerce officials “to build a roster of mentors who can be contracted to provide additional help” to applicants.
    • Garrett talked about what WSLCB had been doing to assist WA SECTF including a licensing presentation, support staff, weekly meetings between agency and task force staff, and contracting with University of Washington (UW) Professor of Sociology Alexes Harris and UW graduate student Michele Cadigan who had been researching court records and presenting to the task force as well as work groups.
      • WSLCB staff first mentioned following Harris and Cadigan’s research in October 2019.
    • She concluded that the task force had been “working hard to provide guidance to both the LCB and Commerce to launch” the program. Garrett pointed out that the task force would deliver a final report in December 2022 and “expire June 30th of 2023.”
  • Thompson talked about how Disproportionately Impacted Communities work group Co-Chair Christopher Poulos had proposed a definition of family, as individuals could qualify as equity applicants if they or a family member had a conviction for drug offenses on their criminal record. “Family” had not been explicitly defined in the law, and Thompson remarked that Director of Policy and External Affairs Justin Nordhorn had provided Poulos with “some statutory provisions about family and definitions of family.” He described Poulos as “very appreciative” of the input, and agreed with Garrett’s assessment that WSLCB staff were “doing everything we can to, to work hand-in-glove with the task force.” Thompson then called attention to “more documents” WSLCB licensing representatives put together for task force members and was clear to agency leadership that staff were "not just sitting on our hands waiting." Citing the licensing division specifically, he referred to staff having “done yeoman’s work” to provide information and there were “a lot of hands on deck” (audio - 4m).
    • Thompson also commented that the board had initiated a rulemaking project on criminal history checks of applicants, though a listen and learn forum reviewing draft conceptual rules scheduled for May 13th was abruptly cancelled hours before and rescheduled to June 1st. 
    • Definitions of “family member,” “immediate family,” or “family or household member,” can be found throughout Washington law:
      • RCW 26.50.010(6) dealing with domestic violence protection
      • RCW 26.52.010(2) involving out-of-state protection orders
      • RCW 42.17A.005(27) which involves campaign disclosures for political campaigns
      • RCW 49.46.210 pertaining to minimum wage requirements and labor standards
      • RCW 49.76.020(5) dealing with domestic violence leave
      • RCW 72.09.015(14) which applies to the Washington State Department of Corrections
  • Director of Licensing Becky Smith emphasized it was “not just one or two staff in attendance" at WA SECTF events trying to “hear the conversation that’s happening” and participate as “folks that are listening to what...input that the community has” for WSLCB. She noted that licensing staff attended all breakout sessions during work group meetings “to provide the information that we already have at hand” and look into issues raised. Smith then said staff had “done a lot of work” regarding local governments and were “working with those jurisdictions that have bans and moratoriums.” That effort was starting to show results as “the board may have heard...that Lewis County is looking at whether or not they want to lift their ban,” she indicated. Smith attributed this change to the efforts of Cannabis Licensing Manager Kevin Milovac and Kaitlin Bamba, Licensing Management Analyst, who had been reaching out to municipal officials (audio - 2m).
    • Lewis County moved from a moratorium on cannabis businesses to a ban in 2017. In 2019, Garrett described the county officials’ “strong” opposition to changing their policy.

• Board Chair David Postman had several questions about actions agency representatives could take in advance preparation for task force guidance.
  • Postman first asked about Lewis County, wanting to know what the agency would do following a jurisdiction ending a cannabis ban or moratorium. “Do we have authority, then, to do something towards social equity,” he wondered, “or are we waiting...for some action on behalf of the task force?” Smith acknowledged that there were seven retail title certificate holders in the county who would get priority in opening up stores under licenses they’d already been granted. Some of these were held by “people of color,” she indicated, saying any certificate holders could “get licensed right away” (audio - 4m).
    • In September 2020, retail title certificate holder Angel Swanson asked the board to allow her to move her certificate out of Lewis County, deeming indefinite title certification a “long, arduous, and financially debilitating process.” FMS Global Strategies President and CEO Paula Sardinas, the former WA SECTF Co-Chair, was “representing Ms. Swanson’s case pro-bono” at that time. Swanson was later selected to join the WA SECTF licensing work group.
    • Garrett said in 2019 that Swanson had been told by a Lewis County official it would be “over his dead body before that ban is lifted.”
  • Postman then asked where WSLCB had “authority to act, and when” if jurisdictions without retail title certificate holders removed ordinances prohibiting cannabis businesses and “what process has to take place...to determine the disadvantaged status” of social equity applicants. Thompson responded that staff were “not ready to, to pull the trigger on” that yet as there were “a number of things that have to fall into place first.” This included receipt of WA SECTF guidance on disproportionately impacted areas and how long an individual would need to have lived there, he said, as well as “some additional eligibility criteria, and we would have to do that by rule.”
    • Section 1(6) of the session law indicated WSLCB “may adopt rules to implement this section” whereas staff generally indicate the agency will undertake formal rulemaking to define the social equity program.
  • Next, Postman said that WA SECTF members “won’t necessarily wait til, you know, its final days to issue one big, huge report” and that agency representatives “may get it in iterative fashion.” He inquired about the timing for the program, and what could be considered “best case” for implementation. Thompson estimated that the new eligibility requirements wouldn’t take effect until July 25th and “I know it takes several months to adopt rules under most circumstances.” Given he was unsure of when they’d receive guidance and “we need those components as well as the time frame...my guess is towards the end of the year...would be an aggressive timeline; not impossible” (audio - 2m).
  • Postman’s final question presumed a less than “best case” situation where guidance or data was delayed. He wondered what agency authority there was “to try to address social equity issues...what do we have in our quiver?” Thompson said a proposal for “new license types is, is a really hot topic at the task force, they’re talking a lot about that” but he felt WSLCB power to take action with the goal of increasing cannabis market equity was “pretty limited." While it would be possible for the board to “consider requesting new authority,” he voiced a preference for "working, sort of, in tandem" with WA SECTF members before "taking the leap into new rules and, and new programs or, you know, those kind of revisions.” Postman clarified that he supported the task force being the leading entity on the issue while looking for “anything that the task force can chip off sooner [rather] than later.” Garrett volunteered to relay input task force members developed for the agency, or feedback the agency could give task force members. However, she understood that absent WA SECTF recommendations "our hands are kinda tied with not overstepping things." Postman was grateful for the clarity, wanting agency staff to be “open with people about this ‘cause we know that there’s some building frustration around this” (audio - 4m).  
  • Following Postman’s questions, Director Rick Garza commented that there had been “three specific ideas that we had that would have amended” HB 1443 to allow for WSLCB officials “to begin moving a little more quickly.” He echoed others’ remarks that staff were working to stay engaged with WA SECTF, the associated work groups, all while providing information or contracting with those who could. Garza asked Smith about the potential for rulemaking pertaining to the social equity laws, suggesting that staff could “open up the CR-101” as a way to “be as prepared and ready as possible” once feedback on eligibility requirements was delivered. He agreed with Thompon’s speculative timeline: “seems to make sense that it would be later in the year before we would get enough information from the task force to begin devising our rules around them” (audio - 3m).