What Alcohol Control Boards Should Know About Legal Cannabis

By Kyle Swartz

April 12, 2017

As more states legalize recreational cannabis, responsibility for overseeing these new markets has gone to beverage-alcohol regulators.

How come? The logic is that marijuana and alcohol are (hypothetically) similar substances. Both allow consumers to unwind, and require regulation for being dangerous when abused.

Alcohol control boards already are familiar with distribution and sales of a controlled substance, and promoting public safety. Couldn’t these same rules and systems translate to regulating legal cannabis?

It’s not so simple.

Differences between cannabis and alcohol make it difficult to replicate regulations. Marijuana requires additional agricultural responsibilities. And as a federally illegal drug, it brings issues with banks and financing.

“If you think you can simply extrapolate alcohol regulatory systems onto cannabis, you could be setting yourself up for unintended consequences down the road,” warns Steve Schmidt, NABCA Sr. VP of Public Policy & Communications.

“There’s going to be unknowns,” he adds. “We don’t have decades and decades of experience to know how to approach it, like we do with alcohol.”

Still, for states that legalize pot, alcohol regulators remain a natural choice to oversee cannabis markets. These officials have the experience necessary to craft safe and effective systems for this budding industry — so long as they understand fully their new responsibilities.

Agricultural Commodity

When alcohol arrives at a warehouse, it’s typically already sealed in packaging. For cannabis that’s not always the case.

Some growers in Oregon, for instance, do not have room or resources to dry, trim and treat their product. State employees must pick up and finish it.

“Marijuana is more of an agricultural commodity, and you need to act more like an agricultural broker,” says Jesse Sweet, director of administrative policy and process, Oregon Liquor Control Commission. “It isn’t as simple as the wholesale picking up of a product and then taking it from point A to point B.”

Speaking at the 2017 NABCA Legal Symposium in Virginia last March, Sweet says that “70 to 80%” of his time is now dedicated to cannabis control. “You can’t just toss it on the back of the beer truck,” he says. “There are specific needs for temperature, and for more security because there’s so much cash involved.”

In Washington, the state’s newly renamed Washington State Liquor and Cannabis Board has embraced its agricultural responsibilities. Recently it moved $500,000 to the Washington Department of Agriculture to fund pesticide testing at cannabis growing operations. Radon tests will follow.

How many black-market growers can claim that?

Background Checks

Washington subjects all applicants to the state’s cannabis business to FBI background checks. This includes investors and financiers, who also receive a financial background check, and must explain their investment plans.

“This part of regulating is easier for us because we’ve already been doing that for 80-plus years,” says Rick Garza, director, Washington State Liquor and Cannabis Board. “We already know how to vet.”

Garza’s team asks applicants whether they’ve ever had legal action taken against them. State employees who perform all this work are the same group that’s already vetting for Washington’s alcohol industry. Their experience and expertise translates naturally into cannabis.

Garza credits robust background checks with keeping gangs and cartels from working their ways into the Washington industry. He also points to these inquiries as a reason why Washington cannabis professionals have better luck with securing financing.

Money Matters

Cannabis is illegal on the federal level. U.S. Attorney General Jeff Sessions is unlikely to reverse his negative opinions of pot, so national legalization remains a pipedream under President Trump.

This complicates finances for cannabis businesses and control boards.

“If you’re thinking about legalization, then the first thing I would recommend is a long talk with your tax attorney,” says Richard M. Blau, Chair of the Alcohol Beverage & Food Law Department for the firm GrayRobinson, during the NABCA symposium. “Federal tax code 280E forbids anyone taking tax deductions from the marijuana business. And that severely limits profitability.”

It also keeps some businesses from accessing banking. Cannabis can be a cash-only enterprise, says Sweet, of Oregon. This is why many alcohol distributors and retailers have stayed out of the industry.

Washington has had luck helping cannabis businesses obtain financing from credit unions, Garza says, because the unions know how well Washington’s control board vets applicants. “We share everything we find with the bank,” he adds. 

The Cole Memo

What little direction states do have from the federal government regarding legal cannabis comes from the Cole Memo.

This well-known, much-quoted memorandum was issued by former U.S. Deputy Attorney General James Cole in August of 2013. Cole instructed federal prosecutors in states that had legalized cannabis to focus less on pot prohibition, so long as their states had “implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana.”

Cole further defined these systems as “effective measures to prevent diversion of marijuana outside the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for.”

In other words, states that safely and effectively control their cannabis markets should be of little concern to federal prosecutors. Many regulators take this as directive.

“My guiding principal is that if I’m meeting the Cole Memorandum, then I’m doing a good job,” Garza says. “That’s the only thing we care about. If we’re keeping it safe and we’re keeping it out of the hands of kids, the we’re promoting responsible sales.”

Vertical Integration

With legal cannabis being so new, control states are still figuring out the optimal way to set up tiered systems.

When Washington and Colorado first legalized, the former forbid vertical integration, while the latter actually mandated it. More specifically, Colorado required retailers to grow 70% of the product they sold.

“Both states acted as they did because they thought their way was necessary for compliance,” says Sweet, of Oregon.

Washington still bans vertical integration. Retailer and producer licenses cannot be owned by the same person. In 2014 Colorado ditched its so-called 70/30 mandate, but still allows retailers to grow their own product (rather than requiring it).

California, which legalized recreational pot last year, forbids vertical integration in its existing medicinal marijuana industry. But the initial law governing the recreational market does not prohibit it.

This has sparked a debate that could lead to vertical integration’s ban by the time recreational shops open there in 2018. And with California being the world’s largest cannabis economy, how California handles its tiered system could define such setups for all other U.S. states.

Public Safety

Alcohol has been legal in America for centuries: most consumers are well educated on safe drinking. Recreational cannabis is a new development, so promoting safe use is a significant responsibility for regulators.

For instance, consumers should know not to consume marijuana while pregnant or nursing. Laws mandating THC and dosage warnings on labels are also critical.

States that have legalized have undertaken proactive education. Washington disseminates pamphlets to retailers to hand out to customers. Based on Colorado literature, these guides include reminders about how effects of edibles and infusions can take time to set in. “It’s all about being careful when you consume,” says the board’s director, Rick Garza.

Washington also enforces maximum THC rules. No product can contain more than 100 milligrams of THC, nor can a single serving surpass 10 milligrams. Oregon is even stricter. It allows only 50 and 5 milligrams per product and serving, respectively.

Garza says that rules minimizing potency are important to help consumers take it slow: “If you’ve been consuming cannabis for many years, then your tolerance will obviously be very high. But many people are new to this now that it’s legal, which makes their tolerance a problem.

Among the trickier regulatory issues is determining whether drivers are intoxicated with marijuana. Blood tests detect THC too far back into a user’s past for effective day-of enforcement. And contemporary mouth swabs are functionally insufficient.

Garza says that several major universities are currently developing better swabs. Until then, consumers who drive while stoned remain a dangerous problem without a definite answer.

Another danger is kids consuming cannabis.

Washington (unlike Colorado) set strict laws against products that could unintentionally appeal to children. Nothing with THC can mimic anything a kid might think to consume. This means no candies or bright colors.

“We have a 92% compliance rate with keeping cannabis out of the hands of kids,” Garza says. “That’s higher than with alcohol.”

Pot And Alcohol

One issue of particular concern to Schmidt and NABCA is the simultaneous consumption of marijuana and alcohol.

Someone who drinks would assumedly be open to marijuana. And legalization will likely raise the odds that more people consume both at once.

“We don’t know yet about the potential impact of us now legally providing both products,” Schmidt says. “What’s the impact on the user? What’s the impact on public health and public safety?”

In the meantime, Schmidt worries that legal sales of both products will “normalize” the act of mixing them. Simultaneous consumption can exacerbate the harmful effects of both substances — especially when driving.

“What does this mean for the bartender?” Schmidt poses. “They’re trained not to over-serve someone alcohol, but now they have to look for someone exhibiting completely different signs. Are we prepared for that?”

Slow Roll

Despite all the profitability and mounting support, are efforts to legalize cannabis moving too quickly?

Some in the industry believe so. After all, state laws for legalization have so far only come by referendum — rather than through Congressional debate and vote.

“I don’t think that’s a good way to look at public policy,” says Schmidt. Rather than rush to set new laws, Schmidt reminds regulators that they can take it slow. You do not need to bend to the interests of commercialization who may push for prompt legalization, he adds.

Politicians in Maine and Massachusetts would seem to agree. Both states pumped the brakes on implementing new cannabis laws after voters approved legalization in 2016.

These states delayed by at least one year their legislative votes on rules for cannabis retailers. In the meantime, shops cannot open.

Schmidt urges regulators to consider the actions of Maine and Massachusetts: “Remember that you can slow down and control this rather than saying, ‘We’re opening the doors to all commercial interests who want to pursue this’.”

The Future Of Cannabis

Momentum remains strong for legal cannabis. Even Sessions and Trump likely cannot stop pro-pot movements gaining steam across the country. And in states that have already legalized, politicians are taking steps to protect their industries from federal crackdown through laws that protect cannabis businesses.

Recreational marijuana is here to stay. And government-controlled markets are primed to reap many millions in annual profits.

 “Why go elsewhere to buy cannabis other than a state-controlled retail store, where you know that the product has been tested for pesticides and labeled correctly,” says Garza. “When you buy on the black market, you don’t know that.”

Kyle Swartz is editor of Cannabis Regulator. Reach him at kswartz@epgmediallc.com or on Twitter @kswartzz. Read his recent piece 8 States That Could Legalize Cannabis In 2017.

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