Proper Planning Proves Prudent

Colorado and Washington were the first two states to pass statewide recreational cannabis initiatives in November 2012. Colorado was out of the gate first, opening up the nation's first recreational cannabis stores on January 1, 2013 to those over 21 year

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Colorado and Washington were the first two states to pass statewide recreational cannabis initiatives in November 2012. Colorado was out of the gate first, opening up the nation’s first recreational cannabis stores on January 1, 2013 to those over 21 years old. While people flocked to Colorado, Washington state chose to watch and learn and deliberately waited until 2014 to open its first legal dispensary retail store based on a substantially different licensing, regulation, and taxing scheme. For your reference, the Cannabist offers 7 key differences between the states.

Similar to California, Washington state passed a statewide Medicinal Cannabis Initiative in 1996 to allow patients to grow their own medicinal cannabis. Their Legislature amended this Medicinal Use of Cannabis Act in 2011, allowing for the creation of the ”collective gardens” for medicinal users. When Initiative 502 passed in November 2012, their state government officials huddled together and convened an interagency “all hands” meeting, assigning a point person from all agencies that would be involved with cannabis. The group met every other week for six months and once per month after that, sharing activities and concerns related to the federal government’s intention, involvement, and possible ramifications.

In particular, the Washington Department of Financial Institutions (DFI) worked with Governor Jay Inslee, Attorney General Bob Ferguson, the Liquor & Cannabis Board’s Director Rick Garza, and members of Washington state’s Congressional delegation to urge the federal government to adopt an enhanced due to diligence (EDD) program for financial transactions related to marijuana businesses, in a way similar to certain EDD programs that had been prescribed for international money transmission and currency exchange so as to comply with federal anti-money laundering (“AML”) and Bank Secrecy Act (“BSA”) standards. These coordinated efforts in Washington state contributed to the issuance by the Justice Department of the Cole Memo on August 29, 2013. Then, understanding that public safety required that marijuana businesses have access to banking services, the Governors of Washington and Colorado penned a joint letter and further lobbied the federal government, which eventually resulted in the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issuing special BSA/AML guidance in conjunction with the Justice Department’s February 14, 2014 memo to all federal prosecutors. The Cole Memo, in combination with FinCEN Guidance and the Justice Department’s second memo, paved the way for banks and credit unions to offer deposit and payment-clearing services to marijuana businesses in Washington and Colorado.

After many back and forths, DFI convened a Town Hall Kickoff Meeting with the Washington State Liquor & Cannabis Board (WSLCB) to create their own due-diligence standards based on the same strict three-tiered system of licensing and monitoring requirements established for liquor and wine many years before.

Strict Licensing Requirements

In order to get a state cannabis or liquor license, all parties, including spouses need to meet rigorous requirements, including:

  • Complete criminal histories and FBI background checks;
  • Financial background investigation that includes revealing sources of funds for the business;
  • A six month residency requirement, with the business entity having to be formed in Washington state; and
  • Providing assurances that the proposed business is more than 1,000 feet from schools, playgroups, childcare centers, transit centers, game arcades, libraries, playgrounds, and public parks.

Initially 7,000 applicants applied for one of the three available license types during their 30-day window. As of 1/6/2017, the state has issued:

  • Producer/Processor Licenses: 1,252 total licenses consisting of 941 Producer/Processors, 168 Producer only, and 143 Processor only;
  • Retail Recreational Licenses: 472 licenses (estimated 92% compliance rates per random audits);
  • Medical Cannabis: 16,289 medical marijuana user cardholders who pay the lower 10% excise tax rates (as compared to what 7,000 current cardholders in California pay) and 479 Consultant Licenses who are available to consult at retail stores that have been issued a medical-marijuana endorsement to a recreational retail license (of 717 medical endorsement have been issued).

Note also that under Washington state law, recreational and medicinal cannabis can only be purchased at brick-and-mortar licensed facilities. Delivery services are prohibited.

Since Washington state has such strict licensing requirements, three credit unions and two banks are currently legally accepting cannabis deposits based on the Cole Memo, the FinCEN Guidance for BSA/AML Compliance, and the companion follow-up memo form the Justice Department. Surprisingly, a majority of licensees are making their tax/fee payments electronically (meaning via a bank/credit union-issued debit or credit account).

WSLCB has also created strict packaging and labeling requirements overseen by a four-member committee that reviews all packaging and labeling for infused and edible products. Any edible product that mimic candy or appear to be especially appealing to kids are banned. However, similar to other states, there are 16 certified labs that produce inconsistent results. WSLCB is grappling with this issue and working on new procedures to certify labs. Starting this month, the WSLCB will do random testing of growers for pesticide use.

Revenue Collection Exceeded Expectations

In relation to revenue collections, Colorado collected a total of $44 million in new taxes/fees from recreational use in 2014, which consisted of a 10% special sales tax and a 15% excise tax on wholesale marijuana-transfers. This amount was far short of their initial projections of $70 million.

Washington state assesses an excise tax of 37% on final retail sales (note: the tax rate in the original Initiative 502 was 25%, 25%, and 25% collectible from producers, processors, and retailers. This proved to be cost prohibitive, so the Legislature amended the rate to 37%). To Washington state’s surprise, their actual revenue collections are larger than they predicted and growing faster than expected. For example, in 2013, Washington state estimated excise taxes collected was $36.3 million in fiscal year 2015, $80 million in 2016, and $120 million in 2017. However, the revised current excise tax projection (as of June 2016) is $65 million, $164 million, and $272 million respectively.

Intergovernmental Cooperation Benefits Agencies

I was really impressed with Washington state’s intergovernmental cooperation that benefited each agency involved. I hope whatever track-and-trace system California picks, it will have a broad benefit, provide useful information for multiple agencies, and not overburden those implementing the myriad of new laws.

I was most hopeful and inspired with Washington state’s banking results! By not reinventing the wheel (and saving time), the WSLCB used the same strict state-licensing liquor requirements, which made a favorable impression on the Justice Department and FinCEN, thus allowing banking access to significant numbers of businesses in this industry.

Washington and Colorado will host a Regulators Summit in Seattle in mid-April 2017 to share more lessons learned as the pioneers in this new budding green economy. I look forward to participating!