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Should Marijuana Legalization Include Interstate Commerce?

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As Congress moves forward with proposals to legalize marijuana at the federal level, with the introduction of the long-awaited Cannabis Administration and Opportunity Act and subsequent historic Senate hearings, some questions remain about the details of what federal legalization should ultimately look like. In particular, what has emerged as one of the most contentious details when it comes to federal regulation of cannabis is the question of whether interstate cannabis commerce should be implemented with legalization, delayed for a few years, or barred altogether.

For background, while cannabis is fully legal in over a dozen states across the country, and dozens more for medical use, while it remains illegal under federal law no cannabis products are allowed to cross state lines- no plants, no pre-rolled joints, no edibles, no tinctures, nothing. If it’s made in California it needs to stay in California. If it’s grown in New Jersey then it needs to be consumed in New Jersey. Plainly said, retailers in one state must only purchase products from cultivators and producers in that state, regardless of whether there is consumer demand for out of state products or if wholesale prices are cheaper across state lines.

It also means a company with cannabis business licenses in multiple states must spend millions – and often tens of millions of dollars replicating their entire production infrastructure in each state, rather than scaling up production and using one facility as a central distribution point for retailers across the country. Imagine Starbucks SBUX having to grow all of the beans for their Rhode Island stores in Rhode Island, and having to duplicate this model in every state across the country.

At first blush, it would appear that most cannabis businesses would welcome interstate commerce, but the reality is much more complicated. Many multistate operators (MSOs) have built their businesses, and their stock values, on operations in states with limited licenses where they have come to control outsized market share with little competition. This has kept wholesale pricing inflated in limited license states like Florida, Illinois, Pennsylvania and Maryland. Interstate commerce could mean having to compete with high quality low-cost cannabis from places like California and Oregon where growing conditions are more advantageous to large scale cannabis production. While the average price per pound nationally has plummeted to under $1,200, according to Viridian Capital Advisors, the price per pound in states like Illinois, New Jersey & New York can still exceed $3,000 per pound.

But there is also a concern among larger MSOs that the current economic advantage they currently enjoy in the industry could be quickly eclipsed by the entrance of large alcohol and tobacco companies, as well as hedge funds and holding companies currently sitting on the sidelines due to cannabis’ federal illegality. Delaying the start of interstate commerce would allow existing cannabis businesses to take advantage of the influx of new institutional money that would flow into the industry with federal legalization.

Many in the industry worry that implementing federal legalization too quickly would massively upend current state markets, many of which are still getting up and running, harming operators large and small. Brett Novey, CEO of large multi-state operator Pharmacann, explained his company’s more nuanced take on the situation.

“It's not about the timing of transition, it's about the process of transition. As an industry we need to ensure there is a concrete and defined process for transitioning more than three dozen unique intrastate markets into a national interstate marketplace,” said Novey, “It will be difficult to find a balance that ensures the jobs, tax revenue, and financial opportunities the states intended to create for residents and businesses are not eviscerated.”

Novey said, “In my opinion, it's about implementing a transition process that creates a level playing field so all stakeholders, including the states, current operators, the federal government, new market entrants, and consumers, benefit from the legalization of cannabis.”

This is a position shared by many on the opposite end of the industry’s philosophical spectrum. A coalition of social equity advocates, led in part by longtime cannabis policy reform advocate and former Massachusetts regulator Shaleen Title, currently CEO of the Parabola Center think tank, has joined with many of the multi-state operators in calling for a delay to interstate commerce whenever federal legalization happens.

But this position is also more nuanced, with a vastly different goal than the multi-state operators. Shaleen Title explains the approach, “Allowing versus delaying interstate commerce is a false binary. The first would favor Amazon AMZN and Big Tobacco, the second would favor existing multistate cannabis conglomerates, and neither option is good. Instead, Congress should use its robust power to regulate interstate commerce to design a model that would (1) gradually transition to interstate commerce, (2) advance equity, and (3) allow for data collection and evaluation so that regulators can correct course toward its goals over time. Parabola Center's preferred model is to begin by initially allowing only state-certified social equity businesses to engage in interstate commerce. Our preferred model aside, any gradual transition would be better than an overnight switch to an interstate market — the nightmare scenario from the equity perspective.”

While Title would prefer that only equity businesses be allowed to engage in interstate commerce initially, many large-scale producers in over-saturated markets like California, Oregon and Washington would love the opportunity to access markets in new states, especially east of the Mississippi River. After all, the over-saturation of the wholesale market in these states has led to major wholesale price compression, leaving companies hungry for new opportunities to sell their products.

A company like NorCal Cannabis, which has successfully navigated a difficult California market through the combination of high-quality products produced with a high degree of efficiency, would love the opportunity to ship their cannabis products across state lines. NorCal Co-CEO Jigar Patel explains his thoughts on interstate commerce, “By enabling commerce to take place between states, new markets and opportunities would certainly open up. Businesses like ours would also be able to bring decades of experience, operational efficiencies and best practices to states coming online. Most operators haven’t been in the business for nearly three decades, so they are faced with a host of lessons learned the hard way. However, that doesn’t need to be the case. By giving the cannabis industry the tools it needs to drive growth, the sector will continue to help rake in millions of new tax dollars for state and federal coffers, create well-paying jobs with growth potential and benefit patients and consumers — all without any taxpayer subsidies or handouts. That seems like a win-win scenario to me.”

Yet despite all the debate around what interstate commerce should look like under federal legalization, there is a movement percolating in a handful of legal states that could lead to some form of interstate commerce even without federal legalization. The Alliance for Sensible Markets, headed up by longtime cannabis reform advocate and fellow long suffering New York Mets fan, Adam Smith, is pushing for states to adopt legislation that would allow for the intestate trade of cannabis products between legal states that opt in to allow it.

Sure, this would require circumventing federal law. But that’s no major change from the status quo. After all, cannabis remains a schedule 1 substance under federal law, and aside from a provision in a spending bill that prevents the Department of Justice from interfering in state legal medical marijuana programs, no federal law or statute currently permits any business activity currently taking place in the states, even for businesses operating with permits in clear and unambiguous compliance with state law. Explains Adam Smith, “Every single advance in legal cannabis has been driven by state action, with the Department of Justice indicating their tolerance. In fact, waiting for the U.S. Congress to fix cannabis policy has never once been a winning strategy. Interstate commerce will be no different.”

To date, California and Oregon have passed bills that would allow for limited interstate commerce between states that allow it, and in August New Jersey Senate President Nicholas Scutari introduced an interstate bill mirroring California’s. This makes New Jersey the first “consumer state” to file an interstate commerce bill, and both the timing and the overlapping bill language hints that some potential early communications on the issue of commerce between CA and NJ may already be happening.

Like the Oregon law, both the California and New Jersey bills empower their states to enter interstate agreements if the federal government either allows state-regulated commerce via statute, or indicates tolerance through a Department of Justice memo or policy statement. The latter is how all state-legal cannabis businesses are allowed to operate now, despite ongoing federal prohibition.

The California and New Jersey bills, however, will both also allow their states to enter interstate agreements without any federal action, if their state Attorney General issues an opinion that such agreements will not pose significant legal risk for the state. This condition is quite aggressive and signals a desire on the part of these states to move forward.

Whether the Department of Justice would give their blessing, implicitly or in the form a guidance memo, for an arrangement such as this is a very open question. On one hand, both Attorney General Merrick Garland and the Biden Administration have repeatedly stated that they will keep their hands off the states. At the same time, President Biden has never been a fan of cannabis legalization, and accepting a situation that goes beyond respecting state laws but steps into territory clearly under the purview of the federal government like interstate commerce may well be a bridge too far for this administration.

Yet Adam Smith remains convinced this is a viable path, if not inevitable for the viability of the industry, stating “these bills are indicative of a realization among forward-looking state leaders that state-siloed markets are unsustainable. In natural producer states like Oregon and California, thousands of small farms and businesses are on the verge of collapse due to a lack of access to the markets these growing regions have traditionally served. In consumer states, where cannabis is more difficult or expensive to grow at scale, thousands of existing and potential small businesses in retail, distribution, delivery, product development, manufacturing, wellness, and hospitality, will wait years for a still-limited and overpriced supply chain. Opening these markets will give those businesses immediate access to thousands of existing, world-class suppliers at more competitive pricing.”

Whether Smith’s optimism will ultimately come to pass remains to be seen. But there is no doubt that the question of interstate commerce, whether as part of broader federal reform or state sanctioned trade pacts, will remain at the center of the cannabis policy debate for the foreseeable future.

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