Washington state marijuana industry robust, but challenges remain 10 years after legalization

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Image of a Welcome to Washington sign bearing cannabis leaves

Ten years after Washington voters approved one of the nation’s first recreational marijuana programs, the state’s cannabis industry has become among the country’s largest, with annual sales of roughly $1.5 billion and more than 11,000 employees.

Yet as Washington state marks the 10-year milestone, industry executives and advocates say reforms are needed to address issues such as high taxes and a “gotcha” regulatory climate as well as a shortfall in minority participation.

They also argue that companies face a funding squeeze and that more needs to be done to make the state’s cannabis industry more competitive if and when the federal government legalizes marijuana.

“I think overall the market has progressed,” said Joseph DuPuis, CEO of Doc & Yeti Urban Farms in Tumwater, Washington, one of the state’s earliest licensed producers.

But DuPuis said there’s been a lot of “ups and downs” and a regulatory environment that “prevents an operator from taking a natural path to business growth.”

The 2021 MJBizFactbook projects that adult-use sales via retailers will increase approximately 50% by 2025, to $2.3 billion-$2.5 billion.

A chart showing marijuana sales projections for Washington State

Despite that growth, industry experts say the program faces a variety of challenges, including:

  • High taxes. Washington state imposes a nationwide-high excise tax of 37% on adult-use sales. The tax puts pressure on prices, squeezes business profit margins and encourages many consumers to turn to the illicit market, according to industry critics.
  • Regulatory hostility. Industry officials and cannabis attorneys say the state’s Liquor and Cannabis Board cracks down on minor matters and penalizes cannabis operators more than their liquor and tobacco industry counterparts. The LCB maintains that’s an “unfair representation” of its oversight.
  • A restrictive residency requirement. Some businesses say the provision prevents them from gaining access to the outside capital they need to grow.
  • Social equity. While new and emerging adult-use marijuana markets have built social equity into their licensing and/or tax reinvestment models, Washington state is struggling to adopt a model that embraces greater minority participation.

“There’s no easy way to grow,” said DuPuis, who serves on the board of the Washington CannaBusiness Association (WACA).

The high excise tax puts pressure on operating margins, he added.

DuPuis and others also argue the residency requirement restricts outside investment and is an obstacle to mergers and acquisitions.

“You can’t generate enough retained earnings to fund the next project,” DuPuis said.

“In order to take the next step, we need access to capital, whether it be bank loans” or outside investment.

Large economic impact

The WACA recently commissioned Seattle-based High Peak Strategy to conduct a first-ever economic analysis of the state’s regulated cannabis industry.

In addition to finding that the industry directly employed 11,330 workers and generated $1.4 billion in sales in 2020 alone, High Peak Strategy concluded that the industry’s economic impact totaled $2.7 billion in revenue and 18,360 jobs.

But Spencer Cohen, the study’s author and High Peak strategy founder and principal, also noted a number of business challenges.

While California’s marijuana tax structure is often deemed as the most onerous in the country, Washington state actually has the highest state excise tax, at 37%, he said.

When adding other state and local taxes, Washington marijuana consumers pay an average tax rate of 46.2%, he said.

The high tax burden sustains the illicit market, according to Cohen.

Experts also point to what they characterize as an overly aggressive regulatory climate.

The WACA last week pointed to a 69-page paper on “The Turbulent History of Cannabis Regulatory Enforcement in Washington State,” that is pending publication in the Winter 2022 edition of the Cornell Journal of Law and Public Policy.

The paper was co-written by cannabis attorneys from Seattle-based firm Miller Nash.

The journal article concludes that while Washington has one of the nation’s most mature marijuana industries, the state’s Liquor and Cannabis Board (LCB) employs a “gotcha” culture.

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The paper notes an overbroad interpretation of rules, unnecessarily burdensome inspections, forced settlements and steeper penalties than those levied on the marijuana industry’s liquor and tobacco counterparts.

In one example, the board in late 2018 ordered cannabis-infused candy producers to cease production after earlier approving certain products.

The paper noted that some reforms have been made, but more needs to be done.

WACA Executive Director Vicki Christophersen said the LCB needs to be overhauled “so public trust can be restored at the agency overseeing the legal market.”

Her organization is supporting Senate Bill 5671, which would expand the number of board members from three to five, including four ex-officio legislators, with the idea to build its capacity to better tackle marijuana issues.

Brian Smith, the LCB’s communications director, called the criticisms an “unfair representation” of the board’s work.

WACA, he said, is using “multiple” tactics to try to get what it wants, which is to kill a separate LCB-supported bill that would regulate certain intoxicating cannabinoids.

Smith said that, as an industry pioneer, Washington state focused on opening a recreational marijuana market in an orderly way “to keep the federal government off our backs.”

He added that the board has evolved over the years and data shows that today it’s more education- than enforcement-focused.

Residency requirement

By law, cannabis business applicants must reside in Washington state for at least six months before being issued a license.

Cohen of High Peak Strategy said businesses he interviewed expressed concerns that the residency requirement hampers their ability to raise capital to finance expansion.

An Idaho businessman has challenged the requirement on constitutional grounds.

But the case was tossed back to state court from federal court after the Washington attorney general’s office filed a brief in federal court saying that “no federal constitutional protections exist for a federally illegal marijuana activity.”

In response, Christophersen fired off a letter to the AG’s office, saying: “Your position that our state’s cannabis industry does not enjoy the same protections as every other lawful Washington business undermines the will of state voters who overwhelmingly approved the creation of a legal marketplace in 2012.”

She and others said that a market more open to outside investment is needed for Washington to keep pace with other states and be competitive if and when federal legalization takes place.

Strengthening social equity

Washington state lags behind new and emerging adult-use marijuana markets in providing opportunities for minorities and other social equity applicants.

According to data self-reported to the LCB in 2020, less than 20% of marijuana retail owners identified as minorities.

That included 7% Asian, 4% multiracial, 3% Black, 2% Hispanic and 1% other.

Reforms that took effect in late 2020 enabled social equity applicants to get retail licenses that had been forfeited, revoked or canceled.

The problem is “those (licenses) are in the boondocks,” said Jim Buchanan, founder and executive director of the Washington State African American Cannabis Association.

“That’s set up for failure,” he said. “The only good thing about that bill is that it opened up the conversation (about social equity) and (a grassroots) demand for change.”

Buchanan cited the work of a social equity task force and the support of Gov. Jay Inslee, who requested a bill to create a community reinvestment fund. Measures have been proposed to bolster social equity.

A reinvestment measure, House Bill 1827 and its companion Senate Bill 5706, would set aside $125 million a year beginning in fiscal year 2023 for community reinvestment and a cannabis policy equity grant program.

Funds also would be earmarked for technical assistance and mentoring to social equity businesses.

A licensing measure, House Bill 2022, would create:

  • 304 new social equity cannabis retailer licenses by 2029 (38 per year).
  • 200 new social equity cannabis producer/processor licensing by 2029 (25 per year).

Starting in 2030, social equity applicants would receive at least half of all new licenses.

It’s unclear if the bills will pass. But Buchanan is optimistic.

“We’re at a good place in trying to do the right thing,” he said. “We’ve been fighting like everything for equality.”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.