Week in Review: Colorado Trumps Washington on Recreational Cannabis, For Now

By Chris Walsh

Which state will serve as a model for other markets when it comes to crafting a recreational cannabis program: Colorado or Washington?

Colorado appears to be the clear choice at this point from a business perspective, with its recreational marijuana market humming along nicely. The industry is already generating tens of millions of dollars in sales, and entrepreneurs are reporting enviable profits.

Washington State’s program, on the other hand, is mired in controversy and has experienced several setbacks.

The latest issue for the state emerged earlier this week, when the agency overseeing the program decided to reduce the number of cultivation licenses a business can apply for and also slash the amount each operation can grow. This is a major change at a relatively late stage of the rule-making process, and it’s creating huge problems for entrepreneurs who have already invested time and money in their business plans and applications.

“People are apoplectic,” Washington attorney Ryan Agnew said. “Many people had already formed partnerships and made the capital outlays necessary to grow at (the higher production cap).”

Additionally, sales tax estimates released this week by a state agency projected that actual recreational marijuana sales might not begin until June 2015 – a full year later than anticipated at this point. While that’s a worst-case scenario, the fact that it’s even being floated as a possibility is telling.

Although Washington and Colorado both legalized recreational marijuana in November of 2012, the two states have taken very different paths since then.

Washington put strict limits on cultivation and the number of retail stores, and the original demand estimates it used to set those rules now appear woefully off base. It also has flip-flopped on several key aspects of the program, and its ban on home growing in the recreational market could exacerbate supply issues.

Perhaps most significantly, it’s moving forward with plans to more or less abandon medical marijuana rather than create an entirely separate market.

“The MMJ community was cut out of the drafting of (the law) and thus missed an opportunity to share their knowledge of the market and work in rules that might benefit existing MMJ businesses,” attorney Agnew said, adding that there are also issues with location restrictions, high tax levels and large operating and startup costs.

Colorado, by comparison, created a clear division between the medical and recreational industries so the two could co-exist. The state also gave current MMJ stakeholders a huge role in the rule-making process, helping to ease the transition and avoid controversy.

Additionally, it left a good chunk of the industry in the hands of the free market, allowing an unlimited number of retail stores and cultivation sites to participate and letting residents cultivate their own cannabis.

This structure allowed officials to develop rules and regulations on the industry quickly and efficiently. Colorado worked aggressively to get the first retail businesses licensed, leading to an on-time, relatively smooth roll-out of retail sales.

Of course, first is not always best. And there are some key differences in the markets.

The fact that Colorado already had a robust regulatory framework covering medical marijuana businesses certainly helped it transition to recreational sales.

Washington never developed rules for dispensaries, and the medical marijuana industry as it exists now in the state is technically illegal. Washington therefore faced additional challenges from the start, and the process likely would have been more controversial than in Colorado anyway.

Additionally, each state has different concerns and a different idea of where they see the industry going.

We also have no idea how this will play out over time. Washington’s model might emerge as the national blueprint once it clears these initial hurdles, while problems certainly could crop up in Colorado (particularly if unrestrained growth invites scrutiny from the feds).

But the early results show some hiccups in Washington’s initial approach where businesses are concerned, and its move to eliminate – rather than embrace and restructure – the medical marijuana industry is a crucial mistake in the eyes of many.

For these reasons, other states considering recreational marijuana legalization could take more pages from Colorado’s playbook.

Chris Walsh is editor of Marijuana Business Daily