This week the joint (heh heh) legislative committee working on implementation of Amendment 64, Colorado's marijuana legalization initiative, struck a blow against pot protectionism by rejecting a requirement that retailers grow at least 70 percent of what they sell. That rule, supposedly aimed at preventing diversion of marijuana to illegal sales, currently applies to medical marijuana suppliers, some of which lobbied to keep it. The Amendment 64 Implementation Task Force, appointed by Gov. John Hickenlooper to advise the legislature on regulation of the newly legal recreational market, recommended retaining the 70 percent rule for at least three years, at which point the legislature could revisit the issue. The task force also recommended protecting current medical providers from new competitors for the first year. But on Monday the joint committee—which is headed by state Rep. Dan Pabon (D-Denver), who also chaired the task force—rejected that recommendation, saying pot stores should be allowed to buy as much of their inventory from growers or wholesalers as they choose. Under the committee's proposal, retailers still could grow their marijuana, but cannabis entrepreneurs could choose to specialize in growing, wholesaling, or retailing. The committee also voted to shrink the "grace period" during which current operators would have a lock on the market from the year recommended by the task force to 90 days. Assuming the Colorado General Assembly goes along with the committee's recommendation, this is good news for consumers, new competitors, and the current marijuana suppliers who support a more flexible approach.
Mike Elliott, president of the Denver-based Medical Marijuana Industry Group, argues that the 70 percent rule "makes sure that if you're growing it, you have a legal way of selling it." Yet there is no such requirement in other industries where diversion is a concern. Pharmacies do not have to make the drugs they sell, and liquor stores do not have to distill the whiskey they stock. Jessica LeRoux, proprietor of Twirling Hippy Confections and a vocal opponent of the 70 percent rule, says it would benefit large marijuana sellers at the expense of their smaller competitors. In a letter to legislators, LeRoux warned that mandating vertical integration would mean that "only the most well-funded current medical entities from the big city will be able to expand into new locations." In an interview with Denver Westword's Michael Roberts, Warren Edson, an attorney who represents cannabis businesses, elaborates on the difficulties created by the approach that Elliott favors:
The skills needed to be a retailer aren't necessarily the skills needed to be a grower—but they pretty much force you to have the same skills or find somebody to work with who has the skills you don't. That works sometimes, but it doesn't always.
Medical marijuana is one of the few industries, if not the only industry, where retailers are forced to own the whole line of production. It's a huge pain in the ass to run a business like that—and to force that model into retail is ludicrous, particularly given that Colorado voted to regulate marijuana like alcohol, and alcohol is just the opposite.
Rather than requiring vertical integration in the alcohol industry, states (including Colorado) generally prohibit it, a policy aimed at fostering competition by preventing manufacturers from controlling retailers (as with the brewer-controlled taverns, a.k.a. "tied houses," that existed prior to Prohibition). The approach supported by the joint committee is an improvement on both of those systems, letting the market determine which combinations of functions make sense.
In a less encourging development, the joint committee is recommending marijuana taxes a lot heavier than the ones imposed on alcoholic beverages (even taking federal taxes into account). In addition to the 15 percent excise tax authorized by Amendmen 64, the committee is calling for a special sales tax, as recommended by the task force, also at a rate of 15 percent. The ABC affiliate in Denver says that, combined with existing state and local sales taxes (which total 8 percent in Denver), these levies would raise the retail cost of marijuana by roughly 40 percent. But the impact would actually be more dramatic than that, since the effect of the excise tax depends on the wholesale markup, and the sales tax will be calculated based on a retail price that includes the wholesale markup, the excise tax, and the retail markup.
Part of the rationale for the special sales tax was that the wholesale price would be hard to calculate and prone to manipulation if retailers were growing their own marijuana. But if the legislature agrees that the 70 percent rule makes no sense, that justification carries less weight.
The General Assemby has until May 8, the last day of the current session, to enact legislation setting the ground rules for recreational pot stores, which are supposed to start opening next year. Any taxes would have to be approved by voters this fall.
[Thanks to CK for the tip.]