A Budding Industry

October 10, 2016 Amanda Pampuro

(Editor’s Note: The Guam Legislature recently rejected the proposed rules and regulations for medicinal marijuana use drafted by the Guam Department of Public Health. They would have gone into effect August 10, 2016, but critics called the rules and regs overly restrictive. The Joaquin Concepcion Compassionate Cannabis Use Act, which legalized medicinal marijuana use in Guam, was passed by the Legislature in 2015. The following is an in-depth look at how medicinal marijuana rules and regulations have been implemented in Colorado.)  

“While most Coloradans might be ho-hum about the ‘new normal’ that was established in their state, the rest of the country is fascinated by it,” wrote Rob Feeman in the inaugural issue of SENSI, an industry-funded lifestyle magazine. “No one beyond our borders seems able to fully comprehend just how the legalization of cannabis is working out here...It’s a mystery to many people, a source of jokes, or envy, or consternation, or anger, depending on where they stand on the subject.”

In a country where cannabis is banned as a Schedule I drug, Colorado was the first state to legalize it not just as medicine but for recreational use as well. As the United States’ unofficial pilot program, the home of Bubba Kush is testing political policies and product potency before the scrutiny of press, investors, social scientists, law enforcement, naysayers, and stoners.

Andrew Livingston calls Colorado “the epicenter of the cannabis economy.” As Director of Economics and Research for Vicente Sederberg Law, he represents the interest of marijuana stakeholders in this brave new world. “Colorado, being one of the first, we’re leading the charge. We are the nation’s experiment, but that means we have less examples to study from.”

 

The Planting of a Seed: History of Medical Marijuana in Colorado

While friends of “Mary Jane” often celebrate her birthday on April 20, the Centennial State added its own high holiday to the calendar on Jan. 1, 2014. Dubbed Green Wednesday, that New Year was rung in with retailers serving legal laughing grass to the general public for the first time in eight decades.

Marijuana was first regulated as a narcotic in the 1930s, followed by the Boggs Act of 1952 creating mandatory sentences for cannabis possession. Although penalties for possession, use, and distribution generally increased at the federal level throughout the 20th century, individual states like California, Oregon, and Colorado made consistent countermoves to decriminalize the substance. While California legalized medical marijuana in 1996, operations were continually challenged by the federal Drug Enforcement Agency.

Colorado voters followed California’s lead in 2000 with Amendment 20 laying the framework for “authorizing the medical use of marijuana for persons suffering from debilitating medical conditions, and…establishing an affirmative defense to Colorado criminal laws for patients and their primary caregivers relating to the medical use of marijuana.”

According to Livingston, the trajectory of Colorado’s modern policies stem from this act. “So much of the regulation that comes out deals with intricacies of history,” he said.

This initiative, passed by 54 percent of voters, allowed the state to establish a system that would encourage patients to talk openly with their medical care providers and break down stigmas associated with treatment. As Livingston pointed out, “This first wave of ballot initiatives was implicitly non-commercial.”

The Rocky Mountain High Intensity Drug Trafficking Area (RMHIDTA), tasked with analyzing the impact of partial legalization in 2013, estimates 5,993 individuals applied between 2000 and 2008 for a red card, the license required to carry medical marijuana. During this period, there were zero dispensaries operating within the state; instead marijuana was grown by individual users or distributed through licensed caregivers, limited by the Colorado Department of Public Health and Environment (CDPHE) to serve a maximum of five patients.

In 2007, the five-patients-to-one-caregiver ratio was challenged by a Denver district judge, “open[ing] the door for caregivers to claim an unlimited number of patients for whom they were providing and growing marijuana.” Still, with the 2001 court case United States v. Oakland Cannabis Buyers' Cooperative setting the precedent, fear of federal prosecution curbed many would-be investors from opening dispensaries.

 

Plant Germination: What We Legalized When We Legalized Weed

Shortly after Barack Obama was sworn into the White House in 2009, then-Attorney General David Ogden issued a memorandum clarifying the relationship between federal prosecutors and state marijuana law.

The Ogden Memorandum discourages legal action against establishments in line with local law, by prioritizing resources for operations involving “unlawful possession or unlawful use of firearms; violence; sales to minors; financial and marketing activities inconsistent with…state law, including evidence of money-laundering activity and/or financial gains or excessive amounts of cash inconsistent with purported compliance with state or local law; amounts of marijuana inconsistent with purported compliance with state or local law; illegal possession or sale of other controlled substances; or ties to other criminal enterprises.”

Ogden’s position to turn a blind eye “on individuals whose actions are in clear and unambiguous compliance with existing state law providing for the medical use of marijuana” proved to be the green light investors had been waiting for.

“By the end of 2009,” RMHIDTA noted, “new patient applications jumped from around 6,000 for the first seven years to an additional 38,000 in just one year. Actual cardholders went from 4,800 in 2008 to 41,000 in 2009. By mid-2010, there were over 900 marijuana dispensaries identified by law enforcement.” In the Mile High City (named so for its elevation of 5,280 feet), the Denver Channel was quick to calculate that there were more pot shops than Starbucks in 2010, and longer lines too, with individuals waiting up to six months for red card approval.

The CDPHE continues to issue medical cards to individuals with qualifying conditions. Of 106,066 cardholders this year, less than 10 percent are suffering from cachexia, HIV/AIDs, glaucoma, seizures, or cancer; 12.4 percent qualified for experiencing severe nausea; 24.2 percent for muscles spasms; and the rest for severe pain. Some patients report multiple conditions.

On Nov. 6, 2012, 55 percent of Colorado voters approved Prop 64, the constitutional amendment titled the “Campaign to Regulate Marijuana Like Alcohol.” Under this law, age of use was established at 21 years, and driving under the influence, as well as distribution to minors remained explicitly forbidden.

Otherwise, the law permits “legitimate, taxpaying business people, and not criminal actors, [to] conduct sales of marijuana” as well as “possessing, using, displaying, purchasing, or transporting marijuana accessories or one ounce or less of marijuana; growing, processing, or transporting no more than six marijuana plants, with three or fewer being mature, flowering plants…[and] consumption of marijuana provided that nothing in this section shall permit consumption that is conducted openly and publicly or in a manner that endangers others.”

Rather than legalize marijuana retail across the state, Amendment 64 operates as more of an open invitation for individual counties and towns that wish to adopt their own industry. The DENVER POST reported that as of June 8, “While 53 [towns and counties] have chosen to permit retail marijuana—with 27 levying special taxes—more did not. The [Colorado Municipal League] counts 165 cities and towns that decided against the leap. An additional 16 municipalities have moratoriums on the idea of legalized recreational marijuana.”

While Denver and Boulder continue to boast the most marijuana shops in the state, the second largest city, Colorado Springs, continues to keep merchants out. Pueblo County, heavily invested in cannabis cultivation, plans to vote on retail later this year.

 

Groundbreaking Seedling: Growth of Sales, Marketing, and Merchandise

“I love marijuana, and I’ve always been very particular about it,” writes John Andrew, the founder of the shop L’eagle. “I feel the same way about fine foods and wine. Why not have the same expectations for cannabis as you have for food?”

With the recreational market has come the rise of luxury marketing aimed at elevating cannabis consumption to that of a cultured, leisure activity. Besides smoking paraphernalia, shops sell smokeless vape pens, edibles (bars, brownies, and candies), concentrates, lotions, and salves. Pot product lines are as distinct and numerous as the seasonal selection of microbreweries. And these high quality commodities come with corresponding price tags. New York-based monthly magazine HIGH TIMES’ “Pot Prices” analysis for June 2016 reported artisanal ounces ranging from $180 for Portland, Oregon’s Jack Herer to $490 for the Blue Dream of Lubbock, Texas. Colorado's most popular strains include the Golden Goat at $280 an ounce and Pre-'98 Bubba Kush at $300 an ounce.

“Ever since recreational use was proclaimed legal…the industry has been rebranding itself, wiggling away from its counterculture roots and in turn aligning with the burgeoning wellness movement,” Chavie Lieber reported for RACKED last April. “In Denver, the epicenter of this thriving industry, the dispensaries are chic, the grow houses specialize in organic strains, and the edibles are artisanal and sometimes even gluten-free…The ubiquitous green leaf isn’t just a drug here, it’s a lifestyle.”

As the massive marijuana market cause first-time visitors to stop and stare, the University of Colorado Boulder Business Research Division was just as surprised by the number of consumers looking to fill their pipes. The actual demand for cannabis has defied all predictions since their 2014 publication, MARKET SIZE AD DEMAND FOR MARIJUANA IN COLORADO.

In state, an estimated 485,000 “adult regular marijuana users” consume cannabis at least once a month—about 9 percent of the state’s population of 5.363 million. While a majority of users partake less than once a week, 21 percent of users are consuming cannabis 26 to 30 times a month, taking in 66 percent of Colorado’s production and selecting products of higher potency. In 2014, UCB estimated Colorado residents consumed 121.4 metric tons of marijuana, with visitors adding 8.9 metric tons to the demand.  

“Purchases by out-of-state visitors currently represent about 44 percent of metro area retail sales and about 90 percent of retail sales in heavily visited mountain communities,” the report said.

While no studies currently distinguish which visitors come to Colorado solely for cannabis, ski resorts alone receive upwards of 11.4 million annual tourists. In the year prior to legalization, 64.4 million visitors spent $17.3 billion in the state. In 2014, 71.3 million visitors spent $18.6 billion, and in 2015, 77.7 million visitors spent $19.1 billion.

 

Vegetation Stage: Tax Dollars Trickle Down from Quiet Streets

From January to July 1, the Mile High City issued 2,780 marijuana business licenses, including 529 medical centers and 435 retail stores, many of which are operated in the same location, but require separate paperwork.

The tye-dye tinted head shop stuffed with novelty items and morose retail staff is a thing of the past. Instead, marijuana dispensaries are decorated with bright colors and clean counters covered with bouquets of joints, glass jars of green buds, and little silver packets of candy bars. With fierce competition, any budtender will tell you customer service is key.

The manager of Ganja Gourmet, Willie Smith, said people seek out his shop because, “We probably have the biggest edible selection in Broadway. A lot of out-of-staters don’t want to smoke. They want to eat a cookie and see how they feel, so we do great with them. Also, all of our prices include taxes to avoid sticker shock at the register.”

Between the Colorado Retail Marijuana Code and the Denver Revised Municipal Code, consumers are taxed 20 percent at point of sale, including 2.9 percent state sales tax, 10 percent state marijuana sales tax, 3.65 percent city sales tax, and 3.5 percent special city tax. Reflected in the price, but not explicitly passed on to consumers, CRMC also collects a 15 percent excise tax between distributor and retail outlet. Medical marijuana sales, exclusively available to red cardholders, are affected only by initial state and city sales and taxed 6.4 percent per transaction.

In 2015, the Colorado Department of Revenue reported consumers purchasing $996.1 million of cannabis products—an increase of $300 million compared to sales in 2014. From this pot, the state collected $135 million in taxes. Factoring in additional licenses and fees between May 2015 and May 2016, Colorado collected $156.6 million from the marijuana industry.

The first $40 million from recreational excise taxes is deposited into the Building Excellent Schools Today Fund, while the rest are collected into the Marijuana Tax Cash Fund, to be “used for health care, health education, substance abuse prevention and treatment programs, and law enforcement.”

During FY2014, $2.5 million from marijuana taxes were appropriated to the state Department of Education to address behavioral health issues, $2 million went to the Tony Grampas Youth Services program, $2 million into incarceration prevention, $5.6 million to public marijuana education campaigns, and $7.6 million to the Department of Revenue's Marijuana Enforcement Division (MED).

Policy-makers and readers of the DENVER POST alike are awaiting the latest studies with bated breath, to see if the benefits of increased funding outweigh the potential consequences of an open marijuana market. Between 2014 and 2016, however, not enough data has been generated to draw definitive conclusions either way.

 

Pungent Flowering: Consequences, Commercialization, and a Cash-Only Economy

While tax revenues and business profits seem to be streaming in through rivers long stripped of gold, this growing market is not without growing responsibilities. Follow-up legislation has already tightened regulations involving ski resorts, product testing, and edible concentrations.

“Edibles have been around for quite some time, but it was not until Colorado and Washington started to make products available in large scale that it became problematic,” noted Chris Lindsay, Legislative Council for lobbyist group Marijuana Policy Project (MPP). “Before then, edibles were considered the benign form of consumption, and policy-makers were more concerned with smoking.”

Between 2014 and 2015, however three deaths associated with psychotic episodes brought on by edible overdoses indicated that better labeling was needed.

“The most significant problem deals with the types of consumers [and] the differences in their understanding of the product,” said marijuana economist Andrew Livingston. Within the closed medical market, patients were expected to work out doses with their medical providers, whereas recreational users only get information from the package.

In addition to clearer product labeling and regular lab testing, beginning October 1, retail consumers will be limited to purchasing 800 mg of edible marijuana at a time.

With an increased number of children admitted to emergency rooms for marijuana exposure, and edibles accounting for half of these, lawmakers have also taken cautionary measures to keep products out of their reach. While childproof packaging is already required, another recent law bans edibles molded in shapes easily recognized by children as candy, like fruit and animal gummies. While Livingston described this last measure as more political than effective, he said the goal remains to “create regulations to maximize consumer safety. Let’s be constructive and put consumer safety ahead of business growth.”

When it comes to establishing policy in other markets like Guam, Livingston said regulation must be sustainable by the industry. For example, the intricate monitoring systems in Colorado, tracking plants from sprout to sale, they are paid for by the $900 million industry. Smaller markets would need to weigh the intended effect against the actual effect of regulation to find policies that are equally economical and effective.  

Vice president of the political action group Smart Approaches to Marijuana (SAM), Jeffrey Zinsmeister cautioned other legislative bodies “to be careful before introducing profit-margins.”

Commercialization, Zinsmeister argued, is not the answer to criminalization. While MPP compared marijuana consumption to alcohol during the campaign for legalization, SAM uses the tobacco industry as an allegory forewarning of “Big Marijuana.”

“The pot industry is writing laws in Colorado, and the money of lobbyists has taken hold. Most concerning is that they have started to support initiatives that would change the ballot process,” Zinsmeister said in reference to House Bill 16-161, which increases the number of petition signatures required to initiate “ordinances or regulations governing the time, place, manner, and number of retail marijuana establishments” from 5 to 15 percent of the voting population. While outlining testing and labeling procedure for marijuana products, the bill also withholds test results and other company information from public record.

“This is the sort of behavior SAM is concerned about, not incarceration,” Zinsmeister said. “Measures that put marijuana in the drivers’ seat.”

Driving under the influence also remains an issue of high concern. An initial study by Rocky Mountain High Intensity Drug Trafficking Area found in the first years, “traffic fatalities in Colorado decreased 16 percent, from 2006 to 2011, which is consistent with national trends. During the same six years in Colorado, traffic fatalities involving drivers testing positive for just marijuana increased 114 percent.”

A recent survey conducted by the National Highway Traffic Safety Administration of 2,500 Washington drivers attempted to measure the impact of legalization on DUIs. While 14.6 percent of drivers tested positive for THC six months prior to Washington’s legalization, in the following year the survey found 21.4 percent of drivers positive. Still, the survey noted, “Drug presence does not necessarily imply impairment. For many drug types, drug presence can be detected long after any impairment that might affect driving has passed.” In context of Washington’s established DUI limit of 5 nanograms of THC per milliliter of blood, “the study found a statistically significant reduction in the percentage of THC-positive drivers who were over the per se limit. In Wave 1 [6 months before legalization] there were 14.5 percent of drivers over the 5-ng/mL limit while in Wave 2 [6 months after legalization] the percentage decreased to 5.3 percent of THC positive drivers. In Wave 3 [12 months after legalization] the percentage over the limit was to 9.2 percent.”

Penalties for driving under the influence of marijuana in either Washington or Colorado remain the same as alcohol, including fines, imprisonment, and suspension of driving privileges.

In addition to their negotiations with local legislation, the marijuana industry is not yet in the clear of federal oversight. While estimations pin marijuana profits for 2016 at $7.1 billion, and project sales upwards of $40 billion by 2020, Livingston said the industry is still too small to convince big banks to give them a hand up.

“No discussion of banking in Colorado in 2015 would be complete without addressing banking of marijuana businesses,” reported University of Colorado’s recent 2016 BUSINESS ECONOMIC OUTLOOK. “While marijuana businesses are legal in Colorado, federal rules continue to preclude banks from serving these businesses. Guidance issued by the Department of Justice and Financial Crimes Enforcement Network (FinCEN) in February 2015 makes it absolutely clear banks can be prosecuted for serving marijuana businesses, imposes new Bank Secrecy Act reporting requirements on banks, and requires banks to perform extensive due diligence,” it added.

Following the legalization of medical marijuana in Washington D.C., FinCEN also issued a set of guidelines clarifying how “financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” Essentially the guidelines give individual banks leeway to create their own policies to ensure clients are not in violation of local and state law.

Still, of the state’s 148 banks, only a dozen smaller institutions service dispensaries as “even if bank regulators are permitting the activity, the federal law has not changed and could be enforced…at any time.”

While all businesses are required to track sales for MED and report income to both the local Department of Revenue and the IRS, Colorado’s billion-dollar marijuana industry remains a cash-only market. Some dispensaries still rely on banks for payroll, but risk remains so high that few budtenders know so much as the name of the banks their shops use.

Cannabis will continue to face increasing concerns regarding consumer safety, industry interest in policy development, and investment security. “At the very least, marijuana has added tax revenue, made the state more enticing to millennials, and reduced prison anxieties,” Livingston said, adding that it is a mistake to assume that, “there haven’t been any problems ever, and everything is going smoothly.”

 

Pollination: Where and How Far the Dust Will Settle

On a Friday afternoon, four-and-half miles south of the state capital, customers trickle into Sticky Buds on South Broadway, largely unaware of what bills are circulating the house or what is driving the price of their pot.

A Denver native in his sixties, Mitchell Burzynski estimates he has rolled 88,000 joints since he started keeping count, and was glad to finally find a job where he could put his skills to good use. He is weighing an ounce for a man with a coupon, while Joe Haynes uncorks jars of Cookie Wreck and Death Star Tangie for a pair of out-of-towners. Twenty-something Haynes moved cross-country from Tennessee earlier this year itching to see the Green Rush up close.

Budtenders and buyers alike gather here because they heard about the state’s great pipe dream, and they wanted to see if it was true. They stay, thinking this could be the start of something new, believing they are part of something bigger than themselves.

Maybe it’s the western frontier spirit. Maybe it’s their proximity to the wares’ infamous euphoric effect. Or maybe, just maybe, there is gold in them thar hills.

One thing for sure is that the seeds have been sown, and though no one knows how high the plants will rise or how far the pollen will spread, Colorado cannabis is soaking up 300 days of sunlight and growing at a steady pace.

 

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