12.26.22 – Daily Record – By: Bryan P. Sears
Maryland lawmakers face a beat-the-clock scenario in January as they look to finalize details of the state’s new recreational cannabis industry.
Voters in November approved an amendment to Maryland’s constitution legalizing adult-use recreational marijuana by a 2-to-1 margin. But cannabis is not yet, strictly speaking, legal. The ability of adults to buy the drug starting July 1 hinges on lawmakers passing legislation governing licensing, regulation and taxation and dodging the looming threat of lawsuits.
Failure to do so comes with the risk of ceding a large portion of a potentially $2 billion market to illicit black market sales.
“The issue we face is coming up with a licensing structure that allows legal purchases while at the same time balancing other issues,” said Del. Luke Clippinger, D-Baltimore. “It is challenging. We don’t have all the answers as of yet.”
Clippinger is both chair of the House Judiciary Committee and of a work group started by House Speaker Adrienne Jones that has focused on the state’s move to legalizing recreational marijuana for adults.
The issues facing the legislature include establishing rules for licensing, regulating and taxing the new industry. Lawmakers will also want to ensure minorities — particularly Black entrepreneurs — have a shot at entering the market. The focus is narrow but the answers are perhaps more difficult.
“I think we still have time to get those answers,” said Clippinger. “We have the time to make sure we have a structure that addresses those issues to the best of our ability.”
Decriminalization to legalization
Maryland joins 20 other states, the District of Columbia, Guam and the Northern Mariana Islands that have legalized adult-use cannabis.
Starting in January, the state is phasing in the move to legalization by expanding the decriminalization of possession of the drug.
Beginning that month, possession of up to 2.5 ounces of marijuana is punishable only by a civil fine. In July, adults 21 and older can possess 1.5 ounces or up to two plants for personal use.
The legal sale or purchase of marijuana in Maryland by July 1 will require the passage of laws governing the licensing, regulation and taxation of the industry.
Sen. Brian Feldman, D-Montgomery and the newly named chair of the Senate Education, Energy and Environment Committee, said constituents are already calling asking about when they can legally buy the drug.
“If you don’t put product out into the marketplace relatively quickly, the illicit market comes in and grabs up the market and the legal market never gets into the game,” said Feldman, who is a member of the current cannabis work group and a sponsor of legislation in 2022 that could be a roadmap to getting the new industry up and running. “That’s happened in recent states like New York and Connecticut. It’s a big problem.”
A 2019 study of the California market found that illicit cannabis sellers outnumbered legal, regulated businesses by a 3-to-1 ratio. In Colorado, it’s estimated that only 60% of the marijuana consumed in the state is sold legally. In Oregon, about 15% of the market is illicit, according to Jackson Brainerd, who covers tax and economic development issues for the National Conference of State Legislatures.
Brainerd briefed the work group on recreational cannabis issues in November.
In New York, efforts to get a recreational market up and running has lagged behind laws that decriminalized the substance. Confusion created by New York’s law sparked — perhaps in the parlance of Cheech and Chong — an Acapulco Gold rush of illegal shops seeking to establish themselves in a post-legalization New York market.
Law enforcement and governments have been loath to crack down on those illegal dealers because of the civil offenses and a desire to move away from the drug war policies of the past that resulted in a disproportionate number of arrests of Black and Hispanic people.
“The basics are, there has to be a place to go to purchase this legal product for adults over 21 that’s not the medical cannabis product but one that is taxed, regulated and tested,” said Feldman. “You have to have a license to do all that and right now until we put in place that framework, you won’t be able to purchase that legal product anywhere.”
The black market
Clippinger and Feldman agree that a failure to pass a bill to license, regulate and tax recreational cannabis will cause the black market to fill the void. The legal industry, once operational, may never fully supplant that illicit market.
One potential solution is to allow the state’s medical cannabis growers, processors and dispensaries to begin selling to recreational customers in July while the state moves to license new businesses.
“The difference between medical and rec is there is no difference,” said Jake Van Wingerden, chairman of the industry group CanMD and president of SunMed, a Cecil County-based cannabis grower. “At the end of the day, the same products that are sold in the dispensaries today to medical patients should be sold to the general public. The only difference then is do we tax it or not, and how much do we tax it or not.”
There are 18 states that started with a medical cannabis program before legalizing recreational sales. All later allowed the existing medical growers, processors and dispensaries to sell to recreational users in an attempt to tamp down illicit sales.
“If it’s just a difference of tax or not tax, the existing system works — the production, the testing, the distribution, the sales to the public with medical cards,” Van Wingerden said. “That all works. Why don’t we build on that and only differentiate the product at the register?”
Lawmakers will have to wrestle with allowing current licensees to immediately enter the recreational market while balancing the desire to ensure there is equity in the new industry.
“There are people concerned about medical processors getting a head start on everyone else,” said Clippinger. “So we’re trying to figure out how to balance out those concerns to allow for supply to happen while at the same time recognizing we want to have people join this market equitably.”
When asked if Maryland could have legal sales by July without relying on the existing medical cannabis licensees, Van Wingerden said: “No. How could it?”
A long process
Maryland’s move to legalization has been slow and complicated.
Nationally, states began the move to legalization a decade ago.
In Maryland, the use of medical marijuana was approved in 2014. It would be another three years before the first legal sales.
That first round of licenses resulted in a number of lawsuits and 2018 legislation attempting to correct the lack of diversity in licensing.
But four years later, businesses that received those licenses have yet to move through the final stages of approval and produce products.
One dispensary awarded a license five years ago only received final approval from state regulators earlier this month.
Social equity in licensing will remain a flashpoint. Lawmakers and incoming Democratic Gov. Wes Moore, the state’s first elected Black executive, want to ensure minority ownership and wealth-building opportunities. Lawmakers also want to avoid the lawsuits that hobbled the start of the medical industry.
But court rulings prohibit set-asides for minorities except under specific circumstances identified by disparity studies of the industry. Laws passed in the 2022 session require such a study similar to what was done for the medical industry.
“Until we have a disparity study that is received, there can be no new licenses issued,” said Feldman. “As of right now, as we quickly approach Jan. 1, there is no disparity study that has been completed or received by the General Assembly. That is a potential delay because that puts in place some constitutional issues in what we might be able to do within the issue of social equity licenses.”
What’s at stake
Maryland’s medical marijuana industry surpassed $508 million in retail sales in November, according to the Maryland Medical Cannabis Commission.
Cannabis sales in the state could increase to as much as $2 billion annually with the addition of a legal recreational market, according to lawmakers and industry experts.
Van Wingerden said that should result in the expansion of available licenses for growers, processors and retail stores.
“We have the existing industry, and if the market place is going to triple there’s an argument to be made that they should triple the number of licenses they give out. “I think that would be a good goal for the state to achieve. The state should give more opportunity to more people to participate. I’m not a believer in limiting people’s opportunities. I believe if you qualify and have a good business plan you should be able to effectuate that.”
But there is a glut of product in the Maryland market.
The total amount of raw cannabis flower has increased seven of the first 11 months of the year. Monthly sales to medical patients during that same period decreased from a high of $46.5 million in April to under $38.1 million in November.
Over the last two years retail prices for raw flower, which is smoked, have decreased from about $65 for an eighth of an ounce — an amount slightly heavier than a U.S. penny — to about $15-$20, according to Van Wingerden.
And while Van Wingerden is not a fan of limiting opportunity, he said creative limits on the industry could allow for the existing industry to sell now while saving market share for new businesses.
“There’s a pathway to do this,” Van Wingerden said.
The Cecil County grower pointed to states, like Colorado, that cap the amount of product that a grower can produce. Studies to determine the existing demand in Maryland could lead to setting similar caps for existing license holders.
“If we turn on July 1, you probably need to prevent existing growers from building more space and having more capacity,” he said. “If you limit my ability to expand and keep me where I’m at maybe give me the ability to expand 20 or 30 %, then what that does is preserve production capacity for new people coming online in a couple years. You’re basically saving market share for them.”