Describing the direction in which the cannabis industry is headed these days is a headscratcher. But In cannabis legal news 4/23, Despite hurdles, Cannabis growth (at least the legal side) continues to grow in leaps and bounds. Business is hopeful and promising, and pessimistic and challenging, all at the same time.
1. Growing Pains
We start with good news from the 30,000-foot view: The US cannabis industry (at least the legal side) continues to grow in leaps and bounds.
The MJBiz Factbook posits that the total U.S. economic impact generated by legal cannabis sales will exceed $100 billion in 2023, and that’s up more than 12% from 2022. Of that sum actual cannabis sales are expected to reach $34bln in 2023, up from $30bln in 2022. (MJBiz Daily 4-12-23: Cannabis industry will add $100 billion to US economy in 2023.)
Adult-use legalization in the States is moving forward. That will make this picture even more robust.
But closer to ground level: There were headwinds in 2022 which persist into 2023. These obstacles are transitional and should moderate over time. But for now, industry participants need to be agile and have iron-clad stomachs. Whatever does not kill you…….
For example, Federal Reserve interest rate increases are designed to fight inflation. But they are especially damaging to a young cannabis industry where any kind of financing is already expensive and a struggle to find. (Investopedia 11-10-22: Biggest Challenges for the Cannabis Industry in 2023.)
Inflation this past year reduced consumer disposable income for cannabis, at least from pandemic induced peak demand levels.
And this occurred just as higher costs smacked business owners on all fronts, including payroll, debt, rent, utilities, water, energy, cost of supplies, etc. Lower sales volume but higher business cost creates an economic pressure sandwich up and down the supply chain.(CNBC12-9-22; Marijuana sales decline after pandemic surge )
Over-cultivation in most siloed State industries slashed the price of cannabis to record levels. This is good news for the cannabis consumer but it presents challenges to the bottom line of budding businesses (pun intended!) In Massachusetts, the cost of cannabis product is now 50% of what it was in January, 2020. That means cultivators and retailers need to sell twice as much product to make the same revenue – again, just as inflation began to bite. (Merryjane.com 4-5-23: Legal Weed Prices Sink to a Record Low of $7 a Gram in Mass.)
Nor is this merely a Massachusetts issue.
Many State industries, particularly those with maturing markets, are struggling with oversupply, even to the point of feverishly seeking new markets beyond their State borders. (AP News 4-19-23; The marijuana industry has too much pot.)
However, new State industries, such as in New York or New Jersey, are seeing the opposite: Limited flower supply, and a limited number of stores, have hiked prices to astronomical levels (Asbury Park Press4-27-23; NJ weed the most expensive .) And as readers have doubtless heard, the excruciatingly slow rollout has also allowed an illicit competitive market to take root which is proving difficult to eradicate. (Ganjapreneur 3-16-23; New York’s Slow Licensing Process Could Cost State $2.6B Over 8 Years.)
Merger activity slowed in 2022 reducing even the previously limited trickle of capital flow into the cannabis space (MJBizDaily 1-3-23; 2023 cannabis industry trends.) The cannabis industry honeymoon with SPACs (special purpose acquisition companies) seems to have ended. What seemed like a perfectly fitted high-risk investment vehicle for the high-risk cannabis industry fell victim to rising interest rates and increased regulatory scrutiny. (New York Times 6-2-22; Game over for SPACs)
Even trend-setting Colorado is having its challenges.(NBC News 9-KUSA/KTVD 11-30-22; High wears off Colorado marijuana industry as sales drop.)
The result is that 2022/2023 has seen a pullback by many companies in the business. In a first, industry jobs dipped by 2% in 2022 (MJBizDaily 4-13-23; Marijuana industry jobs dipped by 2% in 2022)
But don’t jump off the bridge just yet.
This is all just a phase. We promise you! The future still remains bright and full of sunshine, and good news is around the corner.
2. Legalization Looks Up (More states join the party)
The long and hard climb towards full-on recreational legalization continues. Voter referendums in Maryland and Missouri approved adult-use cannabis this past November.
More in cannabis legal news 4/23: Maryland sales are projected to commence on July 1, 2023 (MJBizDaily 4-10-23; Maryland adult-use marijuana sales on track for July 1.)
Red StateMissouri, the “Show Me” State, certainly showed us all. Adult-use sales commenced a mere 4 months after ballot approval. Over $125mm in cannabis sales were recorded in March, 2023 alone. State officials project over $1bln in sales for 2023. (Ganjapreneur 4-7-23; Missouri Total Cannabis Sales Reach $125M in March) Heavier than expected sales volume is already producing supply shortages but also more employment. (Springfield News-Leader 4-19-23; Missouri marijuana shortage impacts 420- celebrations.) Are you seeing this, New York and New Jersey?
Red State Kentucky became the 38th State to legalize medical cannabis with regulated sales of medical marijuana anticipated to commence in 2025. (Lex 18 3-31-23; Kentucky approves medical marijuana.)
And while we usually don’t report on pending legislation, we can’t ignore the bipartisan medical marijuana bill in Texas (The Texas Tribune 4-22-23; Expanded access to medical marijuana gains traction in Texas), approved in the Texas House or Representatives by a vote of 127-19. That bill will allow for 10mg doses for chronic pain. Texas is the motherlode of Red States. So, even if the bill is limited in scope, it does reflect a proverbial foot in the door for the Lone Star State.
It will be an interesting experiment to see if the Republican US Senators from Missouri, Kentucky and Texas slowly soften their cannabis opposition and transform their positions to viewpoints more sympathetic to their growing home State industries. Those Senators would be: Josh Hawley, Eric Schmitt, Rand Paul, Mitch McConnell, Ted Cruz and John Cornyn. Let’s keep an eye on them.
Referendums in Arkansas and South Dakota rejected adult-use in November, 2022, followed by a voter rejection in Oklahoma in March 2023.
In Delaware, the Democratic governor vetoed a recreational use bill in a prior legislative session. He still fears an adult use market. But this time around, legislative approval occurred at veto-proof margins. So, Governor John Carney took no action on the bill, and allowed recreational use to become legal in The First State. (The Philadelphia Inquirer 4-21-23; Delaware recreational weed legalized .)
The next State likely to adopt recreational use could be Minnesota. (APNews 4-25-23; Minnesota cannabis legalization moves forward.) ;
On the Federal level, we note that this year is 2023, and a new Farm Bill is in the cards. After all, Congress passes a new Farm Bill every 5 years. The 2018 Farm Bill shook the rafters with its legalization of CBD.
3. Is Interstate Commerce Coming? (Courts pave the way)
Because cannabis is prohibited on a national level, each approved State industry is supposed to stop at that State’s borders.
It remains a violation of Federal law to ship or otherwise conduct cannabis business across State lines.
For sure, removing cannabis commerce barriers between the States would result in mass efficiencies and would lower costs, pricing and improve quality and perhaps even product safety. Consumers would generally benefit. But Congress is not there yet.
It’s a reasonable argument that, because of prohibition, Congress deliberately withdrew from the cannabis business, leaving it to the States to incubate their individual cannabis industries, even to the point of enacting rules favoring in-State residents over out-of-staters. But are the Courts now shaping a doctrine which allows Federal law to raze State preferences for in-staters, even as Congress purposely rejects any participation in the business?
We last spoke with you in September about Northeast Patients Group v. United Cannabis, where the US Court of Appeals for the First Circuit rejected Maine’s state residency requirement for a medical marijuana license. The Court ruled that an in-state residency requirement was unconstitutionally protectionist against out-of-staters.
Then, in New York, the Commerce Clause argument (actually, for the legally inclined, it’s “The Dormant Commerce Clause”) was again successfully used to challenge a State regulation which conditioned equity/justice retail licenses on the applicant having a New York cannabis conviction. The plaintiff in the challenge had a Michigan cannabis conviction. The Court, on an interim motion, granted an injunction against New York, since reduced in scope, stating that an unconstitutional preference in favor of in-staters occurred when New York premised license eligibility on only New York convictions (Variscite NY One, Inc. v. State of New York.)
In Oregon, a cannabis wholesaler sued various State officials seeking to void that State’s ban on cannabis exports and imports to and from other states. The complaint specifically cites the holding in Northeast Patients to support its demand (Jefferson Packing House, LLC v. Brown, et. al.) Motions to dismiss are pending.
However, in Washington State, the Federal Court for the Western District of Washington came to the opposite conclusion. That Court held that State cannabis rules are insulated from the Commerce Clause because there is no Federally legal interstate commerce in cannabis to regulate or promote. (Komo News 2-29-23; Judge upholds Washington State’s residency requirement for pot. ) (Todd Brickmeyer v. Washington State Liquor and Cannabis Board.) The decision noted, and disagreed with, a good many of the prior cannabis Commerce Clause cases, including Northeast Patients.
Expect this doctrine to be vetted over the course of several appeals.
However, if Courts ultimately agree that interstate commerce rules apply to preempt State rules, then where does it stop? How will delicately curated intra-State equity/justice industries survive? Will they be bulldozed under by mass produced, low-cost imports?
Transport between States remains Federally illegal, of course. But recent testimony by Attorney General Merrick Garland appears to confirm that the principles of the Obama Administration era “Cole Memo” will apply. That means that the Department of Justice will take a “hands-off” approach to cannabis law enforcement. (Marijuana Moment 3-1-23: Attorney General still working on marijuana policy approach.)
If Courts are knocking down interstate trade barriers and, at the same time, frantic cultivators are determinedly pushing to sell and “illegally” ship product to new markets across State lines, is a clash coming? How will a Cole Memo oriented DOJ respond?
- At the NRA meeting earlier this month Former President Donald Trump suggested that there may be a link between the use of “genetically engineered” marijuana – whatever that means- and mass shootings. Oy!
- A “study” published by Real Estate Witch and Leafly found Portland, Oregon (ironically, home to the “Trailblazers”) to be blazing its own trail as “the best [USA] City for weed” for 2023. Apparently, this is an annual national ranking-thing.
- Season 3 of Jim Belushi’s Discovery series “Growing Belushi” premiered on April 5. The show concerns the very real business struggles of Belushi’s South Oregon cannabis farm.
- Mike Tyson makes a second appearance in our Short Takes column with a collaboration with Evander Holyfield on a gummy collection named “Holy Ears.” A picture is worth 1,000 words: Mike Tyson Holy Ears;
- Following a Vice report, Vermont is investigating possible links between Russian oligarch Roman Abramovich and multi-state cannabis operator Curaleaf. Curaleaf had previously publicly stated that Abramovich “…is no longer a creditor to or investor in Curaleaf.”
- The IRS decided not to automatically challenge cannabis business owners’ claims for IRC Section 199A deductions (“…there shall be allowed as a deduction for any taxable year…”) Section 199A is a significant Trump era tax break for small businesses which the IRS seems ok with passing through to cannabis business taxpayers – despite IRC 280E (“No deduction …. shall be allowed for any amount paid…. in carrying on any …[schedule I] …business….) Speak to your tax advisor.
- Speaking of 280E, New York enacted a law allowing for licensed cannabis businesses to deduct general business expenses and claim credits on their New York income tax returns. Previously, New York conformed with IRC 280E. Some 20 States have likewise, in some fashion, decoupled their State income tax codes from IRC 280E (assuming that, in New Jersey, Gov. Murphy signed the decoupling bill sitting on his desk by the time this update is distributed.)
That’s it for cannabis legal news 4/23
View the entire Cannabis legal news archive here
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Till next time, and stay safe!!
Best – doug