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Minnesota Legalizes Adult Use Cannabis: Part 1

By Abraham Finberg, Rachel Wright, Simon Menkes
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Part 1: The Current Status of Legalization

Minnesota has long been known as the “Land of 10,000 Lakes” and boasts over 14,000 bodies of fresh water covering at least 10 acres. The Dakota Sioux word for water, “Minne”, appears in the word Minnesota (clear blue water) and many locations around the state, including Lake Minnetonka (big water), Minnehaha Falls (waterfall) and Minneapolis (water + the Greek word for city).

With all this emphasis on water, it’s no wonder Minnesota’s cannabis-lovers are wondering whether the state’s new adult use legislation will issue in a river of profits for both the state and its future adult-use cannabis businesses.

Overview

In May 2023, House Bill HF100 was passed by the legislature and signed into law by Governor Tim Walz on May 30, 2023, making Minnesota the 23rd state in the union to legalize adult use cannabis. Effective August 1, 2023, it will be legal to possess up to 2 pounds of flower (2 ounces in public), 8 grams of concentrate and 800 milligrams of infused edibles.

HF100 also established the Office of Cannabis Management (OCM), which will be responsible for overseeing the state’s adult-use program. Minnesota’s medical cannabis program, now under the auspices of the state’s Department of Health, will transition over to the OCM on March 1, 2025.

The OCM website makes clear that “the regulatory framework will take time to develop and will require input from communities throughout the state” and that “the legislation proposes that retail sales for adult use cannabis in Minnesota begin in the first quarter of 2025.”

Minnesota Licensing Framework

The legislation establishes sixteen licenses including ten adult use license types: microbusiness, mezzobusiness, cultivator, manufacturer, retailer, wholesaler, transporter, testing facility, event organizer and delivery service. There are also two hemp licenses and four medical cannabis licenses.

Adult use license fees are reasonable compared with other states with application fees from $500 to $10,000, initial license fees from $0 to $20,000 and annual renewal fees from $2,000 to $30,000.

The state also will give preference to social equity applicants and notes that “The legislation prioritizes applications for business licenses from people who live in low-income areas that have experienced a disproportionate impact from cannabis prohibition and for military veterans who lost honorable status due to a cannabis-related offense. Social equity includes people who were convicted of cannabis-related offenses before the effective date of the legislation.”

Taxation of Cannabis Sales

Tax on cannabis products will be limited to 10% in addition to the state sales tax of 6.875% and any local sales taxes which may already be in place. Local governments will not be allowed to collect an additional cannabis-specific tax. Additionally, medical cannabis sales will not be taxed at all. The combined adult-use cannabis excise tax of 16.875% gives Minnesota the fifth-lowest cannabis tax rate in the country, with only four other states—Michigan, Delaware, New Jersey and Maryland—offering marginally lower rates.

Cannabis tax revenue will be split 80% for the state’s general fund and 20% to local governments. These tax receipts will fund a wide range of programs including the Minnesota Department of Health’s prevention and education efforts (including for media campaigns), data collection and grants for local and Tribal public health departments to support education, technical assistance and outreach.

The Social Equity Factor

As with many other adult-use states, there is a strong social equity element in Minnesota’s legislation. The legislation calls for automatic expungement of low-level cannabis convictions and for creating a Cannabis Expungement Board, which will review felonies for expungement or resentencing.

The law also creates a Division of Social Equity within the OCM, which is charged with providing outreach and services to communities disproportionately affected by cannabis prohibition. HF100 states that “Status as a social equity applicant must account for at least 20 percent of the total available points.” This suggests a strong favoring of a social equity application but stops short of requiring a certain amount of social equity licenses be awarded at the beginning of the program, as has been the case in New York.

At this time, HF100 states that an individual qualifies as a social equity applicant if they’re:

  • a military veteran who lost honorable status due to a cannabis-related offense;
  • a resident for the last five years of [a] … neighborhood that experienced a disproportionately large amount of cannabis enforcement [as determined by the OCM]
  • a resident for the last five years of [a neighborhood] … where … the poverty rate was 20 percent or more; or … the median family income did not exceed 80 percent of statewide median family income.

To Recap

Minnesota just legalized adult-use cannabis with the passage of House Bill HF100 and is in the early stages of rolling out its program. The first adult-use sales aren’t expected to take place until the first quarter of 2025.

Just a cursory glance at the state’s adult-use cannabis program shows Minnesota is trying for a friendly, business-positive environment for new cannabis companies, especially considering its low excise tax and moderate licensing fees. As with most other adult-use states, the social equity factor will play an important part in the issuing of licenses and must be taken into consideration.

We at 420CPA encourage cannabis entrepreneurs to examine Minnesota as a potential location for their future cannabis business. To that end, our Part 2 will dive more deeply into Minnesota adult-use with these topics:

  • Important information for those looking to start a cannabis business in Montana
  • How license applications will be scored
  • Other valuable information with which to weigh your decision.

Minnesota adult-use cannabis presents an exciting opportunity for cannabis entrepreneurs. 420CPA will help make that decision as easy as possible!

Desperate California Cannabis Vendors Seek Credit Protection

By Abraham Finberg, Rachel Wright, Simon Menkes
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Cannabis companies representing 45% of California’s cannabis sales are pushing a bill that will crack down on non-paying customers. Well known operators, including Kiva, Lowell Farms, Nabis and Sunderstorm, recently formed Financial Stability for California Cannabis (FSCC) and moved to support Assembly Bill 766.”

The bill, nicknamed “The Cannabis Credit Protection Act,” would require a cannabis licensee to pay for goods and services sold or transferred by another licensee no later than 15 days following the final date set forth in the invoice. If full payment is not received by that date, the seller would be required to report this to the Department of Cannabis Control (DCC), which in turn would notify the delinquent buyer and begin disciplinary proceedings. The buyer would be prohibited from purchasing any other cannabis products on credit until the delinquent invoice was paid. In addition, the DCC would be empowered to issue a penalty (unspecified), taking into account “the frequency and gravity of the licensee’s [past] failure to pay outstanding invoices”.

In a letter of support for AB 766, the FSCC stated, “This culture of nonpayment that has emerged in California’s cannabis market leaves businesses across the entire industry and supply chain – as well as ancillary businesses that support legal cannabis operators – with outstanding balances and unpaid invoices sometimes totaling hundreds of thousands of dollars…This ballooning debt bubble in the cannabis industry will only continue to grow without proper oversight, putting the entirety of the state’s supply chain at risk of collapse and impacting state revenue decline even further.”

Opponents of the bill acknowledge the problem of non-payment in the industry, but feel AB 766 is too heavy handed and is “ripe for abuse.” In a blog post for the international legal firm Harris Bricken, cannabis attorney Griffen Thorne writes, “[L]icensees who are reported would be legally prohibited from buying goods or services on credit from other licensees until they pay the invoices for which they were reported in full … The person making the report has to give the DCC almost no information in order to make the report. There is no hearing. There does not even seem to be an opportunity to contest the report. The second a report is made, the other side loses its rights to buy goods on credit – presumably even under preexisting contractual arrangements with third parties. This seems like an obvious due process concern and ripe for abuse.”

The number and amounts of unpaid cannabis product invoices have ballooned over time and have driven California cannabis vendors to take such extreme measures. Collections and outstanding receivables are a symptom of an industry struggling under heavy taxes and competition from illegal operations that pay no taxes whatsoever, and which now account for over 60% of all cannabis sales within the state.

In order to ascertain the current status of AB 766, 420CPA reached out to Assemblymember Phil Ting (D-San Francisco), co-sponsor of the bill along with FSCC, the Cannabis Distribution Association, California Cannabis Industry Association and the California Cannabis Manufacturers Association. We corresponded with Tania Dikho, Ting’s Legislative Director. Ms. Dikho informed us that the bill was heard in the Assembly Appropriations Committee on May 18, but it was not passed.

“It’s a 2-year bill meaning we can’t act on it until this legislative year is over, so the bill will not have another hearing [and we] can’t make any changes to it until next year,” explained Ms. Dikho.

The 2-year status is a tenuous one. The bill must be approved by the Assembly and make its way to the Senate between early January 2024 and January 31, 2024 or it may no longer be acted upon and will die a legislative death.

Businesses that would like to voice their opinion for or against AB 766 should contact their state legislative representatives.

The Hot Debate Embroiling New York’s Potency Tax

By Abraham Finberg, Rachel Wright, Simon Menkes
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On March 31, 2021, New York legalized adult-use cannabis with the passage of the Marijuana Regulation & Taxation Act (MRTA). Perhaps the most controversial portion of the Act was Section 493(1)-(3), which established taxes on the potency of cannabis products sold by distributors to retailers. Many cannabis advocates condemn this tariff, arguing that it increases the effective tax rate to such a high level that legal cannabis businesses can no longer compete against the illegal operations. A movement to repeal this tax and substitute a flat tax of 20% is gaining momentum.

Potency Tax Rates & Official Projected Total Tax Percentage

The three potency taxes are:

  1. Edibles (food & beverages): $0.03 per mg of THC
  2. Concentrates (vapes & resins): $0.008 per mg of THC
  3. Flower (loose flower or pre-rolls): $0.005 per mg of THC

The THC tax accrues when cannabis is sold from a distributor to a retailer and is paid to the State by the distributor. If the distributor is also a licensed retailer, such as a microbusiness, the tax accrues at the time of the retail sale.

Along with the state excise tax of 9% and the local excise tax of 4%, the New York Office of Cannabis Management has projected a total tax burden of 20% on an average cannabis purchase.

Potentially Higher Total Tax Percentage

Critics of the potency tax say that it drives the total tax rate much higher than official estimates. In a recent study by the Cannabis Service Team of New York law firm Barclay Damon LLP, tax attorney Jason Klimek (Klimek is also chair of the Tax Committee for the New York State Bar Association’s Cannabis Law Section) provided an analysis showing an effective total tax percentage of 31%-41% on a typical cannabis purchase.

Potency Tax Likely to Result in Higher Tax Rates Down the Line

Rachel Wright will be discussing taxes and more on October 17 at the CQC in New Jersey. Click here to learn more. In addition to possibly burdening legal cannabis businesses with higher taxes, a major problem with a potency tax is that it is product-based, not price-based. This means that, if the retail price of a cannabis product is forced down by market conditions, the potency tax remains the same and effectively becomes a higher percentage of the sales price than it was before.

Because legal cannabis businesses are competing with illegal businesses which pay no taxes, it is likely that legal prices will be forced downward in order for those businesses to compete. This is what has taken place in California, as well as in other states with a strong illicit market. It is much harder for legitimate cannabis operators to remain competitive if they’re saddled with a potency tax. Critics of the potency tax point out that, of the 38 states in which cannabis is legal, only Connecticut has a potency tax.

Increased Costs of Compliance and Other Issues

The potency tax requires producers to pay significant lab expenses for testing of products. Plus, the tax burdens small cannabis producers with higher record-keeping and personnel costs just to manage the process.

Another concern is that today’s testing equipment is not accurate enough to provide a precise measure of THC and thus a precise tax calculation. One recent report by a New York cannabis law firm showed how current testing could result in a variance in taxation of 35% as well as in a retail user consuming 35% more THC than expected:

A lab may have a Measure of Uncertainty (MU) of 3% with a confidence interval of 95%, meaning that there is a 95% chance the true value [of THC] will be within ± 3% of the stated value. Under these hypothetical facts, a farmer that produces 1,000 pounds of cannabis that tests at 20% total THC has a product that may actually range from 17% to 23%. In terms of taxes owed, the difference would be a range of $385,560 to $521,640. Presumably, the farmer would be taxed at whatever percentage is reported on the label, but would be able to choose the percentage on the label, so long as it fell within the MU… This results in at least two  problems. The first problem is that the government may be shortchanged in its tax collection. Second, there is a public health concern resulting from underreporting… if a farmer is incentivized to report the lower percentage, that could result in a consumer consuming approximately 35% more THC than expected.

State Legislators Take Action

On March 6, 2023, Assembly Majority Leader Crystal Peoples-Stokes (D) and state Senator Jeremy Cooney (D) announced Senate Bill S4831 which would replace the potency tax with an increase in the state excise tax, from 9% to 16%. Combined with the local excise tax of 4%, New York would then have a total “flat tax” of 20%.

Cooney commented, “Replacing the potency tax with an increase in the excise tax will allow licensed operators, including social equity operators, to sell competitively-priced products and be less susceptible to undercutting by illicit market prices without sacrificing revenues.” The bill is currently in the Senate Budget and Revenue Committee.

New York’s potency tax has come to be seen by many as a burden to adult-use cannabis companies. Many believe it results in increased taxation and costs of compliance and leaves the nascent legal adult-use cannabis industry in a less competitive position vis-a-vis those companies that operate illicitly. In addition, the variability of the laboratory measurements used in the calculation of the potency tax opens the door to confusion regarding the correct amount of tax owed to the state and could lead to consumers absorbing significantly higher doses of THC than expected.

Businesses that are in favor of substituting an increased rate of excise tax for the potency tax should contact their state legislative representatives and urge support for Senate Bill S4831.