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Montana Revisited: How Did Its Cannabis Gold Rush Pan Out?

By Abraham Finberg, Simon Menkes, Rachel Wright
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A little over a year ago, we at AB FinWright took a look at the newly-opened adult-use cannabis market in Montana and posed the question: Is Cannabis the Next Gold Rush for Montana? Now, with our 20-20 hindsight, we can see that cannabis sales have taken off in the Treasure State and the tax dollars are rolling in. But political infighting has arisen that threatens to derail the will of the voters who approved adult-use. In addition, arbitrary local approval has set many cannabis entrepreneurs on edge, wondering if they’ll have a business a year from now.

Sales: Predicted Versus Actual

When voters passed Initiative I-190 in 2020 and adult-use commenced January 1, 2022, the Cannabis Control Division (CCD) of the Montana Department of Revenue expected total adult-use sales in 2022 to top $130M. Montana’s imbibers blew that figure out of the water. By the end of last year, the Treasure State had notched up almost $210M of adult-use sales, alongside $93M of medical sales, for a total of almost $304M. With a state population of only 1,085,000, that translates into $280 of cannabis sales per capita. For context, Oklahoma sold $214 of cannabis per person in 2022, while California did only $135/person last year. (It’s estimated that 55% of California’s sales are made by illegal dispensaries, which would translate into a far more robust total of $301 of cannabis/person.)

How Has the Tax Situation Changed in Montana?

At the beginning of 2022, we noted that Montana charges a 4% cannabis tax on medical sales and a 20% cannabis tax on adult-use sales. A 3% maximum local tax was part of the new law, but only 3 counties had enacted it. Fast forward a year and 17 more counties have chosen to enact the local tax, all of them charging the maximum 3%. 10 states allow adult-use sales and have no local tax, which leaves 26 counties that have prohibited adult-use sales (the red counties).

The good news: wholesale sales are exempt from cannabis taxes, and there is no regular sales tax on retail sales, so there is no tax-on-tax (unlike California, which has sellers calculate and collect sales tax on the sale price of their cannabis products plus the cannabis excise tax they’re required to collect).

Montana does not follow Internal Revenue Code 280E and allows normal business deductions for licensed (legal) cannabis corporations, as well as pass-through entities and individuals with licensed cannabis operations.

As State Cannabis Tax Revenue Goes Up, Fights Break Out Over the Funds

Total cannabis tax revenue for 2022 was almost $46M and is projected to rise to $53M for the fiscal year 2023-2024, which starts this July 1, 2023.

Eyeing this revenue, Governor Gianforte (R) initiated House Bill HB 462 on February 17, 2023, whose intent is to funnel revenue away from state parks and wildlife as approved by the voters, and more towards law enforcement and the state’s general fund.

I-190, along with approving adult-use cannabis, specified that the first $6M in tax revenue would go for the state program Healing and Ending Addiction through Recovery and Treatment. All remaining funds would be split between the general fund 65%, various parks and wildlife programs (32%) and veterans and surviving spouses (3%).

HB 462 would see the general fund receiving 75%, law enforcement 7.5%, veterans and surviving spouses 5%, with parks and wildlife reduced to 12.5%. Many feel this subverts the will of the electorate.

On almost the same day as HB 462 was introduced, another bill was put forward, AB 420, which would eliminate the 4% cannabis tax and 3% local tax on medical marijuana. The bill’s sponsor, Representative Mike Hopkins, a Republican from Missoula, believes that adult-use tax revenues are “more than capable” of funding the adult-use program as well as the other addiction and parks and wildlife programs enumerated in I-190. The bill is being countered by the Montana League of Cities and Towns which believes that repealing that tax would create a $4.5M dent across those communities who instituted the local tax.

Both bills have been tabled in committee and will continue to be debated in the second half of the 2023 legislative session.

Retail, Cultivation & Manufacturing – Grandfathered Licenses Only, for Now

Original adult-use legislation stated that, from January 1, 2022, until July 1, 2023, only Montana medical licensees who were licensed on November 3, 2020 (or had an application pending with DPHHS on that date) might be issued a license for cultivation, manufacture or sale of adult-use marijuana. In an explicit effort to give current Montana-based dispensaries a temporary advantage over out-of-state players, the new law imposed an 18-month moratorium on all new licenses. Once the moratorium expires, new license holders will be limited to a small Tier 2 license, which restricts the amount of cannabis they can grow.

New license holders will need to show one year of Montana residency in order to even apply. That being said, there’s nothing stopping an out-of-state business from buying an existing business from a current Montana resident.

Near the North entrance of Yellowstone in Park County, Montana

In an update to this legislation, a rider was recently added to HB 128 that would extend the licensing moratorium two more years, to July 1, 2025. The bill was approved by committee on February 14, 2023 and will come before the House later in this legislative session. In a recent presentation on cannabis in Montana, Bozeman cannabis attorney Christopher Young commented, “I’ve talked to Jason Ellsworth (R, Senator, President of the Montana Senate), and I’ve been told HB 128 is going to pass.”

HB 128 Has Many Medical Cannabis Businesses Worried

The number of medical cannabis cardholders has dropped drastically since adult-use became legal, from 40,522 registered cardholders on January 1, 2022, to 22,325 on January 1, 2023, a reduction of 45%. For those dispensaries that initially chose to remain exclusively medical (18% of all dispensaries), as well as those that, for one reason or another, missed the boat to sell adult-use, they have seen a significant decline in revenue. Consequently, a significant number have been eagerly awaiting the July 1, 2023 to apply to sell adult-use cannabis. The possibility of having to wait an additional two years has them very concerned.

At a hearing on HB 128, Norman Huynh of Pacific Valley told lawmakers he believes he can’t continue to sell only to medical cannabis cardholders because he doesn’t make enough. “There are only a finite amount [sic] of cardholders left,” he stated.

An adjustment in HB 128 is being debated which would allow 16 medical shops to become adult-use that had applied for adult-use before January 1, 2022 but who didn’t complete the process. Without this adjustment, many of these medical dispensaries believe they’ll face bankruptcy.

Opt-In, Opt-Out – Fickle Counties Have Cannabis Companies Nervous

Initiative 190 legalized adult-use cannabis by default in the counties that voted for it. In 2021, the Montana legislature hammered out implementation of adult-use cannabis in House Bill 701, and one provision of this bill allows counties and municipalities to vote to opt-out of legalization.

Pray, a town near Livingston, Montana

Granite County, which became a green county when nearly 55% of voters approved I-190, chose to do just that, opting-out of adult-use sales on June 7, 2022. The county’s sole dispensary, Top Shelf Botanicals, had begun selling to recreational users and estimates 80% of its customers are now adult-use. It has responded to the opt-out by drafting a new initiative to get voters to opt-back-in to adult-use sales. Their struggle to re-win the hearts of Granite County’s voters is ongoing and appears to be an uphill battle.

While Granite is the first county to opt-out of adult-use sales, changing them from a green county to a red county, movement is under way to opt-out in Cascade County, Carbon County, Ravalli County and Flathead County, among others. The opt-out movement is gaining strength in the state and has Montana dispensaries concerned. “The opt-out provision is very problematic, and I think it’s more problematic than people recognized at the time,” says Kate Cholewa, lobbyist with the Cannabis Industry Association. “What other business would people accept being in the position of potentially losing their business every two years?”

Taxability of Discounted Products – Department of Revenue Parses the Details

Initially, it was thought that the Department of Revenue required cannabis tax to be assessed on the regular retail price of a product, even though that product might be discounted. However, the DOR now says this is not always the case. “If the discount is offered to all customers, as opposed to a discount that is offered to only a particular individual or group, the established retail price can change.”

Examples where the discounted price becomes the new, lower established retail price: every Friday you offer everyone a 20% discount on certain products, or, you offer discounts to medical cardholders only. An example of when you must charge cannabis tax on the original, non-discounted price: a discount offered to a particular group, such as veterans or students. (Why medical cardholders are not considered a particular group is unclear, but this information is from the state’s website.)

Tax Comparison to Other States

We stand by our original assessment that Montana is actually a low-tax state for cannabis operators. First of all, it doesn’t follow federal statute 280E, but instead allows the deduction of regular operating expenses on state income taxes. In addition, unlike some states like California, Montana does not charge sales tax on top of cannabis taxes i.e., it doesn’t charge tax-on-tax.

If one examines tax rates, while Montana’s adult-use tax is high at 20%, its medical tax of 4% is a low one. The local tax of 3% (compared with Los Angeles’s 10% adult-use local tax, for example) is quite low and is not charged by 37% of the counties that have adult-use sales.

And if AB 420 is passed and the medical and local cannabis taxes are repealed, Montana will truly enter the ranks of low tax cannabis states.

Kentucky Legalizes Medical Cannabis

By Cannabis Industry Journal Staff
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Following years of attempts by legislators and activists to get legal medical cannabis moving in Kentucky, the state just legalized medical cannabis last week, making it the 38th state in the country to legalize medical cannabis. In front of a crowd of stakeholders, advocates, patients and legislators, Governor Andy Beshear signed SB 47 into law along with a sports betting bill as the crowd erupted in applause.

Crowds cheer as Gov. Beshear signs the bill into law

“I have been pushing for medical cannabis and sports betting for years,” Gov Beshear wrote in a tweet. “Today, I signed these two bills into law. Team Kentucky delivers and we get results. Congrats, Kentucky.” The Cabinet for Health and Family Services is tasked with developing the regulations for medical cannabis, which are due by July 1, 2024. The law doesn’t go into effect until 2025 though. That agency will be in charge of implementing the medical cannabis program, operation, oversight and regulation for growing, retail and production.

Each state legalizes cannabis in its own weird way and Kentucky is no different. The bill does not allow cannabis smoking, but does allow for raw cannabis flower to be sold and vaporization. Qualifying conditions include PTSD, epilepsy, cancer, nausea, MS and pain management, but the bill allows for more conditions to be approved for medical cannabis prescriptions later on. This sort of foot-in-the-door approach has been used by plenty of other states and often carves a path for a broader, more sensible medical cannabis framework following legalization.

Rep. Jason Nemes, R-Louisville is a major proponent of medical legalization in Kentucky and has sponsored bills in the past. While he stressed the importance of the weird no-smoking provision, he also praised the legislature for finally getting this done. “There are thousands and thousands of Kentuckians who just want to be and want to feel better, and this will help them with that,” says Rep. Nemes.

New Jersey Moves to Remove State’s 280E Tax Code

By Jason K. Gross, Esq.
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The New Jersey legislature recently approved legislation that would allow licensed cannabis businesses to deduct ordinary business expenses on their state tax return that they are prohibited from deducting on their federal tax return, and such legislation has been sent to Governor Phil Murphy to potentially sign into law. This relates to the universally dreaded (among those in the cannabis industry, at least) Section 280E prohibition. This legislation is important because it would change current law to allow legal cannabis businesses in New Jersey to operate on more of a level playing field with other businesses in the state.

Cannabis operators and applicants are penalized by their inability to deduct certain expenses on their state and federal tax returns. The cause for this frustration is twofold. First, under federal law, cannabis is considered a Schedule I controlled substance under the Controlled Substances Act, 21 U.S.C. § 801 (CSA). Second, under IRS Tax Code Section 280E, cannabis businesses that are legal under state law are still considered drug traffickers for the purposes of federal tax law. While a related issue that is often considered along with Section 280E is whether or not it is sound public policy to continue to classify cannabis as a Schedule 1 drug, that is beyond the scope of this article.

It is important to understand the history and purpose behind Section 280E. The history is unusual in that Section 280E was enacted in 1982 as a reaction to a court case in which a convicted cocaine trafficker asserted his rights under federal tax law to deduct certain business expenses, including a portion of his rent, the cost of a scale and packaging expenses. The court agreed that the cocaine trafficker should be legally able to deduct his ordinary business expenses as part of his criminal enterprise. The federal government then created Section 280E to punish drug traffickers by removing the profit out of drug deals. Section 280E provides, generally, that no deduction or credit will be allowed in running any business that consists of trafficking any controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).1

Fast forward several decades and New Jersey has legalized medical and adult-use commercial cannabis activities. Still, because cannabis remains a Schedule 1 controlled substance, federal law prohibits legal cannabis companies from deducting ordinary business expenses and New Jersey has similarly applied the Section 280E prohibitions. New Jersey’s legislators understand the inequity in having legalized, State-compliant cannabis cultivation, processing and retail businesses, where those same businesses cannot take advantage of standard expense deductions applicable to other legal businesses.

If enacted, this New Jersey legislation would decouple New Jersey’s business tax provisions from the Section 280E rule barring deductions for cannabis businesses. Under the proposed New Jersey tax code revisions, a licensed cannabis business’s gross income would be determined without regard to Section 280E of the Internal Revenue Code.2 The legislation was approved overwhelmingly in both chambers: by the New Jersey Senate in a vote of 32-3; and by the New Jersey assembly in a vote of 69-8. It would apply to tax years beginning on January 1 of the year following the date the Governor enacts the legislation.

The State Capitol in Trenton, New Jersey

Under Section 280E, a business may not deduct expenses unrelated to its costs of goods sold (COGS), which are, generally, the costs to a cannabis business of producing cannabis products and inventory, including transportation costs to purchase the wholesale cannabis. Virtually everything else is subject to the Section 280E prohibition and non-deductible. So, all other typical costs, such as wages and salary, overhead, advertising, insurance, travel expenses and depreciation do not reduce taxable income. These ordinary expenses are still necessary for the operation of all businesses (to varying degrees). If businesses cannot legally deduct such expenses on their tax returns, their tax liabilities will increase and they will have less money to invest in their facilities and equipment, pay higher salaries and expand their operations.

The impacts of Section 280E are dramatic. An example helps to illustrate this. Consider a hypothetical C Corp. with gross sales of $1 million, COGS of $600,000 and other expenses of $300,000. Such business has a gross profit of $400,000 and net income of $100,000. If the business is normally taxed as a C Corp. at the 21% Federal tax rate, it would pay $21,000, or 21% of $100,000 net income and also $9,000 in State taxes (applying 9% State tax rate on $100,000 net income), for a total tax liability of $30,000. However, that same business in the cannabis industry would pay $120,000 in combined Federal and State taxes, with 21% Federal tax on $400,000 gross profit plus 9% State tax on $400,000 gross profit. As this demonstrates, a cannabis business may be taxed on 100% of the expenses a non-cannabis business could write off. Instead of a 30% effective income tax rate, the cannabis business in this example would have a 120% effective income tax rate. Such business that would otherwise have a profit instead would have a deficit.

Section 280E places a significant tax burden on legal cannabis operators that does not exist for other businesses. While New Jersey’s legislators cannot change the Federal tax code, they are taking action to revise New Jersey’s tax code to level the playing field. Let’s hope the Governor signs into law the pending New Jersey legislation to decouple its tax law from Section 280E.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.

References

1.  The relevant text of Section 280E provides: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

2. The full text of the legislation provides: In the case of a taxpayer that is a cannabis licensee, there shall be allowed as a deduction an amount equal to any expenditure that is eligible to be claimed as a federal income tax deduction but is disallowed because cannabis is a controlled substance under federal law, and income shall be determined without regard to section 280E of the Internal Revenue Code (26 U.S.C. s.280E) for cannabis licensees.

Looking for Quality in Security: A Q&A with Superior Protection

By Cannabis Industry Journal Staff
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In New Jersey’s legal cannabis market and other states with newly legalized cannabis, a new market for security agencies has emerged. The increased demand, much like other aspects of the industry, has created a gold rush mentality with plenty of new and old security agencies looking to earn the industry’s business.

Kelly Conklin, founder and president of Superior Protection Professionals (SPP), wants to show people in the industry the difference between quality security agencies and those that simply hire guards and adjust their marketing for a new industry. Along with his son, Kelly Jr. vice president of SPP, they have developed a team of professionals that pride themselves in quality, integrity and trust.

Here, we sit down with Kelly Conklin for a brief chat to get his thoughts on New Jersey’s legalization and the need for heightened security in cannabis facilities.

Cannabis Industry Journal: How did you get into this business and how are you helping cannabis businesses stay safe?

Kelly Conklin (left) and Kelly Jr. (right)

Kelly Conklin: Thanks for speaking with us. We started SPP primarily because of the horrible uptick in mass shootings happening in all sorts of public spaces, like churches, synagogues, schools, and we wanted to do something that would make a positive and meaningful impact on people’s lives, to help people. We had a clear objective when we started. We wanted to build a premium brand and deliver a quality product.

CIJ: From licensing and planning to running a cannabis business, security is a big part of being in this market. What’s required and what do you suggest cannabis companies do to get ahead of the curve?

Kelly: The state requires security for all cannabis facilities. Theft at every step of the way, from the cultivation to manufacturing, to transportation and the dispensary, is a big potential problem. The presence of our agents helps to prevent these crimes. We also help to provide electronic security such as cameras, alarms, key FOB entry doors, monitoring and much more. Things like these are also mandatory for the facilities. You should take a good, hard look at the state’s requirements for security when developing your standard operating procedures and make sure you have every area of security covered.

CIJ: We’ve seen reports of armed robberies at dispensaries in various parts of the country. How do you staff a dispensary to help prevent those?

Kelly: Each dispensary has different needs based on their locations and foot traffic. We tailor our services to each and every client and give them exactly what they need specific to their facility. For example, at one of our dispensaries we have 2 armed guards inside and one unarmed guard at the door scanning IDs. Whatever’s needed, we provide. We like to provide an assessment done at each facility so the client knows exactly what to do to be compliant with all local and state regulations. We insist that if we work with someone, we want them to know us, and feel comfortable with us, knowing they are in good hands. We’re a quality security agency and we want our clients to understand exactly how to operate safely.

CIJ: You mentioned “quality security agency,” what do you mean by that?

Kelly: We work hard to deliver quality. To us, that means trained professionals, be it veterans of the military or federal, state and local law enforcement. Our staff are highly trained, skilled and capable, but most importantly, they care. We’re fully insured, licensed and bonded. Quality also means good customer service. Again, we tailor services to each individual client, we want people to feel comfortable, safe and happy around us. The state conducts audits with us as required by law and we pride ourselves in our ‘above and beyond’ approach. We’re looking forward to the industry’s growth and feel that we can lend a helping hand where it’s needed. Security isn’t just a state requirement that you have to comply with, it’s unfortunately necessary in the cannabis market to keep employees, customers and products safe. We welcome folks in the industry to reach out to us, by phone (908-783-1939) or email as well and we can answer any questions whatsoever.

The Story of 5th House Farms: Economic Empowerment & Equity in Cannabis

By Aaron G. Biros
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Based in Rochester along the I-5 corridor in western Washington is 5th House Farms, a black-owned cultivation and processing company. Founded in 2016 by a BIPOC family with a tier three producer license, the company has quietly built an impressive brand success story in the state. 

Coming from an economically-disadvantaged background, Carlondo Mitchell, owner of 5th House Farms, persevered through adversity to build a successful cannabis business in Washington state. By influencing consumer behavior at the retail level with branding, they are trying to turn the concept of social equity on its head.

As a family owned and operated business since its launch, they have embodied the idea of economic empowerment in the cannabis industry. As of this writing, 5th House Farms has sold over one million vape carts, reaching the top 10 in sales for that product category in Washington and their products are sold in about 35% of dispensaries in the state. 

From Section 8 to Venture Capital

Carlondo Mitchell, Owner of 5th House Farms,

After cutting his teeth in the state’s medical cannabis market back in 2012, Carlondo Mitchell later grew in the cannabis space as a farm worker and sales representative. He ultimately took over operations of 5th House Farms in 2019, building on the same entrepreneurial and family-focused legacy that the company started with. “I learned a lot as a trimmer and sales rep,” says Mitchell. “I was the guy who would work 18-hour shifts for you, whatever you needed.” 

This month marks five years in the Washington adult use cannabis market for him. “I come from a single parent, low-income household so it was important to have an entrepreneurial mindset,” says Mitchell. Coming from humble beginnings in Section 8 housing, he has grown 5th House Farms into a multimillion-dollar business. “Now I own the company, I own the land, my family is there and we have twenty employees,” says Mitchell. 

The business has definitely become a success story, to the point that the state of Washington is working with 5th House Farms as a case study for economic empowerment and social equity. “For some people in this industry with a lot of opportunities, the path to success is pretty short and wide,” says Mitchell. “For me, and a lot of others, it’s been a lot more narrow, long and thorny. Through 5th House Farms, we want to show people what’s possible. We’re trying to show people that it is possible.” 

Innovating & Differentiating

Back in 2018, it was tough to compete in a marketplace dominated by flower, so Mitchell went in a different direction and started pouring vape carts by hand. “There wasn’t room for me at the table, so I thought I’d try and do carts and chase that. It was a day-by-day effort. He says you need to know you must work twice as hard to get noticed. “You have to prepare to be disregarded. Getting in the first store was the hardest step; you had to go through ten stores who said no to get one who said yes.” Their success came through partnering with retailers, building strong relationships, understanding consumer trends, identifying their needs and working closely with budtenders. 

Some of the product offerings from 5th House Farms

He says they treat people how they want to be treated. They sell products that they themselves would want to buy, by offering good, consistent products that are high quality and for a reasonable price. “Before you knew it, we had a prototype on the market and it took off. I do believe fundamentally that on the ground, consumers make choices with their morality. Some of our biggest retailers didn’t even know we’re a black owned business just a few months ago.” 

Economic Empowerment from the Bottom Up

Typically, when people in this industry think of social equity, they think of this top-down policy approach that tends to rely on lawmakers and regulators to develop things like social equity funds, a minimum number of licenses reserved for minority owners, license fees for equity programs and other policy approaches. Through 5th House Farms, Mitchell and his team are working on a different approach starting with the consumer. “We’re not only fighting for social equity, but also fighting to use cannabis to create equity,” says Mitchell. “Now that people are identifying us as a black farm, it’s a cool opportunity to show people what is possible. The equity is starting to come from people caring about how they spend their money.” 

Social equity, while a relatively new concept to the cannabis industry, has garnered attention in state legislatures, legalization initiatives, conferences and talking points, proving to people that they’re an ally of BIPOC stakeholders and those harmed by the War on Drugs. “To me, social equity is really about giving everyone a seat at the table. Not just trying to make things fair, but reversing this cycle of extracting from communities and instead, uplifting them.” He wants to eliminate the idea that social equity is about taking from one side of the fence and giving to the other side, rather it is about removing that fence altogether. 

5th House Farms is currently working with BIPOCANN on a product badge to be displayed on product packaging, identifying it as sold by a black-owned business. “We need a tactful way to show people where their investment is going,” says Mitchell. By influencing purchasing behavior at the retail level with branding and packaging, they are essentially trying to turn the concept of social equity on its head. 

Looking Back & Forward

In the chaos of chasing a dream and building a business, people tend to move quickly. “I would tell the version of me that’s ten years younger to slow down and trust the process,” says Mitchell. “As a young man, I was always looking for the cheat code.” He says his success came from losses, but they were also valuable lessons. When states began legalizing cannabis, it created real opportunity and real hope for a lot of people, but Mitchell says you need to stay vigilant and be mindful. “Try not to be so excited for the opportunity that you forget that you need to put in the work. I would tell others in this industry the same thing: to take your time in your process.”

Looking ahead, Mitchell says the plan for 5th House Farms was always sustained growth, to go national and then international. They’re in discussions with companies in other states about moving beyond Washington and they’re building a lifestyle brand. “The dream is to sell 100 million carts.” In talking about his future plans for the company, Mitchell spoke of Tyler Perry’s success story, going from sleeping in his car in the 90s to owning the largest production studio in the country today. “He didn’t have a seat at the table so he created his own table. We are intent on creating tables everywhere we can.” 

A greenhouse grow facility

The Science of Cultivating Cannabis: Tips for a Thriving Grow Operation

By Nathan Johnson, Ph.D.
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A greenhouse grow facility

Creating a healthy cannabis growing environment based on the science behind growing top-notch, medical-grade cannabis is essential for producing consistent results, assuming you start with quality genetics. Before speaking about the environment, it is necessary to highlight that quality and consistency has to first start with quality plant material. In this article, we will explore six key factors that make for a healthy cannabis growing environment and how regular testing allows growers to achieve consistency and quality. Keep in mind, optimizing these factors to the cannabis strains and environment they are grown in is a must.

Lighting

Lighting is the most important factor in creating a good cannabis growing environment. Cannabis plants require specific types, wavelength and exposure times to grow and produce high-quality flower. The two main types of light that are essential for cannabis growth are blue and red spectrum light where blue is primarily dedicated to vegetative growing and red for flowering. The exposure time is necessary for non-autoflower cannabis to maintain a vegetative or a flowering plant.

lightwavesincTo ensure that the plants are receiving the right type and amount of light, growers can use specialized grow lights that provide both blue and red spectrum light. They can also monitor the intensity and duration of light using light meters and timers. Regular testing of the light spectrum and intensity can help growers fine-tune their lighting setup for optimal plant growth and flower development.

Temperature

Temperature always needs to be considered when creating a strong, healthy cannabis growing environment. Cannabis plants prefer a warm, humid environment, but temperatures that are too high or too low can negatively affect plant growth and flower development. The ideal temperature range for cannabis growth is between 70-85°F (21-29°C) during the day and between 58-70°F (14-21°C) at night.

To maintain a consistent temperature in the growing environment, growers can use temperature-controlled grow rooms or HVAC systems. They can also monitor the temperature using digital thermometers and adjust the temperature as needed. Regular testing of the temperature can help growers identify and address any temperature fluctuations that may affect plant growth and flower development.

Humidity

Like other factors that require precision, humidity needs to be carefully dialed in when creating an optimal cannabis growing environment. Cannabis plants prefer a humid environment, but too much humidity can promote the growth of mold and mildew. On the other hand, low humidity can cause the plants to dry out and become stressed.

A humidity sensor mounted in a weatherproof enclosure
A humidity sensor mounted in a weatherproof enclosure

To maintain a consistent humidity level, growers can use humidifiers and dehumidifiers in the growing environment. They can also monitor the humidity level using a hygrometer and adjust the humidity as needed. Regular testing of the humidity level can help growers identify and address any issues that may affect plant growth and flower development.

Airflow and Ventilation

Proper ventilation helps regulate temperature and humidity and prevents the buildup of carbon dioxide, which can be harmful to the plants. It also helps prevent the growth of mold and mildew. To ensure proper airflow and ventilation, growers can use fans and air ducts in the growing environment. They can also use carbon filters to remove odors and other contaminants from the air. Regular testing of the air quality can help growers identify and address any issues that may affect plant growth and flower development.

Nutrients

Nutrients are a non-negotiable for cannabis growth and flower development. Cannabis plants require a balanced supply of macronutrients such as nitrogen, phosphorus and potassium, as well as micronutrients such as calcium, magnesium and iron.

To ensure that the plants receive the right amount of nutrients, growers can use nutrient-rich soils or hydroponic systems. They can also supplement with fertilizers and other nutrients. Regular testing of the nutrient levels in the soil or growing medium can help growers adjust their nutrient regimen for optimal plant growth and flower development.

Pest and Disease Management

Cannabis plants are susceptible to over 90+ pests and diseases, including insects, mold, mildew, viruses and viroids commonly infected through the environment by touch, air, water and nutrients. The most common are spider mites, aphids, powdery mildew, botrytis, fusarium and hop latent viroid. It is estimated by the United Nations that 20% to 40% of total global crop loss is due to improper pest and disease management. The cannabis growing environment is no different.

Damage from whiteflies, thrips and powdery mildew could be prevented with an appropriate IPM

While lighting, humidity, air flow and nutrients are key aspects for a cannabis growth environment, the most common overlooked aspect of growing is proper pest and disease management. Cannabis plants are susceptible to a variety of pests and diseases, which can have a significant impact on plant health and crop yields. To take optimizing a cannabis growing environment one step further, here are five essentials for developing an effective pest and disease management setup.

  1. Prevention

Prevention is the first and most important step in pest and disease management. Growers should always take steps to prevent pests and diseases from entering or infesting the growing environment in the first place. This can be done by quarantining new plants or clones, using clean equipment, sterilizing the growing area, and monitoring plants for signs of pests and diseases through both visual inspection as well as testing.

Some diseases such as those caused by viruses and viroids, require molecular based testing to identify. Growers should quarantine and test any new plants or clones before introducing them to the growing area. This can help prevent the spread of pests and diseases from infected plants to healthy ones. Growers can also use biological controls, such as beneficial insects, to help prevent pests from infesting the plants. These insects can help control pest populations by preying on them or interfering with their reproduction.

  1. Early Detection

Early detection is key to preventing an entire crop from being infected and scrapped. Growers need to regularly inspect their plants for signs of pests and diseases, including yellowing leaves, discoloration, spots and unusual growth patterns. Early detection can help prevent the spread of pests and diseases and limit the damage they cause, not to mention saving a business’s bottom line!

  1. Integrated Pest Management

Integrated Pest Management (IPM) is an approach to pest and disease management that involves a combination of preventative measures, biological controls and chemical treatments. IPM aims to reduce the use of chemical pesticides, which can be harmful to the environment and human health.

IPM involves regular monitoring of plants for signs of pests and diseases, using biological controls to prevent and control infestations, and only using chemical treatments as a last resort. Chemical treatments should be used sparingly and only when necessary, and growers should follow all safety precautions when using them.

  1. Sanitation

Taking the necessary precautions to ensure all equipment used throughout a cultivation is properly sterilized will save growers from countless headaches. Growers should keep the growing area clean and free of debris, which can provide a breeding ground for pests and diseases. They should also regularly sterilize equipment and growing containers to prevent the spread of pathogens.

  1. Record Keeping

Record keeping is essential for effective pest and disease management in the growing environment. Keep detailed records of all pest and disease issues, including the type of pest or disease, the severity of the infestation, and the treatments used. Cultivators, you will thank yourselves later! This will help identify recurring issues and develop effective pest and disease management strategies.

While there are key aspects of creating a healthy cannabis growing environment, the most common overlooked aspect of growing is on proper pest and disease management, which involves prevention, early detection, integrated pest management, sanitation, quarantine, and record keeping. By taking these steps, growers can help ensure the health and vitality of their plants, produce high-quality cannabis that consumers want and preserve their business’s bottom lines.

Adult Use Cannabis Begins in Compassionate Connecticut

By Abraham Finberg, Simon Menkes, Rachel Wright
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On January 10, 2023, Connecticut joined those states in our union that have opened their doors to adult use cannabis sales. Seven dispensaries stepped through those doors and by January 31, Connecticut had recorded $5.1 million in adult use sales, plus an additional $8.2 million in medical sales for a total of $13.3 million.

Like other states now embracing adult use, Connecticut has enacted a strong social equity program, with mixed results so far. Also, perhaps more than any other state, Connecticut has committed to protecting its existing medical cannabis patients and has put in place various mechanisms to guard their access to cannabis.

Slow Roll-Out of Retail Cannabis Licenses

Like other recently-legal states, Connecticut’s rollout of its retail licenses has not been rapid. The state’s initial goal has been to issue twelve retail licenses by lottery, with six reserved for social equity applicants. Also, the eighteen already-operating medical licensees were given the option to upgrade to a hybrid medical-adult use license, a process separate from the lottery.

Governor Lamont at a press conference on January 9, discussing the social equity focus

As of the end of February 2023, there appear to be only twelve current (approved to do business) retail licenses, with eleven of those twelve belonging to medical-adult use hybrids. The majority of the 39 retail licenses listed on the state website are still in the provisional phase, which allows them to “work toward securing a final license.”

Connecticut Social Equity

Connecticut has committed to a robust social equity program and provided an early application opportunity for social equity applicants ahead of non-social equity applicants. In addition, the Nutmeg State has reduced fees for adult-use licenses by 50% for Equity Joint Venture applications, which is where investors agree to partner with a social equity applicant. Further, the state has eliminated 43,754 low-level cannabis convictions.

Connecticut’s social equity requirements are less rigorous than those of neighboring New York and New Jersey, which may provide additional entry opportunities for both in-state and out-of-state entrepreneurs. Connecticut defines a social equity applicant as requiring that at least 65% of a business be owned by an individual with less than 300% of the state median household income in the past three tax years. Since the median household income was $79,855, that individual would need to have earned less than $239,565 annually.

Subversion of the Lottery Process

The lottery for the six initial social equity licenses was held in May 2022 followed by the lottery for the initial six general licenses, which took place in September 2022. Both were administered by a professor and department head at the UConn School of Pharmacy (the state law stipulated the lottery operator must be part “of the state system of higher education”).

15,605 applications were received for both lotteries. Unfortunately, many of the winning applicants flooded the lottery system with hundreds of applications, spending hundreds of thousands of dollars to do so. One example, SLAP ASH LLC, accounted for 850 of the 8,360 applications submitted to the social equity lottery, winning 2 provisional retail licenses. Another company, Jananii LLC, spent over $200,000 to submit 807 entries, receiving one provisional retail license. “There were individuals applying for licenses who submitted 50 applications or more to enter the lottery,” said House Majority Leader Jason Rojas, D-East Hartford. “That wasn’t our intent.” Rojas and others are looking at other options for the next lottery to try and combat the problem.

Protecting Medical Cannabis Patients

Perhaps what makes Connecticut’s adult use cannabis program most unique is its outsized commitment to protecting medical patients’ continued access to cannabis. Concerned that adult use sales wouldn’t leave enough supply for patients, the state mandated a cap of ¼ ounce of cannabis for all adult use purchases. Lieutenant Governor Susan Bysiewicz commented that this action emphasized the importance of “not losing sight of a very robust medical program.”

Lt. Gov. Bysiewicz speaks to an audience on the day adult sales became legal, outside of the ZenLeaf Meriden dispensary.

With the recent strong sales of adult use cannabis, however, patients have expressed concern about access, and now the Nutmeg State is considering further action. A bill is being considered in the state legislature which would create a state cannabis ombudsman. This individual would act as a liaison between patients and the state and would, in effect, be there to put pressure on the four licensed growers. These cultivators are required to submit a medical cannabis preservation plan to “ensure against supply shortages of medical marijuana products” and are in many ways responsible for continued patient access to cannabis.

Licensing Fees

Connecticut lottery winners’ license fees will vary from $1,000 for a micro, to $25,000 for a retail, to $75,000 for a cultivator, subject to a 50% reduction if the applicant is deemed social equity. However, once the field is open to regular applicants, the fees will become sizeable.

Retail license fees will be $1 million and cultivation license fees will be $3 million, and even with a 50% reduction for an Equity Joint Venture application, the investment will be significant. The $1 million fee also applies to any existing medical dispensary that wishes to convert to a hybrid license without going through the lottery process. The four existing cultivation companies that wish to service the adult use market and avoid a lottery process will have to pay the $3 million as well.

Tax Issues

Connecticut cannabis-businesses are obligated to pay a sales tax of 6.35%, a gross receipts tax of 3% and a privilege tax of $0.00625-$0.0275 per mg of THC, depending on the item. Other than New York, Connecticut is the only state to have a tax based on the potency of the cannabis product.

Federal Tax Subject to Section 280E

On the federal level, cannabis businesses are subject to Internal Revenue Code Section 280E, which disallows deductions and credits for expenditures connected with trafficking in controlled substances under the Controlled Substances Act, schedule 1 or 2. As cannabis is a schedule 1 drug, cannabis companies are only permitted to reduce their sales by cost of goods sold when determining their taxable income. By example, a cannabis dispensary would only be allowed to deduct the cost of the product purchased and the cost to transport the product to the dispensary, while disallowing such significant expenses as rent and payroll. All cannabis businesses must forgo expense deductions related to selling, general and administrative expenses, as they are disallowed under the tax code.

While some states like California have not conformed to 280E and allow their cannabis businesses the same deductions as other businesses, Connecticut is not one of those states. Personal income tax starts with Federal Adjusted Gross Income while corporate income tax starts with Federal taxable income as reported on line 28. There are no provisions that say Section 280E does not apply. This will mean a significantly heavier state tax burden for cannabis businesses.

Labor and Employment Issues

Connecticut state flag

Cannabis is expected to fuel significant employment growth in Connecticut, and experts project more than 11,000 cannabis jobs will be added once the market reaches full capacity. These jobs are expected to include full time and temporary positions in all cannabis verticals: cultivation, manufacturing, distribution, retail, marketing, testing, finance, accounting, legal, compliance and C-suite.

As part of its social equity program, the state has made it clear it would like to see cannabis businesses employ individuals from those communities that have been disadvantaged by the war on cannabis. Connecticut has also made it a requirement that every approved licensee enter into a “labor peace agreement” with a labor union, and that such an agreement shall be an “ongoing material condition of licensure.”

The state is focused on maintaining quality control on all aspects of its adult use cannabis businesses, including the people involved. Licenses are needed for all cannabis employees along with a special license for key employees in managerial positions. Additionally, financiers must be licensed, with a Backer license required for individuals with direct or indirect financial interests in a cannabis establishment totaling 5% or more.

Connecticut cannabis employees must be pre-trained through the state’s Social Equity Council. The state also requires that each license recipient have a workforce development plan approved by the Council “to reinvest or provide employment and training opportunities for individuals in disproportionately impacted areas.”

In Summary

No adult cannabis state has come close to having a smooth opening for it adult use sales program, and Connecticut is no exception. With well-funded groups gaming the license lotteries and medical patients concerned about their continued access to cannabis, the Nutmeg State has its work cut out for it. But with its strong commitment to social equity and its outsized commitment to protecting its medical cannabis patients, Connecticut can serve as a role model for compassionate cannabis capitalism. 2023 will reveal how the state rises to its challenges and matures its cannabis marketplace.

The Importance of Regulatory Compliance for Cannabis Delivery Providers

By Katherine Lehman
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Cannabis retail is becoming more and more commonplace in the United States. According to a consumer trends survey by North Hollywood-based cannabis brand Ganja Goddess Inc., 90% of respondents said they used online ordering and delivery services to purchase cannabis. Around 60% reported that online ordering and delivery would continue to be their preferred method of purchase post-pandemic. The pandemic hugely impacted the delivery market, pushing sales up 300% by the end of 2020. However, in a lot of states, brick-and-mortar stores remain illegal. Delivery services allow cannabis companies to reach customers in areas where dispensaries are not allowed. While cannabis delivery is an incredible opportunity for companies to reach new customers they would not otherwise be able to, following the law can be difficult in an environment with a patchwork of local laws and changing regulations. So, what do you need to know about regulatory adherence to stay ahead of the curve?

Delivery services allow cannabis companies to reach customers in areas where dispensaries are not allowed.

The short answer is it’s complicated. Each state has dramatically different laws regarding cannabis delivery, and laws can vary by jurisdiction. Some states allow full access to adult use cannabis, some only allow medical cannabis and some completely ban delivery, making it tricky to adhere to the law. There are currently 6 states that allow cannabis delivery: California, Colorado, Massachusetts, Michigan, Nevada and Oregon. Others like New York are taking the steps to allow delivery with careful regulation. With more states legalizing cannabis sales every year, delivery laws in existing delivery states are evolving and adapting to licensing changes. California introduced major changes to laws on January 1, 2023. These changes included allowing drivers to carry double the amount of product (up to $10,000 worth), no longer requiring vehicle inventory to be allocated or pre-purchased, and allowing curbside delivery for all licensed retailers. These changes to the largest cannabis market in the world showcase how much delivery is still changing and being regulated, and stresses the value of staying up to date on the latest laws and regulations.

Another aspect of delivery to consider is licensing specifically for delivery. Like regulations, licensing varies state to state and jurisdiction to jurisdiction. For example, in Massachusetts there are two types of licenses. Licensed providers must register as either a Marijuana Courier or as a Marijuana Delivery Operator. Couriers are allowed to earn a fee for delivering cannabis products from licensed retailers to consumers, and operators may buy and sell cannabis products wholesale, as well as deliver them. In Colorado, delivery requires two permits, however, a holder of both permits can still get in trouble if they deliver to an area or jurisdiction that has not affirmatively permitted delivery.

Although highly dependent on local, state and federal laws, the cannabis delivery space shows no signs of slowing down anytime soon.

A big win for delivery services came when Apple allowed cannabis delivery apps on iPhones in June 2021, with downloads restricted to states that allow adult use cannabis. Even then, a lot of individual counties or cities within adult use states still prohibit the delivery of cannabis. This patchwork of regulation makes adherence tricky, and makes certain software features like real-time driver tracking and proof-of-age verification crucial to delivery operations. With competition increasing it’s even more important for cannabis delivery operators to provide an outstanding experience for customers every time. One way they can achieve this is by improving their cannabis delivery software. According to cannabis last mile delivery management software provider Onfleet’s study, 72% of cannabis delivery operators said a delivery management tool was “critical to running delivery operations.” Delivery software also helps companies stay compliant with local regulations. Route planning allows your drivers to stay within legal zones. These platforms can also capture images of state-issued ID for age verification and record customer signatures so drivers can focus on ensuring customers are getting the best experience.

Although highly dependent on local, state and federal laws, the cannabis delivery space shows no signs of slowing down anytime soon. And if (or when) cannabis is legalized on a federal level, it would pave the way for major corporations like Uber and Amazon to enter the space – Uber is already taking steps in Canada. Whether that’s a good thing is up for debate, but delivery certainly isn’t going anywhere anytime soon. Depending on regulations and the market’s next moves, we will see a variety of delivery models and services in the coming years. Delivery services are the future of cannabis, providing customers with ease of access and personalized deliveries as well as benefiting retailers by lowering overhead costs and providing options for easy, quick customer service. Just make sure to check local laws before you confirm a delivery order, even in states where cannabis is legal.

California’s DCC Requests AG Opinion on Interstate Cannabis Commerce

By Abraham Finberg, Simon Menkes, Rachel Wright
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On January 27 this year, Matthew Lee, General Counsel for the Department of Cannabis Control, sent a letter to Senior Assistant Attorney General Mollie Lee requesting an opinion on whether “medicinal or adult-use commercial cannabis activity … between out-of-state licensees and California licensees, will result in significant legal risk to the State of California under the federal Controlled Substances Act.”

The eight-page letter, itself a detailed legal opinion in favor of interstate cannabis commerce, states strongly that the legal risk to California of such commerce is insignificant. The DCC hopes the AG will help authorize the state to negotiate agreements with other states, allowing their cannabis companies to do business with each other. Such agreements, the letter says, “would represent an important step to expand and strengthen California’s state-licensed cannabis market.”

Prices for wholesale cannabis in California have plummeted in the last year: a pound of packaged flower is wholesaling in the $1,200 to $1,400 per pound range compared with $1,700-$1,900 a pound at the beginning of 2022, a year-over-year decrease of about 25%-30%. With many growers struggling and many others forced to enter the illicit market to get a sustainable price for their product, the DCC believes opening up interstate opportunities for California growers will provide much-needed support for their large cultivation industry.

Additionally, this request by the DCC should serve as a roadmap for other states to follow in order to move interstate cannabis commerce forward through state legislatures since it appears that federal progress in legalizing cannabis has become mired in inaction.

The DCC cited new state legislation, Senate Bill 1326, which took effect on January 1, 2023, and which allows interstate agreements for both export AND import of cannabis. This is important because other states would not be inclined to enter an agreement with California if they could only receive (import) cannabis into what may be an already glutted market.

In drafting their letter, the DCC chose to side-step some “thorny” issues, including avoiding having the Attorney General delve into any discussion regarding the federal illegality of cannabis.

While many states to the east, including New York, New Jersey and Connecticut, are opening up their states to adult-use cannabis consumption, California is paving the way forward for the future of interstate cannabis commerce. The DCC’s letter is a bold move to support and strengthen California’s cannabis industry and will likely be watched closely by other cannabis states and the nation as a whole.