How far out can Vermont take cannabis?

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How far out can Vermont take cannabis?

Fri, 05/10/2019 - 4:02pm -- Anonymous

Ceres Natural Remedies senior manager of cultivation, Seth Gillim, tends to flowering cannabis plants in a carefully managed space. Courtesy photo.

by Bruce Edwards, Vermont Business Magazine Whether hemp and marijuana are able to replicate Vermont’s successful craft beer industry will depend on a number of factors, some of which are out of the state’s control. 

But what’s clear is that the fledgling sister industries have a foothold in the state. How far that goes depends on whether the state takes a major leap and passes a tax and regulate bill that would legalize retail marijuana sales.

Last year, Governor Phil Scott with some misgivings signed into law H511 a bill that made it legal to possess and grow for personal use marijuana for anyone 21 and over. 

Vermont is also among 34 states that have already legalized medical marijuana. 

Then there is the growing CBD market – cannabidiol oil made from hemp. Unlike its cannabis cousin, hemp used in the production of CBD is a non-intoxicating extract used to treat a variety of medical problems. 

CBD

One of the major players in the CBD market is Ceres Natural Remedies which sells 50 brands of CBD products, including its own brand, at its stores in Burlington, Middlebury and a drive-through location in Brattleboro. 

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Shayne Lynn, executive director of Ceres Natural Remedies, said 18 months after opening a medical marijuana dispensary in Burlington more and more people started making inquiries about the availability CBD. 

That’s when Ceres opened a small CBD-only store in the same building with the medical marijuana dispensary.

At first, Lynn thought it might be a trend and if it didn’t work out he didn’t have much to lose financially. 

But Lynn said he was pleasantly surprised the trend just kept on growing. “At that point we started looking for additional space and that’s how we ended up on College Street in Burlington with kind of our flagship store,” he said.

(The Burlington and Brattleboro locations also dispense medical marijuana under Champlain Valley Dispensary and Southern Vermont Wellness respectively.)

Ceres sells a variety of CBD products and brands, including its own. The company has expanded into the CBD beverage market recently acquiring organic maple water beverage maker Tretap.

Nataka White started in the hemp business in the early 1990s creating a company using Hungarian hemp fabric. Since then, White has been an advocate for promoting domestic hemp production. In 2014, he registered with the state as a hemp grower. 

“It was an opportunity for me to get acquainted with commercial production but seed was very hard to come by,” said White, who makes his home in Salisbury.

Although the 2014 Farm Bill authorized a hemp pilot program, it didn’t grant an exemption for importing good hemp seeds. 

White said since there were no “viable” or good seeds available in the U.S., he took a chance and imported sterilized seeds from France in hopes that not all of those seeds were sterilized. 

And that’s what happened. White said a few seeds turned out to be viable to start a seed crop. He has been cultivating those seeds and now expects to harvest his first hemp crop on a one-acre parcel in the fall for CBD production.

“We’re growing about 1,000 plants,” he said.

That’s enough to produce 12 kilos or 26 pounds of hemp-derived extract, which is then processed into CBD. 

White said the hemp and CBD market looks promising.

“We’re rediscovering an ancient plant and modernizing it,” he said. “There is a lot of room in front of us for how that plant is going to be developed.”

He said hemp has a variety of uses as food, fiber, energy source and as a medicinal product.

One Rutland retailer who sells CBD products said the public response has been overwhelmingly positive.

The retailer, who asked to remain anonymous, said his customers report that CBD is an effective remedy for a variety of ailments including pain relief, sleep deprivation and anxiety.

While many customers see a dramatic improvement, others experience little or no effect, he said.

The Rutland store sells CBD in liquid, cream, salve and capsule form, purchased from three Vermont growers.

“I’ve never seen a product like it, how it’s taken off,” he said.

Two colleges in the state are already offering courses in cannabis: Vermont Technical College and the University of Vermont have created certification courses.

VTC is offering a CBD and greenhouse cash crop certificate program. The nine-day course will start in the fall and cost $1,350. 

UVM’s Cannabis Science and Medicine Professional Program offers a non-credit certification. Tuition for the seven-week course is $2,250.

Legal Pot?

S.54 would create a tax and regulate retail market for marijuana beginning in 2021. 

It establishes licenses and fees for cultivators, wholesalers, testing labs and retailers.

The bill also creates a three-member Cannabis Control Board. A companion House bill calls for a five-member board.

Chart courtesy of Leafly: According to Leafly, a cannabis information resource, total tax revenue from adult-use states in 2018 totaled more than $1 billion.

Instead of imposing the state’s sales tax, S.54 imposes a 16 percent excise tax at the retail level, plus a local option tax of 2 for communities with retail cannabis stores. 

That’s far less than the 26 or 27 percent tax recommended in December by the Governor’s Advisory Commission on Marijuana.

Calculating a 16 percent excise tax, the Joint Fiscal Office is estimating that by the third year of operation, a tax and regulate market would generate between $8.6 and $16.6 million in tax revenue. 

License fees for various cannabis businesses would generate at a minimum $650,000 a year starting in fiscal year 2021, according to the JFO, which based its estimate on the Massachusetts experience to date.

The JFO also issued two cost estimates to operate the Cannabis Control Board. In the year 2022, a five-member board would cost $940,000 and a three-member board $890,000. Board members would be full-time state employees.

Under a five-member board proposed by the Senate Judiciary Committee, each member would be paid $53,000 a year. The Senate Appropriations Committee plan calls for the Board chair to be paid $105,000 a year and the two other members $80,000 a year each. In addition, both committees would hire an executive director and assistant at a salary of $106,000 and $70,000 respectively. 

Sen. Dick Sears of Bennington, chairman of the Senate Judiciary Committee, is one of several sponsors of S.54, “an act relating to the regulation of cannabis.”

Sears compares the current situation to the prohibition era on alcohol where people were still able to buy and sell booze without any oversight.

He said legal retail sales also make sense because neighboring states are moving or have moved in that direction, including Massachusetts.

“It means Vermonters will be going down there buying a product presumably bringing it back here and paying taxes in Massachusetts rather than in Vermont,” Sears said.

If passed and signed into law by Gov. Scott, he said the law would take effect in 2021.

Rep Ron LaClair, ranking member of the House Government Operations Committee, also said the realty is cannabis is here to stay. He said the challenge is to legalize retail sales the right way.

“There are some that are looking to grow this so that it can be looked at kind of like our microbreweries,” LaClair said. “I’m not quite sure I’m in that camp.”

LaClair said there is a lot to be considered including prevention and highway safety. 

Highway safety is also on the mind of the governor. Scott said recently he would not sign a bill unless it included saliva testing for drivers.

In addition to education and highway safety, LaClair said there is the risk to financial institutions that are willing to take in doing business with an industry that the federal government still considers off limits. 

“There’s some work to do on this thing,” he said. “There’s no question about that.”

LaClair also expressed concern about the ripple effect the retail market will have on the five current medical marijuana dispensaries that operate in the state.

“They’ve seen anywhere from a 25 to 30 percent decrease in business since July 1 of last year (with) the legalization of the home grown,” he said.

LaClair said lawmakers are looking at ways to protect the dispensaries which have made a significant financial investment.

He said one proposal would allow the dispensaries a head start to sell retail marijuana before the rest of the retail market jumps in.

Prevention

A significant concern moving forward is whether a legal market would result in an increase in addiction, especially among young Vermonters.

Sen. Ginny Lyons, chair of the Senate Health and Welfare committee, would like to earmark money raised from cannabis sales toward addiction education and treatment programs.

“This is going to be a major conversation going forward,” Lyons said. “When we had our discussion in committee we felt if we were going to have prevention programs, especially for young kids … they should be funded from the things that are actually causing the problems.”

She said revenue from cannabis, tobacco, alcohol sales should be looked at and invested in prevention.

However, Lyons said proponents of the cannabis bill were “very adamant” that cannabis revenue should only be used for regulation.

“So this is the beginning of what I consider to be a relatively intense conversation going forward,” she said.

Jobs, Revenue

With legalization of marijuana in the state growing more likely, there are questions about the economic impact of the entire cannabis industry. On the plus side, the industry is expected to add jobs and tax revenues. 

There are also costs associated with regulation and enforcement. Questions have been raised about the need to find an accurate method for police to detect drivers under the influence of THC, the psychoactive ingredient found in marijuana.

According to Leafly, a cannabis information resource, legal marijuana sales last year increased 34 percent nationwide, to $10.8 billion; there are now more than 211,000 full-time cannabis industry jobs in the U.S. with 64,389 added in 2018 alone. 

Because the federal government considers cannabis jobs illegal, the Bureau of Labor Statistics does include the industry in its North American Industry Classification System (NAICS). Leafly turned to economists who devised a benchmark for counting jobs in the industry.

There are 10 states, including Vermont, and the District of Columbia that have legalized adult use of marijuana but only seven of those states regulate and tax retail sales, according to the Leafly’s “Special Report: Cannabis Jobs Count.”

The report listed Washington State, California and Colorado the top seven states when it comes to cannabis revenue (taxes, licenses, fees). In 2018, Washington took in $319 million in tax revenue, California $300 million and Colorado $266 million. 

Since 2014 when Colorado became the first state to legalize marijuana sales, the state has taken in nearly $1 billion in tax revenue, according to the Colorado Department of Revenue.

Financing Hurdles

At a recent meeting of the state’s regional economic development corporations, interested parties brainstormed ways to help the fledgling hemp and CBD businesses.

Like any business, access to capital is the key to starting and growing any business, said Adam Grinold of the Brattleboro Development Credit Corp.

Grinold, who also serves as the current president of the 12 regional development entities, said hemp farmers and CDB businesses have limited access to capital. Because hemp is a species of cannabis, federal law barred federally insured banks and government finance agencies from lending to hemp-related businesses like growers, CDB processors, wholesalers and retailers.

Under the 2014 farm bill, a pilot program was developed for states that allow the cultivation of industrial hemp. The pilot program remains in place until new rules are written for the hemp exemption in the 2018 bill, said Cary Giguere, director of public health and agricultural resource management with the Agency of Agriculture Food and Markets.

While the 2014 Farm Bill allowed hemp cultivation as long as the business was registered with the state, the 2018 bill goes further, delisting hemp as a controlled substance. However, it still requires a business to register with the state, certifying the growing location, variety of hemp, and end purpose, Giguere said.

He also said the Agency of Agriculture is “developing standards for consumer protection and quality control so when you’re buying a CBD product it says full spectrum or broad spectrum or whole plant extract you know what you’re getting.”

Giguere said the agency will also have protocols in place for testing.  

To qualify for the hemp exemption under the farm bill, the THC content of the hemp cannot exceed 0.3 percent.

Now banks, credit unions and other lending institutions are awaiting regulations at the federal and state level.

Grinold said given the passage of the farm bill it seemed like a good time to meet with interested parties, including lenders, Agency of Agriculture, USDA, Vermont Sustainable Jobs Fund, hemp growers and processors. A representative from the office of Sen. Patrick Leahy also attended.

“Clearly there’s a desire for everyone to understand what is the current market, where’s capital available,” Grinold said, “and to be able to support entrepreneurs who are trying to enter into this sector is a role the RDCs as a statewide organization feel strongly about and we’re excited about what we learned.” 

He said there’s an opportunity for Vermont to be a leader in the national market for safe and reliable CBD oil.

Vermont is considering legalizing retail marijuana but Grinold said the meeting was strictly on hemp and CBD. He said marijuana was not on the agenda.

SAFE

When it comes to legalized marijuana sales, a spokesman for the National Cannabis Industry Association said progress is being made at the national level to end the lending prohibition.

Morgan Fox, the industry media relations director, said the Secure and Fair Enforcement Banking Act (SAFE) was introduced in the House this year and passed the House Financial Services Committee on a vote of 45-15 with 11 Republicans joining Democrats.

Fox said a Senate version of the bill is expected to be introduced.

“It’s a narrowly tailored bill that basically provides a safe harbor for financial institutions that want to work with the cannabis industry,” he said. 

Fox said the bill makes reporting less burdensome, allows banks to provide services to cannabis businesses without the fear of federal prosecution and creates a number of other protections for a variety of financial institutions.

“It would allow cannabis retailers to open bank accounts,” he said. “It would still be up to banks to determine whether they want to work with the cannabis industry but it would make it a lot easier and safer for them to do so.” 

He also said “it would greatly increase access to capital.”

Fox said another related impediment to the industry that needs fixing is the tax code.

Currently, a business engaged in cannabis cannot take the usual business deductions afforded other businesses, he said. 

Bankers’ View

Chris D’Elia of the Vermont Bankers Association, said passage of the SAFE Banking Act would take away the concern about doing business with a cannabis-related business, including medical marijuana. D’Elia said that’s a path Vermont banks have been unwilling to take for good reason.

As far as hemp goes, he said the 2018 Farm Bill takes hemp out of the cannabis equation. 

In 2013, the Obama administration issued the Cole Memorandum which served notice that given its limited resources the Justice Department would not enforce federal marijuana laws in states that had legalized marijuana.

D’Elia said the Cole Memo in theory gave banks the go ahead to provide banking services to cannabis-related businesses provided banks followed certain procedures and filed what’s known as Suspicious Activity Reports or SARs. The problem, D’Elia said, is bank examiners had wide discretion in determining whether a bank was operating within the rules, subjecting banks to potential sanctions or even prosecution.

The issue became moot when the Trump administration rescinded the memo last year. 

Because marijuana is a Schedule 1 narcotic, D’Elia said after the memo was rescinded it created more uncertainty for banks. 

“At least here in Vermont, they have kind of stepped back and said we’re not going to provide access to banking services,” he said. 

D’Elia said based on his information only between 450 and 500 banks and credit unions across the country were providing services to cannabis-related businesses.

“Our banks, call it a little bit more of a Yankee conservatism  whatever it may be, they’re not willing to go down that road yet,” he said. “They don’t feel comfortable with the federal regulators … and not knowing what the outcomes of that discussion might be.”

He said the real solution is the SAFE Banking Act, creating a safe harbor for banks to provide services to businesses in states where either medical marijuana or tax and regulate marijuana is legal

He said with hemp no longer a banned substance Vermont banks are now willing to consider providing services to hemp-related businesses. 

“I’ve got a number of banks that have started to go down that road,” D’Elia said. 

He added, however, banks still must remain cautious to ensure that the hemp doesn’t contain a THC level that exceeds the legal limit. 

Acknowledging the political change, the Vermont Economic Development Authority is moving toward providing financing for hemp-related businesses.

Cassie Polhemus, VEDA’s chief executive officer, said with the 2018 Farm Bill exempting hemp as a prohibited crop, VEDA will look at hemp loan applications. She noted that the state Agency of Agriculture must first come up with a plan that complies with rules that have yet to be promulgated by the U.S. Department of Agriculture. 

“We’re going to do it very cautiously,” Polhemus said. “We know there’s a lot of interest out there.”

Bruce Edwards is a freelance writer from Rutland.