June 15, 2018. By Matt Okaty

The recreational marijuana industry in Massachusetts is finally getting rolling, as June 1st marked the date that the Cannabis Control Commission began accepting general applications for Marijuana Retailer and Marijuana Product Manufacturer licenses (priority applications were accepted as early as April).   It’s taken about a year and a half to get to this point – while the citizen-driven ballot measure for legalization passed in November 2016, its implementation was delayed so that the legislative and executive branches could wrap their heads around it and draft regulations to govern this new and emerging industry.  Now that a comprehensive regulatory framework is in place, it is quite possible that the Commonwealth could see its first marijuana retail location open this summer.

One of the many concerns in drafting the regulations was to ensure that the industry remains accessible to small local businesses and that it does not become monopolized by a few large corporations.  One way they attempt to do this is by creating roughly nine different license categories with limits on the number of licenses any one person or entity may hold.  Such licenses include cultivators, craft cooperatives, product manufacturers, retailers, transporters, research facilities, testing laboratories, and microbusinesses, with a few sub-categories as well.  The microbusiness category in particular is available only to Massachusetts residents and offers reduced application and license fees among other benefits.  By segmenting the industry in this way there should be a lot of opportunities for individuals and businesses with different areas of expertise to become involved.   Two additional license types that are not currently available are social consumption (for on-site consumption) and delivery (direct to consumer) licenses.   The Commission anticipates drafting regulations for these license categories in February 2019, although on-site social consumption will need to be approved by the municipality first through a separate ballot process in order for a license to be issued.

Another important concern of the regulators has to do with social justice.  Numerous studies have shown that despite roughly equivalent usage rates people of color and other minorities are much more likely to be arrested and incarcerated for using or selling marijuana.  The stigma and consequences arising from such convictions can potentially last a lifetime.  Thus, a guiding principle of the regulations is to decrease the disparities in life outcomes for these individuals by encouraging and enabling participation in the industry by people who come from communities that have been disproportionately impacted by marijuana prohibition and enforcement and to positively impact such communities.  Two programs were created to address this: 1) Economic Empowerment Priority Review, which prioritized application review and licensing decisions for individuals who are able to demonstrate experience in, or business practices that promote, economic empowerment in communities of disproportionate impact and who meet certain criteria, and 2) The Social Equity Program, which offers free training and technical assistance to qualified applicants, as well as waived application and software fees and exclusivity on social consumption and delivery licenses when those licenses first become available.

Applying for a license is accomplished online through the Cannabis Control Commission’s portal and is broken into three packets: Application of Intent, Background Check, and the Management and Operations Profile.  Although they can be completed in any order, the last packet mentioned entails the most amount of work and requires the submission of a complete and detailed business plan along with written policies and procedures covering security, storage, transportation, inventory, quality control, personnel, diversity, record-keeping, operations, etc.  Once all three packets are completed and the application fee is received the Commission has 90 days to review it and either grant a provisional license or issue a denial.

However, another major component of the application process is the Community Outreach Meeting, which must be completed within six months prior to filing the Application of Intent.  This meeting gives residents of the city or town where the establishment will be located the chance to ask questions of the applicant and to obtain information about potential impacts to their neighborhood and community.  Proper notice must be provided and there is a list of specific information that must be included in the presentation, including the type of establishment, security information, steps taken to prevent diversion to minors, plan for positive community impact, and information to demonstrate the location will not be a nuisance.  Upon completion of the meeting, the applicant must enter into a Host Community Agreement which needs to be signed by the contracting authority or authorized representative of the city or town.

What if a city or town does not wish to allow any marijuana related businesses in their jurisdiction? Municipalities may only place reasonable time, place, and manner restrictions on the operation of marijuana establishments.  Otherwise, if they wish to prohibit or limit such establishments beyond what is allowed there is a special procedure they must follow which will depend on how that municipality voted on “Question 4” in 2016 (the original ballot question legalizing marijuana).  For municipalities that voted in favor of legalizing marijuana in 2016, two steps must be taken before prohibiting or limiting marijuana establishments: 1) the bylaw or ordinance must be approved by the voters by ballot at an annual or special election, and 2) the bylaw or ordinance must also be approved by the local legislative body.  For municipalities that voted against the legalization of marijuana in 2016, no ballot vote is required, and the bylaw or ordinance only needs to be approved by the local legislative body.  However, this special provision expires on December 31, 2019 after which all municipalities will need to follow the same two-step process if they wish to prohibit or limit the type of marijuana establishments allowed in their jurisdictions.

In addition to the general state sales tax of 6.25%, marijuana transactions will also be subject to a 10.75% excise tax (on the first sale or transfer, such as from cultivator to retailer) as well as up to a 3% local option for cities and towns.   All revenue received from application and license fees, state taxes, as well as from civil penalties received for violations, will go into a Marijuana Regulation Fund to be used first for the implementation, administration, and enforcement of the non-medicinal marijuana industry (M.G.L. Chapter 94G).  Thereafter, money in the fund shall be expended for public and behavioral health, public safety, municipal police training, the Prevention and Wellness Trust Fund, programming for restorative justice, jail diversion, workforce development, industry specific technical assistance, and mentoring services for economically-disadvantaged persons in communities disproportionately impacted by high rates of arrest and incarceration for marijuana offenses.

While this has the potential to turn into a multi billion-dollar industry (Colorado had over $1.5 billion in total marijuana sales in 2017), it is important to remember that marijuana is still illegal at the federal level, and thus there is a lot of risk and uncertainty in this industry.  Many if not most banks currently refuse to open accounts or offer loans for marijuana related businesses,  and filing federal taxes can also be problematic, such as the loss of certain deductions and credits that other business are able to use to stay profitable.  Momentum seems to be building across the country, though, as nine states have legalized the recreational use of marijuana now in addition to the District of Columbia (29 states have legalized the medicinal use of marijuana).  If you are considering opening a marijuana related business, it is advisable that you first speak with legal and tax professionals.