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Cannabis Laws and Regulations: Q&A with Adam Fine of Vicente Sederberg

By Kevin Cassidy, Adam Fine .

Every cannabis business should consult an experienced cannabis attorney for up-to-date information about new cannabis laws and regulations. Citrin Cooperman’s Cannabis Advisory Services (CAS) team sat down with Adam Fine (AF), Partner with Vicente Sederberg’s cannabis practice, to get his expertise on the new Massachusetts (MA) cannabis bill that was signed into law on August 11, 2022.

CAS: What are the highlights of the new MA cannabis law for companies?

AF: Let me first give a little bit of context. The bill is groundbreaking in Massachusetts primarily because the legislature of the Commonwealth is slow to act on issues, especially relating to cannabis. This is the first piece of legislation that changes cannabis law since it passed in 2016. Legislature ensued in 2017 attempting to change the law, and despite a lot of pleadings from many stakeholders and different groups, including governmental agencies, the Commission, and others, it took the lawmakers a while to get around to it. But it is quite a comprehensive bill. So let me tell you what it does.

There are primarily four significant areas of this legislation. One is that it allows for social consumption, which was allowed under the enabling legislation originally. But the secretary of the Commonwealth previously had stated that there were technical flaws in the drafting of the legislation, making it impossible to do the ballot initiatives required under the enabling legislation or to implement them so this new law fixes that. And for the first time, we will now have the opportunity to have social consumption lounges. So, the law fixed some of the problems with the prior law such that local cities and towns could have opt-in ballot initiatives to allow for social consumption.

Another important aspect of the law is the Host Community Agreement (HCA) reform legislation, which is a long time coming in the Commonwealth. As many of your clients and individuals that you work with have probably read about, we had a big controversy around host community agreements in the Commonwealth primarily because cities and towns were extracting large sums of money from these companies in order for them to be situated in the city or town. We are the only State in the entire country that mandates community host agreements or community benefit agreements, and that is a contract between the city and the town.

And for the operator to operate there, it functions as a license. What was occurring was that the cities and towns were asking for large sums of money in excess of what many in the industry were asking for. The agreement was intended only to reimburse the city or town for the costs imposed upon the municipality for siting the marijuana establishment there, but in practice, we felt that it violated the law. There was a cap of 3% of gross sales, but cities and towns were consistently exceeding that cap and finding ways around it. Many people felt that was making the industry less equitable, just allowing larger companies with deeper pockets to enter the marketplace to the exclusion of the less well-heeled, smaller operators, social equity applicants, et cetera. So, what the law does is completely eliminate the fee after eight years; HCAs will no longer be able to impose a fee at all and during that eight-year period, all these HCA’s that are currently in existence will need to be reformed.

To comply with the new law, which states that the city or town cannot charge more than its actual impacts on the city or town, they are going to have to document them. And if they attempt to charge these operators more and violate the law, they could be subject to private civil lawsuits, including awarding of attorney’s fees to the operators. In addition, the Cannabis Control Commission now has authority to enforce this aspect of the law and review the agreements for compliance with the law. This is a big change.

The third major aspect of the law is social equity. Now we have the creation of a social equity fund, which will be funded through taxes from the General Fund. That is a huge step forward for the Commonwealth because there has been a desire to help those that have been negatively impacted by the years of prohibition, and social equity applicants and economic empowerment applicants will now have meaningful participation in the industry. These groups will now be able to apply to get funding and we will see how that is going to be established.

Along with that is what I call both the carrot and stick on the cities and towns to host social equity applicants. The carrot being that the tax law has changed. Now, if a city or town hosts or provides a host agreement and allows a social equity applicant or candidate in this business to operate in the city or town, they will get more tax revenue from the state fund.

Whereas now cities and towns are getting 3% of sales, if they have a social equity operator, they will get an additional 1%, for a total of 4% of sales. That is a bit of an unknown provision which is really important. It is going to financially incentivize cities and towns to have social equity applicants operating in their municipalities. And the important thing to know is that it does not raise taxes on anybody. It is reallocating taxes that are isolated currently for the state and the General Fund and now will go back to the cities and towns that have an operator.

The stick part is that the cities and towns really need to implement new policies and show that the policies promote and encourage social equity. And there are consequences if they do not implement this. Namely, they cannot get any fees from the HCAs if they do not have policies in place to promote the intent of the law as it relates to social equity participation.

The fourth area to highlight is an important tax change, which I know many of your clients will be happy about. That is the decoupling of 280E state taxes from federal taxes. This means that the burdens of 280E will not be applied at the state level; that is huge.

Companies are getting a small break on taxes here as well. We hope that break will be passed on to the consumer in terms of better products and lower prices. We know that the marketplace is becoming more competitive and that wholesale prices appear to be on a downward trend.

CAS: How do the social consumption sites fit in with the new law’s social equity focus?

AF: That is a good question. We do not know how the Commission is going to undertake revamping regulations as it relates to really everything in this new law. We are going see that coming later in the fall. From a regulatory perspective, we will see what advantages are afforded to social consumption license types. I do think that there are incentives created under the law for cities and towns hosting social equity operators, so that will hopefully carry over.

The challenge of the social consumption licenses is that we do not really have a successful model for this anywhere in the United States. People should not think that these licenses are going to be game changing. There is certainly an aspect that can work and may be profitable, but it is often best not to be the guinea pig on some of these license types.

There are going to be companies that will make a profit with this type of license. But who are those companies? What is the sales channel? What are you able to connect? What kind of volume are you going to be able to do and will the regulations be stringent? We know that social consumption is brand new and that it is going to be overregulated even more so than other license types.

There are a host of considerations around insurance and liability, especially for liability when you know people are consuming at your licensed facility and then go out on the roads; and it is even worse if they have consumed alcohol with marijuana. Any one of those things alone is a violation under the influence laws. But it really will create problems if people start getting into accidents and injuries. It is a novel license that is going to have to be navigated carefully, both by the operators and the regulators. And how do those interplay with social equity and what will that look like? We will see that over time.

But I will say that the interesting question is around delivery or courier licenses. Those are exclusively designated right now for social equity and economic empowerment operators and those have similar challenges around margins and making licenses profitable. Just because they are exclusive does not mean they are going to be profitable. So those are the challenges we are seeing right now with delivery. I think they will figure it out over time, but the length of the exclusivity period matters. Is the current exclusivity period long enough? Some say no. But some companies certainly want to get into the space. Only time will tell if these preferences will carry over and to what degree it relates to social consumption.

CAS: Why do you think 280E was scrapped at the state level in this legislation?

AF: I think that lawmakers took into consideration the increasing challenges these businesses are facing. There is a high regulatory burden on these businesses, and it costs a lot of money for them to just stay compliant at the state level in addition to the high effective tax rates these companies face because of 280E.

There is not much that state lawmakers can do. They cannot change federal law and can only control what is in their state. We have seen this in a number in other states, so there's precedent for it. I do think that it will make a difference. And that is to the Commonwealth’s credit, because it does not help them financially to eliminate 280E. Currently, the Commonwealth is doing well and is already at a point of an overall 20% tax rate at the point of sale, which is high. Because of that and the challenges of the illicit market, you want to create policies that help the regulated market to compete with the illicit market. Now not all taxes are the same, but it all adds up for companies and impacts their ability to bring products to consumers that are competitive with the illicit market. That all played into the Commonwealth’s decision, but it was just the pressure from the industry, and I think common sense prevailed.

CAS: Do you expect any additional changes being contemplated in the Commonwealth?

AF: Legislatively, nothing immediate, but you never know. I mean after all these years the legislature now will want to do more. But all the issues are not related to cannabis, so I do not think additional cannabis legislation is coming anytime soon. The legislative cycle is, as I mentioned earlier, slow in the Commonwealth and it is deliberative. So, the changes that people need to be mindful of are the regulatory changes that will come. And we should not forget that the regulators have a lot of power. They have broad delegation of authority to implement regulations. We are going to see changes that come about as a result of regulation changes, so that is the important thing to look forward to. And I think there can be a lot that can be gained or lost depending on your perspective around these potential regulatory changes relating to any aspect of the current law. An example of the kind of hot issue that I think we're going to see talked about is the idea of considering a license cap, especially as it relates to cultivation licenses. This is because we do not want to see the marketplace plummet in the Commonwealth like we saw in western states such as Oregon and Washington, where the wholesale markets are depressed to a point where the illicit market does not flourish with a lot of over-capacity. You then see regulated products going out the back door of licensed operators, which is a disaster for everybody. I think there will be pressure on regulators to make sure we are not in the same situation that we saw out west in terms of supply.

For more information on how Citrin Cooperman's Cannabis Advisory Services Practice can assist you with your cannabusiness, please reach out to Kevin Cassidy at kcassidy@citrincooperman.com.

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