Cannabis Investment Report – Overview of State Licensing, Taxation, and Regulation (Dec 2017)

Cannabis Investment Report | December 2017 limited number of cannabis plants (typically, 4 to 6) for personal use. (Washington is an exception, however, and makes personal cultivation a felony unless it is done by a person registered in the state’s medical marijuana database.) Unlike state medical cannabis laws, which may restrict the form of can- nabis products available, recreational laws permit production and sale of most common forms of can- nabis products, including a wide variety of flower, concentrates and infused products. State recreational laws designate state agencies to issue commercial cannabis licenses and regulate participants in the cannabis supply chain. Some of these agencies are newly established specifically to regulate cannabis, such as California's Bureau of Cannabis Control (BCC) or Massachusetts’s Cannabis Control Commission. Others are existing state agencies (and typically oversee tax or alcohol matters), such as Nevada’s Department of Taxation or Oregon’s Liquor Control Commission. These agencies also may regulate state medical cannabis industries, as do Colorado’s Marijuana Enforcement Division, Washington’s Liquor and Cannabis Board and California's BCC. State regulatory agencies issue separate licenses for different types of commercial cannabis activities. Common categories of licenses include cultivation, production, manufacturing, distribution, transpor- tation, laboratory testing and retail. A state may further provide for multiple types of licenses within a category. For example, California’s recreational law provides for 12 types of cultivation licenses, which vary according to factors such as the size of a cultivation facility and indoor or outdoor cultivation. Most states allow companies to hold licenses in multiple categories, thereby allowing vertically inte- grated cultivation, manufacturing and retail businesses. Washington is an exception—in most cases, a business is prohibited from holding licenses across categories. Even states that allow vertical integration typically prohibit the holder of a laboratory testing license from holding licenses in other categories. State laws give significant power to counties and municipalities to impose zoning and permitting requirements that may severely restrict or prohibit cannabis activities. California requires a state-license applicant to demonstrate it has all permits, licenses and approvals required under local law, and many California cities and counties have effectively banned the recreational cannabis industry. Massachu- setts allows towns that voted “No” on the state’s recreational law to ban cannabis businesses through December 2019 and requires other towns that wish to prohibit cannabis businesses to do so through a local ballot initiative. Each state has chosen to levy significant taxes on the recreational cannabis industry, and somestate laws authorize local governments to levy additional cannabis-related taxes. Nevada imposes a 15% excise taxon cannabis wholesales by cultivators and a 10% excise tax on retail sales. Oregon and Massachusetts charge a state excise tax of 17% and 10.75%, respectively, and each state authorizes local governments to levy up to another 3%. Washington originally imposed a 25% excise tax on cannabis sales at each of three different points in the supply chain— grower to processor, processor to retailer and retailer to consumer—but now charges a single 37% tax on retail sales. California imposes a 15% excise tax. All state and local cannabis- specific excise taxes are in addition to normal state and local sales tax. Although the possibility of gen- erating significant tax revenue is one reason state governments have embraced legal cannabis, some proponents of legalization argue that high tax rates will keep consumer prices high and discourage consumer transition to legalized markets. 66 © 2017 Ackrell Capital, LLC | Member FINRA/SIPC HOUSE_OVERSIGHT_024702