A much-hyped letter from California cannabis regulators to the state’s attorney general raises an intriguing question: Is the Golden State teeing up interstate trade in marijuana?
Top officials from the state’s Department of Cannabis Control (DCC) on Jan. 27 sent an eight-page letter to the office of California Attorney General Rob Bonta, laying out the legal argument for how California could sidestep federal obstacles if state officials decide to green light exports of cannabis across state lines.
The letter raised eyebrows among marijuana executives and legal experts, with industry players calling it a major development – but one that would take time, if it ever does come to fruition.
One key sticking point: California would need to find another state willing to take its marijuana, said Hirsh Jain, a California-based cannabis consultant.
“I know that there’s a lot of excitement,” he added. “But if you really think through the mechanics here, it’s unlikely anything will happen this year.
“California needs a dance partner.”
In their letter to the attorney general, the DCC’s executive director, Nicole Elliott, and general counsel, Matthew Lee, asked Bonta to issue an opinion on whether exporting marijuana to another state would “result in significant legal risk to California” under the federal Controlled Substances Act.
Elliott and Lee, for their part, argued “it will not.”
They noted the Commerce Clause of the U.S. Constitution bars Congress from restricting how states regulate their own interstate commerce.
Marc Hauser, principal of Hauser Advisory, a California-based consulting firm, sees this as another step in normalizing marijuana commerce across the country.
“It’s a big deal and important for the industry,” he said.
This comes after California Gov. Gavin Newsom in September signed Senate Bill 1326, which would create interstate commerce pacts if only one of the following criteria are met:
- Federal legalization, which is not imminent.
- A U.S. law is enacted that bars the federal government from spending money to prevent interstate marijuana shipments.
- The U. S. Department of Justice issues an opinion or memo allowing interstate marijuana commerce.
- The U.S. attorney general issues a written opinion that state law pursuant to medical or adult-use commercial marijuana activity will not result in “significant legal risk to the State of California under the federal Controlled Substances Act, based on review of applicable law, including federal judicial decisions and administrative actions.”
‘Bull by the horns’
Other states have taken steps to permit interstate commerce, though most depend on changes to federal cannabis law:
- In Oregon, a recently filed lawsuit challenging state law could help move the needle to allow state-to-state sales.
- New Jersey Senate President Nicholas Scutari filed a bill in August that would permit the governor to authorize interstate marijuana trade.
- Washington state lawmakers approved a bill in January that would allow interstate marijuana commerce if federal law changes.
For large-scale growers such as vertically integrated California cannabis company Glass House Brands, the move could prove profitable.
“This makes all the sense in the world,” said Graham Farrar, president of the Santa Barbara-based business.
“The fact that California – the fifth-largest economy on the planet and the largest cannabis economy in the world – is taking the bull by the horns and saying, ‘We want to make progress to get consumers what they want by growing plants in the right environmental place.’ … This is awesome,” he added.
Farrar noted that the states – versus Uncle Sam – have spearheaded major developments in marijuana reform, from medical cannabis legalization to adult-use markets.
“Literally 0% has been led by the federal government,” he added.
“So there’s no reason to think that interstate commerce is going to be any different.”
Not so easy
However, while California’s move signals another step toward allowing cannabis companies to sell marijuana beyond state borders, the logistics of how it could work are unclear.
California’s Emerald Triangle region has long supplied the country’s illicit market with outdoor-grown cannabis, and some of those growers have gone legit and operate in the legal market.
Those cannabis growers would like to see the entire country opened up to legal trade to help ease overproduction.
And they would also like to establish an appellations program where California cannabis is treated and marketed much like France’s famed bubbly, Champagne.
But right now, if California could find a willing commerce partner, it would have to be a bordering state since marijuana air travel is regulated at the federal level.
But that, too, could prove problematic.
Oregon’s market is glutted. And there no signs that Arizona or Nevada need additional cannabis.
Another key wrinkle: Why would any state forgo the tax revenue and jobs and economic benefit of growing and manufacturing marijuana within its own state?
“The states are going to very strongly oppose this, whether it’s done politically or it’s done through the courts,” Hauser said. “Because they want to retain those tax dollars.”
He pointed out the states with mandatory vertical integration wouldn’t want this because it would disrupt the entire business-licensing structure.
“It becomes a lot more competition for the cultivators and manufacturers within the state,” Hauser said. “It can create a race to the bottom.”
That’s a problem the industry is already experiencing, as mature recreational cannabis markets across the country report falling prices and oversaturated flower sectors.
Could take time
Although a few other states with legal marijuana markets have taken steps to set up interstate trade, most have not.
Even if California does get that partner to dance, that state must agree to all the terms in SB 1326.
Among other things, the new law stipulates that the partnering state must meet all the same standards as California’s cannabis market, including testing, packaging and labeling.
“That’ll be a real obstacle,” Jain said.
“Just imagine a world in which California imposes really rigorous sustainability requirements on its cultivators, then it will have to impose those requirements on cultivators in other states or it will get a lot of flak right from its own cultivators.”
And if California’s cannabis market is known for anything, it’s for being the most heavily regulated market in the country.
“There’s going to be many diverse interests in both states that have different takes on these questions,” Jain said.
“And that will slow down the process of establishing agreements.”
Jain added that even after the governor comes to an agreement, he must submit it to a legislative committee that has 60 days to look at it and provide feedback.
Then the agreement must be posted on the state website for 30 days.
“This will take a really long time,” Jain said. “This is a signaling of the trickle that is to come that will take many years to actually build into a river.”
Bart Schaneman can be reached at bart.schaneman@mjbizdaily.com.
