A CBE staff report

When the voters of the State of Washington historically voted for the legalization of cannabis, the campaign for initiative 502 promised to take the sale of the substance out of the hands of criminals. 

Marijuana in Washington, like in all states, has become a fact of life. The only questions remaining are “should society condemn marijuana users because marijuana is immoral,” and, should the commerce be regulated and taxed and should there be consumer protections of the product?

The question as to whether cannabis should be available when a doctor recommends it seems all but answered nationally with more than 80 percent of Americans believing that it should.  Washington and Colorado were the first states to legalize cannabis for recreational adult use in 2012 — Washington with Initiative 502 (I-502) and Colorado with Amendment 64 (A-64). It was unknown at that time what the reaction from the federal government would be. 

In August of 2013, Federal guidance was given in the “Cole memo.” It stated that state legalization efforts would be tolerated if they also enact a “strong and effective regulatory and enforcement system.” The voter initiative that passed in 2012 designated the Washington State Liquor Control Board (later re-named the Washington State Liquor and Cannabis Board) to provide this.

A bold new experiment

Washington and Colorado had embarked on a bold new experiment, and the world would be watching. Both states had medical cannabis programs already in place due to previous voter initiatives, and both states also had made legislative fixes along the way to better regulate the medical commerce. 

Colorado’s efforts to regulate medical cannabis created the Marijuana Enforcement Division of the Colorado Department of Revenue. Washington state’s attempt at reform, SB 5073, was partially vetoed by then Gov. Chris Gregoire after the U.S. Attorneys said that state workers could be considered a part of a criminal conspiracy if they participated in the program. What was vetoed was basically every regulatory or licensing provision for medical cannabis outside of law enforcement.

When Colorado legalized the recreational adult use of cannabis, it already had a regulatory system in place, as well as historical medical producers, processors and retailers who had experience at what they are doing. Colorado’s law allowed the people who had the experience to participate in the implementation of the recreational distribution system. 

When the State of Washington legalized recreational marijuana, there was no licensing for medical cannabis, because it had been vetoed. So, the State Liquor and Cannabis Board took the position that medical did not exist.

By this time there were over 100 medical retail stores in the City of Seattle alone. Many of them had been pioneers in creating a safe and compliant medical cannabis system. These businesses had every license that the medical cannabis businesses could have.

The medical industry had to work with the Department of Revenue to even be able to accept tax money, which often had to be made in cash payments. While there were certainly some cannabis shops that played loose with the rules, many shops were as compliant and legal as they could be, earning the respect of their localities. They even formed a trade organization that adopted its own best practices, which far exceeded what was required by the state.

Washington State’s regulators start from scratch

When Washington rolled its recreational adult use system out, even though there was already an operating system in place, it was determined to start from scratch.

In the State of Washington, one could argue that the Liquor Control Board was an agency in decline. For years, hard alcohol had been distributed solely by retail shops controlled by the State Agency. Almost exactly one year before legalization, in 2011 voter Initiative 1183 (I-1183) had essentially kicked the Liquor Control Board out of the alcohol business.  http://www.seattletimes.com/seattle-news/voters-kick-state-out-of-liquor-business/  By the time of the passage of I-502 came about, the state Liquor and Cannabis Board had lost roughly half of its employees.

The Board essentially received a reprieve when I-502 passed. The trouble was, no one in the agency had any experience with cannabis, and those that had experience with medical cannabis in the private sector were not generally thought of as relevant by the Liquor and Cannabis Board.

Along with medical marijuana there was, as is the case with all states, a thriving criminal enterprise involving black market drugs. Roughly half of the drug revenue of the black market is from cannabis. There were many people in Washington whose income was entirely dependent on this black market.

The passage of I-502 was writing on the wall for the black market that times were going to change.

A licensing system that is open to everyone?

The Liquor and Cannabis Board wanted to create a system that was open to everyone. In their eyes, all applicants were equal, and there were no restrictions on the number of producers and processors that could be licensed.

However, the Board did set an arbitrary cap of 334 retail licenses that would be issued. Why 334? Well, 334 was the number of stores that the old Liquor Control Board had allowed for liquor prior to voters passing I-1183.

It was decided that, because of the limited number of licenses, that they should be given out through a lottery. Of course, the black market entrepreneurs had a bit more at stake than the average applicant in winning the lottery. They also happened to be fine with breaking the law.

When the licensing window opened, each entity was allowed to apply for three (3) licenses based on three (3) locations that the entity controlled, and, was compliant with distance relationships from schools, day care centers, etc. Of course, you also had to comply with local zoning restrictions or you could not operate a business, right?

The compliant medical shops put in applications on the stores they already had open and had been given an OK for zoning,  and then been approved for a Change in Use and received a building permit. The state Cannabis Industry was regulating itself to follow the rules to the letter. It seemed, after all, that the existing medical retailers would have a pretty good chance at getting licenses. You had to have control over the property you applied for. After all, who was going to sign a lease on a building in order to be in a lottery?

Problems with the license application process

One more wrinkle: the license application fee was only $264. Along with the medical retailers, there were people who had experience working with the Liquor Control Board through alcohol sales and, of course, the black market.

Well, $264 seemed to be a reasonable price for a lottery ticket. Instead of actually having control over a piece of real estate, why not just forge some documents? Or submit many applications with the same address? Or just use your residence as the retail location address? And if you win the lottery on a fake address, would you be allowed to move it? It seemed like a reasonable risk to take.

And why put in just three applications? It seems that the more you have in the pipeline, the better the chance you have to win the lottery. Or, why not form a group with covert agreements that whoever wins the lottery, control will be granted to a single entity and the lucky winner will get a small percentage? So, let’s put in 60 applications. Of course, due diligence by the state Liquor and Cannabis Board would reveal all of this, but what if they never check?

As it turns out, the Washington State Liquor and Cannabis Board didn’t so much as pick up the phone to call a single landlord to see if anyone actually had control of the real estate in their application.

In fact, there were some applications that had 60 applicants all using the same address. One application actually used the Seattle Public Library as their address. Amazingly, this application was not rejected because it was the library and obviously not controlled by the applicant. No, it was thrown out instead because it was too close to a daycare center.

When the lottery finally took place, only a handful of medical retailers won. This set the scene for the next legislative session to resolve the question about what to do with medical cannabis.

Meanwhile, a new breed of operator entered the above-ground cannabis business. These were largely represented by those that the system was most likely to admit to a system of sales under the Federal Schedule 1 Controlled Substance — those that had no problem with bending the rules.

Editor’s note: CBE will be closely following what happens next in the State of Washington, and how these events and decisions have led to a series of active lawsuits against the Washington State Liquor and Cannabis Board.