Editor’s note: This is an ongoing analysis of what happened to Washington State’s marijuana retail licensing system. In order to understand what has happened up to this point, see Part 1 and Part 2.

A CBE staff report

The Washington State Liquor and Cannabis Board was tasked with the original licensing of recreational adult-use retail under I-502, Washington’s marijuana legalization citizen’s initiative. and the licensing of historical medical marijuana dispensaries under legislation that Washington passed in 2015 — SB 5052.

The I-502 process was a lottery that was gamed heavily with little attention paid by the Liquor and Cannabis Board as to the validity of application (see part 1). The SB 5052 is in process. The problem is that it is not, in fact, moving over medical retailers into the Board’s licensing system as the Legislature directs them to. In fact, it appears to have the converse effect of making sure they do not (see part 2).

A finite number of new retail establishments, not enough to move over the existing medical dispensaries as SB 5052 envisioned, were allowed in about 120 localities. Each got a specific number of new licenses assigned by the Liquor and Cannabis Board.

In the City of Seattle, 21 were granted. There were 48 compliant medical marijuana dispensaries identified by the City. Yet, due to the licensing process of the Board, only three (3) were granted to the historical medical retail outlets.

The rest were granted to new entities that did not meet the standard set by SB 5052; they simply knew how to look like they did. There remained 45 dispensary locations in limbo when notice was given that Seattle was going to close. Seattle is the largest city in Washington, and it made sense that it was the most attractive to apply in, and therefore, first to close.

A race to apply

The City of Seattle was only the first locality to close. At the time of close, there were more than 60 “Priority One” applicants in the city and even more Priority 2 and Priority 3. All but 21 got notices that they had to move their “proposed location” to another jurisdiction.

The Seattle applicants that were displaced descended on the other population centers. Olympia, Pierce County at Large, Bellingham, Tacoma and others closed soon after. This displaced other applicants and the race was on for the remaining localities in the state.

The word of the state retail caps and the closing of localities spread. Applicants realized that Priority Two and Priority Three were going to be worthless with all of the displaced Priority One entities descending on the rest of the state. Many of these applicants became aware that their only hope was to cobble together an entity that could pass as Priority One.

4 elements for a Priority One designation

You need four basic elements for a cobbled-together Priority One designation. You need:

1. A business entity.
2. Someone to own a percent of that company that applied for a retail license in the first round of 502 licensing.
3. You need the same for someone who had “operated or was employed by a collective garden prior to Jan. 1, 2013;” and,
4. You need to have some documentation from the “collective garden” showing no outstanding balances with the Department of Revenue and a master business license pre-dating 2013.

There were lots of unsuccessful retail applicants from the first round of licensing under 502 that were looking for any way to cash in on this opportunity. The definition of a “collective garden” under RCW 69.51a.085 is pretty vague.  It became pretty easy to show that you worked for or were the owner of collective gardens with names such as “Joe’s Drywall” or “Duval Auto Repair.” The argument was that drywall was only one line of business for a company.

Some of the revenue, however small, was from a “collective garden” that was another line of business for the company. The companies could claim that due to Federal illegality of marijuana that they did not itemize marijuana sales. And again, some of the investigators would allow this and others would scrutinize.

Getting creative

This is only one of many ways to artfully get a Priority One designation. Another way would be to just keep being creative and staying persistent.

Since Priority One was the only way to get a retail license, it is not surprising that applicants would do what it took to get this designation. Original 502 applicants and “employees” became something that could be bought and sold. Often those seeking to sell or buy these were listed on Craig’s List. The Priority One status itself became something that could be bought and sold.

Due to this, the numbers of Priority One designations climbed even higher. All Priority One applications were equal in the eyes of the Liquor and Cannabis Board. With localities closing, these Priority One applicants descended on the remaining localities even those localities where retail marijuana is banned. Once all of the localities in Washington become full, a Priority 1 designation becomes worthless without a license.  Applicants were out to get a license anywhere they could.

It became clear that in order to get a license, applicants needed to be quick, but not necessarily compliant.

Applying for a building permit would probably take you out of running in a locality as the process was too long and cumbersome especially when there are other entities willing to subvert this process. Actually holding real estate was risky as applicants were competing against so many other applicants in a locality, some other applicant could easily beat them to the punch leaving them with a long-term lease to pay off. Why would an applicant even spend money on tenant improvements that they didn’t have to?

Once a license is obtained, you have a license. It does not matter if the license is usable or not. It costs $80 to move it to a building that it viable once you have obtained a license. A license holder has all the time in the world to negotiate a lease to change locations and plan and execute their tenant improvements and to go through a permitting process. Or they could simply sell the license.

Another Lord of the Flies?

This is Washington retail licensing system now. It has devolved into a sort of Lord of the Flies situation. There are now more than 2,000 applicants vying for less than 100 remaining licenses.

The historical medical dispensaries have been all but completely left out of the system. It’s a system that was designed to give them licenses, not to open locations for new entities. Patients are worried that they will not be able to have access to the entities that understand them and their conditions and that the new retailers will not even know to ask producer/processors for the types of products that work for them.

The lawsuits continue to be filed. If there is any hope for historical dispensaries and the patients that they serve, it seems inevitable at this point that it will be decided in a courtroom. CBE recommends that rule-makers in states with medical programs keep a close eye on this situation as it develops further and think about the transition of medical to recreational/adult use licensing to avoid similar issues.