Why Jersey’s Adult Use Program Will Ignite East Coast Cannabis

With 44 million consumers banging on its door, and $950 million of revenue projected over the next three years, New Jersey’s adult use marijuana program is poised to define cannabis across the eastern seaboard.

With 44 million consumers banging on its door, and $950 million of revenue projected over the next three years, New Jersey’s adult use marijuana program is poised to define cannabis across the eastern seaboard.

Currently comprised of merely 95,000 patients and 12 alternative treatment centers (ATCs) to serve its 9,241,900 population, New Jersey’s decade-old medical marijuana program is both under performing and mired by ludicrous limitations and legal challenges.

Based on its proximity to New York, Pennsylvania, Delaware and Maryland’s “adult use access lacking” consumers, ground-breaking legislation (featuring statewide home delivery and consumption lounges), and forward-thinking safeguards, New Jersey’s adult use marijuana program will be first to market and set the standard for Mid-Atlantic region cannabis sales.

Legalized Marijuana’s Supply Chain

Those cultivating, processing, infusing, transporting or dispensing cannabis are deemed to be a “plant touching” marijuana-related business (MRBs) and, despite being legal in the majority of American states, marijuana remains federally illegal.

The Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. Sections 801, Et. Seq (1970) (CSA) currently lists marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use” “under medical supervision.” The CSA prohibits marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s supremacy clause, state laws conflicting with federal law are generally preempted and void. See U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942)(”No form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).

Those cultivating, processing, transporting, distributing or dispensing marijuana, (i.e., literally touching marijuana at some point along the supply chain), are deemed “plant touching” enterprises. See “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, Feb. 14, 2014. Licensed and regulated by the state, plant touching MRB’s include those planting, cultivating, harvesting, processing/extracting, testing, packaging, disposing, transporting and dispensing marijuana. See U.S. Senate, “S. 1726: Marijuana Businesses Access to Banking Act of 2015,” July 9, 2015; Representatives, H. R. 2076, April 28, 2015. Further, any entity having a financial or controlling interest (regardless of ownership percentage) in a plant touching MRB, including “investment” or “management” shell companies, are also deemed Plant Touching MRBs. See “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, Feb. 14, 2014.

Because the CSA prevents cannabis from being sold outside of each respective legalized-marijuana state and no “interstate cannabis commerce” can occur, state regulators like New Jersey’s Department of Health Division of Medical Marijuana (DOH), and not federal agencies like the Food and Drug Administration, regulate MRBs.

Whether deemed “medical” (purchasable only with a state-issued card to treat a resident’s statutorily defined “covered medical condition”) or adult-use (purchasable by anyone over 21 with a valid identification), cannabis takes four forms: “flower” that is smoked; “oils” ingested by vaporizing; “concentrates” only consumable after being heated to a high temperature; and “infused” products ranging from eye drops to “edibles.”

With few exceptions, medical and adult-use cannabis items are identical and delineated only by their purchasers: medical card “patients” or “adult use” consumers.

New Jersey’s Medical Marijuana Program

Enacted on Jan. 18, 2010, the Compassionate Use of Medical Marijuana Act, N.J.S.A. 24:6I-1-30 (Medical Marijuana Act) charged the DOH with implementing New Jersey’s marijuana program and, based on a competitive application process, issuing licenses for vertically integrated ATCs to grow, process and sell cannabis. Further, under the Medical Marijuana Act, each card holder can only register, and purchase cannabis, at 1 ATC and initially required quarterly “covered medical condition” certifications from a physician.

In 2011, and again in 2018 (Phase II), the DOH issued six ATC permits broken out by two licenses in New Jersey’s respective northern, central and southern regions. Despite passing terrifically expansive cannabis legislation and accepting applications for a third set of licenses that would triple the program’s size, New Jersey’s progress got derailed in late 2019.

First, on July 2, 2019, New Jersey passed the Jake Honig Compassionate Use Medical Cannabis Act,  N.J.S.A. 24:6I-2, et seq. establishing a specialized Cannabis Regulatory Commission, shattered the “vertically integrated” requirement by establishing distinct “cultivator,” “manufacturer” and “dispensary” licenses, “sunsetting” the sales tax at 6.625% by 2022, allowing annual doctor recommendations (rather than quarterly) and out-of-state patients to purchase medical marijuana, and expanding “qualifying medical conditions” to include chronic pain and post-traumatic stress disorder.

Second, on Aug. 21, 2019, the DOH accepted applications for a third set of licenses comprised of up to four ATCs, five cultivation, and 15 dispensary permits (Phase III) that would have tripled New Jersey’s medical marijuana program.

This progress ended on Dec. 24, 2019, after Phase III applicants with rejected “missing or corrupted filings” obtained a stay halting the DOH from scoring Phase III applications pending a determination of whether “technical-error-based submission disqualification” was consistent with the Medical Marijuana Act. As a result, despite 100-plus applications languishing for over 20 months, none of the 24 available licenses were issued and New Jersey’s medical marijuana program remains underperforming.

Further, in a separate proceeding that did not reverse the Phase II license awards, New Jersey’s Superior Court’s Appellate Division ruled that the DOH “tolerated too great a degree of ‘relative error’” in its scoring” and “its decisions were arbitrary, capricious and unreasonable” ordering the competitive application scoring process to be revamped to ameliorate “numerous, indisputable anomalies” and establish a “common standard of competition” in which the request for applications are “as definite, precise and full as practicable in view of the character of the undertaking.” See In the Matter of the Application for Medicinal Marijuana Alternative Treatment Center for Pangaea Health and Wellness, (New Jersey Department of Health) (Consolidated) (A-2204-18T4/A-2219-18T4/A-2276-18T4/A-2278-18T4/A-2283-18T4/A-2288-18T4/A-2292-18T4/A-2305-18T4) (November 25, 2020 Opinion), pp. 17, 18 & 53.

New Jersey’s Adult Use Marijuana Program

Based on its proximity to 44 million “adult use access lacking consumers,” ground-breaking legislation, and forward-thinking safeguards, New Jersey’s adult use marijuana program is poised to define cannabis across the eastern seaboard.

First, because its is nestled in the Mid-Atlantic region and a short distance from New York, Pennsylvania, Delaware and Maryland’s population, all of whom lack adult use marijuana access, New Jersey’s first-to-market adult use program will service region’s 44,155,195 prospective purchasers. Stated another way, tiny New Jersey will soon be feeding the cannabis appetite of a consumer base exceeding the population of California (the world’s fifth-largest economy).

Second, beyond correcting its medical marijuana program’s flaws, New Jersey’s adult use program features dimensions unseen in the eastern United States and diffuses landmines that have impeded and derailed other states’ efforts.

Specifically, the Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (Adult Use Act) enables:

• Those 21 and older to purchase up to an ounce of marijuana or five grams of cannabis concentrate;
• Existing medical marijuana dispensaries to sell to adult consumers;
• Statewide retail stores and onsite consumption (subject to bans by local jurisdictions);
• Statewide cannabis delivery services regardless of local bans; and
• Maximum 6.625% state sales tax and up to 2% hosting tax imposed by municipalities.

The Adult Use Act empowers the Cannabis Regulatory Commission (CRC) to issue respective grower, processor, wholesaler, laboratory testing facility, distributor, delivery service and retailer licenses:

• 25% of which will go to microbusinesses, capped at 10 employees and impose residency requirements;
• 15% of which are reserved for minority-owned businesses;
• 15% of which will go to women or veteran owned businesses; and
• 35% of which in each category will be “conditional” to make process more accessible to lower-income applicants.

Although capping nonmicrobusiness grower licenses at 37 during legal sales’ first two years, the CCR will issue all other licenses based on “customer demand” and confer “priority status” on applicants hiring employees from “high arrest, crime or unemployment rate” areas.

Finally, to promote marginalized groups inclusion, the CRC has created the “Office of Minority, Disabled Veterans and Women Cannabis Business Development” and 70% of sales tax revenue, and all funds raised by an excise tax on cultivators, will fund restorative programs for legal aid, health care, and mentoring in minority communities disproportionately affected by the drug war.

Thus, beyond removing its medical marijuana program’s ridiculous limitations, New Jersey’s adult use program will offer innovations including statewide home delivery and consumption lounges, reserving a high percentage of licenses for residency-based microbusinesses, minority, veteran or women owned businesses, and “conditional” application procedure leveling the playing field for lower-income applicants against better funded multi-state operators.

Further, by imposing a rational and modest maximum 8.625% state sales and hosting tax, New Jersey will avoid a misstep often dooming nascent adult use program and causing the black market to flourish. For example, after legalizing adult use marijuana on Jan. 1, 2018, California imposed taxes throughout the supply chain (including a $9.25 wholesale per-ounce tax, 15% retail excise tax rate and 9% retail sales tax) causing a gram of cannabis to sell for 77% more on the legal white market than the average black market price.

By keeping its sales and excise tax at a moderate level, New Jersey’s adult use program will diminish, rather then extend, black market cannabis sales and fortify its sustainability.

Reprinted with permission from the December 14, 2020 edition of the Legal Intelligencer © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].