Cannabis and/or cannabis derivatives are legal in some capacity in almost fifty countries today, but just five years ago that number was around thirteen. People say that experience in the cannabis industry is gained in “dog years” because the pace of change and evolution is lightning speed. There hasn’t been a shift on any agricultural commodity at this scale in the last century and we are experiencing the tipping point of the emerging sector into mainstream acceptance.
As the industry matures, there are two major factors that dictate the rules and space in which licenced producers operate. Regulations and Taxes.
No one wants to reinvent the wheel, but someone has to be first. There are a handful of countries that made the first push into the international legal cannabis space and took on the challenges of creating a massive newly regulated sector without a reference point. Their successes and stumbling blocks have given the rest of the world models to learn from.
In 2001 medical use of cannabis was legalized in Canada and in 2018 responsible adult use was legalized in Canada under the Cannabis Act and regulated by Health Canada. The Cannabis Act is the most comprehensive and widely applied model in North America. The act addresses every step of cultivation from seed to sale, import, export, processing, security, distribution, marketing, packaging, traceability, patient eligibility, etc. It has been used as a reference in several jurisdictions in Oceania and the United States due to its extensive coverage of topics and applicability internationally.
Canada’s model, however, suffers from a few shortcomings. The application of cannabis regulations has placed a high administrative burden on Health Canada which has struggled to keep up with licensed producer applications, research applications, inspections, and approvals. The slow pace of approving and regulating legal distribution has resulted in an inability to meet the high national demand, with the limited supply of legal product. The lack of domestic legal supply has led to a flourishing black market, which places a higher burden on regulatory authorities and so the cycle continues…Additionally, excessive tax burdens through excise taxes on retail values (an issue seen in California) and licensing fees for producers have increased the financial burden on both legal cannabis consumers and licenced producers.
In 2014 Uruguay became the first country in modern history to fully legalize cannabis. The legalization of cannabis in the region spurred a conversation about drug policy reform, access to medicine, human rights, and public health. Cannabis retail sales are only allowed in licenced pharmacies under strict controls. Uruguay’s system has an anonymous patient drug registry, caps the amount of cannabis that a registered patient can purchase in a given month (40 grams) and, limits the amount of THC that cannabis products can be sold with. Patients can also join legal cannabis clubs or register to cultivate up to six plants in their own home. Uruguay’s cautious roll out of regulations to manage the cultivation and sale has shown a cultural resistance to cannabis production seen in LATAM, but the first steps have shown other jurisdictions that it is possible to manage cannabis legally.
Being overly cautious however, has led to restrictive conditions that lower access and increase demand. Licensed pharmacies that distribute cannabis products are few and far between and because THC limits on flower are low, it limits varieties that can be grown and sold in the country. As of December 2018, Uruguay has only two licenced commercial growers. Home cultivation alleviates some supply side issues, but is difficult to regulate product quality and ensure there is no diversion to illicit markets. The regulatory model in Uruguay is pioneering, but suffers from conditions that create extremely limited access to legal cannabis, and as a result allow for a thriving black market.
While cannabis legalization polls often show a marginal majority for regulation if at all, cannabis taxation polls often show an overwhelming majority of people favor increased taxation of the cannabis industry. While the idea of the cannabis industry funding schools, infrastructure, and public programs seems good, overtaxing has stifled industry growth, placed a greater burden on legal consumers, and ultimately lowered overall tax revenue despite having higher taxes.
One of the most publicized examples of legal cannabis funding social development, education, and infrastructure is the Colorado model. This structure utilizes:
- A 15% excise tax on wholesale retail marijuana which goes directly to a special public school fund
- A 15% special sales tax on retail marijuana which is split three ways between a State Public School Fund, A General Fund, and the Marijuana Tax Cash Fund which covers departmental operation costs of the cannabis program
- A 2.9% regular state sales tax on both medical and retail marijuana
The above tax scheme splits the financial burden between consumers and producers while ensuring revenue gets allocated to specific social development programs. Because revenue goes directly into assigned funds which have been dedicated to cover department operational costs and social development projects it can be easily allocated, tracked, and presented to the public.
While Colorado's model has a strong, transparent, and straightforward tax structure with clear fund allocation other states have struggled to gain a market foothold in the legal cannabis industry. California, for example, has fallen well below tax revenue projections for 2018 and continues to struggle with a thriving illicit market. When all taxes are taken into account Cannabis businesses may pay up to 45% in California placing an exceptional burden on licensed operations and stifling growth. As federal legalization approaches an even higher tax burden will be placed on Cannabis businesses hurting the sector and pushing more consumers into the black market. Regulators must remain conscious of the impact of taxes on the cannabis sector and ensure that they are not inadvertently taxing licensed cannabis operations into bankruptcy. As the industry moves forward tax structures will adapt to meet the needs of the marketplace or businesses will move to more tax-friendly jurisdictions as trade barriers are removed.
Jurisdictions have had a very short span of time to implement regulations and tax structures and have a long way to go within major markets let alone internationally. With any new economic sector the first set of regulatory structures are tests to be adapted as businesses and consumers express their needs. The market is evolving rapidly and will regulators will have to keep pace as demand drives change. We in the industry today are seeing the international cannabis tipping point and an incredibly exciting future for this infinitely versatile plant.