Big changes coming to Minnesota’s recreational marijuana proposal to address worries from hemp edibles industry

Sponsors of bills to legalize, regulate and tax recreational marijuana are preparing a significant rewrite of the lengthy legislation. The planned amendments to the 300-page bills are meant to both incorporate changes agreed to so far and to make clear how the new cannabis market interacts with the hemp-derived edible products legalized last spring.

“We have a lot of great hemp businesses out there that are doing great things, and we do not want to shut them down,” Stephenson said. Port said Thursday she has a draft of a lengthy amendment and hopes to discuss it next week when her bill — Senate File 73 — is before the Senate State and Local Government committee.

It can’t come soon enough for businesses making and selling low-potency hemp-derived edibles and beverages boosted by last year’s legalization. Many in the industry are spooked by how the bills so far treat their businesses.

“HF 100 ends up unfortunately hurting the hemp industry in a multitude of ways,” said Steve Brown, chief executive officer of Nothing But Hemp in Minneapolis.

“The way that this bill is written is confusing,” said Glenn McElfresh, co-founder of Plift Beverages. “I welcome the opportunity to look at the amendment. I’ve been told a fix for that is coming in weeks, but it feels like it’s perennially two weeks away. The way this bill is written is bad for all the businesses who have invested in these low-dose THC products.”

“I cannot specifically name any current issues with the bill, primarily because the bill was never ready for prime time,” said Shawn Weber, who owns Crested River Cannabis Co. in Morgan and is president of the Minnesota Hemp Growers Cooperative. “Because of my confidence and my relationship and my involvement, I knew they were looking out for our best interests and this was going to be a process to address these issues.”

Weber said the first drafts were written by legislators and lobbyists who are not experts on the industry. Those drafts contained technical flaws and terminology gaps that could only be pointed out by people doing the work in the industry. But Weber said he is confident they are being addressed and was critical of industry players who have been told that, yet continue to testify in committees using the same talking points.

“They develop an excellent case of amnesia and come back with the same written testimony,” Weber said.

“We’re going through the bill issue-by-issue and seeing if the language in the current version meets the realities of what we’re going to need in the market,” she said. One example is to make sure there are separate licensing tracks for hemp to make sure they can still deduct business expenses from federal income taxes. Those deductions aren’t available for marijuana or other illegal drugs, which remains illegal federally, due to a section of IRS law known as 280e.

“We want to build in enough separation there that it is very clear that they are not selling anything adult-use [recreational marijuana],” she said.

The taxation issue is just one illustration of how the two markets seem the same in general but are quite different in the details.

Hemp, for example, is recognized by the federal government as a legal product. It can cross state lines, it can make use of interstate banking, it is eligible for tax benefits provided to all legal businesses. Last year’s bill legalized the market for low-potency intoxicating edibles and beverages but it lacked licensing, taxation and regulation.

Cannabis remains illegal at the federal level, though 21 states have legalized its sale and use for recreational purposes and 37 states have legalized it for medical uses. It cannot be imported or exported across state lines, the industry’s access to regular banking is limited and business expenses for these enterprises are not deductible on federal income taxes.

That is why there are hazards in the intermingling of cannabis provisions and hemp provisions in the same sections of the bill.

On example of how this has caused confusion and some fear is a provision that would allow the new Office of Cannabis Management to “issue the necessary number of licenses in order to ensure the sufficient supply of cannabis flower and cannabinoid products to meet demand, provide market stability, and limit the sale of unregulated cannabis flower and cannabinoid products.” To Brown, that sounds like the office could cap the number of hemp-derived businesses which were first created starting in 2018 and exploded starting July 1 when the edibles bill took effect.

No one is sure how many businesses make, distribute or sell edibles because there is no state licensing and only some local governments have stepped in to fill the regulatory and enforcement gap. 

“We don’t know how many there are. Are they going to be able to get those licenses?” Brown asked. McElfresh said he, too, is concerned about punting the decision on the number of licenses to a future agency.

“Unless there is an unlimited number of licenses, there are going to be losers and that’s inherently inequitable,” he said.

Stephenson and Port have given assurances that low-potency licenses will be plentiful. Fatehi said the intent was to license and regulate those hemp-derived products but not limit the number of businesses.

Brown said he’ll remain worried, “until things are down on paper.”

“I don’t think their intention is to harm the industry,” he said. But as the session advances “and there haven’t been any amendments, that’s pretty darn scary for the hemp industry.” 

One point of disagreement within the hemp industry involves what is termed vertical integration — one business owning different parts of the supply chain such as growing the plants, processing the plants, distributing products and retailing them as well. One of the core principles of both the House and Senate bills is to disrupt such integration as a way of keeping recreational marijuana businesses smaller and thwart large companies from dominating the sector.

Making up for the ill-effects of legal prohibition that fell hardest on low-income and communities of color, the bill hopes to provide access via loans and training to people from those communities. Limits on single businesses having licenses up and down the supply chain is a way to help smaller businesses.

One comparison could be to alcohol. Minnesota and many other states have a three-tier system that separates manufacturing, distribution and retail. One company can’t get licenses to do all three (though there was an exception made for craft beer and spirits businesses in the so-called Surly Bill that allowed for some on-sale and off-sale at breweries and distilleries).

Similarly, the exception in the recreational marijuana bills is for so-called microbusinesses that could grow, process and sell cannabis products, though the size of those operations would be limited. There are also proposals for allowing more flexibility for those in the next size up, referred to as craft businesses.

But are vertical integration blocks needed in both hemp and marijuana? Weber thinks so. 

“That is critical to this bill. Because in every state that has legalized, Big Cannabis comes in and saturates the market, the entire market crumbles and then these big corporations have to sell pieces of themselves off to survive,” Weber said. 

“It’s a bad model and detrimental to the industry, and we’re going to prevent that from the get-go in Minnesota,” Weber said. But some in the industry want to be able to do more than one function — manufacturing and retailing, for example. And there is some desire for status quo in hemp, that is the no licensing, no extra taxation and little regulation that resulted from last spring’s law.

“There is a knee-jerk reaction from some who don’t want to play in a regulated market,” Weber said.

But Brown said banning vertical integration would put him out of business.

“Most of the hemp businesses that have been successful are still pretty small,” he said. He said he is one of the larger hemp businesses and has 40 employees but manufactures gummies and sells them in six stores across the state.

Sponsors of the bills continue to preach patience. They want to solve the federal taxation issue for hemp businesses and want to remove a burden on beverage makers requiring that they have separate production lines for THC products and non-THC products.

Mostly though, they say they want to draw clear lines between already legal hemp-derived products and newly legal cannabis products. Fatehi said she would prefer the two entities be broken out into separate articles in the bill “to manage some of the anxiety around this.” But there is not a legal reason to keep them separate in the bill.

Said Stephenson: “You are going to have a set of licenses that are going to allow you to do cannabis and hemp and another set of licenses that allow just low-dose hemp. We’re getting there. It has never been a question of desire, it’s just been how do you make it work?

“We do want those gummies to go behind the counter, we do want childsafe packages. There are a lot of rules that need to happen,” Stephenson said. “But we are going to create a new license structure that will allow them to keep doing what they are doing but with guardrails.”