Cannabis Legalization�Implementing the world’s first system of legally growing, processing and retailing cannabis.�

Washington State Liquor and Cannabis Board (WSLCB)

June 2021

Overview

• I-502 Key Elements
• Agency Objectives
• Cole Memo
• Federal Enforcement Guidelines
• Licensing and Inspections
• Public Safety: Security and Transportation
• Traceability
• Banking and Revenue
• Q and A

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I-502 Key Elements

• Legalized system of producing, processing and retailing cannabis for adults age 21 and older
• Decriminalizes possession of
• 1 ounce of useable cannabis for smoking
• 16 ounces in solid form
• 72 ounces in liquid form
• Taxation
• Imposes excise tax rate of 37 percent on cannabis sales collected at retail
• Public Safety and Education
• Establishes a THC bloodstream threshold for cannabis DUI’s
• Limits on store locations, advertising and number of outlets
• Earmarks revenue for healthcare, research and education

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Agency Objective

Public Safety

• Create a tightly controlled and regulated cannabis market

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Agency Role and Responsibilities

• Create a 3-tier regulatory system for cannabis
• Create licenses for producer, processor, and retailer
• Enforce laws and rules pertaining to licensees
• Inspections
• Traceability system
• Compliance checks
• Collect and distribute taxes/fees

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In addition to Washington’s laws and rules, the Department of Justice issued eight enforcement guidelines for cannabis businesses known as the Cole Memo. The guidelines were separate from Washington’s and enforced at the discretion of the US Department of Justice. The Cole Memo was rescinded in 2017 but WA continues to uphold and enforce the spirit of these enforcement guidelines.

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Eight Guidelines

1. Preventing distribution to minors.
2. Preventing the revenue from going to criminal enterprises, gangs and cartels.
3. Preventing the diversion of cannabis from states where it is legal to other states.
4. Preventing state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity.
5. Preventing violence and the use of firearms in the cultivation and distribution of cannabis.
6. Preventing drugged driving and other adverse public health consequences associated with cannabis use.
7. Preventing the growing of cannabis on public lands and the environmental dangers posed by cannabis production on public lands.
8. Preventing cannabis possession or use on federal property.

Federal Enforcement Guidelines

Licensing Investigation

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• Criminal history investigation - RCW 69.50.331 (1) / WAC 314-55-020 (7)
• All true parties of interest (no longer review criminal history for spouses)
• FBI fingerprinting checks
• Point system - WAC 314-55-040

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• Financial investigation - RCW 69.50.331 (1) /WAC 314-55-020 (8)
• Identifies source of funds

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• Six-month residency requirement - RCW 69.50.331 (1)
• Entity must be formed in Washington State
• Demonstrate at time of application

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• Property must be more than 1,000’ from: schools, child care centers, transit centers, game arcades, libraries, playgrounds, public parks - RCW 69.50.331 (8)
• Local jurisdictions may reduce the buffer restriction to 500’ except for elementary schools, secondary schools, and playgrounds.

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Licensing Requirements

Final Inspections

WSLCB Final Inspection – RCW 69.50.331 (1) /WAC 314-55-020 (10)

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• Verify floor plans
• Security requirements
• Provide education on cannabis license rules and requirements

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Processing Facilities

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• Extraction methods that use combustible materials require approval from the local Fire Marshal – WAC 314-55-104

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• Any facility processing ingestible cannabis infused products (edibles) require kitchen approval from Washington State Department of Agriculture – WAC 314-55-077

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Licenses

Issued as of May 2021�

Wholesale

• Producer: 150
• Producer/Processor: 921
• Processor: 227

Retail

• Retailer: 484
• Medical Endorsements: 287
• Title Certificate: 47

Other

• Transportation: 11
• Research: 1

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Surveillance Requirements*

• Video surveillance system will have a minimum camera resolution of 640 x 470 pixels.
• All cameras must be fixed and placement must allow for the clear and certain identification of any person and activities in controlled areas of the licensed premises.
• Controlled areas are defined as:
• Any area where cannabis is being grown.
• Any area where cannabis waste is being stored, destroyed or processed.
• All point of sale areas.

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• All cameras must record continuously twenty-four hours per day.
• All surveillance recordings must be kept for a minimum of forty-five days.
• All videos are subject to inspection by any WSLCB employee or law enforcement. Officer
• There were two complaints in 2020 for surveillance and or security violations.

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Security Requirements*

• Must have a security alarm system on all perimeter entry points and perimeter. �

* WAC 314-55-083

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Surveillance/Security Requirements

Transportation of Product*

• Only the marijuana licensee, an employee of the licensee, a transportation licensee, or a certified testing lab may transport product and/or occupy a transporting vehicle.
• Drivers and/or occupants of a transporting vehicle must be twenty-one years of age or older.
• Marijuana or marijuana products must be in a sealed package or container.
• Marijuana or marijuana products must be in a locked, safe and secure storage compartment that is secured to the inside body/compartment of the vehicle transporting the marijuana or marijuana products.
• Receipt of shipment. Upon receiving the shipment, the licensee or certified third-party lab receiving the product shall report the amount and/or weight of marijuana and/or marijuana products received in the traceability system.
• Transportation manifest. A complete printed transport manifest on a form provided by the WSLCB containing all information required by the WSLCB must be kept with the product at all times.
• Records of all transportation must be kept for a minimum of three years.
• There were 14 complaints in 2020 for transportation violations.

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* WAC 314-55-085

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Transportation Requirements

Education Efforts

• The division conducted 2,080 educational contacts with the cannabis industry in 2019.
• In 2019 72% of cannabis retail businesses received educational support from the enforcement and education division.
• In 2020 the agency implemented changes to promote voluntary compliance.
• The hiring of new consultants whose focus was education and advice.
• The use of notice to correct instead of issuance of an administrative violations notice. This allows the businesses time to correct deficiencies without receiving a fine or suspension.
• Licensees have the opportunity to apply for advice and consultation services from the LCB

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Compliance rates for youth access to cannabis.

• Due to COVID-19 restrictions no compliance checks were conducted after March 2020.
• The compliance rate (not selling to minors) was 96% in 2019.

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Public Safety Education

WA Traceability Overview

• The state’s first contracted traceability system, BioTrack THC, went live in 2013
• The system tracked product from seedling to sale
• Please note that while this phrase has been widely used seeds are not in fact being tracked in any state traceability system.
• System did not meet OCIO standards
• System was not scalable or configurable
• Maturing marketplace outgrew the capabilities of former system
• The LCB unsuccessfully attempted to secure a contract extension with BioTrack THC
• Faced a “burning platform” with an Oct. 31, 2017 contract expiration
• In 2017 the agency rebid the traceability system, which was awarded to MJ Freeway, who hosts Leaf Data Systems
• LCB signed a contract in mid-July 2017 to implement a new system that had to be in place by October 31, 2017
• Typically, development takes 12-18 months for a project of this complexity
• The Leaf system was implemented February 1, 2018 and effective December 2019 the IT project was closed and the system is considered to be in subscription services.
• Defects and daily issues remain. Contract terms and negotiations have continued with the vendor.
• The state is looking to revisit traceability in a manner that does not require the state to be the backbone of the entire market

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Traceability Lessons Learned

• Vendor selection is critical
• There is reasonably only one stable vendor in the recreational space (Metric). Other vendors have had state contracts include: BioTrack, MJ Freeway, and Kind
• In general recreational states do not operate Point of Sale systems, the point of sale systems used by retailers are integrators to the state system (report sale, does not have sales conducted out of the state system).
• A clear purpose for a traceability system is important. Reporting system requirements are very different than requirements for a system that is intended to be used for compliance (compliance built into the system)
• The cannabis market and product development will move faster than the software is able to adapt to
• Embedding law and rule in to software appears will appear to be a good idea until the law and rule change (and change often)
• Very few state software systems (licensing, unemployment, revenue etc.) allow outside parties to input data directly into the system (third party integrators) As a result data share agreements and the authority to audit or remove third party integrator system access is critical
• Contract terms and conditions that require the vendor to procure bonds for loss should never be a item of negotiation.
• Licensee training and verification of basic rule and system requirements (training and validation of completing training) is a best practice.
• State system’s that operate as the backbone of the industry create a risk of full market impact (single point of failure) if the state system has problems or experiences an outage.

Banking

• Six state chartered banks and credit unions banking licensees.
• Access to information provides assurances to banks.
• Extensive criminal and financial investigations conducted with results provided to banks.
• Sales information posted to website is used to validate cash deposits.
• Retail sales predominantly in cash.
• Alternative solutions being developed to facilitate card transactions.

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Retail Sales/Excise Tax�(in millions)

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*In addition, DOR collects Retail Sales and Business and Occupation taxes

Fiscal Year Retail Sales Excise Tax

2015 $175.4 $64.9

2016 $501.9 $185.7

2017 $850.8 $314.8

2018 $978.4 $362.0

2019 $1,055.1 $390.4

2020 $1,268.1 $469.2

Revenue Projections

Q and A

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