Background:

Overview of Initiative Measure No. 502.

Initiative Measure No. 502 (I-502) was a ballot measure approved by Washington voters in November 2012 that: (1) legalized the production, processing, possession and personal use of marijuana; (2) created a framework for a regulatory scheme to be further developed by the Liquor Control Board (LCB) through its rule-making authority; and (3) revised provisions in criminal statute to accommodate such legalization in accordance with the requirements of the initiative.

The scope of I-502 was broad and contained statutory provisions that include the following:

legalizing the personal use and possession of up to 1 ounce of marijuana, as well as specified products directly related to such marijuana use;
licensing and regulating marijuana production, distribution, and retailing;
designating the LCB as the regulatory entity responsible for the implementation of the initiative, including continuing oversight over the commercial practices and conduct of licensed marijuana producers, processors, and retailers;
providing the LCB with broad rule-making authority with respect to the development of the requisite regulatory scheme;
implementing excise taxes on marijuana production, processing, and retailing;
creating a dedicated marijuana fund for the collection and distribution of marijuana- related tax revenues;
deleting statutory provisions containing criminal and/or civil penalties for marijuana-related activities authorized by I-502; and
amending driving under the influence laws to include specific provisions pertaining to driving under the influence of marijuana.

The statutory provisions of I-502 are codified in the state Controlled Substances Act (CSA), chapter 69.50 RCW.

Federal Response to Marijuana Legalization by the States.

Washington is one of at least 23 states that have passed legislation allowing the use of marijuana for medicinal purposes and one of four states that allow its recreational use. These activities, however, remain illegal under federal law.

In August of 2013, the United States Department of Justice issued a formal enforcement policy memorandum in response to the legalization of recreational marijuana in the states of Washington and Colorado. In this memorandum, federal prosecutors were instructed to focus investigative and prosecutorial resources related to marijuana on specific enforcement priorities to prevent:

the distribution of marijuana to minors;
marijuana sales revenue from being directed to criminal enterprises;
marijuana from being diverted from states where it is legal to states in which it is illegal;
state-authorized marijuana activity from being used as a cover for trafficking other illegal drugs or other illegal activity;
violence and the use of firearms in the production and distribution of marijuana;
drugged driving and other marijuana-related public health consequences;
the growth of marijuana on public lands; and
marijuana possession or use on federal property.

With respect to state laws that authorize marijuana production, distribution, and sales, the memorandum states that when these activities are conducted in compliance with strong and effective regulatory and enforcement systems there is a reduced threat to federal priorities. In such instances, the memorandum asserts that state and local law enforcement should be the primary means of regulation. The memorandum, however, affirms continuing federal authority to challenge state regulatory systems and to bring individual enforcement actions in cases in which state regulatory efforts are inadequate.

Licensing of Marijuana Producers, Processors, and Retailers.

The LCB is authorized to issue three categories of commercial marijuana licenses: (1) the marijuana producer's license entitles the holder to produce marijuana for sale at wholesale to licensed marijuana processors or other producers; (2) the marijuana processor's license entitles the holder to process, package, and label marijuana for sale at wholesale to marijuana retailers and other processors; and (3) the marijuana retailer's license entitles the holder to sell marijuana products at retail prices in retail outlets.

The three categories of marijuana licenses are subject to identical regulations regarding initial application fees and renewal fees. The initial application fee is $250. The subsequent issuance and renewal fee, required annually, is $1,000.

Excise Taxes Imposed on Marijuana Producers, Processors, and Retailers.

An excise tax of 25 percent of the sale price must be paid by each of the three categories of licensees at each step of the production, processing, and marketing process:

producers pay a tax of 25 percent of the wholesale price of the marijuana sold to processors or to other producers;
processors pay a tax of 25 percent of the wholesale price of the useable marijuana or marijuana-infused products sold to retailers or to other processors; and
retailers pay a tax of 25 percent of the retail price of the useable marijuana or marijuana-infused products sold to the consumer.

There are no statutory provisions explicitly addressing the taxation of retail sales of medical cannabis by collective gardens or medical cannabis dispensaries.

Sales and Use Tax.

Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes were not collected when the user acquired the property, digital products, or services, then use taxes apply to the value of property, digital product, or service, when used in this state. The state, most cities, and all counties levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary from 0.5 percent to 3.1 percent, depending on the location.

Location Limitations for Marijuana Production and Marketing Operations.

The LCB is prohibited from issuing a license to any prospective producer, processor, or retailer whose business premises are located within 1,000 feet of the perimeter of the grounds of any of the following facilities:

elementary or secondary school;
playground;
recreation center or facility;
child care center;
public park;
public transit center;
library; and
any game arcade, admission to which is not restricted to persons 21 years of age or older.

Federal law imposes additional penalties on the distribution of controlled substances within 1,000 feet of an elementary or secondary school, college, playground, or public housing facility. The same additional penalties are imposed for distribution within 100 feet of a youth center, swimming pool, or video arcade.

Residency Requirements for Applicants for Marijuana Producer, Processor, and Retailer Licenses.

Currently, a person is required to have established state residency of three months to apply for a marijuana producer, processor, or retailer license.

Public Use of Marijuana.

It is unlawful to consume or open a package containing marijuana or marijuana products in view of the general public.

Marijuana Product Advertising Limitations.

Marijuana retailers are subject to specified restrictions regarding the advertising of marijuana and marijuana-based products. Included in these regulations is a blanket prohibition barring any advertising under the following circumstances:

within 1,000 feet of school grounds, playgrounds, recreation centers, child care centers, public parks, libraries, or specified types of game arcades;
on or in a public transit vehicle or public transit shelter; or
on publicly owned property.

A licensee who violates any of these advertising prohibitions is subject to a $1,000 fine for each violation. The proceeds of such fines must be deposited in the dedicated marijuana fund established under I-502.

Transport and Delivery of Recreational Marijuana by Third-Party Carriers.

Transportation and/or delivery of marijuana and processed marijuana products may be done only by the employees of a producer, processor, or retailer. Other transportation or trucking services may not be used for this purpose.

Dedicated Marijuana Fund.

I-502 created a "dedicated marijuana fund," deposited with the State Treasurer that consists of moneys derived from marijuana excise taxes, license fees, penalties, forfeitures, and all other moneys, income, or revenue received by the LCB from marijuana-related activities.

Proceeds from the fund must be distributed every three months by the LCB to specified public entities and in amounts established in statute. Among the distributions is $5 million annually for the LCB to administer the legal marijuana system.

Life Sciences Discovery Fund.

In 2005 the Life Sciences Discovery Fund (LSDF) was created to promote life science research in Washington. The LSDF was authorized to receive tobacco settlement strategic contribution payments and leverage these state contribution payments by providing grant opportunities to support life sciences research and development. The LSDF is managed by the LSDF Authority, governed by a board consisting of legislators and persons appointed by the Governor. The LSDF Authority solicits and reviews grant applications.

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Summary of Substitute Bill:

PART I:

Intent and Tax Preference Performance Statement.

The bill includes the legislative intent and a tax preference performance statement for the authorized sales and use tax exemption for qualified patients. The Department of Revenue (DOR) is required to provide a specific tax reporting line for marijuana retailers to include the amount of exempt sales on their tax return.

PART II:

Taxation of Marijuana Producers, Processors, and Retailers.

The two 25 percent marijuana excise taxes on marijuana producers and processors is eliminated. The third 25 percent marijuana excise tax on retailers is modified by specifically imposing the tax on the buyer of any marijuana product subject to the excise tax. The rate is changed to 30 percent and applies to the final retail price of marijuana products subject to the tax. This tax is in addition to state retail sales and use tax and must be separately itemized on the sales receipt provided to consumers. However, the displayed shelf price must illustrate the final price to the consumer, including the marijuana excise tax, but does not need to include the general retail sales tax.

A sales and use tax exemption for qualifying patients is allowed for patients with an authorization card. Designated providers of qualifying patients are also exempt from retail sales tax when purchasing for a qualifying patient.

Additional provisions are included to provide the LCB with the proper authority to collect and administer the marijuana excise tax. This includes the opportunity for persons who have been issued a notice of unpaid marijuana excise taxes, which are trust fund taxes. Trust fund taxes are defined as those taxes collected from the buyer and held in trust by the seller until remitted to the state agency that administers the tax; this includes the 30 percent marijuana excise tax.

Distribution of Marijuana Excise Tax Revenue.

A portion of marijuana excise tax revenues deposited into the State General Fund are shared with counties and cities. Distributions to local jurisdictions will not occur until $25 million dollars of marijuana tax revenues have been deposited into the State General Fund, at which point 30 percent of the previous fiscal year's General Fund revenues will be distributed to eligible counties and cities in four installments.

Each county, and cities and towns within the county, are allocated a portion of state revenue based on the amount of marijuana excise tax revenues attributable to any area within the county as a percentage of the statewide total. Counties may receive 60 percent of this allocation. Eligible cities will share the remaining 40 percent ratably based on their share of total sales within the county. Local jurisdiction distributions may not exceed $20 million per fiscal year. The distribution to local jurisdiction expires January 1, 2022.

Allowable Uses for the Division of Behavioral Health and Recovery (DBHR).

The substitute bill changes the types of programs that the DBHR is permitted to support using the revenue distributed to them under I-502 to include development and evaluation of programs and practices aimed at prevention or reduction of maladaptive substance use among middle and high school students. Also allows the DBHR to use their marijuana tax funds for evidence-based or research-based programs and requires these programs to be deemed cost-beneficial by September 1, 2020.

Marijuana Retailer Signage Requirements.

Marijuana retailers may only display two signs for purposes of identifying their business or trade name. Signs must be no larger than 1,600 square inches and cannot be posted within 1,000 feet of an elementary or secondary school or a playground. Marijuana retailers are no longer required to ensure that product in the store is not visible from a public right-of-way.

PART III:

Revising Buffer Distances Between Marijuana Businesses and Specified Facilities.

The legislative authority of a county, city, or town is permitted to reduce the buffer requirements for licensed marijuana businesses from 1,000 feet to 100 feet from recreation centers, child care centers, public parks, public transit centers, libraries, and certain game arcades. However, the 1,000-foot buffer requirement for schools and playgrounds is maintained. In order to reduce the buffer requirement, a county, city, or town must pass an ordinance declaring that the reduction will not negatively impact the jurisdiction's law enforcement efforts, public safety, or public health. The LCB may license businesses located in compliance with such an ordinance.

Residency Requirements for Applicants for Marijuana Producer, Processor, and Retailer Licenses.

State residency requirements for those applying for a marijuana producer, processor, or retailer license are increased from three months to six months.

PART IV:

Consuming Marijuana in Public Places.

Consuming or opening a package containing marijuana or marijuana products in a public place is prohibited. "Public place" has the same definition as in liquor control statutes, except that consumption in state parks and on brewery and winery grounds is not permitted. A violation is a class 3 civil infraction, punishable by a fine of $50, plus applicable local fines.

PART V:

Transportation and Delivery Services for Licensed Marijuana Business.

A licensed marijuana producer, processor, or retailer may use the services of a common carrier to physically transport or deliver marijuana, useable marijuana, marijuana concentrates, and marijuana-infused products within the state. The common carrier must be licensed by the LCB. Employees of a licensed common carrier who are involved in the transportation of marijuana or marijuana products must be at least 21 years of age.

An employee of a common carrier engaged in marijuana-related transportation or delivery services is prohibited from carrying or using a firearm during the course of providing such services, unless:

the LCB explicitly authorizes the carrying or use of firearms by the employee;
the employee has a private security guard license; and
the employee is otherwise in full compliance with LCB regulations.

The LCB must establish rules creating an annual licensing procedure for a common carrier who seeks to transport or deliver marijuana, useable marijuana, marijuana concentrates, and marijuana-infused products. Such rules must:

establish criteria for the approval or denial of a license application;
provide minimum qualifications for any employee authorized to drive or operate the transportation or delivery vehicle;
address the safety of the employees transporting or delivering the products, including issues relating to the carrying of firearms by such employees;
address the security of the products being transported, including a system of electronically tracking all products at both the point of pickup and the point of delivery; and
set reasonable fees for the application and licensing process.

PART VI:

Allowing the LCB to Accept Donations for Funding Informational Material.

The LCB is authorized to accept donations or grants from any source for the purpose of improving public awareness of the health risks associated with the use of marijuana by both youth and adults.

PART VII:

Cannabis-Based Beauty Aids.

Cannabis health and beauty aids are exempted from all regulations in the CSA pertaining to marijuana, marijuana concentrates, or marijuana-infused products. "Cannabis health and beauty aid" is defined to mean a product containing parts of the cannabis plant and which:

is intended for use only as a topical application to enhance appearance;
contains a THC concentration of no more than 0.3 percent;
does not cross the blood-brain barrier; and
is not intended for consumption by humans or animals.

PART VIII:

Signage Requirements for Prospective Licensees.

Applicants for a marijuana producer's, marijuana processor's, marijuana researcher's, or marijuana retailer's license under this chapter must conspicuously display a sign on the outside of the premises to be licensed, notifying the public that the premises are subject to an application for such license. The LCB must promulgate such rules as are necessary for the implementation of this section, including rules pertaining to the size of the sign and the text thereon, the textual content of the sign, and any other requirements necessary to ensure that the sign provides adequate notice to the public. The LCB is required to provide the sign to the applicant but may charge a fee.

PART IX:

Changes to Marijuana-Related Definitions in the CSA.

The term "marijuana concentrates" in the CSA is redefined to include all such concentrates having a THC concentration greater than 10 percent.

The definition of "marijuana-infused products" in the CSA is revised to reduce the maximum allowable THC concentration in such products from 60 percent to 10 percent.

PART X:

Marijuana Research Licenses.

A marijuana research license is created, allowing holders to produce, process, possess, and deliver marijuana for the purposes of:

testing chemical potency and composition;
conducting clinical investigations of marijuana-derived drug products;
conducting research on the efficacy and safety of marijuana use as medical treatment; and
conducting genomic and agricultural research.

The license application fee is $250, and the issuance and annual renewal fee is $1,000. Half of all fees collected from a research license must be deposited in the LSDF.

An applicant for a marijuana research license must submit to the LSDF Authority a description of the research it intends to conduct, and the LSDF Authority must review the proposal for compliance with the license requirements. The application must be denied if the LSDF Authority determines that the proposed research does not comply with the allowable areas of research or license requirements. The LSDF Authority must also review any research reports generated by licensees under LCB rules and determine the licensee's continued compliance with license requirements. Such reports are exempt from public disclosure if they contain proprietary information.

A marijuana research licensee may sell marijuana to other research licensees but not to any other person or entity. Research activities conducted under a valid research license do not constitute a violation of Washington state law.

Research licensees may contract with the University of Washington (UW) and Washington State University (WSU) to collaborate in marijuana research projects, which must be approved by the LSDF Authority. Both the UW and WSU are given authority to contract with licensees to conduct research.

The LCB has authority to make rules regarding application and renewal requirements, conditions, security, quantity of marijuana and marijuana products, reporting, and other matters relating to the research license.

PART XI:

Dedicated Marijuana Account.

The dedicated marijuana account is created in the State Treasury. Monies in the account must be appropriated before the distributions under Part II can be made.

PART XII:

Effective Date.

Except for Parts V and X, which take effect October 1, 2015, the proposed substitute bill would take effect on July 1, 2015, provided Senate Bill 5052, as amended, is enacted into law by July 1, 2015.

Local Funding.

Funding of at least $12 million, in addition to the amounts required by the proposed substitute, is provided in the budget for distribution to local governments for marijuana enforcement under the distribution formula included in Part II. The $12 million is required to be appropriated, at least $6 million in each fiscal year of the upcoming biennium. If the $12 million is not appropriated in the operating budget this section is null and void and locals will not receive the additional funding.

Staff Summary of Public Testimony:

(In support) Marijuana excise tax reform is a top priority of legal marijuana business owners in Washington. The current marijuana excise tax structure negatively impacts legal marijuana businesses because the direct competition, the illicit market, is not subject to the high tax rates and confusing application. The current tax structure harms the profitability of small businesses and should be restructured to allow legal businesses to compete with the illicit market. Without tax reform, legal marijuana producers, processors and retailers will go out of business. No other product in Washington is taxed as heavily as marijuana. The tax rate should be lower and 30 percent is an appropriate tax rate. The legal marijuana retailers provide a larger selection and higher quality product than the illicit market can offer. The recreational market will succeed if they are allowed to charge a competitive price. As the number of legal marijuana businesses increase, the number of union wage jobs in Washington will increase as well. The allowance for legal marijuana businesses to transport and deliver products is also appreciated. This will allow legal marijuana businesses to better compete with the illicit market.

Local jurisdictions support the provision that allows a portion of marijuana excise tax revenue to be distributed to cities and counties. Cities and counties are partners with the state in the newly legalized marijuana market to ensure safety around marijuana producer, processor, and retail facilities. As marijuana use increases, the demands on local emergency services will increase as well. Paying for these additional services can be aided with the additional funds. The revision of buffer distances between marijuana businesses and specified facilities, including recreation centers and child care centers, will enable additional communities to support legal marijuana retailers and equalize access to legal marijuana across the state.

The marijuana research licenses will allow Washington to become leaders regarding marijuana studies, research and innovation.

The allowance for the Liquor Control Board to accept donation for information materials is appreciated. The informational materials are essential to continue educating the public about health risks to both adults and children. Continue to limit marijuana access to underage individuals.

The medical marijuana tax exemption is appreciated.

(In support with amendment(s)) Counties do not have a stable, robust general fund and access to the numerous tax revenue streams like cities and the state. Support is required to provide the services the state has required counties to provide. The proposed legislation would share less than 6 percent of the current marijuana revenue with local jurisdictions. Direct the revenue distributions currently directed to defunct programs to the State General Fund and make more revenue available to local governments. With additional support from local jurisdictions, the state will see more business and excise tax revenue. Because marijuana is so easily brought across jurisdictional boundaries, the local jurisdiction revenue distribution should not be limited to jurisdictions that have active recreational marijuana businesses. The revenue should be distributed to all local jurisdictions that allow recreational marijuana businesses and not limited to those that currently have an active recreational marijuana business. A broader array of marijuana offenses should be misdemeanors rather than felonies, which will make enforcement more comparable to alcohol enforcement and will allow cities to enforce lower-level marijuana offenses.

The Liquor Control Board is only allotted $1.2 million in the bill to reduce the illicit market. However, the LCB has identified the need for $5 million to achieve this objective and does not want to divert funds from other important work to fully fund this program.

The bill should also require local jurisdictions to receive voter approval before imposing a ban on recreational marijuana businesses. These changes to voting requirements would align the requirements for the marijuana industry and the liquor industry in Washington. The residency requirement should not be changed from three months to six months.

Insert the word "health" back into the phrase "health and beauty products" in section 7 of this bill. The products are both therapeutic and aesthetically enhancing.

Vaping lounges and night clubs serve underage individuals and should be regulated. Initiative 502 does not address this problem.

(With concerns) The proposed 30 percent marijuana excise tax rate is too high. Currently, marijuana excise tax revenue collected by legal marijuana businesses is not allowed to be deducted as business expense at the federal level for tax purposes. This needs to be remedied. Out-of-state marijuana businesses should also be allowed to do business in Washington.

While local jurisdictions appreciate the marijuana excise tax revenue distribution in this bill, the distribution of $20 million to all jurisdictions is arbitrarily low. Additionally, the revenue distribution should not end in 2022. If the state is asking local jurisdictions to combat the illicit market, the state should provide continued financial support for these efforts.

(Opposed) This legislation will close over 1,000 medical marijuana businesses in Washington. The benefit of this is unclear. Requiring medical marijuana patients to obtain their medicine from recreational stores is burdensome for patients. The bill will lead to the incarceration of medical marijuana consumers. Medical marijuana is legal at the federal level and recreational marijuana is illegal. The recreational market will need vertical integration in order to be successful and compete against the illicit market. Farmers must not be prohibited to sell their products or they will go bankrupt. Disbanding the medical market and illicit market were not objectives of Initiative 502.