Over the past month, both Delaware and Minnesota have legalized adult-use cannabis. They are the first two states to legalize in 2023 and represent the 22nd and 23rd states to allow for adult-use commercial cannabis markets. Both states continue the trend by states of decriminalizing cannabis and legalizing medical cannabis first and then moving toward adult-use legalization.
DELAWARE
On April 23, 2023, adult-use cannabis became legal in Delaware following Gov. John Carney’s decision not to veto HB 1, a bill that legalizes possession of cannabis by adults 21 years old and older. Carney also elected not to veto HB 2, an act regulating and taxing adult-use cannabis, which became effective without his signature on April 28, 2023. Carney had previously vetoed legislation legalizing adult-use cannabis and has repeatedly made clear that he does not support the legalization of cannabis for all adults.
While HB 1 and HB 2 passed both houses of the Delaware Legislature, the legislation did not have enough votes to override a veto by the governor. However, in a statement issued on April 21, 2023, Carney agreed to allow legalization to move forward, stating, “I believe we’ve spent far too much time focused on this issue, when Delawareans face more serious and pressing concerns every day. It’s time to move on.”
Key highlights of the two laws include the following:
- permitting possession of limited amounts of cannabis for adults 21 and older
- creating separate social equity licenses for those most impacted by cannabis prohibition
- setting a timeline for the opening of applications and the issuance of licenses
- allowing vertical integration
- continuing to forbid home cultivation
- taxing adult-use cannabis at a 15% tax rate
Licensing and Regulatory Framework
While Delaware HB 1 makes possession of cannabis legal, nearly all other aspects of cannabis legalization and regulation are contained in Delaware HB 2. HB 2 splits regulatory action between two agencies: enforcement of cannabis laws and regulations will be overseen by the Division of Alcohol and Tobacco Enforcement of the Department of Safety and Homeland Security (the Division), while the creation of regulations implementing HB 2 has been tasked to the newly formed Delaware Marijuana Control Act Oversight Committee (the Committee). The Committee will create licensing criteria, the application process, and marketing and labeling rules.
HB 2 creates four classes of “open licenses” and “social equity licenses,” including a retail marijuana store license, marijuana testing facility license, marijuana cultivation facility license, and marijuana product manufacturing license. The state establishes limits as to the number of each license type to be issued during the initial licensing period, which will last at least two years at the discretion of the Committee. Social equity licenses are available only to entities with 51% ownership by individuals who were convicted or adjudicated delinquent, or those directly related to someone convicted or adjudicated delinquent, of certain cannabis-related offenses. Social equity licenses have reduced licensing fees, but under HB 2, at least, there are no operational differences between open and social equity licenses. Notably, in stark contrast to New York, there is no statutory prohibition on vertical integration, and retailers are explicitly permitted to obtain cultivation licenses.
HB 2 also creates two microbusiness licenses — a marijuana cultivation facility license and marijuana product manufacturing license. Microbusinesses are limited to entities with majority ownership by individuals who have lived in Delaware for five of the previous 10 years and are restricted to 10 employees, 2,500 square feet of canopy area, and 1,000 plants per month. However, the residency restriction may be challenged in court, as other states have seen their residency requirements invalidated under the dormant commerce clause.
While the Committee will promulgate most cannabis regulations, HB 2 contains a number of restrictions on where and when cannabis can be sold or delivered. Cannabis cannot be sold or delivered on Easter, Thanksgiving, or Christmas. It also cannot be sold or delivered between 1 am and 9 am Monday through Saturday, or before noon or after 8 pm on Sunday. Municipalities with more than 50,000 residents can further limit Sunday hours to as few as four hours and may set earlier closure times. However, HB 2 sets special hours of operation for retail stores between October and December, during which time cannabis sales may occur between 8 am Friday and 10 am Sunday. Sunday operation requires an additional biennial fee. Municipalities may prohibit establishments with any class of cannabis license from operating within their borders. Again, this contrasts with New York’s approach and more closely aligns with neighboring New Jersey. New York law allows municipalities to prohibit retail cannabis activity only within municipal borders, whereas New Jersey law allows municipalities to prohibit all cannabis businesses.
Finally, HB 2 creates conditional licenses, available to social equity and microbusiness applicants. Like New Jersey’s conditional license program, it allows these applicants to apply for licenses prior to securing real estate, and it gives them 180 days to secure a site following receipt of the conditional license.
Personal Use
Individuals 21 years old and older may possess up to one ounce of dry cannabis, 12 grams of concentrate, and cannabis products containing 750 milligrams of delta-9 THC.
Employers can still forbid cannabis use, as can property owners. However, landlords may prohibit non-smoked cannabis only if: 1) the landlord is a resident of the building, no more than three rooms in the building are rented, and no more than three tenants occupy the building; 2) the residence is incidental to detention or provision of medical, geriatric, educational, counseling, religious, or similar services; or 3) failure to prohibit cannabis possession or consumption would cause the landlord to lose monetary or licensing-related benefits under federal laws or regulations.
Timeline
HB 2 requires the Committee to start accepting applications 13 months from its effective date, or on May 28, 2024, and begin issuing licenses one month later. Delaware will have a staggered rollout of licenses based on license type, with a limited number of licenses available at the outset. The Committee may lift the limits on the number of licenses it may issue after two years.
Taxes
Adult-use cannabis will be taxed only at the retail level. The tax will be 15% of the sale price, in addition to any applicable sales tax. The tax revenue will be deposited into the Marijuana Regulation Fund (the Fund). Seven percent of the revenue will immediately be deposited into the Justice Reinvestment Fund. The Fund will then utilize the tax revenue to fund the Committee, the Division, and the Criminal Justice Council’s administration of the Justice Reinvestment Fund. The remaining tax revenue may then be appropriated by the General Assembly.
Notably, Delaware will allow cannabis establishments to deduct their business expenses when determining state tax liability. This differs from federal law. Other states — including Massachusetts, New York, and, most recently, New Jersey — have “decoupled” their tax law from federal law with respect to the deductibility of business expenses. Whereas those other states decoupled separately from adult-use legalization, Delaware has decoupled concurrently with adult-use legalization.
Other Considerations
Home cultivation of cannabis remains illegal in Delaware. And while Delaware has created a Justice Reinvestment Fund to assist the communities that were most negatively affected by cannabis prohibition, the statutory language is vague as to what measures will be taken.
Delaware’s location between two states that have already legalized adult-use cannabis — New Jersey and Maryland — will also pose a challenge to its new industry. Delaware is only 9 miles wide at its narrowest point and 35 miles at its widest; therefore, Delaware residents will never be too far from New Jersey’s or Maryland’s cannabis market. Delaware will have an incentive to lower the cost of business for its own operators in order to compete with its neighbors. Delaware legalizing adult-use cannabis may also apply additional pressure on Pennsylvania to legalize adult-use cannabis.
MINNESOTA
On May 30, 2023, Gov. Tim Walz signed House File 100 (HF 100), legalizing adult-use cannabis in Minnesota. The 320-page bill was the product of a robust vetting process in both houses of the Minnesota Legislature, having been considered by 15 House committees and 13 Senate committees. A bicameral conference committee met three times to resolve differences between the House and Senate versions, and the two houses voted to approve the final version on May 18, 2023, and May 20, 2023. The North Star State joins Michigan, Illinois, and Missouri as Midwestern states where cannabis is legal for adults 21 years of age or older.
Key highlights of the legislation include the following:
- allowing the home cultivation of up to eight plants (including four mature plants) and the possession of up to 2 pounds of cannabis flower at an individual’s private residence
- authorizing the sale of up to 2 ounces of flower, 8 grams of concentrate, or 800 milligrams of tetrahydrocannabinol (THC) in edible products by licensed cannabis retailers
- establishing the Minnesota Office of Cannabis Management, which will regulate the new adult-use program as well as the state’s existing medical program and hemp product market
- setting a 10% tax on retail cannabis sales, with one-fifth of that revenue going to local governments to cover the costs of licensing and enforcement
- prohibiting local governments from banning cannabis businesses altogether, although localities may limit the number of cannabis retailers based on the population of the jurisdiction and may regulate the time, place, and manner of cannabis businesses’ operation
- implementing social equity goals, including automatic records expungement of certain cannabis offenses beginning on August 1, 2023, and the launching of a program to ensure that individuals and communities most harmed by prohibition have an opportunity to engage in the state-legal cannabis industry
Personal Use
Minnesotans 21 years of age or older may possess up to 2 pounds of cannabis flower, up to 8 grams of cannabis concentrate, and edible cannabis products (including lower-potency hemp edibles) containing up to 800 milligrams of THC. Cannabis products may be used in a private residence, on private property unless explicitly prohibited by the owner of the property, or on the premises of an establishment or event licensed to permit on-site consumption. The use, possession, or transport of cannabis paraphernalia and the possession or transport of up to 2 ounces of cannabis flower in a public place are also permitted.
Licensing and Regulatory Framework
HF 100 creates the new Office of Cannabis Management (OCM), which will be responsible for regulating commercial cannabis activity and issuing cannabis business licenses. In addition to regulating the adult-use market, OCM will take over responsibility for regulating the state’s existing medical cannabis program as well as for regulating hemp and hemp-derived products, including low-THC edible products, which were made legal pursuant to a state law passed last year.
The new law creates 16 different licensing categories, including cultivator, manufacturer, retailer, wholesaler, transporter, testing facility, event organizer, and delivery service. OCM will also be responsible for issuing licenses for medical operators and for manufacturers and retailers of lower-THC edible products.
HF 100 allows for vertical integration by cannabis microbusiness and cannabis mezzobusiness licensees. Operators holding such licenses may participate in all aspects of the supply chain, from cultivation to retail, but the sizes of those businesses are capped. A mezzobusiness can cultivate only up to 15,000 square feet of canopy at an indoor facility (or 1 acre in an outdoor location), may manufacture only products based on the amount that can be harvested from such a canopy, and is restricted to three retail locations. Microbusinesses are limited to 5,000 square feet of canopy (or one-half acre in an outdoor location) and one retail location. Otherwise, vertical integration is limited to medical providers that obtain medical cannabis combination licenses. Hemp businesses may also be vertically integrated.
Timeline
While the personal-use provisions go into effect on August 1, 2023, HF 100 does not establish a date by which OCM must start accepting applications or granting licenses for commercial cannabis activity. It is expected to take an additional 12 to 18 months before licenses are issued and the state’s first adult-use cannabis sales are expected in the first quarter of 2025. Retailers will be able sell up to 2 ounces of cannabis flower, up to 8 grams of cannabis concentrate, and edible cannabis products with up to 800 milligrams of THC during a single transaction to a customer age 21 or older.
Taxes
Adult-use cannabis sales will be taxed at 10% (in addition to the state’s existing sales tax). Eighty percent of the funds generated go to the state’s general fund, with the remainder going directly to local governments to help pay for implementation costs. Local jurisdictions are prohibited from adding their own cannabis-specific taxes on cannabis product sales.
Local Control
In contrast to the path taken by many states that have previously legalized cannabis for adult use, including older markets like California and newer markets like Delaware (see above), HF 100 prohibits local jurisdictions in Minnesota from banning cannabis businesses altogether. However, cities and counties are permitted to limit the number of cannabis retailers in their jurisdictions to one location for every 12,500 residents. And localities can regulate the time, place, and manner of operation of cannabis businesses in the localities. The law requires a local jurisdiction to certify that an applicant for a cannabis license meets all local zoning, fire, and building ordinances within 30 days of receipt of an application from OCM. And the legislation contains a unique provision allowing cities and counties to own and operate their own cannabis dispensaries if they so choose.
Social Equity
In crafting the law, the bill’s sponsors added several provisions with the goal of remedying the negative impacts of the war on drugs. The law requires the automatic expungement of certain cannabis offenses beginning on August 1, 2023, and creates a Cannabis Expungement Board to consider the expungement of felony cannabis offenses. And the scoring system used by OCM to evaluate cannabis license applications must award additional points for individuals meeting the criteria of a “social equity applicant,” with the goal of facilitating economic opportunity within the nascent industry for individuals disproportionately impacted by the war on drugs. Social equity applicants include applicants living in low-income areas or areas that experienced a disproportionately large amount of cannabis enforcement, farmers from underrepresented communities, and veterans who are disabled or lost honorable status due to cannabis-related offenses, as well as individuals convicted of cannabis offenses or who have an immediate family member with such a conviction.
Medical and Low-THC Edible Providers
OCM will take over regulating and licensing for the state’s existing medical cannabis market and for low-THC edibles, which were legalized through the passage of HF 4065 last year. Medical cannabis providers will continue operating under the existing rules until March 1, 2025, when OCM will take over the regulation and licensing of such businesses. The new law allows medical operators to participate in the adult-use market beginning on March 1, 2025. Medical cannabis sales will not be subject to the new 10% tax on adult-use cannabis sales.
HF 100 amends Minnesota Statute 151.72 (the state’s existing low-THC edible law) to clarify that low-THC edible products may contain delta-8 or delta-9 THC that is extracted from hemp, even if those compounds are artificially derived. But all other artificially derived cannabinoids, including THC-P, THC-O and HHC, are expressly prohibited. Sellers of low-THC edible products are required to register with the Minnesota Department of Health on or before October 1, 2023. OCM will take over the licensing, regulation, and enforcement of laws relating to such products on March 1, 2025.
Other Considerations
The legalization of adult-use cannabis in Minnesota, coming on the heels of similar action in Delaware, signals that the momentum of state cannabis legalization is still strong, notwithstanding defeats at the ballot box in Arkansas, North Dakota, and South Dakota in the November 2022 election and in Oklahoma earlier this year.
Minnesota does not share land borders with any states where cannabis is legal for adults. Therefore, the North Star State is highly likely to see cannabis “tourism” from neighboring Wisconsin, Iowa, North Dakota, and South Dakota, which will likely increase pressure for adult-use legalization in those states.
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ORIGINALLY PUBLISHED AT JD SUPRA
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