Marijuana board considers Outside investment in testing labs

Reversing course on an earlier policy, the state is considering allowing Outside investment in marijuana businesses.

The Marijuana Control Board is seeking public comment on a set of regulations that would allow limited investment from outside the state in marijuana testing facilities.

The testing facilities are a bottleneck in the state’s industry; all cannabis products bound for the retail market have to pass through a lab first.

There are currently three operating testing facilities in the state: one in Anchorage, one in Wasilla and one in Ketchikan. A fourth is approved for Juneau, pending inspection, according to the Alcohol and Marijuana Control Office.

One of the problems with getting more testing facilities in the state has always been the high cost of entry. In addition to the license application fee of $2,000, an operating testing facility has to employ a scientific director, who must hold a college degree in chemical or biological sciences and have a number of post-graduate scientific lab experiences and conduct a comprehensive array of tests on cannabis products.

The fee to renew a testing facility license is currently $2,000, but a separate proposed regulation would raise the fee to $5,000 for renewals.

When the Marijuana Control Board began regulation cannabis businesses, one of the lynchpin items was that only Alaska residents could invest in or own them. Part of the reasoning was to keep an already-developed cannabis industry in the Lower 48 from swooping in and taking control of the new industry away from Alaskans.

[Earlier coverage: ‘Real nonsense’: Why are Alaska marijuana buyers obsessed with high potency?]

However, with limited capital available because of the state’s small population and lack of access to traditional lending methods due to marijuana’s status as a federally illegal drug, cannabis businesses have struggled to find the money to get off the ground.

In 2015, the board passed a regulation allowing anyone who qualified as an Alaska voter to invest in cannabis businesses.

However, the board tightened that policy later, requiring investors to qualify for a Permanent Fund dividend, a much stricter requirement.

But a new regulation project would open up the opportunity for entrepreneurs applying for cannabis testing facility licenses to seek Outside investment within a number of boundaries. The Marijuana Control Board voted to send the regulations out for public comment at its meeting in Nome Sept. 11-13.

The Alaska Department of Law suggested revising some of the language to make it more quantifiable than the original language, boiling it down to five conditions: whether the investor “directly contributes to improvements in the testing facility’s procedures; enables or supports hiring and retention of highly qualified employees; provides expertise not otherwise reasonably available in this state; enables the facility to obtain and maintain state-of-the-art equipment, and any other factor the board deems relevant,” according to the memo attached to the regulations.

The last factor drew some attention from the board members. Member Loren Jones said he thought it was too ambiguous, allowing board members to use too much discretion.

Board chairman Mark Springer said the ambiguity would provide the breadth board members would need to regulate participation in a new opportunity for investment in the industry.

“We do really need the leeway to look at that investor from all sides and say, ‘Eh, maybe not,’” he said.

The board also considered whether to change its policy regarding cultivator tax delinquency. During every board meeting, the members receive a packet of notices of violation — NOVs for short — that outline the business owners who have violated conditions of their licenses.

Oftentimes, those NOVs have to do with cultivators who are behind on the taxes they owe to the state.

Of the packet of notices the board received for the September meeting, about half were because of delinquent taxes.

The main debate was whether continuing to issue notices of violation over and over again for tax delinquency is appropriate, or whether the board should look at revoking licenses.

Some members suggested switching away from using NOVs for tax delinquency at all, but AMCO Director Erika McConnell said the NOVs are developed from a template and any other form of notification would be just as much or more work for staff.

Board member Bruce Schulte suggested a suspension of some privileges, like transferring product, until taxes are paid rather than revoking a license.

Springer pointed out that that would interrupt cash flow, which would exacerbate the problem of not being able to meet tax liability. Revoking a license would cut off the cultivator’s ability to grow or sell product to meet that tax liability as well, he said.

“Especially for a small cultivator, it’s a very, very competitive marketplace, and some people as you suggested didn’t realize what they were getting into,” Springer said.

“Even some standard (cultivation facilities) put a lot of investment—they either realized they couldn’t sell what they thought they could or they had crop issues.”

Underlying the debate is the issue of tax structure on the cannabis industry. Cultivation excise taxes are assessed on weight alone in Alaska — as price fluctuates in the market, assessed tax obligations stay the same, cutting into cultivators’ profits.

As more people have entered the industry and the prices have become more competitive, industry members have begun advocating for a change in the tax structure.

The Marijuana Control Board does not have the authority to change the tax structure; that authority lies with the Legislature.

Ultimately, the board agreed to continue to issue NOVs for tax delinquency, but to consider the cases of businesses that amass NOVs over time and consider taking action based on the recommendation of the AMCO director and working with the business to get on a repayment plan if possible.