002: The Cannabis Law Landscape with Dan McKillop
002: The Cannabis Law Landscape with Dan McKillop
The vast majority of American states now have medical cannabis programs, and 11 states plus Washington D.C. have adult (or recreational) use programs as well. However, cannabis is still federally illegal, and the rules and regulations vary greatly depending on what side of the industry you’re in and where you’re doing business.
Few people understand the nuances of this highly complex industry better than Dan McKillop. Dan is an attorney at Scarinci Hollenbeck, where he works with companies seeking to break into the medical or adult cannabis industries. Dan was named a Cannabis Law Trailblazer by the National Law Journal in 2018, served on the New Jersey State Bar Association’s (NJSBA) Cannabis Law Special Committee for the 2018-19 term, and he has been invited to speak on various panels regarding developments in cannabis law by organizations such as NJBiz, the NJ Tech Council, the Commerce & Industry Association of New Jersey, and the New Jersey Cannabis Industry Association.
Today, Dan joins our podcast to break down the major differences between the medical and adult cannabis industries in America, the common barriers to entry that many people launching a business on either side face, and why Dan thinks full legalization will come sooner than later.
- Why the prohibition against cannabis is nothing at all like the Constitutional prohibition on alcohol – and why states are effectively being left alone to enforce cannabis laws.
- The challenges cannabis business owners face when it comes to getting bank accounts and paying employees – and why smaller banks are willing to service the industry when large banks are not.
- The barriers to legalization in New York and New Jersey – and what would need to happen for both states to begin to allow adult use.
- Dan’s advice for anyone who wants to break into the cannabis industry at any level – and why it’s never too early to start preparing.
“Of course, they have the backing of the biggest banks in the nation, if not the world and they have to overcome that hurdle because of the federal illegality. So, that’s largely one of the main reasons why you don’t see the big alcohol, tobacco, pharma companies just absolutely jumping into the deep end of the pool. They’re waiting. They’re on the side of the pool. They’re in their swimsuits. They’re ready to go.” – Dan McKillop
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Welcome to The Green Repeal, the podcast that helps marketing and advertising experts navigate the business world of cannabis as it marches towards federal legalization. Join me, Rick Kiley, and my co-host Jeff Boedges, as we interview economists, historians, entrepreneurs, legal experts, and more. Each episode will take you behind the green and help you and the companies you serve successfully overcome the challenges of marketing a product in a heavily restricted industry. This is your guide to cannabis marketing and advertising. This is The Green Repeal.
Rick Kiley: Hello, everyone, and welcome to our second episode of The Green Repeal. In our first episode, we provided a 30,000-foot view of the industry with Sean Everett of Everett Advisors. Today, we continue the conversation about the state of the cannabis industry but this time from the legal side. To explain all these legal things, we welcome Dan McKillop, counsel at Scarinci Hollenbeck. Dan leads the New Jersey-based law firm to cannabis practice in addition to his notable work in the world of environmental law. Dan represents companies that are seeking to obtain medical and adult-use cannabis license and is well versed in cannabis legislation. Recently, he was selected by the National Law Journal as a 2018 Cannabis Launch Trailblazer. Dan is on the front lines of cannabis legislation in New Jersey and New York and we are lucky to be able to speak with him today. Enjoy.[INTERVIEW]
Jeff Boedges: So, today welcome. Our guest today is Dan McKillop.
Rick Kiley: Dan.
Jeff Boedges: Dan the man is an attorney for Scarinci Hollenbeck. They have offices in New York and New Jersey, and he is an expert in cannabis legal. And our topic today of course then is, Rick?
Rick Kiley: Cannabis legal. We use an expert and he kind of gave a little like…
Dan McKillop: I can’t not think of the – I slept at a Holiday Express Inn last night or whatever that commercial is.
Rick Kiley: That’s good. That’s good.
Jeff Boedges: it’s almost like you have no training at all.
Dan McKillop: It’s like that, isn’t it?
Rick Kiley: Yeah. So, here we’re going to talk today, hopefully, with Dan to give a broad overview I think of the legal landscape for the cannabis industry right now. Dan has graciously agreed to give us his time today. And I think we’re just going to try to jump in, Dan, and feel free to add anything in here when we don’t ask the right question and correct us. But I think just for the laypeople out there, I know there are two types of legal status for cannabis across the US. There’s legal medically and there’s legal for adult use or recreational use. I hear both terms. What are the main differences or sort of constraints around each of those two?
Dan McKillop: Yeah. Sure. No problem. And first of all, thanks for the invite. Happy to be here in the space here with SoHo Experiential downtown and happy to be a part of the new podcast effort. I mean, good luck with it. Hopefully, I don’t torpedo it for you here.
Rick Kiley: No, you already.
Jeff Boedges: You’re already better than both of us.
Dan McKillop: Already better than the first guest.
Jeff Boedges: You might be hosting next week.
Dan McKillop: Sure. Well, listen, yeah, broadly speaking, two different types of legal cannabis industries or markets in America, medical or medicinal, which most people know most a lot about. The other is recreational or adult use, which is really the term that industry members use and prefer rather than recreational just because, frankly, anything termed recreational sounds a bit too loosey-goosey. It just allows folks who have a problem with the whole thing anyway to say, “Oh, it’s recreational. They’re all just messing around,” and it’s not the case but largely…
Rick Kiley: This isn’t fun for me.
Dan McKillop: Right? Exactly.
Rick Kiley: I just want to use it.
Dan McKillop: This isn’t recreation. With respect to medical and with respect to adult use, it’s important to know at the outset, of course, this is totally federally illegal. The entire industry, medical recreational/adult use, absolutely federally illegal but state-by-state-by-state states are legalizing it. They’re legalizing it on the medical side. They’re legalizing it on the adult-use side. The vast majority of the states have legal and medical cannabis programs. And 11 states and Washington DC have adult-use legal programs as well. On the medical side, broadly speaking, every state is a little bit different and they get to do it however they want to but broadly speaking, in order to be a patient in a medical program, you’re going to have to demonstrate that you have a bona fide relationship with a physician. That physician has to be registered in the state program. You have to demonstrate that you have a qualifying condition and every state is different.
New York and New Jersey are largely similar. Just to use New Jersey as an example, some of the qualifying conditions are pretty severe stuff, cancer, MS, Crohn’s. It now includes things like migraines, chronic pain, musculoskeletal pain, PTSD. So, it’s pretty broad and it’s been broadened pretty significantly over the last couple of years. But you’re going to have to demonstrate those things that you’ve been working with a doctor with respect to a qualifying condition for a long time. You’ve tried different things, if not everything. The doctor himself or herself is registered in the state program. They are therefore allowed and permitted by the state to issue you a recommendation to go get medical cannabis from a licensed provider, and then you go and do that. You generally speaking might be assigned to a particular dispensary. That’s broadening as well but that’s generally how it works on the medical side.
Jeff Boedges: Are there insurance provisions for that? No insurance for these folks?
Dan McKillop: Everybody is paying out-of-pocket.
Rick Kiley: And can any doctor like is there any doctor or qualifying doctor or do the doctors have to do something specific in order to prescribe?
Dan McKillop: Yes. The doctors themselves have to be registered with the state program.
Rick Kiley: Is it just like a form you fill out online or is it like…
Dan McKillop: Generally speaking.
Rick Kiley: Yeah, okay.
Dan McKillop: You know, it’s not too difficult. As I understand, it’s not too difficult to process for a physician to get licensed in any given state. Frankly, there is some reluctance on the part of physicians to participate in the program because they’re worried that for whatever reason.
Jeff Boedges: Have they change your name to like Dr. Vogue or something?
Rick Kiley: Well, something like that, right?
Dan McKillop: Or they’re worried about blowback with their other patients. Some states required and New Jersey used to require, no longer does, that the doctors who are registered in their medical cannabis program have their names appear on a public list. And then sort of counter-intuitively, they don’t want that because they don’t want to be besieged by people who want to get into the state medical program. So, there’s a little bit of that tension, but generally speaking, it’s not terribly difficult for a physician to get registered and then they can help their patients.
Rick Kiley: Got it. And so like, for the adult-use states, like what are the parameters for someone being able to, I guess, buy and use the product?
Dan McKillop: Yeah. It’s generally regulated like alcohol. You’re going to have an age restriction. Usually, it’s 21. You’ll find that 21 it seems to be kind of sort of the common bottom line across all the adult-use legal states. Every state has its own agency or department or division, or whatever body they want to set up that will regulate the industry. They’ll be in charge of putting together statutory language, regulatory language. They’ll be in charge of enforcement. They’ll be in charge of permitting and licensing and just administering the program in general. And there will be as I say the age restrictions, 21 and up, generally. There will be quantity restrictions. You’re not allowed to purchase more than X per month or X per visit or both. And then…
Jeff Boedges: So, they are tracking that. So, when you go in, you put your driver’s license down then like, “All right, Jeff got X amount,” and so he’s only allotted Y amount more for the rest of the month?
Dan McKillop: Correct. Yeah, because every dispensary out there again, broadly speaking, is required to report back to the state agency or entity that’s overseeing the program and report to them basically their sales and show where the product is going, to whom it was sold, how much, and that’s one way that the state agency whatever it may be keeps track of the market, keeps track of the money flow. Make sure that the dispensaries are complying as they go through their business day and week and month and year.
Jeff Boedges: Is there an inter-dispensary database? So, again, Jeff goes to dispensary A and gets my monthly allotment and then I sneak down the street and I go to the dispensary B and I get my monthly allotment there. Is there some big brother watching all this stuff? Or does it apply state-by-state?
Dan McKillop: It’s state-by-state-by-state and there is, as you kind of say, inter-dispensary eyes on everybody. I mean that’s the whole point. You may be precluded by whatever state mechanism might be in place in a given state from visiting more than one dispensary per day.
Jeff Boedges: So, if you’re buying any kind of marijuana for adult use, it’s best to get the kind that doesn’t make you paranoid because there are people watching.
Dan McKillop: Exactly, right.
Jeff Boedges: Okay. Got that.
Rick Kiley: These are the important things we’re looking to solve here in The Green Repeal. Okay. So, but you did mention, let’s jump to the big sort of like a strange question I think a lot of people don’t understand, including me. You mentioned it from the beginning. It’s still federally illegal and yet…
Jeff Boedges: Here we are.
Rick Kiley: Here we are. We’re having this conversation. There are several states that are doing it. So, if it’s illegal, but the states are making it legal, why is that okay? Is the federal government just choosing to turn a blind eye at the moment saying we have other priorities or can they not really enforce it? Like, what’s happening there?
Dan McKillop: Yeah, a couple of different things. And again, you have to talk about it in terms of the medical side of things and the adult side of things. It requires a little bit of a history lesson, and we’ll go over it very quickly, but in 1970, the Controlled Substances Act is passed. This is the federal law that basically says, “Here are all the drugs that we think are terrible and we’re going to schedule them from 1 to 5, one being the really bad ones, heroin, LSD, ecstasy, Quaaludes and they put cannabis on there too. Now, as we all kind of know in this day and age, one of these does not belong, but in 1970 they threw it on there. And there’s any number of reasons for that. I think there is some merit in the idea that there was a lobbying effort going on by Big Pharma, Big Alcohol, Big Tobacco to put cannabis on Schedule 1 because it’s cutting into their money, frankly. And there were other reasons, but notwithstanding the fact that in 1970, cannabis gets scheduled as Schedule 1, states start to legalize on the medical side. California legalized medical cannabis in 1996. They were the first state to do it. And between 1996 and 2012, roughly a dozen states or so legalized medical. And in 2012, Colorado and Washington legalized adult use.
In 2013, and this kind of gets to your question now, the federal government finally kind of woke up a little bit and they realized what was going on out there and they realized it wasn’t going to stop and they realized that they had to issue some guidance to everybody out there in the field on the federal level about how to enforce these things and how to enforce the Controlled Substances Act. The reality is the federal government didn’t have the manpower to go into each one of these states to start enforcing.
Rick Kiley: So, were they just like, they just weren’t really enforcing it all along like they were just like the states will take care of this.
Dan McKillop: They were generally relying on the state, local police enforcement, local law enforcement. Again, because of a manpower issue. The feds don’t have the manpower to go in every single state and start knocking down doors so they’re relying on the locals. But then in 2013, the Cole Memorandum is issued, and this is Deputy Attorney General James Cole. This is the Obama era Cole Memo. And it basically said, “Look, we the federal government, we see you states out there legalizing on the medical side. We see a couple of you legalizing on the adult-use side. We acknowledge basically that we don’t have the manpower. We acknowledge we have to rely on the states and as long as everyone out there with a legal state program on either side, medical or recreational, adult-use, stays in line with a couple of general federal priorities with respect to cannabis, we’re generally going to take a hands-off approach. We’re not going to come looking for you and we are just going to totally rely on local law enforcement.”
And these priorities were things like make sure that kids aren’t getting their hands on it, make sure that it’s not getting diverted into states that don’t have legal programs, make sure that anti-gang and anti-cartel mechanisms are in place. I mean, they basically said, “As long as you states have robust regulatory programs surrounding this, we’re going to leave you alone by and large.” So, that happens in 2013. In 2014, the Rohrabacher–Farr amendment comes into being. This is a rider to the federal spending bill.
Rick Kiley: Rohrabacher–Farr.
Dan McKillop: There you go. Just rolls right off the tongue.
Jeff Boedges: It does. I think I have one of those guitars at home.
Dan McKillop: I think so. I think you do. But this is an amendment to every federal spending bill since 2014. And long story very short, it prohibits the Department of Justice from spending money to interfere with state cannabis programs on the medical side. And so, basically, any state with a medical program by federal law doesn’t need to necessarily worry about the Department of Justice coming in and knocking them down. So, those two things kind of carry the day between the Cole Memo and the Rohrabacher–Farr amendment and that’s largely what has carried us to today and allowed for the expansion on both sides of the industry.
Jeff Boedges: So, unlike alcohol when it was prohibited, which was prohibited in basically as an amendment to the constitution that was later repealed by another amendment, there is no equal type legal footing for or against cannabis in the United States. It is listed right now. The only place it’s listed as illegal is on this 1970.
Dan McKillop: The Controlled Substances Act is kind of the bedrock. There are other laws, but the CSA is kind of the bedrock foundation for federal illegality of cannabis use, possession, distribution, sale.
Jeff Boedges: But that doesn’t take a constitutional amendment to fix.
Dan McKillop: No, no, indeed. And in fact, there are multiple efforts afoot down in DC to get cannabis descheduled or rescheduled at least off of Schedule 1, or maybe 2, 3, whatever.
Jeff Boedges: So, what’s an example of a Schedule 5? Aspirin?
Dan McKillop: Yeah. Fairly benign stuff. I mean fairly commonplace over-the-counter kinds of things that if taken in quantity can really do some damage, but it’s not LSD.
Rick Kiley: Cinnamon. You know, you can have a lot but not that much.
Jeff Boedges: You don’t want to have that next day. Cinnamon binge. Onion spice.
Rick Kiley: It’s going to fall here, right?
Dan McKillop: Sorry. Exactly. Yeah, fairly benign stuff. The goal is to for the folks who want to have cannabis reschedule is at least get it off Schedule 1 and see what happens.
Rick Kiley: Is there anything else like I can’t think of any of this. Is there anything else that sort of works this way where it’s like federally illegal, but states have made it legal like that you can think of? I haven’t heard of this.
Dan McKillop: I don’t think so. The one thing to think about might have been online gambling, which now has gone sort of the same way cannabis is going that state-by-state was everybody was looking at that and sort of making their own decisions, and then law-making lobbying efforts and whatnot.
Rick Kiley: Well, that’s interesting. Yeah.
Dan McKillop: I’m not…
Jeff Boedges: Is gambling federally legal?
Dan McKillop: Well see, I’m not an expert in myself but in thinking about the question just off the top my head, that kind of came to mind. Let me answer your question this way. I can’t think of another industry, which is the correct term to use here in this particular position where it does have this federal illegality issue, and nevertheless, a majority of states have medical programs and a growing number have adult-use programs and they’re all largely being left alone by the federal government.
Rick Kiley: Yeah. Okay. So, you said it was 11 states that have adult-use programs that are legal. Can we rattle them off? So, it’s kind of like California, Washington.
Dan McKillop: Yeah. It’s Alaska.
Rick Kiley: Alaska?
Dan McKillop: Yeah. Alaska.
Jeff Boedges: Who’s going to enforce anything in Alaska?
Dan McKillop: Yeah. Alaska, California. The mooses are going to run you down.
Jeff Boedges: The nearest policeman is 5,000 miles away. He’s going to send you a very nasty note.
Dan McKillop: But it’s Alaska and California and Colorado. Illinois.
Rick Kiley: Really? I didn’t know that.
Dan McKillop: Yeah, pretty recently. Maine, Massachusetts, Michigan. Michigan has a big program, actually, medical program. Nevada, Oregon, Vermont, and Washington. So, it’s basically the whole West Coast and from Alaska all the way down to California. And it’s moving East and it has been for years, which is kind of how it caught my attention, frankly, a few years back, and kind of kicked off me getting into the field.
Rick Kiley: And on the medical side, I mean, it’s in the 30s, right? Like 35?
Dan McKillop: Yeah. The stat that you keep seeing everywhere is that 33 states have medical programs. When you drill down on that a little bit, what you find is that there are actually only four states that have zero medical cannabis programs because some states have full-on any potency THC sort of programs. Other states have low THC medical programs. So, four states have nothing. They’ve just said, “All right…”
Rick Kiley: Hard no. Which of these four…?
Jeff Boedges: This should be a game show. Could we guess?
Dan McKillop: Yeah. Let’s see. No, let’s guess.
Rick Kiley: Texas.
Dan McKillop: Wrong.
Jeff Boedges: Utah.
Dan McKillop: Wrong.
Rick Kiley: Alabama.
Dan McKillop: Still wrong.
Jeff Boedges: Survey says, eh, and I think it was our third strike.
Dan McKillop: They’re Idaho and South Dakota and Nebraska and Kansas all currently have hard nos on both adult-use and medical.
Rick Kiley: Interesting.
Dan McKillop: Everybody else, even Texas and Texas is another one that fairly recently has kind of come on board, everybody has some degree of medical program.
Rick Kiley: With the exception of South Dakota. I mean, those are some big agricultural states so strange to me since…
Dan McKillop: Yeah. It is obviously and now we get into the economics of it all which a huge part of it, but it’s a reality that this is a cash crop. Now, the regulations involved in cultivating and processing and even selling legal cannabis are immense, obviously, I mean, legion. So, query, whether growing or cultivating outside, is really what you’d want to do but nevertheless, take Kentucky as an example. Kentucky famous, of course, for being a tobacco-producing state for decades. Now, tobacco, of course, has the stigmas that it has in terms of health and whatnot and they’ve done a hard pivot to go to, which is itself cannabis. It’s just a different form of the plant basically with Mitch McConnell leading the way clearing the path for the 2018 Farm Bill. So, from the great state of, that’s right, Kentucky. So yeah, you’re right. You’re right.
Jeff Boedges: Mitch has always been the suspected head, though. I mean, for sure.
Rick Kiley: I mean, yeah, something’s going to…
Jeff Boedges: He’s making his money.
Rick Kiley: I’m going to keep politics out of the podcast. So, hey, Mitch.
Dan McKillop: Almost impossible to do but go ahead.
Rick Kiley: So, imagine like, does the fact that it’s federally illegal and legal in states, does that contradiction present challenges for people who are looking to operate your space legally?
Dan McKillop: Sure.
Rick Kiley: So, what’s the businessperson got to come across in order to operate that’s, I think, unique to the situation?
Dan McKillop: Yeah, sure. It poses all kinds of challenges. To take an example kind of front row example, it’s awful hard to get a bank account, if you’re a cannabis business. The large institutional banks regardless of whether or not they may or may not be investing in cannabis companies through funds and whatnot, and they are, but if you go to a bank, go to Bank of America or Chase or one of the big ones and you say, “Look, I’m going to try to get a license to participate in state XYZ’s legal cannabis program. I need a checking account,” you may have a hard time getting them to provide you services because the federal illegality problem causes enough concern on the part of the banks with respect to whether or not their work is going to be considered money laundering. They’re worried about their account holder clients violating, forget about federal law, they’re already violating federal law but violating the state cannabis laws and getting in trouble. The bank doesn’t want to have anything to do with your business if you go belly up. They don’t want to take in a cannabis business. That’s not what they do.
Jeff Boedges: It’s not the best collateral.
Dan McKillop: Correct. Yeah. So, you face those sorts of business account issues. You face issues with respect to paying your employees. How are you going to direct deposit their pay into a bank account at one of the big banks if the big bank won’t even provide you an account?
Rick Kiley: So, how are people who work for these companies being paid? In cash?
Dan McKillop: There are different workarounds, not necessarily cash. Obviously, everybody tries to avoid cash because of security concerns and whatnot. There are banks that are banking the cannabis industry. It is a myth to say that the banks are not allowed to do this. They are allowed to do this. There are all sorts of guidance documents from FinCEN, the Financial Crimes Enforcement Network and from the Feds saying, “If you choose to do this, this is what you need to do.” And the upshot is, beside all the sort of potential downside risks that I just mentioned, it just costs the bank 5X, 6X, 8X what it costs them to service a regular client. In other words, the record-keeping effort for a cannabis client on the part of any bank is wildly more complicated and requires – it’s a myth that banks are not allowed to bank the cannabis industry. The reality is that big banks besides the downside risks that I just mentioned a minute or two ago, they do a cost-benefit analysis because they understand given the guidance from the Feds about how to go about providing services to the cannabis industry, it’s just going to cost them a lot more, the record-keeping, the reporting.
It’s miles beyond what banks are going to have to do for any non-cannabis client. And frankly, the big banks just aren’t going to realize enough revenue from cannabis clients because the market is as small as it is to make that risk worthwhile. Now, the flip side of this is small banks, banks that are not FDIC insured, credit unions, Mom-and-Pop banks, they are listening to and are servicing the cannabis industry in greater and greater numbers for a couple of reasons. Number one, they see that they’re going to have to comply with all these record-keeping requirements and whatnot and they’re willing to do that because they can charge cannabis clients, whatever fees they want to, almost. The cannabis operators are frankly desperate in a lot of situations to find a bank that will provide them services and so they will pay those fees. And for those small banks, that sort of cannabis clientele would represent a large slice of their revenue pie relative to their other clients. So, it’s worth it to them. It’s worth it to them.
And small banks and credit unions and larger banks, as time goes by, they all do see what is happening here on a larger level. They understand that medical cannabis is moving forward and frankly is not going to get stopped by anyone in the country from President Trump on down. Everybody is in favor of medical cannabis programs. I think, I mean, obviously you read the stats and whether or not you put it much water in any of these stat but 95% of Americans extensively believe in medical cannabis and favor its legalization. So, banks who are providing services to medical operators really aren’t terribly concerned with anything going wrong other than their clients not being able to actually operate the business, which of course, they vet before they give them an account anyway. On the adult-use side, it’s generally the same perspective. I think that the mentality out there is such that the conversation has gotten to a point where the momentum is so great that, number one, it’s not going to stop. The conversation is not going to stop. The federal government, at least under the current administration has signaled that they are very happy to let the states make up their own minds with respect to adult-use programs.
The Cole Memorandum, which I mentioned a minute ago, actually was rescinded in January 2018 and everybody freaked out. That was a long day for me. I was on the phone a long time that day, but the upshot of it was little effect basically. Then-Attorney General Jeff Sessions said, “Look, instead of command and control from DC on enforcement of this Controlled Substances Act, we’re going to let all you US attorneys out there decide what’s best for you and your own jurisdictions so go to it.” And the effect has largely been negligible. You don’t read about a whole lot of either medical or adult-use operations being shut down anywhere. If you do hear about it, it’s a pretty egregious situation. Some instances of this out west but you don’t hear in the news about sweeping enforcement actions by any particular US Attorney out there, and therefore, the comfort level is rising. So, banking, as a way to wrap up this very long answer to the short question is a big challenge, but it’s not insurmountable and that’s just one of the challenges that folks getting into the industry have to face.
Jeff Boedges: Can you explain the taxation piece of this? Because it’s one of the things that still kind of befuddles me a little bit and that I know, because federally, you cannot recognize these businesses. They’re not really allowed any kind of deductions as I understand it. They can’t have any business expenses. And so, the part that I find most confusing is that the federal government is taxing these companies. It is making tax revenue…
Rick Kiley: At a really high rate.
Jeff Boedges: At an extremely high rate, but then at the same time don’t recognize them as legitimate businesses. Again, to me, it’s a contradiction that is not easily resolved.
Dan McKillop: It’s a confusing point of cannabis law? Get out of town. Yeah, it’s one of many. No, but you’re absolutely right. Look, the federal government taxes cannabis businesses. You pay federal taxes as a cannabis business. And you’re right, by the way. You get to take far, far fewer deductions than any other non-cannabis business out there. I mean, basically, the only deductions you’re allowed to take are deductions related to what they call cost of goods sold or COGS and it’s literally just the costs associated with actually, for example, growing the product, the cost of your soil or fertilizer or whatever. You cannot deduct salaries. You cannot deduct utilities. You cannot deduct basically anything that every other business does.
Rick Kiley: On an annual basis.
Jeff Boedges: On a legitimate business expense.
Dan McKillop: Correct. It’s a huge, huge dichotomy in federal treatment of American business.
Jeff Boedges: Federal seems backwards to me even in and of itself. I could see them saying, “Yeah. The cost of goods sold, we’re not going to let you deduct that, because that’s the illegal part.”
Dan McKillop: Correct.
Jeff Boedges: But the stuff that’s legal like office expenses and overhead and things like that, you can’t deduct.
Dan McKillop: And this is another topic of much debate and discussion down in DC. Basically, cannabis tax reform is kind of the title that it comes under. It presents yet another barrier to folks who want to operate in the industry and be successful because it’s hard enough to get any business off the ground when you first started, never mind a business in this area. And it’s seen as largely handicapping nascent businesses in the industry and making it much, much harder for them to succeed which, frankly, doesn’t help anybody. So, that’s another topic of a lot of debate in DC right now.
Rick Kiley: But they must be baking it into the cost for the end consumer, right?
Dan McKillop: That’s exactly right. That’s the point.
Rick Kiley: And is that why I’ve heard that, I mean, you may or may not know, but I’ve heard that the illicit market for cannabis is probably still cheaper than the legal market for cannabis because Is it because of some of these like hefty expenses that are associated with it? Like, I wonder about that. At least on the medical side, that seems to be the case.
Dan McKillop: Sure. Yeah. And it gets to the broader question of what is the legalization effort meant to do on that front vis-à-vis the illicit market? I mean, obviously, one of the things that all the proponents of legalization tout is the fact that, well, look, everybody knows we have this illicit market going on. It’s unregulated. It’s untested. Who knows what you’re getting and you’re paying X for it? Isn’t it going to be worth it to you to have a product that’s tested and regulated, and you know what’s what? And that’s fine because, yes, that can be one of the beneficial net effects of putting in a program. But if you don’t right-size the industry, if you don’t get the tax structure right, same tax structure correct, then you may end up in a situation where, yeah, not only are you not undermining the illicit industry, but you’re making it more attractive, because again, keep in mind on the medical side, you don’t have any insurance coverage for this. You’re paying out of pocket, you’re paying $300, $400, $500 an ounce, depending on your state for a product that extensively anyway, you could get somewhere out on the street, you’re taking your chances because you don’t really know what you’re getting.
But some people do face that financial pinch, of course, where they just don’t have that money to spend on the state-tested, state-approved stuff. And so, the illicit market survives. So, it’s very important to when you’re setting up your state program, make sure you have as close to the correct number of dispensaries as possible, given your state population and patient population and whatnot and even adult-use population, because otherwise, yeah, you may find yourself in a situation where you’ve kind of hoisted yourself on your own petard. You’ve supported the illicit industry rather than undermined it.
Rick Kiley: Yeah, that’s a strange thing. So, is there any chance that do companies worry about that at some point, the federal government might just change its mind just like start coming in? Like, is that a concern? They’re just going to be like, “No, it’s all illegal. We’re enforcing it.” I mean, you seem to think on the medical side, that’s unlikely, but on the adult-use like…
Dan McKillop: Yeah, and it kind of goes back to a couple of things we touched on before. On the medical side, you have the federal spending bill rider that precludes DOJ from coming in and interfering with state medical programs. So, there’s a fair amount of comfort there. You know, that’s been in every federal spending bill since 2014. It shows no sign of stopping. Trump himself on the campaign trail and he’s continued to say it is basically in favor of medical. He says, “Everybody likes medical. We’re on board with medical and we’re going to let the states make up their minds on adult use,” and that still has held true. On the adult side, same sort of mentality. I mean, like we said before, just the comfort level is rising. People see more and more states legalizing and the world isn’t cracking in half. And as long as the states are on top of things, they will be permitted to continue to do so.
Now, the federal government has at all times and still has retained jurisdiction to come on in and correct things if anything goes off the rails with any of these state programs. They’re still able to do it. There’s nothing stopping them from doing it, at least on the adult-use side. Do they want to do it? No, they don’t necessarily want to do it. They don’t want to spend their, frankly, manpower and horsepower and capital on that kind of thing. As long as the state stay in line, the Feds will likely leave them alone.
Rick Kiley: Alright. That’s cool. So, we know that your firm is based in New Jersey, New York, and you’ve been working a lot on these efforts in these two states, in particular, both of whom have been trying to advance bills to make adult-use legal. Correct?
Dan McKillop: Right.
Rick Kiley: Can you talk about some of – and recently, and it still hasn’t happened. So, here we are today in the fall of 2019 and it hasn’t happened even though there’s been a lot of talking about it. What are the current sort of barriers in these states just because you’re familiar with them in order for that to happen? And what would need to occur in order for them to get to the adult-use legal status? Is it a matter of the will of the people like, is it voters? Is it people like rising up and chatting about it and making it an issue? Are representatives that are in the state governments that are arguing like what are the roadblocks? And maybe you can give us a little insight into that.
Dan McKillop: Yeah. In New Jersey, anyway, we came within basically a hair’s breadth of legalizing on the adult-use side this past March and that was an effort that was the culmination of an effort that probably took the better part of the last two years. And New York somewhat similarly has been working hard and, frankly, trying to catch up a little bit to New Jersey on the adult-use legalization effort, and also came not as close this past spring before the break, but came close enough that it’s still a topic. The big problem or the big challenge for both states and for any state, frankly, is making sure that all the stakeholders involved are appropriately and adequately involved in the discussion. One of the main reasons that the effort in New Jersey failed in March is because there were some legislators who felt that their constituencies’ interests weren’t being adequately addressed, that they didn’t have a seat at the table or if they did have a seat at the table that they weren’t being heard. And the other thing that happened was in the end, it became a big rush up to a deadline and legislation just started being thrown around and no one had really time to read it, much less understand it. And so, it just failed. It kind of collapsed on itself.
New York, somewhat similar. Obviously, the governor is talking about this a lot now. It’s still the same issue. You have to make sure that everybody who wants to be heard is heard because it’s awful easy if you feel like you’re not being heard to stand up and say, “Wait a minute, this is all federally illegal. What are we doing here?” And hold it up that way. So, you have to create a big enough 10 and then get everybody in there and let them all say their piece. And it sounds pretty general and pretty obvious but that’s really the crux of it. I mean, you talk about the will of the people. If you pull New York and New Jersey residents, they’re going to say, “Yeah, of course, we think medical is appropriate, and we think it should be legalized and of course it is in both states.” Both states have medical programs.
And on the adult side, you’re going to find a majority of residents in both states. So, yes, we think that it should be legalized and it should be regulated and should be tested and should be overseen and we want all the rules and regs in place. But yes, we think it should be legalized. So, it’s not a question I think of the popular will or the popular demand. And therefore, it is an issue of the politicians, the legislators, and they need to be sophisticated in their approach to the discussion and they need to be inclusive enough of everyone who even thinks that they should have a seat at the table so that they can avoid landmines through the legislative process.
Jeff Boedges: What are some examples of people who feel like they’re not being and what are the issues that they’re not hearing or that they want to hear?
Dan McKillop: Yeah, sure. Well, a big one in New Jersey and it’ll be the same in New York, frankly, is the minority communities that have been inappropriately impacted to a degree far more so than majority populations. This gets into discussions about expungement of past cannabis-related infractions, low-level infractions. It gets into records. It gets into economics, frankly. Where are you going to seek to put these businesses? Shouldn’t some of these or if not most of these businesses go in areas of the state that have been inappropriately impacted by the war on drugs, including cannabis? So, the minority populations of New Jersey and New York, of course, are huge stakeholders, and they have to be part of the discussion, and they are, but I think that at least in New Jersey, anyway, there perhaps was not enough credence given to their interests. And I think it was correct that not that necessarily it failed on that point alone, because that wasn’t the only point alone, but that’s an absolutely critical part of the conversation in any state that’s considering an adult-use program, and it’s going to continue to be part of the discussion in New York and New Jersey.
We were talking now in New Jersey anyway of another attempt to legislatively put an adult-use program into place notwithstanding that it failed in March. They don’t want to wait until a ballot referendum next November when everybody in the state is going to say what we already know they’re all going to say is yes, because then we’re right back where we were in March putting together a law. So, the latest discussion in New Jersey anyway is we are going to apparently try to get a bill put together that a majority of the house in this assembly can get behind and get past. One of the other aspects, of course, here is New York and New Jersey or neighboring states and it is a bit of a race to the adult-use side of the market. It just is. I mean, these are economic realities. I mean, cast your memory back to when the drinking age in New York was 21 and 18 in New Jersey. Everybody along the border came on into New Jersey for the weekends. It’s same with Canada and America back when it was different. So, there is that financial reality with respect to New York and New Jersey, and it’s real. Everybody knows it’s real. No one is discussing it in a lot of detail but there are market forces at work that are driving sort of the politics and the legislative efforts as well. It’s not the preeminent concern necessarily, but it’s a thought.
Rick Kiley: Is there any other than, as you mentioned, a group that doesn’t feel like it’s being part of the conversation adequately? Are there major like lobbying concerns to like really keep it from happening? Like, are there groups out there being like, “No, this should definitely stay?”
Jeff Boedges: Are there prohibitionist?
Rick Kiley: Yeah.
Dan McKillop: Sure. Absolutely. Listen, as with any sort of hot button issue, there are lobbyists on all sides of this thing. All sides. Plenty of prohibition, so to speak, lobbyists.
Jeff Boedges: So, what we call the prohibitionist I’m going to think of as kind of the purist. They’re kind of going out there because it’s evil. They’re going after it because it’s evil. And then I think there are other people that have financial gain from seeing it still. And I imagine everybody from alcohol companies to big tobacco, the same people that had it put on as a Schedule 1, still have that same interest.
Dan McKillop: It’s true. But it’s interesting because you do see more and more in the last, I would say year, year and a bit, you see more and more Big Alcohol, Big Tobacco, Big Pharma brands starting to branch into the cannabis race. You see it with beverage companies, some of the tobacco companies. If you’re a tobacco company and you’ve been getting crucified for the past 20 years because you’re rolling out death sticks, well, you have all the infrastructure in place.
Rick Kiley: That’s a technical term.
Jeff Boedges: If anybody’s listening…
Dan McKillop: It’s Latin. But you have all the infrastructure in place to make a hard pivot to the legal cannabis market. Now, the thing that’s holding them back to the degree that they’re being held back is, of course, the federal illegality. The big companies want to be able to come in at scale, because it’s not worth it to them, frankly, to retool on a state-by-state-by-state level. It’s just not.
Rick Kiley: Interesting.
Dan McKillop: Of course, they have the backing of the biggest banks in the nation, if not the world and they have to overcome that hurdle because of the federal illegality. So, that’s largely one of the main reasons why you don’t see the big alcohol, tobacco, pharma companies just absolutely jumping into the deep end of the pool. They’re waiting. They’re on the side of the pool. They’re in their swimsuits. They’re ready to go.
Jeff Boedges: Do they have those bikini trunks?
Dan McKillop: I couldn’t say. I don’t belong to that country club.
Rick Kiley: Tobacco guys?
Dan McKillop: No, no, no, bad image.
Rick Kiley: Shorts maybe.
Dan McKillop: Right. But that’s the reality. And frankly, that’s the way the industry will go in the end. If you believe kind of as I do that, again, the momentum is just too great to stop, it will be a question of time, but we will get to a federal legalization.
Rick Kiley: So, that’s where we end up here if you think full federal legal status is definitely going to happen.
Dan McKillop: I think it’s a matter of time. I think it’s when, not if.
Rick Kiley: What’s your – like the pool we put up. So, what date? What year, maybe?
Dan McKillop: What year?
Rick Kiley: This decade?
Dan McKillop: I do think it’s going to be sooner than a lot of people believe, based on what I know from speaking to industry folks. But also, if you just zoom out, Canada is federally legal. Mexico is federally legal. Are we going to be the only country in North America that is not federally legal? Aren’t we losing out on untold millions, if not billions of dollars?
Jeff Boedges: I think it’s still illegal in Puerto Rico.
Rick Kiley: Well, that’s a US territory.
Jeff Boedges: Oh, sorry. What’s the Dominican Republic?
Dan McKillop: Possibly. But the reality is that I think it’s going to be, frankly, a social movement that’s going to be impossible to hold back.
Rick Kiley: I mean, it feels very, I mean, part of the reason we call this podcast The Green Repeal is it feels like it’s very similar to the actual repeal of alcohol prohibition in the 20s and 30s and it was repealed state-by-state, alcohol being illegal and it was the 33rd state, which I think coincidentally was strangely it was Utah, but that was the tipping point. That was when it’s like, “Okay.” They go in and that’s it. So, by that logic, if we’re going to try to use history as our guide, we’re at 33 mathematically, right, but we’re at 11 adult-use and probably feels like that adult-use number names to probably climb a little bit higher.
Dan McKillop: I think that’s right, and I think it will, frankly, because again, you have the federal government, the head of the federal government, President Trump saying, “Listen, we’re just letting the states make up their own minds.” I have a pet theory that maybe about this time next year, September 2020, so about two months before the federal election, prediction time President Trump pulls out his phone and tweets out, “Guess what? I’m legalizing federally.”
Jeff Boedges: He should do it on 4-20 though. I don’t care what anybody says.
Dan McKillop: I wouldn’t be surprised. And it’s funny because as I go to different events and talk with different folks in the industry and whatnot, and I venture this, this quiet little conspiracy idea of mine out on the table, everybody at the table is like, “Yes, I know. I think the same thing. I think that’s a real possibility.”
Rick Kiley: Really?
Dan McKillop: And if it is, it is. Now, it’s not to say that, of course, it would become instantly legal. That’s not what would happen. But as a reelection tactic, maybe. Who knows?
Jeff Boedges: What is the road to basically legality on a federal level? What would have to happen? How would that work? Who would make that decision?
Dan McKillop: You would have to have legislation descheduling cannabis from Schedule 1.
Jeff Boedges: So, did Congress create that schedule initially?
Dan McKillop: Yes.
Jeff Boedges: Okay.
Rick Kiley: Yeah. So, someone has to bring that to the floor at the House, and then they go.
Dan McKillop: And as I say, there’s a bunch of legislative effort.
Rick Kiley: Sounds like Mitch McConnell. Big, big pothead.
Jeff Boedges: I see kind of a consortium of Mitch and Bernie getting together and making this happen.
Rick Kiley: Right. If Bernie is not running for president at that time.
Jeff Boedges: Which would be a really cool name for a brand in the business.
Rick Kiley: Mitch and Bernie?
Jeff Boedges: Mitch and Bernie.
Dan McKillop: Right. Bernie and Mitch. Yeah.
Rick Kiley: I think Bernie needs to go first. Bernie and Mitch.
Dan McKillop: I think that’s right. Yeah. Well, you guys are the marketing, folks. I trust you. But yeah, that’s the reality. I mean, ballpark, I’d be pretty surprised if we weren’t federally legal in the next 10 years. Pretty surprised. I mean, I might put it over or under five years. So, take your pick.
Rick Kiley: I’d take the five-year bet.
Dan McKillop: I think that’s fair. You know, it would be interesting to see if President Trump tries to co-op the entire democratic platform on this point, because basically, I think, with the exception of Joe Biden, I think all of the 748 Democratic candidates for president have said that they’re in favor of legalization.
Rick Kiley: Absolutely.
Jeff Boedges: So, in one fell swoop, President Trump takes that from the democratic platform and makes it his own. Maybe. I don’t know. I’m not in the war rooms putting together the campaigns but it would not surprise me. It would not surprise me.
Rick Kiley: It’s tough to keep playing.
Dan McKillop: And you wanted to keep politics out of the podcast.
Rick Kiley: It’s not politics necessarily. It’s reelection tactics.
Jeff Boedges: I don’t know if the [Don – 45:03] and cannabis really should mix. It’s going to go out there in a limb.
Rick Kiley: Well, there’s something on a schedule somewhere. I don’t know what that is. This is great. One last just thought. We talked a little bit because you’ve been involved with working with businesses who are getting involved in cannabis, launching cannabis businesses from dispensaries to people who are growing since I’m sure people want to get into the industry. If you had like a couple of quick thoughts to someone who is saying, “I want to start a dispensary. I want to start a business,” like what should they know or what should they do first before jumping in with both feet?
Jeff Boedges: You guys should get like a fancy phone number, by the way, like 1-800 legal pot. You know, I think that would be…
Rick Kiley: People wouldn’t be able to remember it. Sorry. What was that?
Dan McKillop: Can’t do that. We have 20 different practice groups at the firm. This is one of 20.
Jeff Boedges: It just comes to your phone number. It doesn’t mean…
Dan McKillop: Oh, just me? Oh, I see. It’s just forwarded right to myself.
Jeff Boedges: Yeah, sure. That’d be great. All hours of the night.
Dan McKillop: All right. Yeah. Now, listen, it is obviously a very attractive opportunity for a lot of folks. Off the top of my head for anybody willing to undertake the effort, I think there’s a couple of things you have to keep in mind. Number one, probably is it will take more than you think. It’ll take more time. It will take more money. It will take more effort. It’ll take more just absolute all-out work right now to get in. I think simultaneously with that and related to that is the fact that it is never too early to start preparing. It’s never too early to start thinking about where you might want to set up a shop, set up operations, whatever it is that you might want to be doing, cultivating, processing, dispensing. One of the biggest aspects of applying for a license in general in every state and I’ll just use New Jersey as an example is you will have to tell the state in your application for a license, where you will operate, what your business operation address will be. We will be at 123 Main Street in town XYZ.
Jeff Boedges: That’s pretty risky because you have to actually have to have it leased or owned before you actually can even get permission to operate a business.
Dan McKillop: It’s pretty tough. And for that reason, states, and again, I’ll just use a New Jersey as the example, states will accept letters of intent as “site control”. So, in other words, if you at least have a letter…
Jeff Boedges: So, it’s a contingency plan, essentially.
Dan McKillop: Correct. I mean, you have a letter with the owner of a building somewhere at 123 Main Street that says, “I, owner, agree to lease or sell to you buyer, 123 Main Street, if you get a license,” and you attach that to your application to the state. Even that is a conversation with that building owner. If the guys are just going to sell it to you, that’s a little easier. If he’s going to be your landlord, that’s a pretty detailed conversation. And that lease has to be pretty detailed in a couple very specific ways. So, you can see. And that’s just one aspect of an application to get a license to get in. So, more time, more effort. It always takes more capital than people think. If you have investors, that’s great, but then you’re dealing with investors. If you have partners, that’s great but then you’re dealing with partners who may want employment agreements before they agree to be part of your application. And all this backs up into the overall, you know, piece of recommendation. You got to start early. It’s never too early to start the process, start talking to people who can help you put this all together.
Rick Kiley: It’s good advice for many things but that’s good advice.
Jeff Boedges: Yeah. And these applications, generally, there’s a sunset so it’s like you’ve got between now and then to get this application in.
Dan McKillop: It’s really an application round by application round. New Jersey, for example, basically last summer and then again, this summer, gave everyone about 45 days of notice and then application open period to get their applications done. What this really means is you have to have been getting ready for months prior to that announcement, because there’s no way or it would be very, very surprising if you were able to get your act together on day one and put in a winning application on day 45. So again, it’s never too early to start and just start laying the groundwork, form your entity. You’re going to need a business entity of some kind of be the applicant. Start looking for property. Everything. It just takes longer than you think.
Rick Kiley: Cool.
Jeff Boedges: Okay. Real quick with a couple of final questions here. So, what type of entities are most people forming? LLCs or what’s the primary?
Dan McKillop: Generally speaking, people are forming LLCs. It’s fairly easy to do, fairly flexible business entity. You can change it down the line if you want to.
Jeff Boedges: But even forming an LLC, having done it a couple of times now is usually about a two to three-month process so I can see if you have to have an LLC, you have 45 days to get that done along with everything else. That would be very difficult.
Dan McKillop: We can speed that up but there isn’t a reason to not form it now, for example. I mean even to form a single-member LLC, if you don’t use it, you don’t use it. And you can close it up if you want to but why bother doing that during the application period, when you could be concentrating on more intricate, more involved, more targeted efforts? Just do it now. Put it on the shelf. That’s the phrase I keep using with all of our clients as they’re talking about the idea of getting into the industry. Do everything you can and put it in the can, put it on the shelf. Take care of your entity formation. Let’s start the real estate process. If you have any intellectual property questions or issues, you have a great brand name or logo or artwork, just get it all done. Get whatever…
Jeff Boedges: You mentioned state.
Dan McKillop: Right. Exactly. Get whatever state patent or trademark protection you might be able to get.
Rick Kiley: That might be tough.
Dan McKillop: It might not be much and just put it on the shelf.
Jeff Boedges: It could mean any Mitch and Bernie. Alright. So, and then my final question is really what’s the acceptance rate? One in 100? One in 200? Who gets these licenses?
Dan McKillop: It’s very challenging, let’s put it that way because it is what we said before, it’s a huge opportunity for everybody. So, for example, last summer in New Jersey, they were issuing six licenses for vertically integrated alternative treatment centers. In other words, these are grow…
Rick Kiley: Shop.
Dan McKillop: Yeah. You grow, you process, and you sell under one roof, basically. They were going to issue six licenses. They got 146 applications. So, your odds for whatever that is.
Jeff Boedges: It’s easier to get into Harvard.
Dan McKillop: It might be. It might be. This time around, actually, we just finished another licensing round in the medical side in New Jersey. They are issuing 24 licenses of different kinds and they got about 198 applications. So, your numbers were actually a little…
Rick Kiley: One and six.
Dan McKillop: A little bit better. And of those, the majority will be dispensary applications. Probably as many as 140 or 150 of the applications were for dispensaries. So, if they’re issuing 15 dispensary licenses which is what’s on offer this time around.
Jeff Boedges: Your odds are one in 10. So, not bad. Better than last summer, for example.
Rick Kiley: A couple of them are just like a couple guys like fill them out on crackers and like threw them in. There are a couple of bad ones.
Dan McKillop: There are a range of application qualities.
Rick Kiley: Are there any joke applications like people that did it specifically as a joke?
Dan McKillop: Well, you have to send in $20,000 with your application.
Rick Kiley: Okay.
Jeff Boedges: Is that refundable or is this…
Dan McKillop: 18 of it is.
Rick Kiley: It was a $2,000 prank.
Dan McKillop: Yeah, broke down into a $2,000 kind of processing fee and $18,000 license fee and if you didn’t get a license, you got your $18,000 back.
Jeff Boedges: I just assume that your fees are totally refundable if they don’t get the licenses.
Dan McKillop: I cannot comment on that at this time.
Rick Kiley: I think that’s a good place to leave it right there. I think just before we go, Dan, if someone wanted to reach out and seek some legal advice if they’re interested in starting a business, what’s the best place that they can reach you?
Dan McKillop: Yeah. Well, best place to get me is at my firm, Scarinci Hollenbeck. Obviously, got the website out there, but phone number is 201-896-7115. That’s frankly the best way to get right in touch with me.
Rick Kiley: Wow. You got the digits, people. Well, thank you so much for joining us today. Hopefully, if like laws change if something new happens, 800-legal-pot. If laws change if something comes up from legal aspect, maybe you come back and talk to us for a few minutes another time.
Dan McKillop: Absolutely. It’s going to continue to be a fast pace, quickly developing industry in New York and New Jersey and beyond.
Rick Kiley: Cool. We really appreciate you joining us. Thanks so much, Dan.
Dan McKillop: Not at all. Thanks a lot, guys.
Jeff Boedges: Thanks for coming in, Dan.
Dan McKillop: Bye.[CLOSING]
Rick Kiley: Thanks for listening. If you enjoyed today’s episode of The Green Repeal, hit the subscribe button so future episodes are automatically downloaded directly to your device. And if you want access to today’s show notes, including links to all the resources mentioned, visit SOHOExp.com/GreenRepeal.