Taking a Deep Dive into the Illinois Cannabis Regulation and Tax Act
Now that we’ve had some time to review the 600 page bill, let’s talk about what this regulation really means for cannabis entrepreneurs, social equity applicants, patients, and cannabis consumers. Disclaimer: This post is not legal advice and should not be interpreted as such.
If you are interested in applying for a license, we invite you to read our summary of license types for a quick overview of the number of licenses available, application due dates, and associated fees. You can also access the official summary here, which includes more information on taxes, expungement, advertising and packaging requirements, and possession limits.
Legalization or Regulation?
First, let’s clear up the misconception around “legalization”. Cannabis was not legalized in Illinois. Legalization implies that possessing, cultivating, and selling any amount of cannabis for personal use would not be criminalized — this is not the case. The Cannabis Regulation and Tax Act still criminalizes home cultivation and possession of more than one ounce of cannabis. It also criminalizes public consumption and “illicit” sale of cannabis (similar to alcohol).
We remind you that SB 7 the “Cannabis Legalization Equity Act” (modeled after the more progressive HB 0902) eventually turned into HB 1483, “The Cannabis Regulation and Tax Act”. We appreciate the straightforwardness. The bill does, in fact, regulate and tax “legal” cannabis sales, and this is achieved through licensing and enforcement by the sate and local governments. Taxes are collected for the privilege of cultivating, processing, and dispensing of adult use cannabis.
We appreciate the government’s acknowledgement that individuals who have been unjustly arrested or incarcerated for cannabis-related “crimes” have suffered long-lasting negative consequences, including impacts to employment, business ownership, housing, and long-term financial well-being.
The bill also acknowledges that family members, especially children, and communities of those who have been arrested or incarcerated due to unjust laws, have suffered from emotional, psychological, and financial harms as a result of such arrests and incarcerations. It’s undeniable that communities of color were most effected, and oftentimes targeted, by individuals tasked with enforcing the “war on drugs”.
The Act takes several steps to correct some of these wrongs:
- It removes harmful cannabis offenses from criminal histories, automatically removing cases involving possession of up to 30 grams of cannabis from the criminal histories of those who were convicted of them.
- It provides benefits to communities that were hardest hit by the war on cannabis. The Recovery, Reinvest, Renew program will provide resources directly to community groups to offer services in communities that were disproportionately impacted by violence, poverty, and uneven enforcement of cannabis-related laws. Twenty-five percent of the funds generated from tax revenue and licensing fees are supposed to be available for the program.
- It “creates opportunities for those who were impacted” by creating “significant opportunities and resources for those seeking to enter the regulatory system.”
For the purpose of this post, we will take a closer look at number three.
Social Equity Applicants
In short, a “social equity applicant” is a person who was arrested or convicted of a minor cannabis offense, or who is related to someone who was, or is a person who has lived in an area, for 5 of the last 10 years, which has been “disproportionately impacted” by the war on cannabis.
However, it’s important to understand that this definition applies to entities and not individuals — the license application is for the operating of a business.
Therefore, “Social Equity Applicant” is an entity or business that meets one of the following criteria:
- an applicant with at least 51% ownership and control by one or more individuals who have resided for at least 5 of the preceding 10 years in a Disproportionately Impacted Area;
- an applicant with at least 51% ownership and control by one or more individuals who have been arrested for, convicted of, or adjudicated delinquent for any offense that is eligible for expungement under the Act or who are a member of an impacted family; and
- applicants with a minimum of 10 full-time employees, with at least 51% of current employees currently residing in a Disproportionately Impacted Area or who have been arrested for, convicted of, or adjudicated delinquent for any offense that is eligible for expungement under the Act or who are members of an impacted family.
Advantages for Social Equity Applicants
- Access to the Cannabis Business Development Fund, which will, among other things, provide low-interest rate loans for necessary expenses to start and operate a cannabis business, provide grants, and assist with job training and technical assistance for residents in Disproportionately Impacted Areas
- 50% reduction of the non-refundable license application fees
- 50 point advantage (of 250 total points) above all other applicants for licenses
- Potential to receive $100,000 or more in seed funding from an Early Approval Dispensing or Cultivation License holder (e.g., see GTI & Cresco initiatives) in return for no more than 10% ownership stake. In return for early approval, license holders must commit to a Social Equity Inclusion Plan one of which may include said incubation.
Starting January 1, 2020, cultivating cannabis for personal use in accordance with the requirements of the Act will no longer be a criminal offense under state law. Illinois residents 21 years of age or older who are registered qualifying patients under the Compassionate Use of Medical Cannabis Pilot Program Act will be allowed to grow five plants for personal use.
There are some limitations in the Act. For example, cannabis cultivation must take place in an enclosed, locked space (secure from unauthorized access) and not stored or placed in a location where they are subject to ordinary public view. Additionally, an owner or lessor of residential property may prohibit the cultivation of cannabis by a lessee.
Issues with the Act
Some applicants may have a large advantage over others, namely in terms of available resources, including access to capital, business experience, and access to skilled labor. It’s likely that scoring well in a competitive licensing process will be directly correlated to factors such as socioeconomic status, technical and business competency, and probability of complying with regulations. Depending on your business ambitions, or lack thereof, there are many different ways to perceive and interpret the bill.
Below are some ideas about what are, in our opinion, shortcomings of the bill.
- It is assumed that Early Approval license holders are best positioned to serve, or continue serving, more customers. However, by allowing current medical licencees an early approval advantage, the bill (perhaps unwittingly) furthers current issues of inequity in the Illinois cannabis industry. This measure also allows room for “medical” cannabis companies to potentially de-prioritize serving qualifying patients, while shifting their operations to adult use sales.
- Individual licensed dispensaries are likely to struggle — at least, initially. Until craft cultivators have a viable harvest, adult use dispensaries will be limited to sourcing cannabis products only from early approval cultivator license holders, who will also have competing dispensaries. While there is a provision to prevent selling product at inflated prices to competitors, there is no incentive for early approval cultivators to sell product to their competitors. It’s likely that “vertically integrated” companies will only sell products at their own dispensaries (up to 10 per entity) not only to create a “branded experience” but also to maximize profits and market share.
- The pathway to building an equitable industry is still unclear. First off, a social equity applicant is not necessarily what most would consider a historically disadvantaged person — it can also be a wealthy white person with a minor cannabis conviction on their record…or their son or daughter. The reality is, the Act largely ignores the prominent racial wealth gap in the US and associated socioeconomic impacts. The idea that low interest loans and additional points on an application will be enough to create an equitable industry is overly-optimistic and perhaps naive. While the assembly made an honest effort to put equity at the forefront of the bill, it’s going to take a lot more grassroots organizing for social equity applicants to effectively capitalize on the opportunities allotted to them.
- Enforcement of the Act may cause more inequity and over-policing. Law enforcement and government agencies may begin to over-police to strictly enforce the act. This may be interpreted as protecting the interests of license holders but also to legitimize the government’s control of the industry. As we have written before, regulation of cannabis doesn’t necessarily cut down on policing — it may, in fact, amplify it.
Room for Improvement
Prior to the signing of the Act, one of our founding members wrote an article on “how not to screw up Illinois’ burgeoning cannabis business”. We realize there is much room for improvement. For example, more open-minded approaches could be considered:
- allowing anyone to grow their own cannabis at home
- issuing more craft cultivation licenses at a lower cost to meet (underestimated) demand, prevent shortages, and promote lower prices for consumers
- issuing more dispensing licenses at a lower cost to promote small business development
- allowing for the delivery of cannabis products to individuals’ homes
- separating medical cultivation from recreational — prohibiting entities from possessing licenses in both industries to better serve medical patients
- decriminalizing the possession and cultivation of cannabis completely
With that said, we understand the assembly took a more conservative approach, in an effort to constrict the market and prevent a potential oversupply, but will issue more licenses in the next wave:
To conclude, we hope this post was useful in your examining of the Illinois Cannabis Regulation and Tax Act and what it may mean for you. We wish you the best in your future endeavors.