Dan Haar: Rift on CT cannabis council reveals problems in creating a marijuana market

Photo of Dan Haar
Green Thumb Industries has marijuana facilities in more than a dozen states such as this one in Massachusetts, shown in 2019.

Green Thumb Industries has marijuana facilities in more than a dozen states such as this one in Massachusetts, shown in 2019.

Boston Globe via Getty Images

The debates over full marijuana legalization covered huge, sweeping social issues, more in Connecticut than most other states because the goal here has been to address age-old discrimination from the failed war on drugs, not just to peddle ganja.

Standing up a retail network requires the opposite: attention to countless details, any one of which, if done wrong, could add costs that make the state non-competitive, or make it harder for people from less advantaged backgrounds to gain from the $200 million-a-year market.

One of those details is the subject of a polite but fierce battle among members of the cannabis Social Equity Council, the body charged with making sure the benefits are shared. It is the question of whether financial backers of cannabis businesses applying under the separate equity track must supply three years of federal tax returns.

The rules of the council require applicants for licenses to submit those returns not just for themselves but for any backers with at least a 5 percent stake. That’s ostensibly to check on those backers’ bona-fides, though it makes little sense and that’s not the council’s role.

The rules could, and probably already have, sent would-be backers of cannabis enterprises running for the hills.

Could that alone ruin the cannabis market? No, but it can hurt, and more importantly, the debate over this seemingly small detail reveals problems that could dog the much anticipated Connecticut cannabis market.

Amazingly, the council is set to vote Tuesday, for the second time, on whether to drop that requirement. That’s a bit late in the game, considering the final deadline is Wednesday for first-round applications in the largest and most important class of cannabis business — recreational retailers to the general public.

On April 5, the council rejected a call by key members — including Chairwoman Andrea Comer — to drop the requirement for tax returns. They’re trying again because, obviously, they’re hearing the same concerns that have come my way.

“It’s been difficult,” said one social equity applicant for a retail location, who asked not to be named for competitive reasons. “We’ve been working on it for a while, a long time...If you’ve got 30 people involved, getting everyone’s tax returns, it’s a nightmare.”

This applicant, who grew up in a Connecticut city with family members in the judicial system on marijuana charges, is in a joint venture with an existing cannabis growing business looking to expand to retail. That means he won’t be subject to the state’s lottery, in which the odds for any applicant winning a license are very, very small.

How small? As of Thursday, the state Department of Consumer Protection had received 1,957 applications for a grand total of six retail licenses to equity applicants.

Taking a step back, an equity applicant is a person who grew up in or has lived in recent years in one of the state’s targeted areas, typically urban and low-income. The applicant must have no more than $235,400 in average income over the last three years and the enterprise must be 65 percent owned by equity applicants, or 50 percent owned in the case of joint ventures.

Half of all new cannabis business licenses must go to equity applicants.

What, you may ask, is the problem if we have thousands of applications for just six retail slots? The problem is, we don’t know how many of those applications came from what we in our minds’ eyes know to be “true” equity applicants — as opposed to large companies seeking an advantage in the market.

After all, the application fee for equity hopefuls is $250, nonrefundable. That means if you’re, say, an accountant or store owner in the East End of Bridgeport and want to try entering the marijuana business, you might raise $5,000 just for application fees — nonrefundable — and still have only a 1-in-125 shot at winning, maybe even less.

Also, this system is meant to last for years, so they need to get it right at the outset.

Some council members insisted on the requirement, saying it would help them assure equity.

“I don’t know where you people are from, most of you, but I’ve got so many scenarios running though my head about street money getting into this process,” said Avery Gaddis, a council member. “It’s about our responsibility. It’s about our goal as gatekeepers.”

Others pointed out that crooks and swindlers don’t spell out the source of their income on their tax returns, and that the rule invites lawsuits. The cannabis law that took effect last year doesn’t require tax returns, nor do the regulations. It was added as a procedure.

And, notably, non-equity applicants don’t have the requirement, because the equity council has no purview over them - so right away we’re setting up barriers against the very people the law was intended to help.

Other states including New York, which is establishing its own cannabis retail market with a strong equity component, don’t have such a rule.

“The requirement for three years of tax returns for each backer and anyone owning 5 percent or more of the total ownership in a cannabis establishment demonstrates a lack of seriousness in the social equity program,” Jonathan S. Berck, a New York cannabis attorney with the firm of Catania, Mahon & Rider, said in an email Monday. “Requiring all such persons or entities to go ‘open kimono’ is a huge disincentive to participate in the financing of a new venture.”

Dropping the rule, Comer, the chair, told me Monday, “will help folks identify investors more readily….. I also don’t know that the content of a tax return is going to provide the kind of information that we need to make a determination.”

Ultimately, this debate over tax returns is about how far the state can go to make sure the “right” people win licenses. New York’s law includes carve-outs for businesses owned by women and people in racial minority groups - a step Connecticut rejected although race was a big part of the equity push.

Comer said she expects the legislature to tweak the law, and regulators to tweak the rules, as problems arise. “This was an imperfect legislation, this was an imperfect process. We’re in many cases building the airplane as we fly it.”