Group Funded By Alcohol And Tobacco Companies Pushes Feds To Issue Marijuana Tax Stamps To Combat Illicit Market

September 22, 2023 ·

A new report from the Coalition for Cannabis Policy, Education, and Regulation (CPEAR) looking at the nation’s illicit cannabis market makes a number of policy suggestions aimed at reining in unlicensed marijuana sales. Among them, the group calls for a centralized, nationwide track-and-trace system as well as marijuana tax stamps to help “distinguish regulated cannabis products from illicit products.”

“Eliminating the illicit market requires a multifaceted approach, one that leverages technology and data and relies on collaboration between law enforcement agencies, policymakers, and the regulated cannabis industry,” says a press release from the advocacy group, whose membership includes tobacco and alcohol giants such as Altria Client Services, Reynolds American, Molson Coors Beverage Company and Constellation Brands

The 35-page CPEAR report, published Tuesday, estimates that more than 10 billion grams of cannabis (about 353 million ounces, or 22 million pounds) will be obtained by U.S. consumers in 2023 alone. States where marijuana remains illegal are expected to account for about half of that number, while the 23 states with adult-use cannabis will contribute about a quarter of the estimated total. On average, the illicit market is about 50 percent “as a function of total cannabis demand,” the report says, citing Cannabis Public Policy Consulting research.

CPEAR’s executive director, Andrew Freedman, said in a statement that it’s time for the U.S. government to get involved.

“Despite maintaining a stance of non-interference in state-level cannabis policies, the federal government has remained unwavering in its long-standing criminalization of cannabis,” Freedman said. “This inaction has incurred a substantial cost, giving rise to a widespread, thriving underground cannabis market.”

Among the changes CPEAR is encouraging is the establishment of a federal marijuana tax stamp—an echo of programs employed in the first half of the 1900s, as the government began a broad crackdown on cannabis commerce. Under the proposal, the federal government would issue tax stamps that licensed marijuana businesses would affix to their products to indicate that tax was paid on the product.

In today’s regulatory environment, CPEAR said, a marijuana tax stamp “can be used as proof of payment of a cannabis-specific tax and can help reduce tax evasion and supply chain diversion and inversion.”

Diversion occurs when legally produced products are rerouted to the illicit market. Inversion is the opposite—when illicit products show up on shelves of legal retailers.

A centralized track-and-trace program would further help avoid interplay between legal and illegal markets, CPEAR’s report says, insisting that such a system “or a similar national inventory control mechanism must be adopted.”

“A standardized national inventory control system will help law enforcement and other stakeholders identify supply chain inversion and diversion,” it says, “and prevent cannabis from being sold in states that have prohibited cannabis sales.”

Drawing from data sources and certain forms of surveillance could also aid the fight against illegal sales, CPEAR says, for example by monitoring water and electricity usage, aerial imagery and soil composition for illicit cannabis activity. The report identifies two monitoring systems as examples: the Detection and Interdiction of Marijuana to Aid Enforcement and Conservation (DIMEC), which is a “computer algorithm capable of learning to detect patterns in aerial and satellite imagery,” and so-called environmental DNA (eDNA), which CPEAR describes as “a highly sensitive method of detecting low concentrations of substances from a sample of local water sources.”

Beyond track-and-trace programs, surveillance and tax stamps, CPEAR also recommends the federal government begin setting guidelines “to address inconsistent state regulations.” Specifically, the group wants to see minimum standards for lab testing, packaging and labeling, manufacturing and advertising.

The group also wants clear communication from federal authorities when it comes to enforcement priorities, calling for “frequent and up-to-date guidance to local and state law enforcement agencies regarding the enforcement priorities of the illicit cannabis market and related illegal activities.”

To pay for the new approach, the CPEAR report says that “the adoption of any federal cannabis taxes must ensure that a portion of all revenue is allocated toward comprehensive illicit market enforcement efforts.”

The report stops short of urging the federal government to actually legalize marijuana, though it does assert that “a new paradigm in cannabis reform is inevitable” and that “policy changes at the federal level will mark a new era in cannabis legality.”

Not everyone in the regulated cannabis community is impressed by CPEAR’s new report.

Kaliko Castille, president of the Minority Cannabis Business Association, told Marijuana Moment that the paper seems to be less about how to transition into the legal market and more about ramping up enforcement against unlicensed actors.

“It’s clear that big cannabis and big tobacco are coming together,” he said, “and based on all the talk about enforcement against illicit cannabis in this paper, it’s clear that their priority is cannabis prohibition 2.0. Based on documented history, we know who that disproportionately affects—Black and brown people.”

After an initial review of the report, Castille said he found “not a single mention” of how to make it easier for illicit operators to transition into the regulated marketplace. In a section about the California’s licensed marijuana businesses struggling to compete against the illicit market, for example, the paper omits the fact that “half of the state still doesn’t allow for legal distribution of adult use cannabis,” he said.

“The answer is to make it easier for folks to get into the industry,” Castille continued, by keeping regulations reasonable and tax levels relatively low, in order to better compete with the illicit market. “If prohibition worked, we wouldn’t currently have more than half the states in defiance of federal law.”

Another advocate, Shaleen Title, a former Massachusetts marijuana regulator who now directs the Parabola Center for Law and Policy, suggested that given the track record of the tobacco industry and its representation in CPEAR, the group shouldn’t be looked to as a leader on reform.

“If you go to a drugstore this year, you’ll see signs explaining that Philip Morris and Reynolds America intentionally designed cigarettes to be addictive—court-mandated signage specifically shaming them for their behavior,” Title told Marijuana Moment. “The tax stamps idea is ridiculous, but the idea that anyone should engage these companies or their front groups as serious policy stakeholders is even more ridiculous.”

On social media, Title also mocked CPEAR’s tax stamp idea, spelling “marihuana” archaically to reference the 1937 Marihuana Tax Act, which introduced the tax stamps as a way to discourage cannabis use.

Asked for comment on the pushback from advocates, CPEAR sent Marijuana Moment a statement attributed to Shanita Penny, a senior advisor to the group.

“In meetings with federal lawmakers, public safety officials, small businesses struggling to gain traction in states like New York, and broadly across the public, the illicit market is a major concern—potentially one of the biggest reasons deterring many from fully supporting cannabis policy reform,” Penny said. “Policymakers are looking for answers to the illicit market, and those serious about seeing the movement progress should be promoting ideas that bring transparency, accountability, and fairness to the system.”

A CPEAR representative also noted that the group on Wednesday hosted a cannabis panel at the Congressional Black Caucus Foundation’s annual legislative conference in Washington, D.C., one of apparently three cannabis-focused panels at the event.

The persistence of illicit marijuana cultivation, processing and sales in legal states has become an inconvenient truth for those who saw legalization as a way to quickly eliminate unregulated cannabis activity. Much of that activity exists to supply consumers in other states where cannabis remains prohibited, or to undercut licensed operators within legal markets where taxes and regulations have kept prices relatively high. Increasingly in legal states, enforcement has shifted, albeit typically at a slower pace, to combatting unlicensed facilities and distribution.

For governments, unregulated activity shrinks cannabis revenues and, in some cases, helps fund further criminal activity. Meanwhile legal businesses, which often have to pay expensive licensing fees and comply with onerous regulations, are outpriced by unlicensed operators. Even consumers who benefit from those lower prices may be put at risk. A recent report out of Canada found that 9 in 10 samples of illicit marijuana seized by law enforcement contained numerous pesticides, compared to only 6 percent of products from licensed sources.

In California, the state’s attorney general called last month for a bifurcated approach to the problem. “The barriers to entry are too high,” Rob Bonta (D) said. “The costs to stay in operation are too high. And we should be lowering taxes at least temporarily.” The state is also paying out millions of dollars in grants to localities to license more businesses in areas where access to legal marijuana is scarce. Localities that have opted out of allowing marijuana retailers, with no plans to license them in the future, don’t qualify for the grants.

In further efforts to address the illicit market, last year the state adopted a law eliminating the state’s cannabis cultivation tax.

In New York, meanwhile, the governor in March proposed a bill increasing enforcement against unlicensed operators as the state grappled with delays opening stores widely across the state—obstacles that are ongoing. In an effort to address the bottleneck, the state is allowing direct grower-to-consumer sales through farmers market-style events. Lawmakers have also passed a bill that would permit farmers to sell to tribal retailers in the state.

As for marijuana tax stamps, at least one state still requires them—for illicit activity. In Louisiana, lawmakers in April voted down a bill that would have repealed an existing state law mandating illegal cannabis sellers buy stamps to affix to every parcel of marijuana sold. The stamps are $3.50 apiece, and the law requires one stamp on each gram of marijuana sold, or about $100 tax on each ounce.

According to local reports, the state Department of Revenue is still using its first printing of the marijuana tax stamps, from the program’s start in 1990. “Louisiana received about $1,900 in revenue [last year] and the market is actually stamp collectors,” said Rep. Joe Marino (I), who sponsored the bill. “I don’t know that they’ve even recouped the price of printing all the stamps yet.” (Full Story)

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