Ron Kammerzell is the Deputy Senior Director of Enforcement at Colorado Department of Revenue, he is often referred to as the Colorado Cannabis Czar.
What you’ll discover in this interview:
– How edibles regulations are changing
– Lessons learned by Colorado regulators
– A look at banking for cannabis businesses
– Excise taxes on cannabis going forward
– and More
Matthew: Hi, I’m Matthew Kind. Every Monday and Wednesday look for a fresh episode where I’ll take you behind the scenes and interview the leaders of the rapidly evolving cannabis industry. Learn more at www.cannainsider.com. That’s www.cannainsider.com. Do you know that feeling when you sense opportunity, when you see something before most people and you just know it will be successful, then you're ready. Ready for CannaInsider Consulting. Learn more at www.canninsider.com/consulting. Now here's your program. Our next guest is Ron Kammerzell, the Senior Director of Enforcement at Colorado Department of Revenue. Ron is often referred to as the Colorado Cannabis Czar. Welcome to CannaInsider Ron.
Ron: Thank you very much. I’m glad to be here.
Matthew: Now before we get started, how do you feel being referred to as a Czar? You seem like a nice guy, not someone that’s very Czar-like.
Ron: Well it’s kind of an interesting twist. I don’t know that I’ve ever been referred to as a Czar before, but certainly we’ve been very involved with trying to get this program off the ground. So you know, I’ve probably been called a lot worse.
Matthew: Me too. Can you give listeners an idea of what your job is exactly and how it relates to cannabis?
Ron: Sure, let me give you just a real quick, broad overview. I’m the Senior Director of Enforcement. So I have management oversight responsibilities for gaming, racing, liquor, tobacco, auto industry and marijuana in the state of Colorado. So it’s kind of a varied group of things that I’m responsible for, but in many respects a lot of the things we do in some of these other regulated industries have really translated well to the marijuana industry.
Matthew: And what was your background before becoming the Senior Director of Enforcement?
Ron: I was the Director of the Division of Gaming, so regulating limited stakes casinos in Colorado, for about seven years. And prior to that I was also employed as a criminal investigator with the Colorado Division of Gaming.
Matthew: And one thing I want to point out for listeners before we get into the cannabis-specific questions is that if you live outside of Colorado, the things were talking about are very pertinent today because Colorado’s under a microscope, and a lot of other states are looking at what’s going on here, and it’s very likely that whatever state you look in one or two things will probably be taken from the Colorado play book. And if you know that ahead of time, you’ll be in a good position to understand what’s happening. So as we dive in Ron, looking back at 2014, how do you feel like legalization went?
Ron: I think given the very aggressive timelines that we had, we’re pretty pleased with how things went. The launch of retail marijuana on January 1st went, you know, pretty smoothly. And we’re please with where we are today. Certainly we recognize that we’ve got… we continue to have work to do, but we’re making really good progress.
Matthew: And based on the regulations and the future changing regulations, what do you see cannabis businesses doing really well? What are they adopting well that you think they’re doing a good job?
Ron: Well I think they’ve really embraced the concept of seed to sale tracking which is obviously a critical component with respect to the Cole Memorandum. And the federal government, they’re very concerned about diversion. They want us to have a closed-loop system. And our licensees have really embraced that and has really done a good job of implementing that tracking system. Also with edibles, although there’s been a lot of negative press related to edibles, I can say that the industry’s been very responsive. After we determined that we had some challenges and some issues with edibles and overconsumption, the industry’s really, on their own part, taken a voluntary position really to get ahead of edibles manufacturing leading up to regulation. So, you know, they’ve really done a responsible job in that way.
I think they’ve also done a good job of ensuring that they continue to maintain a dialogue with not only the division who regulates them, but also the General Assembly. And I think as long as we continue to have a really good, open dialogue that ultimately results in really good public policy.
Matthew: Now you mentioned the Cole Memorandum or the Cole Memo. Can you just help us understand what that is and how it affects cannabis businesses?
Ron: Sure, well the Cole Memorandum was issued by the Department of Justice, and it was issued back in August of 2013. And it really gave guidance to states that were implementing the legalization of marijuana on some top priorities that the regulatory bodies as well as the states should focus on. And really the big three for us out of the eight is ensuring that we prevent diversion to other states, making sure that we’re protecting kids, that we’re keeping it out of the hands of our youth, and then also making sure that we’re keeping criminal and corruptive elements out of the marijuana industry. They don’t want this to be a front for organized crime or drug cartels to come in and profit from it. So those are really the three major priorities that we’re really focused on as a regulatory agency. And I think the state as a whole has really done a good job of focusing on those things.
Matthew: As you mentioned, there was some hiccups around edibles. Can you describe what happened that you didn’t anticipate and then how to mitigate that problem going forward?
Ron: Sure. Well we have a couple of very highly publicized incidents, really tragic incidents where it involved at least the possible overconsumption of edible retail marijuana products. And I think the challenge there is, you know, we had about two and half to three years of experience with the medical marijuana industry and regulating that. They also have edibles, and we just didn’t see those overconsumption issues on the medical side. However, I think what we’re seeing on the retail side is we’re seeing new consumers to retail edible products and even people who have perhaps even smoked marijuana have not had the experience of ingesting edible products. And there’s certainly a different physiological reaction to ingesting marijuana versus smoking it.
So I think that was something that we didn’t anticipate. We figured that recodifying [ph] what we already had on the medical side was going to be adequate for the retail side. But it clearly is not the case because we have a lot of educational gaps. If you look at the profile of a retail consumer versus a medical patient, medical patients have a very thorough understanding of the effects of THC and the effects of ingesting THC. And we have that education gap on the retail side. So in order to really focus on trying to make it a safer and a better experience for the retail consumer, we really needed to focus in part on education, and that’s really where the industry has stepped in, and again voluntarily have really done a good job of educating the consumer when they’re in a retail store about how to ingest retail marijuana, being sure you’re going slow, making sure you’re giving adequate time to feel the effects of it. But also really making sure that the consumer clearly understands what a serving size of THC is and if they’re purchasing an edible that has more than 10mg of THC in it, that we give them clear guidance through marking the product or demarking and scoring the product so that they can break off a serving and know that it’s just one serving of THC.
Matt: Now on February 1st the child resistant packaging rules will continue to expand. Can you tell us a little bit about that?
Ron: Of course we had some regulations on child resistant packaging, but what we’ve done is really more than anything in the edible, revisions to the edibles rules is really clarify that. So if a manufacturer or retail edible product is going to manufacture a single serving or 10mg of THC in their edible product, the child resistant packaging must be on the product but it only has to survive the first opening. If they’re manufacturing a product that has multiple servings, so let’s say as an example, a cookie or a chocolate bar that has 50mg of THC, presumably that’s five servings of THC, as we’ve defined it in the rule. And their child resistant packaging has to survive the first opening and remain child resistant beyond that first opening. So you’re looking at things like child resistant zip lock bags which are very popular in the industry, squeeze bottles that have child resistant properties and capabilities. So things of that nature.
Matt: What misinformation is out there among cannabis businesses about regulations and how they should interpret them.
Ron: I think probably the most challenging part of the regulatory scheme is the labeling part of it. A lot of the requirements for labeling are built into the statute, and it’s a laundry list of things. And so I think it’s very difficult for our licensees to comply with those standards. And there’s been a lot of discussion about do we have too much information on our labeling requirements and does it become white noise to the consumer. So things like “Keep out of reach of children” becomes white noise or the actual serving size. This has, you know, 50mg of THC, serving is 10mg, there’s 5 servings in this package. There’s so much information that’s required by statute on the actual labels the concerns from the industry and from others is it becomes white noise after a while.
And so there may be an opportunity here that the legislature perhaps might look at some of the labeling requirements. The industry is also looking at that this year during our General Assembly session to see if there’s some things that we can do to change that and make the labeling more effective and really do what it’s supposed to do for the consumer.
Matt: Now switching gears to taxes. Is there an estimate in how much tax was collected from cannabis businesses in Colorado in 2014?
Ron: I don’t think we have the final numbers available, but we’re looking at right now and I think it’s through November that we’ve collected about $56 million in taxes.
Matt: Great. And for listeners that don’t understand the production limits, can you give an overview of what they are? How will production limits change in the future based on demand studies or something else? I mean how do you gage, you know, gage the production limits to make sure the market exists in way that’s functional for everybody?
Ron: Right. So in the summer of last year we put some production limits in place for retail marijuana. We have tiers at the cultivation level. So we have a Type 1, Type 2 and Type 3. A Type 1 tier restricts the ability of a cultivation facility to grow no more than 3,000 plants. A Type 2 is 6,000 plants, and a Type 3 is 10,000 plants. So part of the production restriction that we put in place is new entrants into the market because vertical integration went away (13.24 unclear) in October. So we have new entrants into the market that maybe only want to be a cultivation. They don’t necessarily want to be a store. So any of the new entrants into the market have to start at that lowest tier, the 3,000 plant limit. And order for them to move up into a higher tier, they have to demonstrate to us that they’re selling at least 85 percent of the marijuana that they’re producing over (13.50 unclear).
So they’ve got… they have to demonstrate that they’re able to sell the product that they’re producing, that they’re not overproducing because clearly our biggest concern is you have too much on hand inventory and overproduction will really drive down the prices of marijuana and really create a stress point or an incentive for people to move marijuana to other markets where the prevailing price is much higher. So that’s kind of the mechanism that we’ve used to do that is if you want to move up your production, you have to prove to us that you’re selling your marijuana in the regulated market at least 85 percent of what you’re producing. We will likely, in fact, in the rules that we promulgated this summer we said that we were going to revisit this. We are going to update the market demand study that we did last year. The good new there is we have a full year of data out of our metric or inventory system that can be utilized to really help us better understand the market here in Colorado. And so once we have that study updated that will really be a springboard for us to take a look at our production to see if we’ve got it right. It’s a challenge for sure, and we’re trying to hit that sweet spot where or to the extent possible we’re balancing supply in demand within the state and it’s not an easy task.
Matthew: I’m interested to hear what you think the price should be per gram, for example, to eliminate the black market or move it down to something that’s just a tiny, tiny piece of the market. I’ve heard people talk about, you know, certain price points where the black market would essentially go away because it’s just not profitable anymore. Do you have any ideas in mind where the price per gram, if it reaches this level, if it drops to this level, it will essentially eliminate almost all of the black market?
Ron: You know we haven’t really looked at that to that granular of level at this point because in large part because just has changed so much in the last year. I mean when retail marijuana opened in January of course we had shortages because there was more demand than supply, and we’re starting to see that correct itself as we have more retail cultivation facilities and retail stores come online. I think it’s really too early to really at least make a confident response to that. I think time will tell, but I think that’s something that we’re really interested in looking at. And you know, the other comment is, and I’ve said this before, is we want to do everything in our power to shrink the black market. We’ll never eliminated it.
Ron: I just don’t think it’s realistic to assume we’ll totally eliminate the black market. But we want to do everything we can to minimize it in the state.
Matthew: Now currently only recreational marijuana is subject to testing. Will medical marijuana be subject to testing soon?
Ron: Well the medical marijuana program just went through a Sunset Review from the Department of Regulatory agencies in that it’s required by statute that we go through that Sunset. And one of the recommendations in their report is to harmonize the testing for retail with the medical marijuana regulatory framework. And I think wherever possible we are really interested in harmonizing the two because the reality is is we have any of our retail licensees are also medical licensees. Many of their operations are in the same buildings or next door to one another. And to the extent we can harmonize them so that the rules are the same on both sides of the fence. It makes it easier for our licensees to comply. And you know, we’re really interested in obtaining voluntary compliance from them. So that’s one critical piece of that is to harmonize the testing. And that’s just one reason. The reason is it seems strange to test retail marijuana, but then the marijuana that’s being used for medicinal purposes by patients is not tested.
Matthew: Right it does seem a little strange.
Ron: Yeah, it almost seems backwards really, but it’s just how the evolution of the industry here has occurred. So I think, you know, we recognized and the folks that did the Sunset review recognized that that’s an important component that we bring medical marijuana into the fold of mandatory testing.
Matthew: Now some people say that the taxes on recreational marijuana are prohibitive and lead to more gray and black market activity. What’s the future of taxation on marijuana both medical and recreation going forward?
Ron: Well you know that’s really up to the General Assembly. When they passed Proposition AA, it gave some latitude to the General Assembly to change the excise tax and the special retail sales tax on retail marijuana. I’m not aware of any movement afoot to change the general sales tax on medical marijuana. I think the general thought is that by changing that you may limit the accessibility of medical marijuana to patients, and I think that that’s probably not a way that the General Assembly would move toward. But I don’t speak for the General Assembly, but I think they’re going to continue to monitor it. And this summer they have an interim revenue committee that took a look at the tax revenues. So I think they’ll continue to monitor it and they may make adjustments over time. They certainly have the authority to do that.
Matthew: Okay so the excise tax on clones, flower and trim has gone up from 2014 to 2015. This is something that the General Assembly decides then or there is some leeway within the Department of Revenue?
Ron: The average market rate, which is the average wholesale price of those products upon first transfer out of a cultivation facility, is set by the Department of Revenue, actually by our taxation group. And so what they do is they look at the wholesale prices and they actually calculate an average. It’s prescribed in statute. The General Assembly gave us very specific formulas to follow. And so based on the information collected by the taxation group on the wholesale price, that’s why the average market rate changed this year.
Matthew: Now going back to taxation or collecting revenue, do cannabis businesses actually drop off cash at your office? How does that work?
Ron: A very high percentage of them do. We have actually developed a system for them to pay their taxes with cash. They pay their license fees with cash. And we, you know, of course had to take additional security precautions with that and you know, have counting machines and some additional equipment to actually process that. But it’s important to note that they’re not the only businesses. You know, there are other businesses within the state that on occasion will pay with cash. So it’s not a concept that’s totally foreign to us, but certainly the volume that we’re seeing from the marijuana industry has made us have to take some additional precautions.
Matthew: We talked about the Cole Memo a little bit and there’s also news of a cannabis credit union opening up here in Colorado. Do you think 2015 is the year that banking will be resolved and cannabis business will be able to partake in just traditional retail checking accounts?
Ron: I certainly hope so. It remains to be seen. I can’t predict what the US Congress is going to do. I know that’s an issue that’s on the radar of many of the Congress folks from Colorado. I know they understand the importance of it. And I think the state is really doing everything they can from the state level to, you know, develop this co-op and I think it would be a huge victory to have banking for the industry because quite frankly I think it’s just a general public safety concern for the state and the communities that have these businesses. But also from a regulatory standpoint it would really improve our ability to have an audit trail to go in and audit taxes and audit the movement of marijuana in the state. I think it would enhance the regulatory framework as well.
Matthew: Have any other states reached out to you for help or guidance in setting up their cannabis programs and regulations?
Ron: We’ve had a lot of contact and interaction with a number of states and countries quite frankly. We’ve had some interaction with Switzerland, Columbia, Uruguay, Canada, France, Germany and pretty much just about every state that’s contemplating legalization of marijuana in one form or another in the United States. And in fact today I’m attending a conference of the Colorado Association of Chiefs of Police on marijuana, and we have a lot of folks from different states that are attending this as well. We’ve met with Oregon and Alaska. Of course as we were implementing retail marijuana we were really talking to Washington State almost on a weekly basis. So there’s been a lot of interaction with other states and other countries.
Matthew: So with other states and other countries that are setting up their regulations, what are the top questions or problems they’re trying to solve and get guidance from you?
Ron: Well I think the number one question we get is what are the most important things for us to get right. And I think our biggest response to that is give yourself plenty of time. Of course we had very aggressive timelines here in Colorado that were established in large part in Amendment 64, but also through the legislative process. So give yourself ample time to set up the infrastructure and make sure that you have proper funding for the program. And you know, make sure that you’re bringing all the stakeholders to the table as you start to begin to set up public policy on this issue. If you don’t bring all the stakeholders to the table and identify the issues upfront, that results in really problems with your public policy, with your regulations, with your statutes. And the more you can get those issues identified upfront and really get them address in the implementation of the public policy, the better off you’ll be.
Matthew: Ron we talked a little bit about what cannabis businesses are doing well and working with the Department of Revenue. What could they do better in 2015?
Ron: Honestly we’ve been really pleased with the level of compliance we’ve had in the industry. Is it perfect, no. A perfect example of that is underage compliance. We modeled our underage compliance program after the Liquor Enforcement Division, what they’ve been doing for years where we sent operatives into try to purchase retail marijuana as under 21 year old. We’ve had an incredibly high compliance rate with that. We’ve had some issues, some noncompliance issues, but they’re pretty minimal considering the scope of things. And you know, comparing that to the liquor industry, you know, we’re probably slightly higher in our rate of compliance right now on underage sales compared to the liquor industry. So I think that’s something they’ve done really well. Again I think they’ve really embraced the inventory tracking model, and they’ve done a good job with that. I think we’ve had some challenges with labeling and, you know, but those are to be expected as we roll out a pretty sophisticated regulatory model. We recognize that there’s a lot of opportunities for us to educate the industry through the compliance process and make sure that they understand things. I think overall we’re pretty please where our compliance level is right now.
Matthew: Great. I love to hear that. In closing how can listeners keep abreast of all the work you’re going at the Department of Revenue?
Ron: Well certainly visiting our Department of Revenue website. We have a lot of information on taxation there, and visiting the Marijuana Enforcement Division tax site or website. You’ll see a lot of activity related to rule making. We’re currently working on putting together an annual report that we anticipate will be distributed widely and will be very interesting to most folks. And really starting to put together some monthly reporting on the state of the industry here in Colorado. And it will pull in information from licensing, from compliance, from aggregate inventory information. I think it will be really important, and it really dovetails nicely with, you know, a big part of our regulatory framework as being transparent to the public. And so the more we can share information with the public on the state of the industry here in Colorado, I think is better for us. Tell your listeners to stay in tuned on that, watch the website and we hope probably by the end of the first quarter to have some of that information out there.
Matthew: Great. Ron thanks so much for being on CannaInsider today. We really appreciate it.
Ron: My pleasure.
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