Comprehensive Smart Legalization Passes the New Hampshire House

In April 2023 remarkably smart, common-sense cannabis legalization (HB639) as originally sponsored by House Majority Leader Jason Osborne and House Minority Leader Matt Wilhelm cleared the full New Hampshire House 234-127, was then amended by House Ways & Means Committee members Terry Spilsbury, Fred Doucette, and Susan Almy and cleared that committee by a vote of 16-4 followed subsequently by approval in a final House vote with a roughly 3-1 margin.

Lessons learned from the mistakes of other states had been substantially applied, and pioneering, first-in-the-nation provisions added.

For example, when New York passed adult-use legalization a couple years before, it permitted anyone to exchange cannabis so long as no money changed hands. So nearly 1000 unlicensed retail stores, mobile trucks, sidewalk tables and the like popped up like mushrooms selling art, t-shirts, memberships, etc, then ‘gifting’ an amount of cannabis equal to the retail value of the non-cannabis merchandise. The result was enormous growth of the underground black market, especially in NYC and general chaos on many levels. Our smart legislators closed that loophole.

New Hampshire would become the first-in-the-nation with no retail sales tax and the lowest cannabis tax rate in the US at a rate of 12.5% imposed at the finished product wholesale price to the retail dispensary as an ‘excise’ tax. Since the retail price is typically about 3X wholesale, the effective tax rate indirectly passed on to the consumer would be around 4%.

New Hampshire would also be the first state in the nation to legalize interstate commerce per Section 318-F15 Part IX: “The following act(s) shall not be illegal under New Hampshire law…Selling, offering for sale, transferring, transporting or delivering cannabis to establishments licensed to process or sell cannabis under the laws of other states if the person or business entity has obtained a current, valid (cannabis) license…”

The NH Liquor Commission (to be re-named the “NH Liquor and Cannabis Commission”) would be responsible for licensing, rules, regulation and enforcement and would be advanced $15M to stand up its separate cannabis regulatory administration. An additional $500K was allocated to develop and implement a public education and safety campaign prior to initiation of retail sales. Both of these were to be reimbursed from future cannabis excise tax revenues.

The Commission’s cost of regulating the cannabis industry was projected to be offset on an ongoing basis from the licensing and related fees it collects, so the proposed excise tax will be fully applied to the specific purposes and programs as described below. However, as the industry matures, the overall increase in business activity from both cannabis licensees and especially those businesses, professions and trades that provide it goods and services were projected to swell revenue from existing state business and payroll taxes and provide even more revenue for the state than the wholesale excise tax. For perspective, the Liquor Commission currently contributes about $200,000,000 annually to the state’s revenue. With the commercial legalization and regulation proposed in this legislation, combined new revenue from cannabis within a decade could easily add 50% – 100% or more to the current liquor-generated revenue.

Revenue generated from the cannabis excise tax was proposed to be allocated as follows: $100,000 annually to the department of safety drug monitoring initiative for data collection and reporting related to the health impacts of cannabis prohibition and regulation; then 50% to the education trust fund, 30% to the unfunded retirement system liability, 10% for substance abuse and recovery, 5% to public safety, including police, fire and rescue, and 5% to children’s behavioral health services.

Other smart provisions include protection of individual privacy, safety, labeling, testing, guaranteed retail availability of low-potency products, municipalities may opt out but cannot restrict delivery, contracts are legally enforceable despite Federal prohibition, protection of professional, occupational, driver’s licenses, parole, probation and pre-trial release programs, protection of access to state services, medical care, employment and contracting. Employers would be permitted to prohibit cannabis use and intoxication on the job, and of course cannabis DWI or use in a moving vehicle would remain prohibited.

Last but not least, existing medical cannabis dispensaries (ATCs) would be permitted to obtain “Dual-Use” licenses so long as they prioritize access for registered patients.

Good Public Policy vs Political Shenanigans

Now it’s early May 2023 and legalization proponents had lined up a majority of Senators to pass this legislation and send it to the governor for his approval. This was an example of good public policy supported by nearly three quarters of New Hampshire residents, according to a recent poll from the University of NH.

But Governor Sununu had other priorities than what was in the best interests of the residents of New Hampshire and set to work behind the scenes to twist this issue to his political advantage and that of his Party. He convened a meeting with three of the four Republican senators planning to support the measure and pressured them to change their vote with some combination of the usual threats of withholding committee chairmanships, preventing bills they favor from receiving a floor vote and/or withholding their access to Senate PAC and Republican Party re-election campaign funds.

At that time the Governor was strongly considering a run for the Republican presidential nomination, and he was concerned that having to take a stand for or against cannabis legalization would alienate him from either the law enforcement or libertarian Republican constituencies depending upon which position he took and whether he signed or vetoed a bill sent to him by the Legislature. So, it was best that it never reached his desk, and he took steps to assure that outcome.

Having succeeded in persuading these three senators to switch their votes, it was also important that the five-member Senate Judiciary Committee disapprove of the bill’s passage. So, it was arranged that one of the Republican senators on the committee favoring passage excuse himself from the committee on the day of the vote permitting Senate leadership to replace him with an anti-legalization stand-in assuring that the committee would vote against the legislation 3-2 ITL (Inexpedient to Legislate) rather than OTP (Ought to Pass).

Then the legalization bill was rejected by the full Senate the next day 14-10 rather than the 13-11 in favor that would have been the result without the governor’s and senate leadership’s intervention.

House leadership was furious with these shenanigans and threatened to attach their bill to already approved unrelated pending legislation up to and including the annual state budget but then in a breathtaking apparent 180º turnaround, the governor announced the following day that he would 100% support cannabis legalization in the next legislative session if it was “done right”, that is with a New Hampshire state monopoly on retail sales under the auspices of the State Liquor Commission.

One must assume that he had this in mind all along. Was his purpose to promote a policy and program that was best for New Hampshire? Not even remotely. Since he was not intending to run for re-election to a fifth (two-year) term he wanted to assure that the issue of cannabis legalization did not hinder the electoral prospects of any of his likely Republican successors (Chuck Morse, Kelly Ayotte, and Jeb Bradley) all of whom were on record in opposition to legalization. Be reminded that the year before, the University of NH published the results of a poll showing that 74% of New Hampshire residents were in favor of cannabis legalization. So, by introducing in the following year a state monopoly bill in the Senate that was rejected by common-sense legislators in both the previous and current years, he was angling to remove the issue from the upcoming campaign by either having a poorly-conceived bill approved, or blaming the Democrats and its other proponents for their failure to pass legalization when they had the chance.

The day following sabotaging passage of this reasonable legalization bill in the Senate after the House passed it by a 3-1 margin, the plan was for the Governor to suddenly pretend to reverse himself by announcing his support for a legalization framework that was patently illegal, dangerous and unworkable. He then rammed a bill through the Legislature creating a heavily-biased “NH Cannabis Study Commission” without any industry or public stakeholders as members with a mandate to study and create state monopoly model legislation that he and leadership knew could never be implemented unless and at least until Federal cannabis prohibition ended. The scheme included having the Senate then pass this stillborn contrivance in its next session and send it to the pro-legalization House forcing them to make a devil’s choice to either pass the legislation to the extreme chagrin of pro-cannabis stakeholders or reject it so Ms. Ayotte and Mr. Morse could claim not to be the ones opposing legalization and thereby neutralize the issue for the election.

In the midst of all this, it must be noted that the State Liquor Commission under the leadership of Commissioner Joe Mollica and his executive team had acquitted themselves with their standout professionalism, energy and devotion to the state’s best interests. Although they knew little at first about the cannabis industry, over the preceding 18 months they’d become well-informed by learning from stakeholders, visiting licensed operators in other states, studying the relevant issues and nuances and thoughtfully incorporating it all into their proposals. They did good work preparing themselves to be well qualified to regulate the state’s eventual program.

Legal Constraints of the State Monopoly Model

They also understood enough to know that state employees cannot be required to engage in violations of Federal law so they devised a workaround franchise model in which the Liquor Commission itself would not actually sell cannabis but franchise independent operators to do so with the rationale that the state would then not be required to defend those operators from possible Federal enforcement penalties and consequences.

With the tension between federal and state law, the cannabis industry is complicated and chaotic in many often-unforeseen ways. For example, the Commission as franchisor would be required to file what is known as a Franchise Disclosure Document (FDD) with the Federal Trade Commission subjecting them to federal jurisdiction, penalties and investigations. A criminal enterprise cannot offer franchises of its business model. Contrived legal firewalls notwithstanding, the State Liquor Commission’s position would be precarious and could easily become subject to serious anticipated and unanticipated legal risks and entanglements.

Claiming to not be directly involved in the business of selling cannabis because one is merely a franchisor is as prima facie absurd as McDonald’s claiming it’s not in the business of selling hamburgers because it has franchisees.

In 2017, a federal district court in Massachusetts dismissed a RICO case (Crimson Galleria Partnership, et.al vs. Healthy Pharms Inc, Century Bank, et.al.) against the bank on grounds that merely providing customary financial services to a cannabis state licensee (albeit operating in violation of federal law) did not rise to the level of direction in and control of the enterprise to implicate RICO liability as a co-defendant. This reasoning allows states to regulate cannabis industry operators as a customary government function so long as they are not substantially involved in the operation and direction of the business itself.

However, the franchise model proposed by the Liquor Commission envisions quite the opposite as they would be enforcing strict standards in almost every aspect of franchisee operations, direction and practices. Enacting this scheme could easily invite multiple RICO-based private litigations as well as public prosecution.