Seed-to-Sale Delays Sow Confusion In Medical Marijuana Market
Three years after Oklahoma voters approved medical marijuana, the state is finally poised to implement a tracking system that will ensure less illegal cannabis makes it onto dispensary shelves, via @pmonies @NewHealthOK #SQ788 #MMJ #cannabis
Delays in implementing Oklahoma’s “seed-to-sale” tracking system for medical marijuana have sowed confusion for businesses in the fast-growing cannabis industry as law enforcement authorities step up their enforcement efforts for illicit marijuana products.
The Oklahoma Medical Marijuana Authority’s efforts at putting the seed-to-sale system in place at the end of April was delayed by a lawsuit from a group of businesses who said the state was forcing them to buy the tags needed to track the cannabis products. A judge in Okmulgee County agreed to halt implementation until the end of June.
Oklahoma voters approved medical marijuana in 2018 under State Question 788. Most states with legal medical or recreational cannabis markets have some type of tracking system to verify that products are grown, processed, transported and sold under the law. The state’s seed-to-sale system was part of House Bill 2612, the so-called “unity bill,” in 2019.
There is broad agreement among cannabis businesses that seed-to-sale is needed to ensure legal products and enable quicker consumer recalls if there are health or safety problems with a particular product. But how the state chose its vendor and how much businesses should bear the costs of regulation has split many in the industry.
Attorney Ron Durbin, who filed the lawsuit in Okmulgee County on behalf of a few dispensaries, said the law requires a seed-to-sale system but doesn’t require businesses to use Metrc LLC, the Florida-based vendor that won the bid for the system in September. More than a dozen other states with legal cannabis markets use Metrc for their seed-to-sale systems.
Durbin’s clients want the state to pick up the costs of the Metrc system and the radio-frequency identification tags to track cannabis products. The online Metrc system costs licensees $40 per month, with plant tags costing 45 cents and product tags costing 25 cents. Average compliance costs per year would be about $705, according to estimates in the state contract.
Durbin said the state failed to properly require medical marijuana licensees to use the Metrc system under agency rulemaking. He said press releases and social media posts by the medical marijuana authority notifying cannabis businesses about Metrc’s implementation constituted “backdoor rulemaking” and didn’t allow for public comment. Durbin said tag costs and monthly subscription fees for the platform was a tax or fee never approved by the Legislature.
“I’m arguing those are not the way you adopt regulations, and the regulations don’t require any of this,” Durbin said in an interview. “If that’s the case, we’re back to where I said we should be, which is: Go adopt some lawfully appropriate regulations to implement your seed-to-sale tracking program. OMMA has way over complicated this. Quite frankly, they dropped the ball and didn’t do their job in getting regulations done.”
Durbin said the state’s 7% medical marijuana excise tax, which has brought in $100 million since 2018, should allow for the authority to pay for the seed-to-sale tracking systems and tags, or at least the costs for the first few months. (Medical marijuana products are also subject to state and local sales taxes.)
The medical marijuana authority declined to comment on the lawsuit but said in court filings the state legally awarded the contract to Metrc and a seven-month training and implementation period had been derailed by the lawsuit. Metrc allows other seed-to-sale programs or point-of-sales systems to communicate with its tracking system. More than 7,100 licensees in Oklahoma have already signed up to use the Metrc system.
“It is only once a commercial licensee’s data makes its way into Metrc that the OMMA can view and track that inventory,” Kelly Williams, the authority’s director, said in an affidavit filed in the case. “In other words, the contract with Metrc provides the OMMA a cloud-based system that gives it visibility in real time to perform its auditing and regulatory function.”
Metrc wasn’t named in the original lawsuit. The company successfully argued in a June 1 hearing that it should be allowed into the lawsuit as a party because the temporary restraining order interfered with its state contract. The next hearing is scheduled for June 29 in Okmulgee County.
Ready To Go
LeeAnn Wiebe, CEO of Apothecary Extracts in Beggs, said her businesses were all ready to go on the Metrc system by April. Apothecary Extracts is vertically integrated and has a grow operation, manufacturing facility and a dispensary. Her company also has hundreds of clients on the wholesale level.
“We hit that April 30 date and we already had everything loaded in before the extension, so we just said, ‘Now we’re live, we’re going to keep it going,’” Wiebe said.
The same wasn’t true for many of her wholesale clients, who had Metrc accounts but stopped using the system amid the confusion over the lawsuit and the new deadline for implementation. Wiebe estimated about 9 out 10 of her company’s wholesale clients aren’t using the platform.
“We really had to adjust at our end because we’re fully integrated to Metrc to be able to transfer products,” she said. “We’ve worked with other clients who aren’t in Metrc, but we’ve had to create some workarounds. It’s really put a damper on the rollout for sure.”
Before the state awarded the Metrc contract, medical marijuana businesses still had to track their inventory and keep records for the medical marijuana authority. But it was in an oftentimes cumbersome program that required a lot of manual entry. Wiebe, who started a cannabis business in Colorado, said there were growing pains in that state when the Metrc system was implemented there.
Weibe said Metrc’s costs, for the license and the RFID tags, is less than 1% of the costs for her Oklahoma businesses. She spends much more to test medical marijuana products, with an estimated $2 million in testing costs this year compared to $20,000 in Metrc tags.
“Anytime you have a new system, it can be overwhelming or cumbersome and it’s a bit fearful because you don’t know it,” Wiebe said. “But shortly after it was implemented, everyone could see the value in transparency and everyone using the same system.”
Wiebe said some of the reluctance to use the Metrc system might be because it’s easy to manipulate the current system.
“Based on working with hundreds of growers at this point, and our challenge in getting license verification, test results or batch information, nine of 10 places we can’t work with because they can’t provide us that information,” she said. “I think most people who don’t want Metrc don’t want it because it eliminates those loopholes or that ability to easily get unregulated product into the market.”
Curbing Illegal Sales
Lawmakers passed several bills in this year’s session to help curtail illegal black market activity in the medical marijuana industry. The Oklahoma Bureau of Narcotics has broken up illegal grow operations in the past few months, including one earlier this month in Muskogee County that had up to 24,000 plants. Last month, authorities seized 4,700 plants in Logan County.
“We are working a lot of investigations statewide on growers illegally shipping out of state and a few stores selling product brought in from out of state,” said Oklahoma Bureau of Narcotics spokesman Mark Woodward. “Black market growers are thriving in Oklahoma. Regarding seed-to-sale, tracking would be helpful in some of our investigations, but it hasn’t hampered our ability to build solid cases on those we’ve already shut down.”
Among the legislative changes are laws that allow the state Bureau of Narcotic and the medical marijuana authority to hire more agents and inspectors. House Bill 2904 would let the authority, which is under the state Health Department, to hire 76 new employees by Dec. 1 for compliance, inspections and investigations. That addition would take the authority to more than 200 employees.
At a special meeting last week for emergency rules, Williams said the authority has a goal of inspecting all licensed businesses this year. So far, about 40% of businesses have had an inspection. The authority has a contract with health department food inspectors to perform some of those inspections.
Sam Bein, owner of Rocking Star Farm in Inola, said enforcement and seed-to-sale tracking are the only ways to ensure legal businesses are on a level playing field. Bein was initially a Metrc skeptic, but said he’s come around to the platform after seeing how it worked.
“It’s going to make it harder to cheat,” Bein said. “Illegal products are still going to get in here, but Metrc is going to slow it down. If you’re a legal business and you’re buying from certified and compliant farms like ours, our product is going to be safe for you. I think the consumer is going to gravitate to those dispensaries and those farms.”
To make up for some of the costs of the Metrc system, Bein said lawmakers should direct the Oklahoma Tax Commission to provide tax credits or deductions to allow medical marijuana businesses to write off their compliance costs. Because marijuana is a controlled substance at the federal level, many deductions or credits available to other industries aren’t available to cannabis businesses under federal tax law. Limited banking options also force many businesses into cash-only operations.
“These costs get passed on to the patient,” Bein said. “If we make those costs higher, then we drive people back to street drugs and out of the safe, legal means of going to a dispensary and the state won’t receive any tax revenue.”
For dispensaries, the Metrc system will need a lot of up-front costs when it gets implemented, said Blake Cantrell, CEO/partner of The Peak, which is about to open its fifth dispensary in Oklahoma. The company also runs a distribution business supplying dispensaries across rural Oklahoma.
Cantrell said the delays and uncertainty when the system might go live means it’s a guessing game for many dispensary owners. The Peak had to buy enough tags and get on the Metrc platform to account for all its inventory at the original deadline at the end of April. Then that got pushed to the end of June, although the next court hearing is June 29.
“We had scheduled it out with our point-of-sale provider because it requires their involvement as well to upload to Metrc our initial inventories for each of our stores to take that systemwide and check the integrations,” Cantrell said. “Now we’ll have to make these exact same types of time-based decisions and plans for the new upcoming date, which could very well be delayed again.”
Cantrell said a lack of communication, from both the medical marijuana authority and Metrc, has meant a lot of confusion among many in the industry. He is also board president of the Oklahoma Cannabis Industry Association.
“We need better understanding, and we need better communication,” he said. “I know that OMMA is actively working on improving that, and they’re getting better, but it’s still not good. Something like this has real-world impacts on us and hard financial costs.”