Five marijuana bills remain after weeks of deliberations

Battles continue over regulation of hemp-based THC products, social equity licenses and other reforms

BY: DAVID ABBOTT – WEDNESDAY MARCH 6, 2024 11:54 AM

Arizona legislators introduced more than a dozen bills focused on amending marijuana laws this year, but just five are left standing as lawmakers have passed the midpoint of their annual session.

Remaining bills run the gamut from advertising restrictions to addressing the failures of the social equity program to regulating hemp production.

Hemp battle continues

In addition to its industrial use for products like rope and fabric, hemp is also a source for cannabinoids, including delta 8 THC and CBD. Products containing those compounds can be found for sale in smoke shops and convenience stores across Arizona. 

They are not regulated under the Arizona Medical Marijuana Act that legalized medicinal marijuana in 2010, or Smart and Safe Arizona, which legalized recreational cannabis in 2020, meaning they can legally be sold outside of dispensaries.

The powerful Arizona Dispensary Association (ADA) wants hemp-derived intoxicants to be either banned outright or regulated the same way the state controls marijuana, through the Arizona Department of Health Services, with licensing to limit access to the market, rigorous testing and strict advertising controls.

The hemp battle, represented by Senate Bill 1186 — an identical measure, House Bill 2679, was killed in committee — has been going on for three years, since the advent of legal recreational cannabis. 

The bill, which is backed by the Hemp Industrial Trade Association, would regulate hemp-derived THC products in similar fashion to marijuana, defining concentration limits, establishing a licensing system overseen by the Arizona Department of Agriculture, including prohibitions against making products attractive to children or marketing to them.

It also mandates testing and certificates of analysis provided by distributors and allows for inspection of hemp production and products with corrective actions mandated for non-compliance.

The ADA is firmly against the measure and has gathered its resources to oppose it, developing a website, Stop SB1186 HB2679 Save Arizona’s Future, intended to help increase opposition.

Hemp is currently regulated by the state under the Industrial Hemp Program, established by a bill sponsored by then-Rep. Sonny Borrelli, R-Lake Havasu City, in 2017, who also sponsored SB1186. 

He has framed the new hemp bills as being “about rope, not dope.” 

Cannabis is one of the most regulated substances in the U.S., but hemp containing less than .03% THC was removed from the U.S. Drug Enforcement Administration’s schedule of Controlled Substances through the 2018 Agriculture Improvement Act, also known as the 2018 Farm Act.

The struggle between the ADA and the hemp industry has resulted in economic casualties in the past. Delta-8 Oils, a Camp Verde manufacturer of delta 8 and other hemp products, moved its operations out of state as a result of a fight in 2022 over SB1715, a bill that sought to ban hemp-derived cannabinoids completely.

According to Sully Sullivan, a former hemp farmer and executive director of the Arizona chapter of the Hemp Industrial Trade Association, the hemp industry generates $28.4 billion annually nationwide and has the economic heft to compete with the craft beer and marijuana industries.

Sullivan has been around the marijuana business since 2010 and has seen many of his friends become rich as a result of legalization. He said he believes banning hemp would help maintain a “marijuana monopoly” and hinder economic opportunities for entrepreneurs outside the cannabis business.

The hemp industry has been under attack throughout the country by a powerful and wealthy marijuana industry, he said, but hemp trade associations have been working to fight against a “strong propaganda campaign.”

“The bill is just the right thing to do,” Sullivan said. “These products have been sold for 10 years here with no regulation. It’s a huge industry, even bigger than the marijuana industry, and they don’t like that.”

He added that SB1186 addresses the issues the ADA has raised in its efforts to kill the bill, from testing products, to prohibitions against marketing to children and designing products that specifically target minors.

The ADA counters that, while the bill addresses some of the concerns it has, the issue comes down to definitions.

“If it looks like marijuana, if it acts in your body like marijuana, if it smells like marijuana, if it does all of this and if consumer experience is going to be very similar perhaps to what marijuana is, it should be regulated no differently than marijuana,” said Ann Torrez, executive director of the ADA. “That’s a hard stop for us.”

Torrez adds that, if the state is going to regulate hemp in the same manner it regulates cannabis, it should be taken to the voters in a future election.

“I’m going to take a gamble on this and say the voters are not going to say yes, that’s what they want. Because when you really dig deeply into this particular issue, schools aren’t happy, child advocacy groups aren’t happy,” she said. “So, what’s actually happening is the prohibitionist conversation is happening as a reaction to the irresponsible sale of these drugs.”

On Feb. 1, SB1186 received tentative support from the Senate Natural Resources, Energy and Water Committee, where it passed by a 5-3 vote. The hearing offered an opportunity for both sides to outline their positions in a public forum and hear what committee members thought of the bill.

Dispensary owners and representatives were on hand to voice opposition, but received a healthy dose of skepticism from senators about their motives.

“What we’re trying to do is conform to the federal guidelines through the U.S. Department of Agriculture to marry up with the Arizona Department of Agriculture,” Borrelli said. “You cannot grow hemp unless you get the seeds that are approved by the Department of Agriculture, so it’s highly regulated. And since the entire program has started, there has never been any findings of complaints or any violations with the program since the beginning.”

Sara Presler, former two-term mayor of Flagstaff and legal counsel for Mohave Cannabis Co and JARS Cannabis, which has locations in Arizona, Colorado and Michigan, expressed concern about hemp-derived products in easily accessible locations.

Presler said that, as a mother of four, she was concerned with the availability of “synthetic” THC in outlets that are not regulated by the Department of Health Services and believes that if SB1186 were to pass, intoxicants that mimic candy, soda and energy drinks would become ubiquitous and could easily fall into the hands of children.

“It’s my professional and personal opinion that you will legalize the sale of drugs on every corner in Arizona,” she said. “My concern is that SB1186 will legalize products containing high concentrations of THC that appear identical to legalized products, but they’re not identical. These are not the same thing, just operating in two different areas.”

She went on to outline the stringent regulations associated with cannabis outlets, from floor plans to product testing to employee background checks, and posited that the bill does not go far enough “to protect the public health and safety of our children.”

Sen. David Gowan, R-Sierra Vista, who characterized the marijuana industry as a “monopoly,” pointed out that most of the objections raised by dispensary owners are addressed in the language of the bill, and that it raises the age for purchase and possession of the products from 18 to 21 years of age.

“How many children go in the smoke shops? I mean, hopefully they’re not going in there and purchasing, because that would be illegal,” he said, adding that the argument from the dispensaries was rhetoric designed to stoke fear. Earlier in the meeting, Gowan wrangled with Copperstate Farms co-founder and CEO Fife Symington IV about the stranglehold cannabis ownership has on the market.

Symington described the economic impact his company has on the rural Arizona towns of Snowflake and Taylor — the Snowflake marijuana grow facility is the largest in the state, and among the largest in the U.S. — and the amount of taxes the cannabis industry adds to state coffers on an annual basis.

“It’s important to understand that Copperstate Farms is just one of many companies involved in the medical marijuana and recreational marijuana business that the voters approved and that’s regulated by DHS,” he said. “There are actually 20,000 Arizonans that are working in this industry that have gone through an extensive background check with DHS, have been fingerprinted and are allowed to work in a production or retail facility that sells these highly regulated products.”

Symington also cautioned against “upending a regulatory structure and a law that was passed by the voters.”

“With all due respect to Senator Borrelli, this bill is about dope and not rope,” he said. “If it were about rope, I wouldn’t be here. Half this room wouldn’t be here.”

After pointing to the portions of the bill that address many of the issues opponents raised, Gowan went to the heart of his resistance to the cannabis industry’s concerns.

“My fear is, your industry, which is the marijuana side, is looking to do harm to the hemp side so that you can get the ultimate control over all that process,” he said, adding that the marijuana businesses want lawmakers to “create a full monopoly” that benefits them.

Copperstate operates nine Sol Flower dispensaries, is one of the large cannabis corporations in the state and, along with Mohave, wound up with a controlling interest in several of the 26 “social equity” licenses that were a feature of Prop 207.

Sen. Juan Mendez, a Tempe Democrat, pointed that out after asking Symington to give more details about his business.

Symington, whose father was governor of Arizona in the 1990s, described the way the licensing structure works and told Mendez that he was familiar with the social equity program and that he was “able to participate with partners in that round of licenses.”

“During the discussion of the inception of it, I guess I never would have imagined those social equity licenses being connected to somebody with your privilege and background,” Mendez said.

Social equity bill on the table

Lawmakers are also considering making changes to that social equity license program. 

Senate Bill 1262 seeks to fix problems with the social equity program that created 26 recreational “establishment” licenses intended to serve communities adversely affected by prior cannabis laws and the war on drugs. The bill, like SB1186, has stalled and will not likely go anywhere.

The bill seeks to correct the problems with social equity that led to only three surviving applicants to the program being from targeted communities. Only one of those is an independent operator unaffiliated with an existing dispensary or a multi-state operator.

In the end, the majority of licenses ended up in the hands of large players in the Arizona marijuana industry, such as Mohave Cannabis Co with five; Copperstate with three; and Mint Cannabis with two. The rest went to private investors and other dispensary owners, often operating under shell LLCs designed to obscure true ownership, according to a report from the Arizona Center for Investigative Reporting.

When the Department of Health Services announced the open period for applications, Copperstate rolled out a marketing blitz called Your Bright Horizons, which promised to cover the $4,000 non-refundable application fee, help applicants expunge records of low-level marijuana-related convictions and “mentor, teach and supply you with Copperstate cannabis while we set up a dispensary as partners.”

Similar strategies were enacted by several large operators in the state. Of 1,500 applications, more than 300 were submitted through the agency of Mohave Cannabis Co.; 110 from Copperstate Farms; and 90 from Mint Cannabis.

At the time, licenses were valued in the $10- to $15 million range, and it was estimated it would take at least $1 million to establish a business.

From the outset, the rules for the program were a source of contention between social justice advocates and the existing marijuana business establishment, which wrote the ballot initiative that voters approved.

In November 2021, a group calling itself Acre 41 and the nonprofit Greater Phoenix Urban League sued the state in an attempt to ensure the licenses went to the communities intended to benefit, but the case was ultimately dismissed. Acre 41 has come out in favor of SB1262 and has become a leading advocate in an attempt to rectify the situation.

But the attorney representing Acre 41 in the lawsuit, James M. Cool, a partner at Frazer Ryan Goldberg & Arnold LLP, believes tweaking the existing laws will not work and the only way to fix social equity is to create new licenses and start again from scratch.

Cool, who filed the lawsuit to try to fix the rules before the program was implemented, believes that the time to fix a broken program is before it rolls out, rather than trying to alter it after it is in place.

“I think it’s the right idea: It’s admirable in a certain way, but I think it’s a deeply flawed attempt. We have created a problem and this is an attempt to fix the problem we created,” Cool said. “But as you could probably predict, when it comes to laws and state programs, it’s infinitely easier to get it right on the front end than to try and fix it on the back. Measure twice, cut once, or measure once, cut twice.”

Should the bill pass, which is not likely as it has yet to receive consideration from the full Senate, Cool believes it will be vulnerable to challenges on its constitutionality and that it may violate the Commerce Clause.

“What you have is a bunch of contracts that were perfectly legal at the time people entered into them,” he said. “They were contrary to the spirit of the law. They weren’t what we intended to do, but they nevertheless followed the regulations to the letter, and they were complying with law.”

Cool posits there would be no way to claw back investments and compensate current owners for the time and money invested in getting the businesses off the ground.

Additionally, there is a possibility that investors may have been brought in or licenses have changed hands, which would create liability for individuals who were not involved in the initial “predatory agreements.”

“So, now you’re some poor investor who did a deal with someone, engaged in a perfectly legal transaction, paying $15 million for three licenses,” Cool said. “And now we take the three licenses away, we say, ‘Sue the guy you bought them from,’ but the guy has no money, so you just lost $15 million. And you literally didn’t do anything wrong.”

A lot of problems could have been dealt with early on if the Department of Health Services would have done a better job of vetting candidates, Cool said, but despite bringing in millions of dollars via the $4,000 nonrefundable fee for entry into the license lottery, not a lot of due diligence was done.

At a Feb. 13 Senate Health and Human Services Committee hearing, Borrelli called the current state of affairs “an injustice that needs to be fixed,” and went into detail about some of the flagrant abuses of the program, including a felon who has five licenses — he said that is under investigation by the Attorney General’s Office — and another case where a single address is being used for multiple licenses.

“Obviously, a game has been technically played on the voters of Arizona who voted for this program,” he said. 

Regulation and stalled bills

While both SB1186 and SB1262 have stalled, remaining bills that still have life are House Bill 2451, which creates stricter guidelines for advertising cannabis products, and House Bill 2664, which increases punishment for possession of cannabis in school zones and defines terms such as “cannabis” and “ drug-free school zone,” mandating schools to display signage and immediately report violations.

HB2451 prohibits marijuana establishments or dispensaries from advertising to individuals under 21 years of age, on public transportation, with publicly funded organizations or electronically, unless the advertiser can prove that at least 71.5% of its audience is over the age of 21.

It also requires all advertising to contain warnings that marijuana use is for adults and that people using cannabis products must keep them away from children, among other prohibitions. 

“The social media marketing restrictions come from the federal guidelines on alcohol marketing,” said Arizona NORML President Allison Stein. “Social media is huge on marketing cannabis brands because they’re blacklisted from marketing on TV, and until marijuana is exactly regulated like alcohol, I see this as being really unfair to little companies and the small dude.”

HB2664 would make it illegal to sell, transfer, possess, use or manufacture certain drugs, including marijuana and cannabis, within “drug-free” zones. It would also elevate the presumptive minimum and maximum sentences for such offenses by one year, along with additional enhanced punishments.

Anyone convicted of such offenses would be restricted for eligibility for sentence suspension, probation, pardon or release until the court-imposed sentence is served or commuted. It would also create a mandatory fine of at least $2,000 or three times the drug value.

And House Bill 2770 allows the governor to lay the groundwork for interstate agreements and a system of delivery that must be in place by October 2028.

Bills that have failed to advance include House bills that would have provided free medical cards to veterans; warnings on marijuana products regarding mental health risks; a bill that would have strengthened protections for tenants who use marijuana and a number of bills that would have redistributed marijuana tax dollars to additional law enforcement agencies such as university police and Arizona Poison Control.

Notable amongst the failed bills was House Bill 2247, which would have established a seven-member Arizona Marijuana Regulatory Board appointed by the governor, and added residency requirements for dispensary or establishment owners.

While the public showed up in force to support the bill sponsored by Rep. Kevin Payne, R-Peoria, tying problems with the social equity program to “industry capture” of the Department of Health Services, many followers of Arizona cannabis laws believe the current system could work if there was a desire to regulate.

But the ADA’s Torrez said the state agency has done a good job of regulating a fast-moving market, even if there have been hiccups along the way.

“I don’t know of a state that has (a marijuana board) that’s working,” she said. 

Cool said the problems stem from the department’s willingness — or lack thereof — to aggressively regulate the industry.

“You can create a whole new regulatory scheme, you can create a whole new medical marijuana agency whose only job is to enforce it, but I have no reason to believe that agency will be any better or any more inclined to do its job” he said. 

“The problem is not that the DHS can’t do their job, it’s that DHS sometimes has no interest in doing their job,” Cool added. “I don’t know if it’s because they’re captured, or something else.”

***CORRECTION: An earlier version of this story misidentified Sara Presler as the former mayor of Prescott. She is the former mayor of Flagstaff.

This report originally appeared in the Arizona Mirror, an online nonprofit news agency. Find more reporting at azmirror.com. More can be found on Twitter at @ArizonaMirror or at azmirror on Facebook.