Colorado’s collaborative comprehensive approach for Marijuana Excise Recovery and Track and Trace is

At the Tax Stamp Forum in Berlin earlier this year, Barbara Brohl, the Executive Director for the Colorado State Licensing Authority & Department of Revenue, presented Colorado’s comprehensive Marijuana Excise Recovery and Track and Trace. The Colorado system is the first statewide Track and Trace system in the United States for Marijuana Excise Recovery. Barbara Brohl is in charge of the regulation of state sales and income tax as well as the division of motor vehicles, the state lottery and the state industries of gaming, horse racing, liquor and tobacco, and recreational marijuana. Barbara Brohl has extensive experience on the topic, since she has chaired the Amendment 64 implementation task force responsible for implementing the world's first regulatory program for cannabis for recreational use.

Article originally published in Reconnaissance Tax Stamp News. See other Tax Stamp news here.

The Marijuana Regulatory and Excise Recovery System sets itself apart by providing a comprehensive program, which includes Licensing, Reporting, Enforcement, as well as Inventory Control Technology and Track and Trace requirements. As a result, this comprehensive system has created significant and steadily increasing revenue since its inception in 2014. To establish such a system, Colorado first needed to implement a comprehensive legislative and regulatory framework.

Background Before Colorado implemented any legalisation or regulation, Colorado’s entire marijuana trade was entirely illicit through black or grey market product. Through a consistent and patient multi-year effort, the Colorado government and legislature slowly transformed Colorado’s marijuana economy through gradual legalisation from a predominantly criminal enterprise into a well-regulated, commercially licensed and regulated environment, where we currently are.

As a first step in 2000, Colorado voters approved Amendment 20 to its state constitution, also known as the Caregiver Model, which allowed private citizen, who had a need for medical grade marijuana under physicians oversight and approval, to grow and possess about 2 ounces or 6 plants. This allowed the home cultivation by patients and caregivers. However, one downside to the legalisation process was the rise in the number of people growing plants and selling them illegally. In response, the legislature took regulatory action in 2010 by creating a set of strict rules through HB10-1284 to regulate the industry. This created the Marijuana Enforcement Division (MED), which regulates cultivations and manufacturers and carries out mandatory financial and criminal background checks for growers. Regulations are overseen by State and Local Authorities and the Local Authority has the power to ban commercial medical marijuana businesses.

Finally, in 2012 Colorado passed Amendment 64 establishing the first regulatory program in the world to legalise marijuana for non-medical uses. The amendment assigned the rollout of the program to the Department of Revenue and State Licensing Authority, which put Barbara Brohl in charge to implement a new ground-breaking system to define licensing criteria, processes and penalties.

Amendment 64 permits personal growth of 6 plants per adult. Individuals 21 years and older may possess, use, purchase, transport and transfer one ounce or less of marijuana to other individuals over 21 years of age. The system was set up specifically so that licensed businesses are able to cultivate product to sell. The amendment regulates the growth, manufacture, and sale of Marijuana at Retail. Also, the amendment created a licensing system for Licensed Marijuana Establishments with mandatory Financial and Criminal Background Checks. Finally, Amendment 64 provides processes, resources and facilities to test quality, strength and other features of retail marijuana.

In order to implement Amendment 64, the Governor of Colorado in 2012 through Executive Order created a Task Force, which is co-chaired by Barbara Brohl. To implement the system, Barbara had to overcome significant initial challenges. The legislature had set an aggressive implementation deadline, infrastructure was lacking or had not been established and funding or resources were either inadequate or variable. Barbara Brohl’s charge was to create a sustainable operation model in an unstable operating environment and to coordinate licensing with local jurisdictions.

A truly collaborative approach The task force convened a diverse group of stakeholders to identify and discuss the issues surrounding the implementation of Amendment 64, discuss recommendations for solutions and then deliver a report to the Governor, General Assembly and Attorney General for the State of Colorado.

The group of stakeholders was truly diverse and broad, including industry members, law enforcement, physicians and representatives from agriculture, public safety and consumer groups. The wide and disparate viewpoints of the stakeholders was a key element to the success of the Task Force, which generated solutions that took concerns of all parties into account.

The implementation timeline was very aggressive, resulting the first licences to sell recreational Marijuana being issued on 1st January 2014, just 9 months after the Task Force Report was delivered.

To keep themselves on track, the task force established three ‘guideposts’ to help guide and focus the task forces throughout project implementation:

  • Preventing distribution of marijuana to minors

  • Preventing the involvement of criminal enterprises, gangs and cartels in legal marijuana industry

  • Preventing the diversion of legalized marijuana to other states

The Commercial Market in Colorado has two industry segments: medical and recreational. Licenses are issued for stores, cultivations, manufacturers and testing facilities. To execute this licensing schema, the task force focuses on clear regulatory objectives with public safety at the forefront.

This highly collaborative rule making process, which considers the opinions and concerns of all stakeholders, resulted in solutions that were comprehensive and current. The task force utilized a process called “Negotiated Rule Making,” which ensured the involvement and partnership with industry.

While some have challenged the rationale of such collaborative rule making, it highlighted that voluntary industry compliance is more likely once their views have been heard, which establishes buy-in and ensures that industry wants to comply and be part of the new system.

Finally, the task force used four guiding principles when issuing regulations that they are transparent, systematic, operable and defensible to the industries being regulated. The regulations are then communicated clearly to licensees, including consequences for non-compliance.

Besides Track and Trace regulations, the task force issue various other Regulations to protect minors, such as child resistant packaging, restriction of sales to minors, marketing and advertising restrictions. In addition the task force issued regulations on waste removal, production limits, restrictions on purchase amounts, hours of operation for sellers, restrictions on where a buyer may consume the product, and restrictions on edible products and demand reporting for the product within Colorado.

A comprehensive multi-pronged regulatory approach Colorado’s regulatory and inventory control structure is centred around business and individual licensing, where each business applicant undergoes extensive criminal, financial and FBI background checks. Any change in ownership structure, location, trade name, or the licensed premises requires review and approval.

As of January 1, 2017, three years after the first set of licences were granted, there were 2,934 Business Licenses approved across the state, with almost 1,600 medical licenses and 1,350 being retail licenses.

Field enforcement is the second prong of Colorado’s approach, with enforcement personnel conducting regular initial, routine and risk-based compliance inspections. They also actively investigate complaints and monitor compliance, with particular attention on underage compliance.

Comprehensive video surveillance of licensed premises is another important aspect of the program, requiring CCTV camera coverage everywhere marijuana can be touched. Footage must be retained for 40 days and can be requested by enforcement personnel at any time.

Colorado state officials also implemented recreational marijuana testing to ensure the product safety by testing for several features, including potency, inter-product THC homogeneity, presence of residual solvents and presence of microbial species.

An integrated approach to Track and Trace The final piece of the regulatory system is Colorado’s inventory tracking system called metrc™. The system tracks the product and establishes a chain of custody from ‘seed’ (a small plant) to ‘sale’ (final product). Every mature plant in a licensed cultivation facility must bear an individual metrc™ RFID tag, the information on the tag is input into a central database for tracking the plant through to harvest. Once harvested, all usable product is individually packaged and assigned another RFID tag, again linked to the central database, and linked to the original plant tag. Waste is also measured and accounted for in the system. This creates a closed-loop system to track medical and retail marijuana, and related products, as they travel through the system. In addition to inventory control, this system also can assist in the case of product recalls, for example - unlawful pesticide usage.

The metrc™ is RFID technology based, which was chosen based on the sheer number of plants, which needed to be tracked simultaneously. The metrc™ system allows growers and enforcement personnel to download all data for a densely stacked growing rooms simply to a handheld device. This makes the system more time and labor efficient than scanning individual plant tags.

Since January 25, 2017 the number of plants tracked using metrc™ has exceeded 1.3 million. The metrc™ system generates a comprehensive and all encompassing manifest from a huge set of data, including product transfers, the weight and description of marijuana being transported, including the name of the delivery driver and the license plate number of the delivery vehicle. This comprehensive manifest enables the reconciliation expected product to be grown, shipped product and product received by retail outlets. Any discrepancy between these amounts triggers an alert to enforcement personnel for further investigation.

There are extensive labeling requirements for retail marijuana-infused edible products: each item requires a minimum of 25 individual items of data on the label. This includes information such as the cultivation license number; manufacturer; potency test results; warning statements; production batch numbers; ingredient list; serving sizes and date of production, amongst others. The number of pieces of information on the label is under review to optimize the understanding and usage of the label by distributors, end-users and law enforcement.

Notably in all of this is also the lack of any overt security features on the label. The label might have covert features, which have not been revealed to the public, but the label clearly has no overt features. This means that the labels security relies on the inherit security of the code. Colorado therefore will be an interesting case study for the value of overt security features. Will the intelligence and surveillance built into the system be sufficient to deter counterfeit or fake tracking labels?

Unlike tax stamps, the tracking labels themselves do not denote any tax value paid, but rather provide the data backbone infrastructure for such information, so counterfeiting labels will not become an issue. Given the comprehensive scanning and tracking of labels through all stages of growing, harvesting and distribution, counterfeit labels would probably also be easy to detect. Colorado seems to be taking a page from Pharmaceutical Track and Trace efforts, which also heavily rely on the digital and code aspects on for e-Pedigree information, while using overt and covert features rather sparingly.

Revenue growth through an integrated approach Excise tax on marijuana products are used exclusively for school construction. Sales taxes are used for marijuana related purposes such as youth prevention, substance abuse prevention and treatment, including grants and public service announcements. Tax collection has increased every year since implementation from $19.5MM for FY 13-14 to $102.7MM for FY 16-17. Since January 1, 2017, a total of $351 million has been collected.

The metrc™ system allows the application of a complex tax system, which applies sales tax based on location, and excise taxes on the first sale or transfer of unprocessed retail marijuana. All excise-taxable transactions of retail marijuana are captured in metrc™. The metrc™ system enables the application of variable excise tax rates for five product categories (Flower, Trim, Immature Pants, Seeds and Whole Wet Plants) ranging from $6 to $1,471 per unit.

The metrc™ system allows for taxes from marijuana sales to be collected in four categories and split over four funds. The system has also enables the comparison of poundage sold of medical grade marijuana versus retail grade marijuana.

The significant tax collection also funds the departments budget for 127 FTEs with a budget of $12.2 million, which funds 12 Field Audit Agents, 4 Criminal Tax Agents, 1 Call Center Agent, 1 Excise Tax Examiner and 1 Sales Tax Examiner.

Besides all its successes, Barbara Brohl pointed out that the system still has several on-going challenges, including rapid Organizational Growth, control of edibles, regulation of pesticides, revisions to banking regulations and the lack of Federal Regulatory Assistance.

Conclusion The Colorado system reinforces several best practices often discussed by this author. The system is not based on a singular technology or stamp, but rather on a comprehensive system of licensing, regulations, record keeping and reporting requirements, well-funded trained enforcement personnel, appropriate legal consequences for non-compliance and the implementation of appropriate technology.

Most importantly, Colorado’s system highlights the advantage of having a truly collaborative rule making process, which involves all stakeholders ranging across government, law enforcement, industry, public health and technology providers. Such a collaborative approach ensures that regulations are transparent, systematic, operable and defensible to ensure high-rates of voluntary compliance.

Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.

Send your comments to SBergmann@VentureGlobalCo.com. ​


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