Ohio Cannabis Companies Anxiously Await Clarity on Adult-use Regulations

This story was republished with permission from Crain’s Cleveland Business and written by Jeremy Nobile.

With the passage of Issue 2, cannabis companies are eager to begin preparations for a recreational marijuana market that, by some estimations, could quintuple retail sales volumes by 2028.

With the state legislature considering edits to the adult-use law approved by voters, however, and an unclear outlook for how program rules may be shaped by regulators, industry stakeholders are grappling with a host of uncertainties that could impact them and the nascent rec market as a whole.

“Business leaders and boards of directors dislike uncertainty,” said Jared Maloof, CEO of Standard Wellness Co., an Ohio-based vertically integrated multi-state operator (MSO) with cultivation and processing facilities in Gibsonburg. “But, unfortunately, that is sort of where we find ourselves.”

Ohio’s new adult-use marijuana law goes into effect Dec. 7.

But Ohio Gov. Mike DeWine has called on lawmakers to consider legislation that could tweak some aspects of the statute—including measures related to THC potency caps, taxes, protections for children and restrictions on smoking in public spaces—before that effective date.

That’s an exceptionally truncated timeline for amending an initiated statute that sat in front of lawmakers for two separate four-month periods in 2022 and 2023, only to be completely ignored with zero discussions each time.

Regardless, any amendments to the adult-use law could, naturally, shape rules and regulations that will ultimately be set by the Ohio Department of Commerce and its soon-to-be-minted Division of Cannabis Control.

This uncertainty won’t last forever. But in this period when adult use has been approved by citizens but the reality of what the program may look like is cloudy, operators are anxiously awaiting clarity.

Some may want to expand cultivation space. Most will need to hire additional workers. Others will want to review or diversify product portfolios—something that’s more challenging when there is debate around permitted product potency.

“There are two levels of uncertainty: what the statute is ultimately going to be when Columbus is done doing whatever they’re going to do, and what are the rules going to look like once written. Both of those things could have a significant impact on what kind of market we can expect in Ohio,” said Geoff Korff, founder and CEO of Galenas, a Level 2 cultivator in Akron with additional cultivation and processing operations in Michigan. “And no one wants to commit to any investment decisions when it still might be a bit of a moving target in terms of what the statute looks like when it is done, and the dust is settled.”

“We are optimistic adult-use increases demand and improves performance of the business,” said Jeff McCourt, CEO of Firelands Scientific, a vertically integrated cannabis company headquartered in Huron. “But exactly how much, a lot of that needs sorted out in the wash as legislation gets finalized.”

As it stands now, regulators are tasked with opening applications for additional adult-use cannabis business licenses by early June.

Those licenses are to be issued in early September, or nine months after the effective date of the law.

But the extent to which companies can begin preparing for this large new rec market is inhibited so long as stakeholders must stand by to see how rules will unfold in a Republican-led legislature—which campaigned against adult-use cannabis—and a regulatory regime that has crafted one of the most tightly controlled medical marijuana programs in the country.

“We are certainly preparing ourselves so we aren’t caught on our back foot when it is time to take action, but the clarity on the rules would certainly help us move faster,” said David Goubert, president and CEO at AYR Wellness, a Florida-based MSO with cultivation operations in Parma and processing in Akron. “So we continue to make preparations, but we aren’t moving forward with many items until we know the rules of the game.”

McCourt said Firelands is lobbying the legislature to move faster than the timeline laid out by the statute that provides nine months to stand up the rec program from the measure’s passage.

“We are taking a bit of a wait-and-see approach,” McCourt said. “I hope and expect that the legislature doesn’t have to do much, if anything, in touching this law.”

Other states, he said, have stood up rec programs in a fraction of that time, including Maryland (two months), Arizona (three months) and Missouri (four months).

Meanwhile, states like New York that have grappled with sluggish rec rollouts ultimately benefited illicit markets and contributed to consumer confusion as unlicensed and unregulated sellers cropped up under a guise of legitimacy.

Licensed cannabis companies obviously want to position themselves to serve a rec market as soon as possible to bolster their bottom lines. But they also don’t want to see the same issues that states like New York have had, for example, which undermine a legal market as it takes shape.

“Like any regulated business, you want certainty. People need that certainty to understand what the program is going to look like,” said John Oberle, a chair of the cannabis practice Ice Miller, who helped write the adult-use statute approved by Ohioans. “Most importantly, the industry wants to be a good partner with the state and make sure regulations are done the right way. But from that business perspective, people are going to have to make decisions on where to hold or move forward.”

DeWine press secretary Dan Tierney said that there is no goal at this time for an outright repeal of the adult-use law that some lawmakers suggested they might pursue prior to the election. The governor “respects the outcome of Issue 2,” he emphasized.
What DeWine has called on lawmakers to consider, though, include measures related to public safety—including traffic regulations and precautions for children—“quality of life” accommodations, like ensuring marijuana smoke isn’t a public nuisance, potency caps and tax rates.

THC limits for manufactured products like tinctures and oils for vaporization are a lingering point of contention for the industry.

While Ohio’s medical marijuana law originally allowed for 90% THC levels for those manufactured products, state regulations later capped that at 70%. But due to flexibility on that level, products with up to 80% tend to be permitted, according to operators.

Nonetheless, when THC levels are capped, processors may add fillers to reduce potency, which could include hemp-derived cannabinoids or triglycerides.

A belief may be that weaker products are safer, or at least less likely for someone to overdo consumption.

Yet, industry officials suggest that consumers are just going to use more of something until they feel the desired effect anyway. And companies prefer to offer purer products because that’s what users tend to want.

“There is zero evidence to demonstrate that by setting lower potency limits that you improve safety outcomes or wellbeing,” Korff said. “I don’t think there should be a potency limit at all, and not because I don’t think there should be guidelines. It should be people’s decision on how to dose when consuming. And I just really don’t think it does anything.”

In Michigan, a state that has greatly benefited from Ohioans crossing the border to purchase recreational marijuana, there are no THC limits. And the worry among some operators is a THC cap on adult-use products here could end up alienating consumers who may seek out stronger, purer offerings from illicit markets or neighboring states.

There’s a similar concern at play with taxes.

In its present form, Ohio’s adult-use statute levies a 10% excise tax on rec sales. Coupled with local taxes, the tax rate on rec products will be in a range of 16% to 18% (medical products are subject only to sales tax).

In Michigan, rec products are effectively taxed at 16% between a 6% sales tax and 10% excise tax. There are no city, local or county sales taxes in the state.

Therefore, the rec taxes in Ohio, depending on the county, are already slated to be slightly more than Michigan at worst or the same at best.

Tierney notes that consideration of increasing taxes on adult-use products in Ohio is due in part to concerns with whether tax proceeds could generate enough revenue to even cover the costs of regulation.

There’s also a perception, he said, that an especially low tax rate sends a message that Ohio is not serious about regulation in general, which could inspire efforts by some bad actors to operate in ways that subvert the program, like attempting to run unlicensed shops.

He emphasized DeWine’s messaging for finding a “sweet spot” with respect to taxes.

“The primary concern on the tax rate is you don’t want to be the lowest but don’t want to be so high that it drives people to the black market,” he said.

Operators are pleased to hear such a perspective as they tend to worry that anything higher than the current projected rec taxes will do just that.

“Deciding to tax too high is going to add costs and make the program less competitive than Michigan and the black market,” said Pete Nischt, chief compliance and communications director with Klutch Cannabis, a vertically integrated cannabis company headquartered in Akron.

To be sure, cannabis companies say they recognize and embrace the need to regulate their industry. No one is trying to fight regulation in general.

The overarching concern is simply knowing what those regulations look like as soon as possible and ensuring that there isn’t so much regulation as to have the opposite effect of what a legal adult-use market is supposed to do by continuing to push marijuana consumers into the shadows.

“Issue 2 is really not about creating new cannabis consumers,” Nischt said. “It’s about allowing current cannabis consumers in the state to come out into the open in a regulated, legitimate economy.”