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Washington's Cannabis Residency Requirement: Proposed Law Could Change Landscape

MJ Landscape LOW

The residency requirement for buying a cannabis business in Washington may change this year. The Washington state legislature is considering a pair of identical bills, House Bill 1341 and Senate Bill 5377 (collectively, the Bill) which would authorize out-of-state ownership of licensed cannabis businesses. While it’s too early to tell whether the Bill will become law, if passed, the Bill would have a huge impact both in and out of Washington.

Cannabis Observer has been tracking HB 1341 and summarizes the Bill as follows:

  • Requires the Liquor and Cannabis Board (LCB) to suspend a cannabis producer's license if no activity has been recorded on the license after July 1, 2021, and for the license to be reissued to the licensee in certain circumstances tied to federal cannabis law or policy changes.
  • Authorizes out-of-state ownership of licensed cannabis businesses.
  • Modifies requirements about who must qualify for and be named on a cannabis license so that, generally, a natural person holding an ownership interest of 10 percent or less of the entity is not required to qualify for or be named on the license, subject to requirements.
  • Authorizes the LCB to impose additional licensing fees to recover costs incurred in investigating a nonresident required to be investigated.

True Party of Interest and Washington Residency Requirement

In Washington, to apply for a cannabis license, the person (or company) applying must meet the requirements of a True Party of Interest (TPI) as that term is defined in WAC 314-55-035. To be a TPI, the applicant must establish residency. If the applicant is an individual, that person must have lived in Washington for six months. If the applicant is a business, then everyone who owns, manages, or profits from the business must have lived in Washington for at least six months.

The term TPI did not appear in Initiative 502, the measure that legalized recreational cannabis. It was a term coined by the LCB and appears in LCB regulations. The LCB adopted the TPI term from the following language in Initiative 502:

No License of any kind may be issued to[:]
A person doing business as a sole proprietor who has not lawfully resided in the state for at least six months prior to applying to receive a license; [or]
A partnership, employee cooperative, association, nonprofit corporation, or corporation unless formed under the laws of this state, and unless all of the members thereof are qualified to obtain a license as provided in this section[.]

The Bill would remove this language from Washington law (now codified at RCW 69.50.331), which has been interpreted to create a residency requirement in Washington state cannabis.

The Proposed Bill would Allow for Out-of-State Ownership

Under the Bill, a person would not be required to be a resident of Washington and an entity would not be required to be formed in Washington to qualify for a cannabis license. If a natural person has more than 10% ownership in the company, they must be qualified for and named on the license. Any person with less than 10% would not need to be named on the license but would still need to be disclosed to the LCB. If no one has more than 10% ownership, the person with the largest ownership stake must be named on the license. The people running the company must also meet certain qualifications. If someone has between 1-10% ownership, their identity must be reported to the board. “Directors of the entity” would need to qualify as if they were on the license. The LCB can charge extra fees if they need to investigate a non-resident. If they can't investigate the person properly, they can deny the license.

License Suspension

The Bill would mandate that the LCB suspend a cannabis producer’s license if no activity has been recorded on the license after July 1, 2021. However, any license suspended under the Bill would be reissued when:

(A) Federal law allows for the interstate transfer of cannabis between authorized cannabis-related businesses; or

(B) The United States department of justice issues an opinion or memorandum allowing or tolerating the interstate transfer of cannabis between authorized cannabis-related businesses.

This portion of the Bill is likely a response to concerns that out-of-state money will saturate the market with investors buying up many of the dormant licenses as possible and pricing out small cannabis businesses. This language would reduce the overall number of licenses available for purchase. If there is suddenly an increase in demand for Washington licenses, the Bill would effectively limit the supply.

Bottom Line

It’s too early to know whether the Bill will becomes law. It would need to pass the Senate and the House and then get signed by Governor Jay Inslee. Removing the residency requirement would have a serious impact on a mature market and would create opportunities to buy and sell cannabis businesses. This Bill could also make it harder for small producers to compete with well-funded multi-state operators. Regardless of the outcome, we’ll continue to write about Washington cannabis to keep our readers up-to-date on cannabis in the Evergreen State.

Daniel Bottom Block
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Green Light Attorneys Perry N. Salzhauer, Daniel Shortt, and Brittany Adikes have joined McGlinchey Stafford