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Alaska grown: Should all marijuana entrepreneurs be Alaska residents?

  • Author: Laurel Andrews
  • Updated: September 28, 2016
  • Published August 25, 2015

Marijuana industry advocates are crying foul about a residency clause in Alaska's draft marijuana regulations that would require all business owners and investors to be Alaska residents.

With the deadline for crafting Alaska marijuana regulations just three months away, the Marijuana Control Board must decide whether the requirement -- which board member Brandon Emmett said "basically crushes the American dream" -- is the best choice for a fledgling market teeming with risk.

Current draft rules read like this: Anyone who wants a marijuana business license, whether an individual, partnership, limited liability company or corporation, must be an Alaska resident. That includes every corporate shareholder and partner. Only a licensee may have a "direct or indirect financial interest," and all licensees must be Alaska residents.

Growers, retail stores, manufacturing and testing facilities -- and any investors -- must all be Alaska-grown.

At the Marijuana Control Board meeting in mid-August, business owners were dismayed by the proposed regulation, which they believe will be detrimental to a new industry that will require hefty startup costs and involves myriad risks.

Midnight Greenery CEO Sara Williams said later the requirement is "the difference between whether this industry succeeds or doesn't succeed." She also questioned whether the residency requirement is legal.

'The song has completely changed'

The proposal is unique to Alaska's proposed marijuana regulations, not mirrored in the state's alcohol statutes. It was proposed partially to satisfy the Cole Memo, a 2013 memo from the U.S. Department of Justice that provides guidance to states that have legalized marijuana. To avoid federal interference, the memo says, there are eight priorities states should follow, including keeping marijuana in-state and preventing revenue from going to illegal actors such as gangs or cartels.

By keeping businesses homegrown, Alaska ensures it knows exactly where all the money is coming from, said Alcoholic Beverage Control Board Director Cynthia Franklin.

"When ownership interests are coming in from everywhere, it's much harder to track," potentially putting the state at risk of federal interference, Franklin said.

After marijuana was legalized in November, the rallying cry from many was that the industry be Alaska-grown, Franklin said. Residency requirements were also viewed as a way of bringing existing black market actors in Alaska into the legal market, without being overrun by big business.

"The song has completely changed" now that the rules are being crafted, she said.

Marijuana industry attorney Jana Weltzin called the Alaska residency proposal a bad idea that creates a barrier to entry in a market already shut off from bank loans.

"Let's be honest: It's not that tricky to get around these regs. It's really not," Weltzin said, adding those willing to invest in a business based on loopholes are likely to be the very kinds of people the state is trying to dissuade from entering the market.

"While I'm all about Alaskan-grown ... I see this as being a shortsighted view of what this market is actually going to be," Weltzin said.

But Franklin questioned whether Alaska's marijuana industry can really support the demand some entrepreneurs believe will exist in the state.

"The idea that Alaska is going to be a Mecca for marijuana is a flawed concept. The rest of the country is going to go legal," Franklin said.

'It’s hard to know which way to turn'

The requirements resemble standards in Colorado and Washington. In Washington, all businesses and investors must be residents for at least six months, said Washington State Liquor and Cannabis Board spokesperson Mikhail Carpenter. In Colorado, there's a two-year residency requirement for all owners and investors. Employees must be residents when they apply. However, in May, Colorado made changes to the law that appear to crack open the door to outside investment.

Establishing Alaska residency requires proof that one lives and works in the state. For instance, the Alaska Permanent Fund dividend requires documents such as employment and school records or vehicle registration.

Still, some marijuana businesses and attorneys question whether the residency requirement is legal. And like so many questions surrounding the newly legalized marijuana industry, the answer isn't clear.

The debate rests on the balance between federal laws regulating commerce and the fact marijuana remains illegal at the federal level. Two clauses of the U.S. Constitution -- the Immunities and Privileges clause, which guarantees citizens equal rights across states, and the Commerce Clause, which allows the federal government to regulate industry among the states -- have been invoked by marijuana entrepreneurs and attorneys.

"There's two realities here. ... There's the argument that constitutionally you can't be favoring in-state market actors," marijuana industry attorney? Weltzin said. "The rebuttal to that would be: Well, it's not legal under federal law, so technically it's a black market."

Marijuana Control Board chair Bruce Schulte called the situation "a continuous loop, and I don't know where you stop."

With marijuana, "because we have so many competing legal statuses, it's hard to know which way to turn," Schulte said.

'Boundaries at the borders'

It's not the first time residency requirements have been questioned in Alaska; the state has a long history of contentious court cases involving residency. Perhaps most applicable are the Alaska-hire requirements, which in the 1970s and '80s were struck down three times by state courts.

In 1986, the Alaska Supreme Court ruled the Immunities and Privileges clause was violated by a state law requiring contractors to hire a limited number of nonresidents. Today, there is a more limited version of Alaska hire in effect, based on unemployment rates.

"I'm sure they had good intentions, but this follows the fine tradition in Alaska of putting up legal boundaries at the borders and hoping they'll fly," said Larry Persily, former deputy commissioner of the Department of Revenue and journalist who covered the residency lawsuits in the 1980s.

There are already residency requirements in effect in many other aspects of Alaska life, such as the PFD and personal-use fishing. Where the marijuana regulations fall on the spectrum remains to be seen. And to challenge this aspect of the industry, someone would need to file a costly lawsuit.

"Who's going to pay for it?" Weltzin said.

A possible way forward, said Marijuana Control Board chair Schulte, is allowing outside participation but making sure it's specific and explicit -- "making the (regulations) sufficiently detailed so that we don't leave huge loopholes," Schulte said.

"It's an interesting discussion and I'm not sure we're done with it," Schulte said.

The board is still crafting the regulations, and the public will still be able to give written and verbal comments on proposed regulations in coming months.

Under state law, marijuana regulations must be in place by Nov. 24.

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