Ask Our Experts 09/16/2018

Q: How is interstate commerce of cannabis restricted under current laws and how would that be affected by federal legalization?

Currently, interstate commerce of cannabis is illegal under federal law. All state-legal production, supply and sales are allowed, so long as they remain within that state’s borders. The federal government is increasingly involving itself in issues of out-of-state export, aka leakage.

Meantime, while proposals have been made for some interstate compacts (agreements between adjacent legal-use states to enable trade and economic activity), such measures have neither been passed nor enacted by any state legislature.

In short, there will be no interstate commerce before federal policy reform.

Per potential benefits for cannabis-related businesses, should federal legalization occur the cannabis market will present opportunities in interstate and possibly international trade, depending on UN treaty guidelines. The federal regulatory structure itself will have changed: Once cannabis is no longer a Schedule I controlled substance, federal legalization will enable banking and tax reform — two persistent barriers for cannabis-related businesses (CRBs).

Per benefits for consumers and states, consumers gain from commoditization through competitive pricing and increased choices. Benefits for states include impacting the illicit conversion market, since decreased pricing is among the most effective means to attract consumers from an illicit market to a regulated one.

Despite substantial benefits to federal legalization, there is a downside: Price decreases significantly impact small businesses due to their comparative volume of sales. States including Massachusetts and California have promoted small, minority-owned businesses and communities in need of economic revitalization when issuing initial operating licenses and regulating their legal cannabis markets, but increased competition will add stress to nascent and already struggling markets. The likeliest means to avoid such risk is to maintain an efficient and cost-effective business capable of sustaining a price decline. That essentially hinges on matters of supply-chain management. (New Frontier Data has recently given several talks on how to manage cannabis supply chains: Upcoming talks on this topic will be featured this month at CWCBE in Los Angeles, and in October at the Business Planning, Forecasting & S&OP: Best Practices Conference in Orlando, Fla.).