BRENDEN MOORE

Though some motives, such as the desire to generate millions of dollars in tax revenue into the state’s coffers, were obvious, the state went further than any other jurisdiction before by addressing past harms.

A path was created to expunge low-level cannabis convictions and a significant portion of the tax revenue generated has been earmarked for communities that have disproportionately been impacted by the War on Drugs.

And, perhaps most importantly, the legislation included provisions meant to ensure that people from communities historically impacted by the criminalization of cannabis had the opportunity to participate in the legal industry. This was also intended to help diversify an industry dominated by white men.

More than a year after the first legal sale of recreational cannabis, the product has been a hit with Illinois residents and pot tourists from other states, leaving existing dispensary owners and, by extension, the state of Illinois rolling in the green.

Dispensaries did more than $669 million in recreational cannabis sales in 2020, with the state collecting more than $175 million in tax revenue — both exceeding the rosiest of expectations.

But for as high as sales have been, the success has been blunted by the botched rollout of the program’s social equity component, which has delayed the awarding of additional dispensary and cultivation licenses and so far has failed to meet the legislation’s lofty goals of righting past wrongs and diversifying a nearly all-white industry.

“I would say ‘A’ for the current dispensary and cultivation rollout, I would say ‘F’ for the social equity additional licensing, both on the dispensaries and craft grower rollout,” said Chris Stone, an advisor and shareholder in Ascend Wellness, a Boston-based vertically integrated cannabis company that has six retail locations and a cultivating facility in Illinois.

Toi Hutchinson, senior advisor to Pritzker on cannabis control, marked the state’s grade on the program’s rollout as “incomplete,” pointing to recreational sales and the reinvestments already made in communities as high marks while acknowledging the work that remains on the social equity front.

“We want to change the face of this industry and we want it to be the most equity-centric place in the country,” Hutchinson said. “That’s what we want because I know what the cannabis industry looks like globally. And we have to do everything we can to make sure that we build a different system here, and we’re in the process of doing that right now.”

“I wish it was faster, but undoing and dismantling 90 years of systemic racism, capitalism and horrible drug policy is going to take all hands on deck for as long as we can,” she said.

Rolling in the green

When legalization legislation was being crafted, it was acknowledged that it would take time to get the program up and running, from awarding new dispensary and cultivation licenses to expunging records and meeting equity goals.

But, to get sales started as soon as possible, the state’s 55 existing medical cannabis license holders were permitted to apply for an “early approval adult-use” license, allowing many to start recreational sales on Jan. 1.

These dispensary owners were also given the exclusive right — if their proposals complied with state rules and local zoning ordinances — to open the state’s first stand-alone recreational-cannabis dispensaries in addition to their existing sites.

Fees associated with these early approval licenses were used in part to fund aspects of the social equity program to come later, including a low-interest loan program for those applicants.

The state’s 21 existing cannabis cultivation facilities were also allowed to apply for an early approval license to produce products for the recreational market. All of them were approved.

When Jan. 1 came along, about 37 dispensaries had approval to sell recreational weed. More than a year later, it has increased to 80, including 32 recreational-only secondary sites.

And sales have reflected that growth, with the state reporting $39.2 million in January 2020 and capping the year with $86.9 million in December sales. There was month-over-month growth for all but two months in 2020, with sales seemingly unaffected by the COVID-19 pandemic.

In all, $670 million in sales were done in year one — including $172.6 million from people who live outside Illinois.

Pamela Althoff, executive director of the Cannabis Business Association of Illinois, said the industry “met the goals that were set out for a slow rollout.”

“It was a win-win situation for the state of Illinois and communities that chose to house medical dispensaries with regard to the amount of revenues that were provided,” Althoff said. “It was a boon to the economy as well as the creation of jobs.”

And in a year the state and local governments saw their tax revenues dwindle amid economic shutdowns and restrictions brought upon to contain the spread of COVID-19, sales from marijuana provided a rare bright spot, generating more than $175 million for government coffers.

Dispensaries were deemed “essential” businesses, putting them in the same category as grocery stores, gas stations and other businesses allowing them to remain open during the pandemic.

Like other businesses, cannabis companies innovated to adjust to the realities of the pandemic, with many now offering online sales and curbside pickup. And processes for moving people through dispensaries have been adjusted to prevent long lines from forming.

Delivery service is a possibility in the future, but would require legislative approval.

With vaccinations ramping up and additional dispensaries expected to open this year and in the coming years, the state’s industry is expected to grow significantly, potentially supporting up to 65,000 jobs and reaching annual sales north of one billion.

“I fully expect that the cannabis industry in Illinois will probably more than double in terms of its revenues and the amount that’s sold to consumers,” Stone said. “I think it’s still an education situation for consumers.”

Stone said that the current number of dispensaries, despite initial supply shortages at the beginning, have been able to serve the current demand for weed, but that he’s “not sure that they’re going to be able to meet demand that grows by two and a half times what it is now.”

How is it taxed and where does the money go?

Illinois’ recreational cannabis tax rates are among the highest in the country.

It includes a 7% wholesale tax, a retail excise tax of 15%, 20% or 25% depending on the product’s THC level, the state’s 6.25% sales tax and the local sales tax rate paid by all retailers.

Municipalities also have the option of tacking on additional 3% tax on all cannabis sales within their jurisdiction. Counties can add an additional 3.75% on sales in unincorporated areas.

This would mean that someone purchasing $100 worth of cannabis products at a dispensary in Springfield, which has a 9.75 sales tax rate and enacted the extra 3% tax, could end up paying a bill of up to $137.50.

So, where does this tax revenue go?

The tax revenue generated from recreational cannabis is divided into six main buckets, with the largest share — 35% — transferred to the state’s general revenue fund, which is used to pay for key services like education, public safety, social services and to make pension payments.

And, keeping with the state’s social equity pillar, 25% is diverted to a program called Restore, Reinvest and Renew (R3), which awards grants to communities that have been harmed by violence, excessive incarceration and economic disinvestment.

The state awarded the first 80 grants totaling $31.5 million in late January. Nearly 400 applications for funds were reviewed.

Among the first recipients included organizations like the Macon County Court Appointed Special Advocates, which received $60,000 and the Chicago Urban League, which received more than $2 million. Cities and school districts across the state were also awarded funds for violence prevention and economic development efforts.

Lt. Gov. Juliana Stratton said the program “will tackle chronic problems that have gone unaddressed for far too long in our underserved neighborhoods” and “promotes a standard for equity and success that other states will hopefully take note of and emulate.”

Another 20% goes toward a fund to support mental health and substance abuse services at local health departments, 10% is earmarked to help pay down the state’s massive bill backlog, 8% is for a law enforcement grant program and 2% is diverted to the state’s drug treatment fund for public education and awareness.

Equity concerns delay industry growth

Tax revenue flowing from sales at existing dispensaries has helped fund several of the social justice aspects of the recreational marijuana law.

And the state has made significant headway on expunging low-level cannabis offenses with the Illinois State Police clearing nearly 500,000 non-felony arrest records late last year. Pritzker has issued more than 20,000 pardons for those convicted of low-level marijuana offenses.

However, the social equity portion of the law thus far has fallen short and has subsequently delayed the expansion of the industry.

Initially, 75 new dispensary licenses were to be awarded by May 1 of last year. Forty craft grow licenses and 40 infuser licenses were to be awarded by July 1.

After initial COVID-related delays, the state announced in early September the dispensary licenses were to be awarded via a lottery that included just 21 applicants out of more than 900 groups that applied.

All winning applicants were social equity candidates, which required at least 51% ownership by one or more people who live in a disproportionately-impacted area; have been, or have had a parent, child or spouse, arrested for or convicted of a cannabis-related offense now eligible for expungement or have half of full-time employees meeting that criteria.

However, many saw the application process as big businesses with the resources to complete dozens of applications boxing out smaller groups meant to benefit from the leg up social equity applicants received in the process. Each ownership group is capped at 10 dispensary licenses.

“You had groups that decided to submit 40, 50, 60 applications full well knowing that they can only get up to 10,” Stone said. “But the intent was that that one group could not submit more than 10. But because the language wasn’t written clearly, these groups figured … the more we submit the better chance we’re going to have of getting into a lottery and getting selected.”

Because of this and questions about the fairness of the application scoring process, the state indefinitely delayed the lottery to award new dispensaries, giving applicants the opportunity to correct deficiencies in the application.

The initial scoring, delays and subsequent changing of the process has led to lawsuits from both top-scoring applicants and those who were shut out.

A Sangamon County judge ruled in November that rescoring could proceed, however, denying a restraining order from winning applicants.

On Thursday, the Illinois Department of Financial and Professional Regulation announced its supplemental deficiency process, which will allow applicants to rectify mistakes on their initial applications or challenge the state’s initial scoring of the application.

Applicants have 15 days to send responses to the state, which will then review and rescore the applications. Any applicants who receive a perfect score will be eligible for the lottery.

But, nearly all involved in the process acknowledged the need for a legislative solution to address equity concerns.

Hutchinson and some state legislators are pushing for the creation of a second lottery that will award 75 additional licenses to “shepherd through the intention of what this historic law is supposed to do.”

A proposal to add 75 new dispensary licenses came up short during the General Assembly’s lame duck session in early January, but lawmakers are working through to find a solution.

“We’re happy to see people coalescing around the fact that we need another lottery, you need a 1B lottery,” Hutchinson said. “And that’s what’s being worked out right now. There’s work groups happening, there are people talking. We’re going to stand behind the legislature moving some of these fixes.”

The second lottery would likely include high-scoring applicants who did not achieve the perfect score necessary to qualify for the first lottery. Many failed to qualify simply because they did not have a military veteran as part of their group, which was worth additional points.

State Rep. Kelly Cassidy, D-Chicago, said they needed “a second lottery out of this pool to make sure that we’re able to get the licenses on the street as quickly as possible.”

She said it’s also an acknowledgement that the first lottery is “likely going to be tied up in litigation for some time.”

“So give folks an opportunity to heal their applications, get them in the best footing possible, establish a cut score on that pool and do a lottery from that pool,” Cassidy said. 

Stone said that between legislative changes, rulemaking and sorting out existing lawsuits, it’s going to take time to get additional dispensary licenses awarded. And if it gets too late in the year, many license holders may push off opening until next year for tax purposes.

“If we can’t get this resolved by June 30, then the likelihood is that you’re not going to see a new dispensary outside of the current ones that have licenses,” he said. “You won’t see new ones open up until January 1 at the earliest.”

Following the first wave of 75 dispensary licenses and a possible second lottery for an additional 75 licenses and the completion of a disparity study, the state is scheduled to award an additional 110 licenses.

After the initial 40 craft grow and 40 infuser licenses are awarded, up to 60 each are slated to be awarded.

Though the initial legislation called for this “second wave” of licenses to be awarded by Dec. 21, Cassidy said it would likely have to be pushed back.

Even with these lingering concerns, Hutchinson said the legislation has been implemented on “multiple tracks at the same time,” with many quite successful. She said she’s been called by other states about the social justice aspects of the legislation.

Now, she said she’s “focused on trying to figure out what the very next step should be.”

“We have to keep at this, and I knew going in that this was going to be a marathon, not a sprint,” Hutchinson said.

 2020: A year of cannabis sales in Illinois

Contact Brenden Moore at brenden.moore@lee.net. Follow him on Twitter: @brendenmoore13