P.4

Ms. Catrice Williams

Office of the General Counsel

Department of Public Health

250 Washington Street

Boston, MA 02108

January 3, 2017

Dear Ms. Williams:

The Commonwealth Dispensary Association (CDA) represents Registered Marijuana Dispensaries (RMDs) operating pursuant to the Department of Public Health (DPH or the Department) Medical Use of Marijuana Program (the Program). The CDA hereby submits the following comment regarding the regulatory review of 105 CMR 725.000 et. seq. and the proposed amendments thereto.

Proposed Amendment to 105 CMR 725.000 et. seq.

The CDA proposes that 105 CMR 725.100(A)(1) should be amended as follows:

A RMD is required to incorporate pursuant to M.G.L. c. 180 and to maintain the corporation in good standing with the Secretary of the Commonwealth. A RMD must operate on a non-profit basis and for the benefit of registered qualifying patients. Such corporation must ensure that revenue of the RMD is used solely in furtherance of its non-profit purpose.

Rationale for the Proposed Amendment

The current Medical Marijuana Program, and thus the availability of affordable cannabis based therapies for qualified patients in Massachusetts, hinges on the ability of RMDs to operate in a fiscally sustainable manner. The passage and implementation of Question 4, The Regulation and Taxation of Marijuana Act, will introduce new market forces that will gravely undermine the financial solvency of RMDs unless 105 CMR 725.100(A)(1) is amended as proposed above.

Without this amendment, economic incentive to enter the medical marijuana industry will be eliminated. Moreover, the economic viability of existing RMDs will be greatly undermined and existing RMDs will face significant pressure to convert their operations to adult-use marijuana production and distribution. In sum, the adult-use industry would rapidly subsume the medical marijuana industry, leaving the Department with nothing to regulate and jeopardizing the overriding purpose of Chapter 369.

Adult-Use Marijuana Businesses will put RMDs at a Significant Competitive Disadvantage

Question 4 allows for-profit businesses to cultivate and distribute cannabis to all adults over the age of 21. These for-profit businesses will have three critical advantages over existing RMDs operating in compliance with 105 CMR 725.100(A)(1) as currently written: (1) adult-use entities will have private ownership offering avenues for raising capital that is foreclosed to RMDs; (2) adult-use entities will be able to operate without the restriction that all revenues must be used “solely” to benefit qualifying patients, there by permitting return on investment to private owners/investors; and (3) adult-use entities will serve a customer base far larger than the qualified patient community, offering these businesses higher revenue potential than RMDs.

New Competitive Disadvantages will Compound Economic Challenges Already Faced By Nonprofit RMDs

When the medical marijuana ballot initiative passed in 2012, many initially believed that nonprofit dispensaries could qualify at the state and federal level as 501(c)(3) public charities (or would otherwise qualify for federal 501(c) tax exemption). With 501(c)(3) classification, an RMD would operate under restrictions prohibiting private benefit to investors and requiring revenue to be applied “exclusively” in furtherance of its nonprofit purpose; but, in return, would have access to standard nonprofit funding sources (including private and public grants and tax deductible contributions) and would enjoy state and federal tax exempt status.

Through use of the word “solely” in the last sentence of 105 CMR 725.100(A)(1) and sub-regulatory guidance issued by the Department on May 15, 2015, DPH’s initial interpretation of the Act appears to track federal 501(c)(3) and state public charity standards.

In the intervening years however, it has become clear that federal law forecloses IRS classification of RMD’s as 501(c)(3) tax-exempt public charities. As a result, Massachusetts RMD’s must now operate on a quasi 501(c)(3) nonprofit basis under 105 CMR 725.100(A)(1) and existing DPH sub-regulatory guidance; but without the benefit of tax-exempt status, without access to standard nonprofit funding sources, and without the alternative ability to secure private investors and access capital on a competitive basis.[1]

Presently, for example, most RMD start-up funding is secured through high fixed-interest loans. Interest on these loans, like a mortgage payment, must be paid on a regular schedule regardless of an RMD’s financial condition. This type of restrictive financing structure, necessary for compliance with existing DPH policy precluding private ownership interests, significantly restricts cash flow and undermines an RMD’s ability to reserve funds; either to ensure the financial security of the organization or to invest in growth.

In a for-profit environment, private equity investment is a standard alternative to debt financing. Investors typically contribute money in return for an ownership (equity) interest in the business. Profit is returned to investors through distributions or increased share value, rather than loan repayment. Equity investment is a common way to raise capital without the immediate pressure to repay investors who, instead, benefit when the company performs well financially. In this changed environment, the inability to secure private investment will put RMDs in an impossible competitive position.

This for-profit/nonprofit imbalance can be corrected by utilizing a membership structure commonly available to nonprofits that are not charitable. In this corporate model, members of nonprofit corporations may contribute value in return for member benefits. There is ample precedent in the Commonwealth for the existence of Chapter 180 nonprofit corporations that are not subject to public charity rules or regulation and operate on a membership model.[2]

No Need to Eliminate the Requirement that RMDs Operate as M.G.L. Chapter 180 Nonprofits

105 CMR 725.000 et. seq. implements An Act for the Humanitarian Medical Use of Marijuana. The Act uses the descriptor “nonprofit,” but does not require RMDs to operate as public charities. The Department does not have the authority to amend the Statute. It can however, amend its interpretation of the Statute by enforcing the requirement that RMDs form as M.G.L. Chapter 180 corporations, without otherwise imputing 501(c)(3) public charity restrictions on these nonprofits. There is no explicit imperative articulated in the Statute for the Department to impose restrictive economic interpretations of the “nonprofit” language.

It may be argued that the proposed revision to 105 CMR 725.100(A)(1) and revision to the sub-regulatory guidance might somehow violate the spirit of the Statute. There is no evidence in the record of the discussions around the passage of what was then Question 3 in 2012 to suggest that this is the case.

Indeed, this action can be taken without compromising any aspect of the existing Program and without causing any undue burden on patients (for example, RMDs will still need to provide discounts to patients demonstrating financial hardship as mandated by 105 CMR 725.100(A)(6)). DPH regulatory oversight would continue in furtherance of its core mission: to promote, preserve, and protect the health of everyone in the Commonwealth and to strive to achieve an optimal healthcare delivery system that ensures safe, effective, high-quality care for all.

Whatever the underlying public policy considerations for including the “nonprofit” language in the original legislation may have been, they cannot be well served by the evisceration of the entire medical marijuana program.

A robust medical marijuana program can successfully co-exist with an adult-use program

As has been demonstrated in a number of other US states, a robust medical marijuana program can successfully co-exist with an adult-use program. Indeed, to achieve the vital mission of providing qualified patients with the cannabis medicines pursuant to Chapter 369, An Act for the Humanitarian Medical Use of Marijuana, the Massachusetts Program must co-exist competitively, as qualifying patients have needs that would not be served by the adult use market, including:

· Unique products such as salves, lotions, tinctures, and transdermal patches;

· Cannabidiol (CBD) dominant cannabis products (non psychoactive medicine);

· Higher dose medication that is expected to be restricted in the recreational market;

· Stricter testing standards to protect compromised immune systems;

· Patient services including onsite consultations to establish patient-specific treatment plans;

· A zero rate of sales tax.

To accomplish this, both types of organizations must exist on a level economic playing field. They must both be able to appropriately allocate risk in their planning processes and they must have equal access to capital in order to facilitate business activity and development. In short: they must have the discretion to allocate their financial resources to activities that facilitate competitiveness, and in turn, continued operational survival.

Modifying 105 CMR 725.100(A)(1) and the DPH sub-guidance would allow market-based economic incentives for RMDs to compete on price, quality and customer service. Such a change would advance Governor Charles D. Baker’s Executive Order 562 by implementing a less restrictive and intrusive alternative and relieving an undue and adverse effect upon Massachusetts’ citizens and competitive environment. For all of these reasons, 105 CMR 725.100(A)(1) should be amended as proposed herein and the sub-guidance revised accordingly.

Timing of the Proposed Revisions

The CDA is aware that the Department has undertaken an extensive regulatory review process over the past year and made its recommendations for proposed regulatory revisions to the Public Health Council on September 14, 2016. The CDA-proposed revision as described above was not included in the Department’s recommendation. While ordinarily the Department would provide all of its proposed revisions to the Public Health Council at one time, the unprecedented change of circumstances brought about by the passage of Question 4 makes this subsequent proposal timely and appropriate.

From the time the Department began its regulatory review process, through the time it made its recommendations to the Public Health Council in September, the outcome of Question 4 was far from certain. Now, with the passage of Question 4, the very existence of the Program has come into question. If there were ever an appropriate time to submit a subsequent recommendation on regulatory amendment, this is the time.

The CDA believes that a well-regulated medical marijuana program is critical for the continued provision of high quality, affordable medicine to patients that need it. Without immediate action as proposed herein, the Program is very likely to collapse. If RMDs become insolvent, all the work that has gone into developing our world-class Medical Marijuana Program will be lost and the availability of medical cannabis products for patients in need will be jeopardized.

We urge that the Department swiftly recommend and adopt the above referenced revision to 105 CMR 725.100(A)(1) and revise the existing sub-regulatory guidance accordingly.

Please do not hesitate to contact me at any time at or 860.918.6197.

Sincerely,

Kevin B. Gilnack

Executive Director

Commonwealth Dispensary Association
13 Commercial Way | Milford, MA 01757
| p: 860.918.6197 | f: 855.869.4031

[1] Additionally, pursuant to IRS rule 280E, unlike most for-profit businesses, RMDs are precluded from deducting ordinary and customary business expenses from their taxable income. This has the perverse result of requiring RMDs to pay taxes on their gross, rather than net, revenues while still being subject to scrutiny that is ordinarily applied only to tax exempt organizations.

[2] For example, physician organizations, business leagues, unions, social clubs, cooperatives, and many other Massachusetts nonprofit corporations further their nonprofit purposes and may also confer personal benefit on their members.