After winning majorities in the House and Senate in November 2022, Minnesota’s Democratic–Farmer–Labor Party moved quickly to advance legislation to legalize cannabis for adult use before the end of the 2023 session. And, with the session’s end just days away, lawmakers have finally agreed on a program that will be particular to the state, including equity provisions and strong protections for small and medium sized cannabis companies.
Four months after its introduction, the 300-plus page legislation has made its way through thirty committee stops in the House and Senate. It passed the House on April 25 and the Senate on April 28. And this week, following a late-night vote in the Senate on May 19, lawmakers sent their reconciled versions to Gov. Tim Walz, who is eager to sign adult use into law.
Many of the lawmakers behind the legislation are following through on a promise they made in the 2022 election, and state lawmakers are familiar with the subject of cannabis. There have been multiple attempts in past sessions to approve adult use, although they’ve come up short. Then, in 2022, lawmakers legalized edibles containing THC derived from hemp, defined as a cannabis plant with .3% THC or less, which became legal under the 2018 Farm Bill from Congress. As Cannabis Wire reported, some Republican legislators may not have understood completely what they were doing when they supported that bill last year.
Since then, a low-dose THC edible market has established itself in the state. As legislation advanced to fully legalize cannabis for adult use in this year’s session, lawmakers took steps not to disrupt that market. But they also worked to bring those edibles under a greater state regulatory umbrella, allocating licenses for “lower potency edible product” manufacturers and retailers.
Some in Minnesota’s burgeoning hemp industry have bristled at their inclusion in the new adult use regulatory scheme at all. The legislation includes a tax on hemp products, which was not part of last year’s law. The hemp industry is concerned that too much regulation and high taxes could hamper sales.
But Senator Lindsey Port, the lead sponsor of the Senate version of the adult use bill, told Cannabis Wire the hemp-derived edibles have different—and carefully considered—regulatory requirements. “Making sure that we’re doing that correctly, in a way that protects the rights that the hemp industry has federally—that’s been one of the most complicated pieces of the process.”
Space for Mid-Sized Cannabis Companies
Hemp-derived edibles and the rest of the cannabis market will be regulated under a new state agency called the Office of Cannabis Management. The Minnesota Board of Pharmacy suggested the creation of this agency last year after hemp-derived edibles were legalized. It was also included in Walz’s recommended budget for 2024-25. Walz made his eagerness to sign adult use legislation known at the beginning of the year.
The adult use legislation creates more than a dozen license classes, including three types of medical cannabis licenses, two types of lower-potency hemp edible licenses, a delivery license, an event organizer license, and the types of licenses for standard adult-use businesses, such as cultivation, retail, and wholesaling.
Along with carve outs for hemp edibles, another unique aspect of the state’s legalization effort is the inclusion of so-called mezzobusinesses. These are mid-sized operations that are bigger than microbusinesses, a category that’s been included in other states’ cannabis programs. Mezzobusinesses are limited in plant canopy size to between 5,000 and 15,000 square feet. Owners of these businesses can operate up to three retail locations, as well as grow and process medical cannabis. Port compares the structure to the state’s tiered liquor licensing system, which articulates the difference between a microbrewery and a craft brewery.
The state goes even further to protect small and mid-sized cannabis operations against competition from large, multi-state operators or MSOs. While standard businesses are prohibited from being vertically integrated, the legislation exempts micro- and mezzobusinesses from that rule. Vertical integration means single companies can grow, process, and sell cannabis products. Medical cannabis companies also are allowed to be vertically integrated.
“If there were no cap on vertical integration, you would see the market here dominated by, like we’ve seen in other states, a couple of these large MSOs that would be able to come in and just dominate the market from top to bottom,” Leili Fatehi, an attorney who worked closely with lawmakers on the legislation, told Cannabis Wire.
Lawmakers want to avoid market domination from MSOs, to the extent they can. Port says ensuring smaller companies have space from the start is a lesson Minnesota has learned from other states. She acknowledges big operators could get the state’s cannabis market off the ground quicker because they have more resources.
“While that does help get you up and running faster, it really also does not do the core goal of our bill, which is to ensure that communities in Minnesota who have been most harmed by cannabis prohibition should have a real stake in this industry going forward,” Port said.
To that end, the legislation lays out requirements for social equity applicants. Those include applicants who have lived for the past five years in a census tract where the poverty rate was 20% or more or the median family income did not exceed 80% of the statewide median family income, as well as military veterans who lost honorable status due to a cannabis-related offense. It will also include Minnesotans who live in neighborhoods that have experienced disproportionate levels of cannabis enforcement, after a study is done to find these areas.
Social equity applications will be scored higher during the licensing process. The legislation also establishes a Division of Social Equity under the Office of Cannabis Management.
Fatehi says the social equity piece was non-negotiable from the start. Democrats and cannabis advocates’ concern was crafting language that benefited people negatively impacted by cannabis laws in the past. “We’re keeping an eye on what’s happening in other states in terms of the constitutional challenges that some of their social equity provisions have created, to make sure that we are setting ours up in a way that accomplishes its goal,” Fatehi said.
The state will automatically expunge certain cannabis offenses through the work of the Cannabis Expungement Board. A fiscal analysis of the House and Senate version of the bills estimates the board will cost nearly $19 million over the next five years.
Republican Opposition, Taxation
One of the top concerns for Minnesota Republicans this session was local control. The legislation prohibits communities from blocking cannabis retail or levying their own taxes, although they can limit the number of business licenses based on their population size.
“The fact that we’re effectively telling cities that you can’t tax this and that you also can’t say no—I still find that quite problematic,” Representative Jim Nash said in the House Ways and Means Committee on April 17—the bill’s final House committee stop. For comparison, he said a Minnesota law allows cities to hold referendums on the legality of selling alcohol.
Representative Zack Stephenson, the House sponsor of the bill, responded in that meeting that keeping taxes—and thus, the price of cannabis—low is integral to displacing the illicit market.
“California is the best example where local governments have the ability to institute very significant taxation and it’s led to a significant gap between the cost of legal cannabis and illicit market cannabis,” Stephenson said.
Stephenson added that local governments will receive funding in other ways under the legislation, including regulatory and licensing fees, as well as grants.
The House version of the bill passed on April 25 with a vote of 71 to 59. Two Republicans joined the majority and one member of the Democratic–Farmer–Labor Party voted against.
In its final stop in the Senate, Republican opponents expressed concern about local control as well. They also said the health impacts of the bill have not been thoroughly thought through. Some of the senators noted the juxtaposition to tobacco, which the state has regulated to a greater extent in recent years, such as increasing the legal purchasing age to 21. Senator Gary Dahms said health insurance companies will pick up the tab for treating people who suffer the health effects from cannabis.
“What we’re doing is driving the health insurance market up and before this session’s over, I can guarantee you we’ll have conversations about health insurance and ‘those darn health insurance companies just keep raising the rates and we can’t figure it out so we better go to a state program,’” Dahms said at the April 26 Senate finance committee meeting.
On April 28, the Senate voted 34 to 33 in favor of the bill, with none of the Republicans joining Democrats in support of it.
One of the final pieces to come together was the tax rate for cannabis sales. House members proposed a tax rate of 8%. The Senate version proposed a higher rate of 10% to provide more tax revenue to local communities. At the final reconciliation meeting between House and Senate negotiators on May 16, lawmakers agreed on a rate of 10%. Under the agreement, 20% of the tax revenue collected will go to local governments.
The legislation also allows Minnesotans to cultivate up to eight plants at home, including four mature plants. A sale date is not set in the legislation but many of its statutes go into effect on June 30. A Cannabis Advisory Council needs to be set up by July 1. Language that will allow medical cannabis license holders to sell cannabis for adult use with the proper license, provided the two spaces are separated from each other, goes into effect January 1, 2024.
Many Minnesota lawmakers have been working toward this moment for years. House sponsor Stephenson noted this while introducing House File 100 in the Commerce Finance and Policy Committee on January 11—long before it had traveled through fifteen committees to get to the House floor.
“Over the last three years we’ve listened and worked to build a Minnesota-specific model for cannabis legalization. I don’t think it’s an exaggeration to say that there’s no other bill that’s gone through as rigorous and complete a process of development that this bill has,” Stephenson said.