Vermont Legislature SmartTranscripts:

[Rep. Emilie Kornheiser (Chair)]: Good morning, Ways and Means. It is Wednesday, April 29. It is 9AM. We are receiving an update on the cannabis market because we are going to receive a cannabis bill from House government operations that has passed the Senate already. And we have time this week, and we might not have time next week when it actually arrives. And so I'm going to ask people to retain the information that we hear this morning until next week in our brains. Is everyone going to commit to that awesome task? Great. Thanks. Ted, you're up.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Good morning. Good morning.

[Ted Barnett (Joint Fiscal Office)]: Good morning. Ted Barnett, joint fiscal office. Great. Okay. So I'm going to run through a overview of cannabis excise and sales taxes and their allocations. This is mostly a review of the general state of the world, but we are going to talk a little bit about trends and kind of the overall status of the market, at least from what we're seeing in terms of tax revenue collection. So starting off very high level, there are two taxes on retail cannabis transactions, the 14% cannabis excise, which is allocated 70% to the general fund, 30 to the substance misuse prevention fund, the 6% sales tax, which is a 100% allocated to the universal afterschool and summer special fund. Key point here is the 1% local option tax. If it is a local option sales tax applies to cannabis in those communities that have adopted a local option sales tax and also have adult have voted to allow retailers with the municipal borders. So that's a combined rate of 20% without the 1% local option. Sales to medical patients or caregivers are exempt from those taxes. In an effort to provide increased access to the medical market, Act 166 in 2025 created something called a medical endorsement, which allows retail establishments to sell to medical patients and those transactions will be tax free. '28, last time I checked, 28 of 110 retailers have adopted this medical endorsement. And data has shown that it's for once the adult use market came online, there was a decline in the number of medical patients that has started to return with this increase in access at retailers. Vermont has chosen a percentage tax on retail transactions. We'll note this is not the only way to do it. For states that only have taxes on retail sales, the rates vary quite substantially. Missouri has a 6% tax on retail, but it ranges all the way up to 37% in Washington. Some states like Connecticut have a tax on THC potency. So generally, the stronger the product, the higher tax rate on those products. And then there are also a number of states that have either a wholesale excise tax or a combination of a retail tax and wholesale level tax. So in Maine, they just increased their retail tax rate from 10% to 14%, but they also tax plants at the wholesale level. So if someone gives an immature plant to someone else within the market, they pay $1 at that wholesale level. The rates are much higher for more finished products. Flour is $223 per pound. And so it scales based on how finished the product is at the wholesale level, at least the main. So on the right hand side, this is a table that shows the overall trajectory of collections in both the sales and excise tax. In fiscal year twenty six, the consensus revenue forecast put the excise tax at $22,600,000 this implies that the sales tax would generate just shy of $10,000,000 this fiscal year. A key point here is I hear a lot of times there is an expectation, I think, that the market is much larger than it actually is, and so the tax capacity is much larger than it actually is.

[Rep. Emilie Kornheiser (Chair)]: There was a really fun VPR piece last summer, maybe, where Did everyone else hear this? Someone had called in and said, Why can't you fix the education fund with cannabis revenue? And they did an entire piece about how much you can't fix the education fund

[James Pepper (Chair, Vermont Cannabis Control Board)]: with cannabis revenue.

[Rep. Carolyn Branagan (Member)]: It's similar to the lottery.

[Rep. Emilie Kornheiser (Chair)]: It is, at the same level. Yes. All the lottery money goes there. Why do you have to spend a bunch on school?

[Ted Barnett (Joint Fiscal Office)]: Yes, so I certainly noticed an increase in questions about cannabis after community. Absolutely. So this implies, so the $22,600,000 since the 14% tax on retail transactions, if you back that out to get the size of the base, it's a little more than 160,000,000 estimated for fiscal year 'twenty six. And so to generate Ed fund savings amount, you would have to have unprecedented tax rates on cannabis. So are this $161,000,000 of market size, 78 towns have at least one cannabis retailer. Folks have to opt in to the cannabis market in a municipality. So it's not available everywhere. You see in the market, Chair Pepper can certainly talk about market structure and geographic distributional retailers, there are clustering of retailers in places that have adopted cannabis in their towns. And so I think there's also questions of why does Burlington have quite a few retailers? Why does Rutland? And it's because they're servicing a much larger geographic area than necessarily strictly local markets.

[Rep. Bridget Burkhardt (Clerk)]: This might be later in your presentation or in the board's presentation, but are you going go into how much of the money that's going into the universal after school or

[James Pepper (Chair, Vermont Cannabis Control Board)]: the substance misuse special fund is getting used?

[Ted Barnett (Joint Fiscal Office)]: Absolutely, yeah, Slater. Yep. Talking in general trends, Early in the market, unsurprisingly, as the market was adding additional retailers, the adult use market first collected substantial. We saw the market opened in October '2. Start seeing tax revenues in November '2, month over month seeing substantial increases in the early years of the market. And then more recently, we've seen a leveling off of tax revenue collections, implying that the market is at some stage of maturity. You'll see oscillations. There's a dip the cannabis market, and tax revenues are, to some extent, correlated with tourism seasons. And so you can see right here around March, close to our mud season, a little bit of a dip. But we're seeing more oscillation month to month. Absent any major changes, you can expect that hopefully things continue to along at this rate. Folks, when I've done this and other committees, asked about this spike in August '5. As far as I can tell, it's not connected to anything. It might just be the data we're using, the daily revenue summaries from the Department of Taxes, and it might be like a month end processing thing as opposed to anything that was happening on the ground in terms of sales.

[Rep. Emilie Kornheiser (Chair)]: It's just been a really nice day.

[Ted Barnett (Joint Fiscal Office)]: Yeah, exactly. Certainly. The revenue forecasts in January 26 were looking forward to 'twenty eight and 'twenty nine, shows tax revenue collections growing at four and a little more than four and a little more than 3% in fiscal years 'twenty eight and 'twenty nine respectively. So that's in line with more of an inflationary growth amount, in line with retail sales, the base staying relatively level.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yes.

[Ted Barnett (Joint Fiscal Office)]: So, this is showing the price per gram for cannabis in Massachusetts. They started off with a price per gram a little bit above $14 They started right before the pandemic. So there's this blip in the pandemic where it's a drop in price and then it recovered. And then after, let's see, this is about a year in change of operation in the market, the price per gram went down considerably and has continued to decrease all the way down to $4 per gram currently. And I put this on here because Massachusetts has a few extra years of experience, let's say, than Vermont does in terms of their market. And this is reflective of what's happened in other states, initially at high price. As growers move into the market and supply increases, the price of cannabis has fallen in those states. I did a very unscientific and unrepresentative survey of retailers online yesterday. The lowest price I was able to see per gram was more in the $7 range. Champagne, I don't know, might have more detail on prices. There has been policy work and the board will temporarily close certain licensing types in an effort to manage supply. The real risk in adult use cannabis market is you have a flood of supply that decreased prices, and that obviously will have an impact on tax collections since the tax is on retail collections. So open question of whether Vermont has more room in the floor for the floor and price. But we'll note that there is a lot of attention being paid to make sure that supply and demand in the market is matched. Representative Waszazak, this is where we start getting into where certain special funds are receiving cannabis revenue. The breakdown's projected for this fiscal year and in future fiscal years. The Substance Misuse Prevention Fund, which receives 30% under current law of cannabis excise tax revenues for fiscal year twenty six. It's expected to get almost $800,000 and then increase a little bit to about $70,000,000 in fiscal year twenty seven. This is administered by the Department of Health. So yes, this money is certainly being used. I can provide more detail into the various uses. Right now, I just have kind of a special fund look. And yes, there is kind of the Substance Abuse Prevention Fund. There's also been conversations about using it for recovery centers and pairing it together with opioid funds. So that's part of the conversation there. The Canvas exercise text has had a long and convoluted history of allocation, reallocation, redirection. And so this is a review of the basic mechanics of that. Historically, in fiscal year 'twenty three, 100% of the revenue was in the general fund. And then in 'twenty four and 'twenty five, 100% of the revenue went to the cannabis regulation fund, which supports the operations of the cannabis control board. In those two fiscal years, the remainder after control board expenses was then transferred to the general fund in substance misuse in the traditional seventythirty split. And then in fiscal year twenty six, that's when started the current structure of the excise tax revenue going to the general fund and then to the substance misuse prevention fund.

[Rep. William Canfield (Vice Chair)]: Yes, concerning the misuse prevention fund, we've actually spent all of the monies that go into that fund for misuse and prevention and addiction issues and that sort of thing?

[Ted Barnett (Joint Fiscal Office)]: Yes, it is my understanding that we do. I can provide more context into the specifics, yeah?

[Rep. Bridget Burkhardt (Clerk)]: I think, sorry, just curiosity. Seventythirty was Why was it seventythirty? Sixtyforty?

[Ted Barnett (Joint Fiscal Office)]: That's my question. I don't know the decision as to why that split occurred. Yeah, don't know.

[Rep. Emilie Kornheiser (Chair)]: I think it's really what Representative Kimbell said. There was a pretty significant debate when the legislation first passed about how much should go into prevention and how much should become just the general revenues of the state in order for people to feel comfortable?

[Rep. Bridget Burkhardt (Clerk)]: Yeah, I was just more observing that it was the state of structure that local option that was at the time. Gosh, no. I mean, that was

[Ted Barnett (Joint Fiscal Office)]: Because this is entirely a joke, because seventythirty felt too comfortable and we were So, Senate appropriations recommended a change to allocations of cannabis excise tax revenue instead of the seventythirty split starting in fiscal year twenty eight. 20% of cannabis excise tax revenue would go to the Higher Education Endowment Trust Fund. In this table here, it shows that that in fiscal years '28 and '29, that would be about $5,000,000 The budget, as recommended by Senate Appropriations, would also make free appropriations one time from the fund, dollars 12,000,000 for a multipurpose center project with UVM, Freedom of Unity grant at VSAC, and for a housing transformation project at Vermont City College to Johnson. The higher ed trust funds had approximately $5,700,000 at the end of fiscal year twenty five. There was a large amount of excise tax revenue that ended there, which I think we all discussed before. Kind of a windfall in tax revenue. And so, this last bullet provides context on how the statutory uses of the Higher Trust Fund, but wanted to mainly flag that they're posing this change of 20% sex tax rate of the new going to a new use, a

[Rep. Emilie Kornheiser (Chair)]: higher interest fund. Which is not going to come to this committee. The piece of legislation that will come to this committee is the cannabis bill that's currently in gov ops. This will likely go to the Appropriations Committee of Conference, the Budget Committee of Conference. So everyone's perfectly welcome to have an opinion. Yes, Representative Masland. But that does not necessarily need to be voiced in this moment either. Floor is yours,

[Rep. James Masland (Member)]: sir. Thank you, ma'am. This seems reasonable. I understand the logic. I can follow that. There is a notion out in the bouts of some of the higher education fund, whatever it's called, for sports arena in Burlington. And just for the record of those around this table, I'm not at all in favor of that whatsoever, so help me. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Thank you, sir. We will not actually have an opportunity to formally weigh in on this proposal. Don't Understood. Just it's

[Rep. Bridget Burkhardt (Clerk)]: here. Absolutely. Yes. And I

[Rep. Emilie Kornheiser (Chair)]: believe that House's official position is to not spend this money.

[Ted Barnett (Joint Fiscal Office)]: Yes. Sure. I'm gonna move right along.

[Rep. Emilie Kornheiser (Chair)]: Thanks so much, Ted.

[Ted Barnett (Joint Fiscal Office)]: Mostly a public servant now. Moving on to the sales tax.

[Rep. Bridget Burkhardt (Clerk)]: Thanks so much, Teddy. So,

[Ted Barnett (Joint Fiscal Office)]: yeah, our 6% sales tax, 100% goes to the Universal After School and Summer Special Fund created in the budget adjustments in 2024. Previously, that sales tax revenue went to the Education Fund. The special fund was created so that the sales tax money could go to after school programs that were of the, that were funded outside of school districts. So the Education Agency of Education administers a grant program with those revenues. With how the agency of education administers the grant program, they choose a cohort of grant awardees, and that cohort receives funding over multiple fiscal years. The programs receive funding for three and a half years, and then incentives receive funding for five years. And so that will scale up the amount of units being spent out of the special fund. The cohort in fiscal year twenty five was awarded $2,400,000 And so, combined with the cohort in fiscal year twenty four in the first year and then in '25, there's $10,500,000 in funding that's allocated to 2,030. They are ramping up spending through the special fund. There more revenue that's going into special fund than is currently being spent, but they're catching up by doing this multi year award and cohort kind of grant funding. And if you were more curious about the grant program and expenditures and how they're looking at awarding those grants, would absolutely defer to the Agency of Education. And then finally, there are fees on cultivators, manufacturers, retailers, etcetera. They raise about $2,500,000 per year. The budget request from the control board in fiscal year twenty seven is about $7,100,000 And inevitably, we talk about fees for the control board, there's a question of were the fees designed, should they be designed to support the full operations of the Control Board? And Act 62, which

[Rep. Bridget Burkhardt (Clerk)]: passed

[Ted Barnett (Joint Fiscal Office)]: folks with developing a fee schedule, noted that the fee schedule should include an amount to repay the general fund for excise taxes and cannabis regulation fund. But at the same time, we'll note that the general assembly included intent language to produce participation in the market by smaller establishments. And ultimately, the fee schedule is designed to encourage smaller establishments. It's scaled so that larger establishments are paying a larger amount in fees and really advantaging smaller growers in Vermont's market. And noting that if the policy goal was to fully pay for the expenses of the board, fees would have to be increased rather substantially. And so it would be, I think, quite hard to get to that.

[Rep. Emilie Kornheiser (Chair)]: And when we set the taxes and fees the first time, there was really remarkably extensive testimony and conversation about price elasticity and what it would actually mean to set prices and fees at a level that the market would function in a substantive way because the goal was to create a legal market given how extensive our gray market was at the time and probably. Does

[Rep. Rebecca Holcombe (Member)]: CCB's budget come out of the excise tax or the sales tax or both? Is it coming off the top of the total amount?

[Ted Barnett (Joint Fiscal Office)]: No, so it is coming out of So, in addition to fees, there is so they have a B section in the budget and the balance between their $7,100,000 budget request and the $2,500,000 in fee is paid for through General Fund. Some folks will make the connection that excise tax is going into the general fund and then general fund is paying for the control board and pulling a link, but really the general fund is the general fund. It's fungible. So the control board is, they receive about $4,600,000 in general funds in the FY 'twenty seven budget, as it currently stands.

[Rep. Rebecca Holcombe (Member)]: And won't those are also a new facility to test marijuana above and beyond the tech center. Does that all inclusive in that budget or is that something that's in the capital bill? Did that money come from?

[Rep. Emilie Kornheiser (Chair)]: Pepper can cover that when he comes on. Pepper can answer that.

[Ted Barnett (Joint Fiscal Office)]: And that's it on my end. I wanted to flag two resources. We have a new type of document called Fast Facts. Oh! I know. So it's one two page document on kind of a frequent It's like an FAQ. It's intended to answer questions that we get quite a bit in a short, really accessible format. There are let's see, I'm trying to there's cannabis excise tax. I think there is one on the Higher Ed Trust Fund. But yeah, there's five of them. They're a new document type there on the JFO website. Absolutely encourage looking at those and we are trying to figure out which topics we'll cover for Fast Facts in the fall. And then we also have a cannabis revenue tracker on the JFO website. So every month we update the amount of sales and excise tax that has come in for

[James Pepper (Chair, Vermont Cannabis Control Board)]: the previous

[Ted Barnett (Joint Fiscal Office)]: month and show I can actually pull this up really quickly. Let's see how well that works. It does. And then it shows Oh, nuts. It totally worked on my screen. I'm going to share again. Okay. Here. I'm married to a school teacher, which is why I say things like nuts and noodles. That's right. So, yeah, it just shows it kind of shows where we are. It shows where we are compared to the previous year and as a reminder of allocations of cannabis, excess tax and sales tax revenue. So if you're ever curious about how tax revenues are doing this, sorry, in the fiscal year, you can check that out on the JFL website.

[Rep. Emilie Kornheiser (Chair)]: And this is the fact that you started doing it. This is like a micro level of revenue to have a tracker for, and it's because you got so very many requests that you were like, it'll actually save time for me to create this thing.

[Ted Barnett (Joint Fiscal Office)]: Absolutely.

[Rep. William Canfield (Vice Chair)]: Do you know where these sales are? I track a lot of information, but can you see where the greatest sales are, which communities are doing better than others.

[Ted Barnett (Joint Fiscal Office)]: I could probably I don't necessarily track that information. I could ask the Department of Taxes because they have managed the data for these two revenue sources. I could ask them to see if they have a permissible breakdown. No, it would be interesting. I imagine you would see some of that clustering around where retailers are. Sure. Where the greatest density of retailers are, for sure. But I would be curious to see if there is certain retailers in certain geographic locations that have more robust business per retailer than per dollars. And at times, too.

[Rep. William Canfield (Vice Chair)]: It would be interesting to see how it coordinates with certain occasions and things like that.

[Rep. Emilie Kornheiser (Chair)]: Indeed. So,

[Rep. Rebecca Holcombe (Member)]: you know a lot of detail.

[Rep. Carolyn Branagan (Member)]: Yeah, Madam Chair, do you have a detail sheet on the fees on the $2,500,000 Specifically, what fees and how much each of them is bringing in?

[Ted Barnett (Joint Fiscal Office)]: I do, but I can share it with you.

[Rep. Bridget Burkhardt (Clerk)]: Hey. Pepper

[Rep. Emilie Kornheiser (Chair)]: might cover that to some degree.

[Rep. Bridget Burkhardt (Clerk)]: Yes. Mhmm. This is more, I think, for you, madam chair than Ted. On the I'd be interested in the after small summer special fund. I don't necessarily want to take testimony time with that, but curious if, like, a memo can

[James Pepper (Chair, Vermont Cannabis Control Board)]: come from AOE as to what the uses of that are and where that money is going.

[Rep. Emilie Kornheiser (Chair)]: Do you have that somewhere?

[Ted Barnett (Joint Fiscal Office)]: There is a great, I will share the link with Sorsha, there is a great after school report from the agency of education that's talking about both the after school and summer special fund and 21C funding and how those two work together within the entire after school.

[James Pepper (Chair, Vermont Cannabis Control Board)]: A few hours ago, so thank you for that.

[Rep. Bridget Burkhardt (Clerk)]: And then for you, madam chair, just curious, I'm trying to have the stadium debate, but do we have jurisdiction over so we have jurisdiction over levying these taxes. Do we have jurisdiction over how Money is spent? Yeah, how those percentages work.

[Rep. Emilie Kornheiser (Chair)]: No, that's appropriations. Interest like, do you give us

[Rep. James Masland (Member)]: a call?

[Rep. Rebecca Holcombe (Member)]: Sort of, yeah.

[Rep. Emilie Kornheiser (Chair)]: Because that's actually covering for a lost tax to some degree. Right. Because the pilot fund's

[James Pepper (Chair, Vermont Cannabis Control Board)]: about Taxes. Taxes.

[Rep. Emilie Kornheiser (Chair)]: Payment in lieu of fees. Sometimes when a tax is set up, we do that part. The overall

[Rep. Bridget Burkhardt (Clerk)]: Yeah, that's just a personal figure.

[Rep. Emilie Kornheiser (Chair)]: But mostly, if that all happened earlier in the session, rather than something that would happen in the committee of conference, we might flow through. But given that's just going to be

[Rep. Bridget Burkhardt (Clerk)]: a conference bother, we do not.

[Rep. Rebecca Holcombe (Member)]: Input rather than authority. Thank you.

[Rep. Emilie Kornheiser (Chair)]: Input rather than authority. Anything else for Ted before we hear from Pepper? Thanks, Ted.

[Ted Barnett (Joint Fiscal Office)]: See later.

[James Pepper (Chair, Vermont Cannabis Control Board)]: I

[Rep. Emilie Kornheiser (Chair)]: just know he has to leave, and usually he would stay for the second half of the testimony. That's all I meant. I actually have

[Ted Barnett (Joint Fiscal Office)]: a little I'll hang out for a little bit. Okay.

[Rep. Rebecca Holcombe (Member)]: Fresh orange.

[James Pepper (Chair, Vermont Cannabis Control Board)]: You deserve it, Tim. Morning. Morning. Thank you for having me. My name is James Tepper. I'm the chair of the Cannabis Control Board. This is my favorite times of year to come to this committee. And most times I start talking about cannabis, people start running the other way, but I have a captive audience for the next So hour and a I'll try not to use the whole time. So I guess maybe I'll just start with answering a few of the questions that I heard in the initial. I have a presentation, the slides are on your website. On what the fees are bringing in, you asked for a report last year that I submitted, I think in November or December 2025, that breaks out all the fees that are coming in by categories. That is posted on your website as well. And it's in the appendix. So it's just kind of a fee table showing all the various fees and what they're bringing in. So, yeah. We do a lot of market analysis to make sure that we're properly kind of meeting that supply and demand. And so we are looking at sales regularly. So there's another report that breaks out sales by product category, by county. It's also on your website. And I've got a few slides on that as well. And then on the lab, the lab expenses are now fully baked into our budget. So the 7.1 includes all the lab expenditures. So as long as there aren't dramatic shifts to the market, I think that 7.1, just with the kind of standard inflations, will be pretty much our operating expenses moving forward. We're not anticipating any huge new costs, absent some dramatic shift in the market. And I know that seven point one, a lot of people say, Did anyone know who's gonna cost that much money to regulate this industry when we started? No one really knew what the entrepreneurial interests in becoming a cannabis business was going to be, how many licensees we were gonna have. So we started with two employees and we're now up to 28. I don't want to mean to sound defensive, but we have analyzed a number of other states, most of the New England states, as to what the appropriate number of FTEs to licensees is to effectively manage. And we operate a very lean agency compared to every other cannabis regulatory agency. Just by way of example, New Jersey has one FTE for every three licensees. Massachusetts has one for every five. So one full time employee for every five licensed business. Maine has one for every seven, and we have one for every 20. So we are a scrappy agency that gets by, but we are certainly, I think the 7,000,000 is a big number, and 28 employees is a big agency, relatively speaking. But I think it's in line, maybe on the average, of some of our other partners in campus regulation.

[Rep. Charles Kimbell (Ranking Member)]: James, how does that

[James Pepper (Chair, Vermont Cannabis Control Board)]: breakdown for revenue from employment? Revenue for the I feel like you asked me that one time and I actually didn't look that up. Really sorry. I apologize. We don't ask

[Rep. Charles Kimbell (Ranking Member)]: the same questions every time.

[James Pepper (Chair, Vermont Cannabis Control Board)]: No, but I should have anticipated that. I apologize. Our revenue is coming in significantly higher than what JFO anticipated in FY 'twenty three when we had a few months of sales under our belts and they kind of projected out a few years. I've got a slide just on that as well. Let me, if it's all right, if you can share me, I can share my screen.

[Rep. Charles Kimbell (Ranking Member)]: We're consistent with our questions.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yes. That's showing? Yes. Alright. So this is just what I have on the agenda. Of course, stop me at any time. If anyone has questions, this kind of generates a lot of questions, this topic. So a general market overview. This is just the number of active licensees that we have over kind of a twelve, fourteen month period. You can see a spike in kind of February, March 2025. That's the time where we voted as a board to close issuing new cultivation retail licensees. We always give the market at least thirty days notice when we make one of those decisions for people that may be midway through the application process or haven't hit submit on their application yet, but have actively started building out the retail cultivation facility, just to give them some notice they need to get that application through the door. And as expected, a lot of people rushed through the door right around the time we voted to close those application windows. And so we saw this somewhat artificial spike that's now leveling off to a more kind of standard. These are just the number of licensees broken out by type. You can see that cultivators are the majority of our five sixty two licensees. We also have 92 manufacturers, 110 retailers. Amongst the cultivators, oops, these are the retail locations by county. We have to, I thought I had a slide.

[Rep. Bridget Burkhardt (Clerk)]: Can we please go back to one for

[Rep. Rebecca Holcombe (Member)]: a second?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Which one is this one?

[Rep. Rebecca Holcombe (Member)]: The map?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah. Spangos

[Rep. Emilie Kornheiser (Chair)]: have a desert situation on

[James Pepper (Chair, Vermont Cannabis Control Board)]: every Right, yes. Yeah. And I think you gave us some authority over retail siting two years ago. Initially, we had no authority over where retail locations could go. There was an opt in opt out provision, so we are seeing clustering in places that have opted in. But as far as within the actual kind of municipality or more broadly, we had no authority to say, It can't be within 1,000 feet of a childcare center, park, arcade. That was all thought to be a local decision, but the market took off before the towns, I think, had a real opportunity to catch up and pass ordinances that would have limited the clustering. That's just But when we have We've closed issuing new retail licenses. There's no retail licenses, new ones being issued. And when they try to move, we have some retail citing guidelines where they can't go to dense, densely populated areas. You're gonna move out of Burlington, for instance, where there's 11, you have to go to a part of the state that's less densely packed with retailers.

[Rep. James Masland (Member)]: So would you have a rush when you stop issuing retail licenses? Yes. Are those people still coming on board or are they all finished?

[James Pepper (Chair, Vermont Cannabis Control Board)]: They're all finished. Yeah, you have to have your license complete before, you have to have your facility complete before we issue the license. And we don't let applications linger for longer than ninety days. This is a breakdown of our licensees by status. The the 2020 legislature wanted to create a category of licensees called social equity. Essentially, you're launching a new market for a product that was formerly illegal, the legislature wanted to acknowledge that there's a lot of people that, because of past criminal histories with cannabis, would probably not be able to get a bank loan or be able to participate in this market. So there is some priority status given to people that have been historically harmed by cannabis prohibition, And they represent about 15% of the market. There's a secondary class called economic empowerment. These are veteran owned businesses, women owned businesses, First American owned businesses, just folks that haven't necessarily been harmed by cannabis prohibition, but are given a little bit of priority status in that initial rollout of licensure when we had it back. For some reason, I'm missing a slide here, but I did wanna note that of our cultivators, three forty five cultivators, two fifty four or 74% are tier one cultivators. They're growing on a thousand square feet or less, and they really are driving the ingenuity of this market. These are very often former illicit market growers, the gray market growers or black market growers that have decided to take a leap of faith and get a license. And they brought a lot of their genetics, they've been cultivating for decades, into the market with them. And it really makes our market unique compared to all of our New England states. Just by way of example, Connecticut, for the first three or four years, their market only had four cultivation mega farms supplying all of the cannabis for the state. They have three forty five cultivators. And another unique feature of our market is before any product actually hits the market, goes to the retail shelf, it has to be registered with the cannabis control board. And we look for compliance with all of our testing requirements, our packaging, labeling, advertising. And this is just a snapshot of the number of products that we have, over 5,000 unique products. The vast majority of those are flour, individual strains of flour or pre rolls, but we have beta cartridges, edibles, concentrates, tinctures. There's some more data about Oh, I actually have it on the next slide. About sales. This is just a snapshot, like a little over a two year snapshot of sales, just giving you an idea of what people are purchasing. Flower is the most popular by a long shot. And then I've got some information on the total spending.

[Rep. Emilie Kornheiser (Chair)]: What infuses a pre roll or a flour?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Infused pre roll of flour. So that would be just a typical joint that has some kind of addition to it, like a terpenes or THC. It's not like rose petals. No, no. The only additives that we allow are ones that are generally regarded as safe by the FDA or that are naturally occurring in Kansas.

[Rep. Emilie Kornheiser (Chair)]: And then vape cartridges. I'm very old fashioned, so I don't understand how vapes work. Do you all just you're regulating the cartridges, like, all of the fancy delivery mechanisms, are those

[Rep. Rebecca Holcombe (Member)]: We don't do the we don't do the

[Rep. Emilie Kornheiser (Chair)]: the Hello Kitty, whatever. How does that all work?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Unfortunately, we don't have jurisdiction over the devices themselves.

[Rep. Emilie Kornheiser (Chair)]: Vice, that's the word, thank you.

[James Pepper (Chair, Vermont Cannabis Control Board)]: And they are causing problems both in the nicotine and cannabis. It's kind of the frontier of where the problems are. You're seeing leaching, and cannabis actually has to be heated to a higher level, higher temperature than tobacco. So it increases the possibility of cracking and leaching of those components, the cheap-

[Rep. Emilie Kornheiser (Chair)]: Like the plastic leaching?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Like the coils that are actually heating it, that are making contact with the oil. Sometimes when those get heated up to a high temperature, especially when it's cold out, they can break. And then there's cadmium or nickel or lead in the oil.

[Rep. Emilie Kornheiser (Chair)]: What are the different temperatures?

[James Pepper (Chair, Vermont Cannabis Control Board)]: I think it's around 400 degrees for THC, and I don't know what it is for tobacco, but it is lower.

[Rep. Emilie Kornheiser (Chair)]: Yeah. Represent Masland?

[Rep. James Masland (Member)]: Actually, James, you answered the question. Oh, the problems with devices.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Okay, yeah.

[Rep. Emilie Kornheiser (Chair)]: There was a lack.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Can we just go back to the last slide quickly?

[Rep. Bridget Burkhardt (Clerk)]: What in the chart on

[James Pepper (Chair, Vermont Cannabis Control Board)]: the left, well, actually, I have a

[Rep. Bridget Burkhardt (Clerk)]: chart, what are the numbers showing? Is that types of The types, or sorry. On the charts, the tables in the top, what do the numbers indicate? Types, for example, flower, 26, 87, is that

[James Pepper (Chair, Vermont Cannabis Control Board)]: the types of flower units sold? Oh, no, that's registered products. So you need registration. You need registration, yes. So

[Rep. Emilie Kornheiser (Chair)]: products on the market, So something could have come on the market, could have been approved in 2024 and then not sold in 2025. It's an

[James Pepper (Chair, Vermont Cannabis Control Board)]: annual registration. Nice. Yeah. Mean,

[Rep. Charles Kimbell (Ranking Member)]: this is lot of different strain.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Each unique strain has to be done different, registered differently, because it's gonna have a different potency, different certificate of analysis.

[Rep. Emilie Kornheiser (Chair)]: And a strain sold as a flower versus a strain sold as a pre roll would be two separate products?

[James Pepper (Chair, Vermont Cannabis Control Board)]: I believe so.

[Rep. Bridget Burkhardt (Clerk)]: It doesn't matter.

[Rep. Charles Kimbell (Ranking Member)]: Sorry. A That's horrible nice. That's my whole

[Rep. Rebecca Holcombe (Member)]: reason go.

[James Pepper (Chair, Vermont Cannabis Control Board)]: It's really what makes Vermont a crap market. It's highly competitive, but it is a very crap market. If there is federal legalization, it's very likely that we will be a net exporter of cannabis products, I would imagine. But we'll see. This is just, again, just a snapshot of the complaints. We have an anonymous complaint process. This just kind of gives you a sense of what people are seeing out there when they're complaining. The majority of them are for advertising violations, but there's all sorts of issues. The letters of warning is our first step in the process as far as sanctions. Usually for unintentional violations, we send a letter of warning. We do have graduated sanctions depending on people, whether something was intentional or particularly extreme. So we have letters of warning, we got notices of violation, we got associated penalties.

[Rep. Emilie Kornheiser (Chair)]: Hi, so many questions.

[Rep. Woodman Page (Member)]: Yes.

[Rep. Emilie Kornheiser (Chair)]: If two different scenarios. If they legalize in New Hampshire and Vermont producers are selling our products in New Hampshire, do we get the excise tax but not the sales tax? And can products cross the border? And similarly, if someone has a cannabis company here and they're licensing products in Florida, their Vermont brand, how does that work? Currently- Tell us about interstate commerce.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah, fair. Currently, interstate commerce is widely believed to be illegal, and that's how it's being interpreted. There are a lot of very well paid lawyers that argue that interstate cannabis markets, even for illegal products, is a violation of the dormant commerce clause. But as it stands right now, no products are allowed to cross state lines. And so if a person wanted a Vermont manufacturer or cultivator wanted to sell products and they shouldn't use New Hampshire because they haven't legalized yet. But in Massachusetts, they would have to get a Massachusetts license, set up a facility there, have a separate LLC there and kind of just establish their own supply chain within the borders of Massachusetts. Even if it was

[Rep. Emilie Kornheiser (Chair)]: an interstate school district. I'm sorry. Totally withdraw my comment. Thank you.

[James Pepper (Chair, Vermont Cannabis Control Board)]: But you mentioned if it's legalized, federal, we're taking off the tier one or what? And it could be interstate commerce at that point. It could be, yes. And I think there'll be a very strong push, especially from the Western states that have much lower energy costs and have these huge bluffs of cannabis to demand that they have our markets open to their products.

[Rep. Charles Kimbell (Ranking Member)]: But if Vermont becomes this exporter, as you mentioned before,

[James Pepper (Chair, Vermont Cannabis Control Board)]: in that legalized market, would we still collect the excise tax on whatever we got to export? So I'll just jump ahead to one of my last slides. What the bill that's coming to you does. A number of those Western states have legalized much sooner, much earlier than we did, have authorized their governors to enter into interstate commerce compacts that will address all of the issues that, the health and safety, the product labeling, the testing requirements, who's collecting the tax, how to do product recalls, how to track these products across states. And the bill that you're gonna get eventually has that authorization as well. And it's triggered by, just like the Western states, they have triggering language. The governor can't just go out and negotiate one of these current loans. Fact, he might be committing a conspiracy to commit a federal crime if he did. But it authorizes him if the Department of Justice deschedules cannabis, or they release a memo very similar to what authorizes us to have a legal cannabis market now, they publish a new memo saying, We're gonna deprioritize for prosecution the interstate commerce between two legal states, or if there's federal legalization. So a couple of triggering issues that could authorize the governor to enter into one of these interstate combatants.

[Rep. Charles Kimbell (Ranking Member)]: That compact would dictate what gets charged and collected for excise and sales. Exactly. Okay.

[Rep. James Masland (Member)]: You're talking about interstate commerce. What about a consumer that comes from Massachusetts into Vermont, takes a purchase and takes it back? That's not what we're talking about.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Theoretically, there could be enforcement by a federal agent at the border. The likelihood of that happening is pretty low, but we do say on our warning label, I believe, don't cross state lines with this.

[Rep. Emilie Kornheiser (Chair)]: And Massachusetts also, of that.

[James Pepper (Chair, Vermont Cannabis Control Board)]: I just have a few quick slides on the medical program, because it often gets overshadowed by the adult use conversation. We still have a medical program in Vermont. In order to qualify for the medical program, you have to have one of these 14 or so qualifying conditions. The doctor who's treated you for at least three months and done a physical examination has to sign a form saying that you have one of these conditions. And then you are eligible to become a medical patient. And I often time get asked, why do we still have a medical program? Why can't these folks just shop the adult use stores? There are certain benefits to being a medical patient that the adult use side of things just is prohibited from offering or not prohibited in some instances, but we have a mandate that any patient that wants confidentiality for their purchases can have it either through a curbside pickup or specialty hours. It used to be that at the medical dispensaries, only one patient was allowed in the store at a time. We had to set up a reservation. So anyway, we've maintained that confidentiality for all of the retailers that have one of these medical use endorsements. Patients also have access to specialty products, many of which are prohibited on the adult use side, the higher potency products, higher THC potency products, things like transdermal patches, certain flavor. We allow lollipops,

[Rep. James Masland (Member)]: anything that can

[James Pepper (Chair, Vermont Cannabis Control Board)]: be confused for candy, but sometimes medical patients want those, so they request those. Specialty services, anyone who's interact, any blood tender, they call them, who's interacting with a medical patient has to have a specialized training that's put on and sponsored by the CCB. And I mentioned delivery. Medical patients can receive delivery to their house. They have access to caregivers as well. People that you can't get out of bed, you can authorize a person to go to a dispensary, purchase cannabis on your behalf, and deliver it to you. Access for qualifying minors, adult use cannabis is 21. There are a very small number of people 21 that are on the medical registry, and anyone 18 needs consent from their parents. Medical patients have increased possession limits. They're allowed to purchase two ounces in a transaction. And then home cultivation, they're authorized to home cultivate six mature and 12 immature plants. Whereas a traditional 21 household can do two and four. And then of course, their purchases are not subject to the 16% excise tax or the 6% sales tax.

[Rep. Rebecca Holcombe (Member)]: Some

[Rep. James Masland (Member)]: of these businesses have a dispensary sign out,

[Ted Barnett (Joint Fiscal Office)]: somehow that's the difference, they're doing the medical thing. So what we saw

[James Pepper (Chair, Vermont Cannabis Control Board)]: let me see if I can just find it properly. Some of my slides, I must've sent the wrong thing, but anyway. So we saw a tremendous drop off in the number of patients. First one, did homegrown. So, prior to 2018, the only way to access cannabis legally in Vermont was to be a medical patient. So we had about around 5,600 patients at that time. And then we did Home and Grow in 2018, and we legalized possession up to an ounce and gifting up to an ounce. And all of a sudden we saw a drop off of about 2,000 patients. Then we instituted adult use and we saw that number drop down to, I think below 2,000 patients. And of course, you're talking about having a standalone brick and mortar dispensary that, there were six of them at the time, six of them in 2018, all of a sudden they started going out of business. So patients had almost zero access to cannabis, to these benefits. And so the legislature responded by creating what's called a medical use endorsement. So in an adult use retailer that's in good standing with the board and is subjected to additional regulatory hurdles can seek a medical use endorsement and serve patients. So it's kind of emerging of the adult and medical use system. As long as they can still maintain confidentiality, as long as they can have a point of sale system that can distinguish between medical and adult use sales, have records of all of the sales for us to the tax department. And as long as they can kind of meet these enhanced education requirements, they serve patients.

[Rep. James Masland (Member)]: So again, they have the banner outside that says dispensary. Yeah. And the guys

[James Pepper (Chair, Vermont Cannabis Control Board)]: that aren't registered for that don't. For the most part, I mean, sometimes the word dispensary and adult use retailer get interchanged, but the dispensary, when we talk about it as it's defined in statutes is exclusively for medical patients and an adult use retailer is the term for retail licensing.

[Rep. Emilie Kornheiser (Chair)]: But someone could put up a sign to feel just sort of cute and old timey, if they want. Okay.

[James Pepper (Chair, Vermont Cannabis Control Board)]: You guys saw all of this with Ted, so I won't go through this. It's just a reminder about how the taxes And this is what I mentioned. Know the numbers are small, but this is that joint revenue forecast from January 2023. We had, I think, three months of the dollar new sales that JFO was basing these numbers off of. And this is what they projected, The just the excise tax was gonna look like for FY '23, '24, and '25. And then this is the same graph, but updated to from January '26, and you can just see the actions. You know, we're significantly above where they projected, it's their job to give you guys conservative estimates. No one knew how much consumer demands. Vermont has the highest cannabis consumption rates in the country pre legalization. So there is a big question mark is cannabis is essentially ubiquitous prior to legalization, and we have HomeGrow. How many of those customers are really gonna wanna pay a 20% premium for regulated cannabis? And it turns out that we're capturing a decent amount of the market, more so than what was estimated. We are seeing the leveling off that Ted discussed. I think a lot of the motivation around the bill that you might be getting is to capture more of the illicit market or those people coming from Massachusetts or New Jersey, places that already have adult use, but are coming to Vermont and trying to make sure that they purchase here and not bring their own from home. So things like event licensing that you might encourage someone to have a cannabis cash bar at a wedding instead of bringing their own cannabis from home, purchase it at a festival here or something like that. So despite the kind of strong revenue numbers, there are some very structural challenges that our cannabis industry faces that I just always need to highlight. So we have a structural oversupply problem. And a lot of that is due to the fact that we had a huge number of people get in outdoor cultivators. We assume because of our climate, we had a number of consultants that looked at the various adult use markets around the country and look at their climates and how many indoor versus outdoor cultivators they have. And we assumed that it'd be about 20% outdoor, 80% indoor, just because you can grow year round when you're indoor and can get between four and six cycles indoors compared to one cycle outdoors. And generally speaking, indoor cannabis fetches a higher price at the market. And so, but we saw pretty much the flip of that initially. We had about 65% of our licensees were outdoor, which is a huge benefit to the environment. Outdoor cultivation is a carbon sequestration. Indoor cannabis cultivation, control of the environment, agriculture, call it, is absent data centers, the most energy intensive industrial activity on a per square foot basis. And that was information we received from Efficiency Vermont when they were trying to when they early on structuring the market. So but it does What you see here is a gray line, which represents the approximate demand for cannabis. And then these, the blue line is the supply. And what you see are these peaks at harvest time. And this is when all of the outdoor cultivators are harvesting their cannabis at the same time, and it leads to this oversupply that hopefully evens out over the course of the year, but it makes the price of cannabis crash. It's very hard to weather this. And it's just one of those things that our outdoor cultivators are starting to move insiders. We're seeing that trend. They're starting to change their license types in the world.

[Rep. Emilie Kornheiser (Chair)]: I think the environmental concerns are really important. And my understanding is one of the other reasons we really wanted to emphasize outdoor cultivation when the market first launched was there's just readier access to it for someone getting off the ground.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Store of costs. Store of costs. So

[Rep. Emilie Kornheiser (Chair)]: when you're seeing that shift to more indoor cultivation, is that folks with established outdoor businesses being able to invest in indoor cultivation, or is it new businesses going along?

[James Pepper (Chair, Vermont Cannabis Control Board)]: It's not new. We haven't issued a new cultivation license for at least a year now. So yeah, it's mostly people shifting from outdoor to indoor or from outdoor to we have this mixed tier. It includes an indoor and outdoor portion.

[Rep. Emilie Kornheiser (Chair)]: Please. Carol, hi.

[Rep. Woodman Page (Member)]: Hi. Yeah. I just wanted to say that I was able to go many years ago, like nine years ago, to a a whole conference, part of a conference on cannabis growing. Before I went to that, I used to think, Oh, well, it's farming in a way. And it should be. But anyway, the important thing is that when it's not grown outside, it's actually just grown in buildings. And those buildings create a huge amount of carbon. And they're basically indoor factories. So I appreciate what you were saying, chair Kornheiser.

[Rep. Emilie Kornheiser (Chair)]: Thanks, representative Woodman Representative Masland.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah. Thank you very much. When

[Rep. James Masland (Member)]: outdoor cultivators move inside, do have any way of getting energy consumption? Is that anything that you guys are interested or would track or could track?

[James Pepper (Chair, Vermont Cannabis Control Board)]: We actually do. We historically did ask for that. It's one of the records that we require people to keep. We so we could audit it. We initially asked for it to make sure people weren't having illicit grow operations in their facility. But it is something that we have access to.

[Rep. James Masland (Member)]: I'm not interested in just getting in their faces, but there are people out there who would really like to know.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah. Yeah. I don't know how difficult it would be to compile it all, but it's one of those records that we require that people keep for a single. Thank you. Another challenge is this demand volatility, as we've spoken about every gram of cannabis sold in Vermont legally has to be grown here, packaged here, tested here. And there's a fixed demand for THC or cannabinoids in the state. You can't try to capture more of illicit market, but even then, there's a fixed demand and there's this seasonality that Ted discussed. So the demand for Vermont grown cannabis within the state can grow or decrease depending on a number of factors that are largely outside of the control of our cultivators. So when we first launched, we had about a year and a half from New York had no retail stores. And now the Western Border is lined with retail stores. So all those consumers that used to travel to Vermont to purchase are now probably staying closer to home. And those retailers are trying to advertise and pull Vermont customers to their stores. So, and then when we saw some drop off following the flood of twenty twenty three, when we had some decrease to our tourism numbers there, that impacts all of the kind of seasonally dependent, tourist dependent industries, including cannabis. So it's just really challenging for cannabis cultivators to predict or kind of prepare for. And then there's the illicit market still exists in Vermont. There's some consumers, a number of reasons that I've got a slide on coming up, that just prefer to stay on the illicit market. And so our regulated cannabis is in competition with that market. And we're not trying to arrest our way out of the illicit market problems. They just kind of operate in parallel. We're trying to outcompete them on the regulated side. And then, so I mentioned the reasons for purchasing on the unregulated market. We recently did some surveying as to why consumers are staying on the illicit market. Number one response was it's cheaper. Not only is there a 20% tax increase, there's all the kind of regulatory burden that's baked into the cost of regulated cannabis. More convenient, I won't read all of these, but I can get the products that I want on the illicit market. There's a number of prohibited products in the adult use side. We're never gonna capture the entire market, but we try and find strategies. Mean, the goal, one of the stated goals in the 2020 bill was to try and shift as many of the cultivators, illicit market operators and consumers into the regulated space as possible. The other market that we are in competition with, that the cannabis market is in competition with, is the intoxicating hemp market that has emerged over the last, since 2018, mostly through an unintended consequence of the way that the federal government defined hemp. And this is relevant because you are also gonna have a bill related to hemp products regulation, hemp process regulation. So it's kind of important that you understand a little bit of this. I'm gonna give you just a little bit of background here. So 2018, there's a lot of interest in growing hemp for non intoxicating purposes, for hemp seed oil, for fiber, hemp concrete, hemp wheat, and for CBD. It's a real thing. It's just there's no real manufacturing supply chain for it. So is actually, there is promise for it. There's lots of hemp bioplastics, hemp based bioplastics. It's just hard to supplant the plastics industry, it's something new. So the federal government responded by creating a legal fiction between hemp and marijuana for the purposes of the Controlled Substance Act. Marijuana, as it's defined in Controlled Substance Act, Schedule I, most highly restrictive, most criminal penalties associated with it. And hemp, which is supposed to have virtually no THC in it, is off the schedule, altogether agricultural product. And this is the definition of hemp that they chose. So you can see it's any part of the cannabis steva plant, which is the same plant, whether it's marijuana or cannabis, as long as it's below this threshold of THC on a dry weight basis. And all of the derivatives, extracts, and isomers, which comes into play later. So the market for hemp, the hemp oils, the CBD products, was a lot lower than what the hemp processors or the hemp growers thought it was gonna be. And so the processors started looking to poke holes in that definition and create effectively cannabis products using hemp and saying that they're hemp. So there's three major loopholes that have been exploited. I say exploited, the hemp people say, Well, it's right there in the law. So the 0.3% is virtually nothing in a plant, the 0.3% THC. But when you start talking about a product, all you have to do is increase the weight of the product, and you can pump more and more hemp derived THC into it and still be below that 0.3% ratio. So this is a candy bar. It says three hundred milligrams. You can see right below it, it's one hundred and fifty milligrams of Delta nine THC and one hundred and fifty grams of CBD. So this is a product that would be illegal in the adult use source if it was grown by a hemp cultivator because we have a per package limit of one hundred milligrams of Delta nine THC. And yet this product, because it's hemp derived and the product itself weighs 50 grams, you can have one hundred and fifty milligrams of Delta nine THC.

[Rep. Emilie Kornheiser (Chair)]: So you like to put nuts in it or something.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah, Just as long as you increase the weight of the product, can is like a serving size manipulation problem. Then you can ship this through the mail, you can sell it to kids, no testing, no labeling, no oversight by anyone and no tax, no excise tax. And this is kind of pretty widespread. This other one, this is very technical, but THCA is a precursor to Delta nine THC. When you ignite THCA, it converts into Delta nine THC. So this is like, this is a joint, this is a cannabis joint for all intents and purposes. They're saying because the definition of hemp only focused on Delta nine THC and not THCA, this only converts into a cannabis joint. It's a hemp joint, it only converts into a cannabis joint once it's lit. So this is like, you can

[Rep. Carolyn Branagan (Member)]: see, it's just, it is vulnerable, compliant,

[James Pepper (Chair, Vermont Cannabis Control Board)]: it says it right on the package. This stuff is very frustrating. And then the derivatives loophole. So remember it said that all parts of the cannabis plant, including its derivatives, isomers. So you can take CBD, you can wash it in hydrochloride gas and form synthetic Delta-nine tubes. And so that's a derivative of the cannabis plant. If it's

[Rep. Emilie Kornheiser (Chair)]: this- I see lots of stuff like this for sale at gas stations.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Exactly. This is the kind of gas station, and these things are like, Oregon, when they started up their state reference lab, just started grabbing as many hemp products out of gas stations as could and just started testing them and publishing their results. And the results are truly, I mean, they're probably what you should expect, but they're all truly pluriful. Pesticides, residual solvents, residual adulterants, just all the stuff that inaccurately of its course. It's the kind of stuff that really makes you wanna stay away from these if you haven't been able to present them. And this is a multi billion dollar industry. You got Snoop Dogg, you got Seth Rogen, Cheech and Chong, Willie Nelson. Edible Arrangements got into the game. I put these up here.

[Rep. Carolyn Branagan (Member)]: Put these up here. Fruits always dry.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Because all of these products, because of our per package and per serving limits, would be illegal in Vermont adult use stores, and yet these are shipped through the mail. These aren't subject to any cannabis excise tax. These are not subject to our advertising restrictions.

[Rep. Carolyn Branagan (Member)]: Who's the

[Rep. Emilie Kornheiser (Chair)]: guy in this sweater?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Seth Rogen. Yeah. And frankly, these are probably the more reputable brands because these people, I'm sure, have reputational interests at stake. It's these products that you start seeing in gas stations, and these are the ones that are really kind of scary. These are mimicking popular candies. They're intentionally trying to look like Cheetos and Funyuns or Oreos. If you place five hundred milligrams of THC in that package, five hundred milligrams, like a thousand. We have a one hundred milligram per container, as I mentioned, this is 10 times as much. And we certainly don't allow any products through that prior registration product. They would look anything like, or could be mistaken for a candy or a popular foodstuff. Okay, well, I think these slides are, for some reason, they seem to be out of sync for some reason. But there are So in addition to the hemp market, there are just structural challenges. I won't go into great detail. Regulatory compliance costs are extreme. What other It costs $1,200 to be a tier one cultivator in Vermont. What other kind of license? It's basically agriculture you charge $1,200 for. And that's not even talking about it's about $450 to do a full panel of testing, seed to sale tracking, child resistant packaging, security costs. There are no federally insured, FDIC insured banks do not, generally speaking, bank cannabis money, and there's certainly no lending. So people are paying exorbitant rates, sometimes $500 a month for purely a depository account just to park money into. Insurance, there are no admitted insurers, but we require insurance. I mean, really, people are walking into these stores, they should really have general liability insurance. So they have to rely on these unlicensed surplus line insurers, unregulated surplus line insurers. They can charge whatever they want and probably find lots of exclusions to what's actually covered in the fine print. There's no, of course, small business support, no SBA support for cannabis businesses. And then 280E of the IRS code, I just wanna say a few. This has kind of an interesting history to it. So there was a kind of notorious drug trafficker named Jeffrey Edmondson. He was arrested and convicted, and he went to the IRS, tried to get them money from his illegal profits. And he said, all right, fine, but I'm gonna write off my I'm gonna deduct my ordinary expenses, the rent where I was storing my drugs, the scales and the packaging that I used, and the telephone bills and my mileage for my car. And the tax court agreed with They said, I'm sure. And so Congress responded the very next year by passing Section 280E of the tax code. It just said, Anyone who's trafficking in Schedule I or Schedule II controlled substances cannot take any of the standard business deductions. So that means that this is just a kind of depiction of what it means to be taxed on gross profit, not net income. So on the right, you see what a cannabis business, if they have 2 in revenue, 2,000,000 in revenue, they subtract the cost of goods so they'll get to gross profit of 1.4. They have all these expenses that this business can write off. And so their income is, their net income is 200,000, but they're taxed on the whole 1,400,000. And so at the end of the year, they're actually in the red, even with 200,000,000 or 2,000,000 in sales. And you just can compare that to a more traditional non cannabis business or a hemp business for that matter, that's making those kind of intoxicating hemp products. I think it's just important to realize that, I mean, these cannabis businesses, even the ones that are successful are struggling.

[Rep. Rebecca Holcombe (Member)]: Mr. Pepper, why then is there such an increase in the market? I mean, if they're struggling so much, why would they go into this? I mean, to me, they're popping up all So the I don't get it, I guess.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Until you really have to grapple with this, I feel like you don't fully understand the consequence of being a 280D business. But I think a lot of the folks that got into our market are people that were growing on the illicit side and really wanted to go legal, wanted to be above board. This is their passion, and they don't wanna be kind of under the threat of prosecution at all times in society. But this is a challenging situation to deal with. I just highlighted, it's difficult. And we've seen a number of license relinquishments. This is a number from 2025. We saw 70 licensees kind of turn in their license. We always do an exit interview with the people when, Why aren't you going? And almost always it's cost of regulatory compliance, cost of insurance, cost of banking, or market access. Those are the main drivers of the license for the bushings. So there are some federal developments, including as of yesterday, that are quite dramatic. I normally don't have to give this kind of disclaimer, but for anyone watching at home, nothing that I say about this, it's evolving so quickly that it could change tomorrow. And there's a lot of ambiguity about what's the signals that are coming out of the federal government and what the Department of Justice is doing, that no one should take anything that I'm saying and rely on it as either legal advice or tax advice. So rescheduling, President Trump made some headlines in December saying that he's directing his attorney general to move cannabis as a plant from schedule one to schedule three. Just as a reminder, schedule one is defined by having no current accepted medical uses, that's the threshold question. And then what's the kind of abuse, the risk profile of it? Marijuana So was put as schedule one along with heroin, LSD, ecstasy. Schedule two is hydrocodone, Adderall, methamphetamines. Schedule III, though, the threshold question is, yes, there is an accepted medical use for Schedule III in a moderate to low abuse profile. So like Tylenol, codeine, certain steroids. Get a lot, there's a lot of ambiguity as to what this would mean to the existing cannabis industry. So what we feel confident in saying is that it would remove the applicability of 280E. So it would fix that tax write off situation for Schedule III business, because the 280E explicitly applied to trafficking of Schedule I and Schedule II substances. It very likely would make it easier to possess cannabis for the purposes of research. Any institution that accepts any sort of federal money or is a five zero one(three), it's tax exempt for some reason, just won't touch cannabis really. Mean, there's ways, there's a very narrow pathway to possess cannabis, but it's just not realistic for most people, for research purposes, I should say. What it will not do very likely, all the adult use products are not FDA approved regulated drugs. So it's not gonna just say that you need to have a prescription to get cannabis, that you need to purchase cannabis at a pharmacy. It doesn't open the doors to interstate commerce of these products. Again, they're not regulated FDA approved drugs. They're still gonna be outside of that system. So no interstate commerce. It may signal to banks, it doesn't do anything immediately to fix the banking problem. There is a separate piece of legislation called safe banking that would theoretically fix that. But it may signal to banks that, Hey, listen, this is a much less stringently controlled substance. Maybe you should consider banking. Gotta say that even that executive order moving cannabis from Schedule one to Schedule three was confusing enough for regulators around the country. And I say that because cannabis is, unlike some of these other substances, cannabis is a botanical that has hundreds of cannabinoids, some known, some unknown. It's this mix of hundreds of compounds that make up cannabis plant. There's a lot of biodiversity. So moving cannabis from schedule one to schedule three, we have lots of bespoke products that kind of take a little bit of CBG or CBD and isolate it and put it into this product at different ratios. Does moving one to three mean that all of those products are now legal? What about the ones that are synthesized, the derivatives? Are those legal now? So even that left, even this executive order left a little bit to, we were, as a regulator agency, asking for clarity from the DEA as to what to do with some of these synthetic and semi synthetic cannabinoids that are isolated from cannabis. But to make things just, this is the first time I've had a chance to talk about this, because as you can see the date, just yesterday, last week, the attorney general's office just bypassed the whole rescheduling process that's laid out in the controlled substance act and rescheduled through obscure, I don't think it's ever been used before, treaty process that we have with a, what is it, the uniform narcotics, the single convention on narcotic drugs. And so with the stroke of the pen, the attorney general bifurcated cannabis even further than just the cannabis hemp debate, and said that immediately, on effective April 28, certain categories of cannabis are gonna be schedule three, and then the rest that are gonna be schedule one. So there are three approved cannabis infused cannabis based FDA drugs. Two of them are synthetic cannabis and one of them is CBD. So Marinalis syndrome, so the synthetic THC's, and then Epidiolex is the CBD. So that's gonna be schedule three. And then the part that's just wildly confusing, products, this is the language from the order. Products subject to state issued license to manufacture, distribute, or dispense marijuana or products containing marijuana for medical purposes. So what is meant by a state issued license? We have medical use endorsed adult use retailers. Is that a licensed medical? There's no uniform definition of medical marijuana products. And honestly, for medical purposes, the definition of schedule one is there's no currently accepted medical uses for cannabis. So what is a medical purpose? There's no uniform definition of what a medical patient is. We have 40 states that have medical programs. Everyone treats patients differently. Some self certify, you can walk in Washington, DC, you can walk into a cannabis dispensary, say, I have a medical condition and you're a patient. So in a lot of states, their medical, just like in Vermont, their medical and adult use emerged. What does this mean for those types of businesses? There's a lot of nuance that was glossed over in this quarter. And I don't think I mean, we've been on kind of like these all state calls trying to figure out what this means and what clarity we need from the Department of Justice, from the Department of Treasury as to how we treat this.

[Rep. Emilie Kornheiser (Chair)]: Do you have any sense, like what rules or interpretations, what the timeline's gonna look like, Franklin? I know that for some other, I know that at least for some tax laws, we haven't received a Yes,

[James Pepper (Chair, Vermont Cannabis Control Board)]: we have no real concept of that. What was in the order is that they're gonna expedite registration with the DEA to become one of these marijuana distributors, like medical marijuana distributors. So they've already opened the portal for this. You can register as a medical marijuana distributor, and you have to submit a bunch of information about your products and your employees and your inventory to the DEA. And theoretically, you might get some two eighty degree relief, that's the kind of carrot that they're dangling out in order to do that. But it's very confusing to know what that even means. Is it just you're gonna be able to write off deductions related to the sales to medical patients or It's probably best for me to not even talk about it because it's so confusing. And so no one has any real concept of what this means. That being said, the DEA also has scheduled a hearing on June 29 to move all the rest of the business products to schedule three. So we don't know what that outcome of that hearing is gonna be or how quickly things might become schedule three after the hearing is concluded, because there's gonna be any sort of legal kind of interference with that. But all I have to say is this is a rapidly evolving situation. So please, anyone who's a cannabis licensee, don't think that we have all the answers at the board quite yet. We're trying to figure this out. The other just piece before I go to the legislation, I see the time, I

[Ted Barnett (Joint Fiscal Office)]: know this is kind of

[James Pepper (Chair, Vermont Cannabis Control Board)]: a dry subject, but also a shock to everyone. The bill to reopen the government in November 2026 had a rider on it that systematically closed all of those intoxicating hemp loopholes. It said instead of the point 3% does apply, but there's also gonna be a point four milligram per package. So that one hundred and fifty milligram candy bar can only have now zero point four milligrams of THC. It can't have the one hundred and fifty. It closed down the THCA loophole, the joint loophole, and it said that any cannabinoids manufactured outside of the cannabis plant are synthetic and are not hemmed. So it very effectively closed those three major loopholes, but it put a one year delay on me effectively. As I mentioned, there's a lot of big money interests in seeing this fix changed. And so that one year delay, there's no guarantee that this is actually gonna be the law. And a lot of the big hemp producing states are advocating to either delay implementation of this even further or change it. Okay, so you have two bills coming your way. S-two 78, an actuary in cannabis. This is kind of a reimagining, I would say, of the cannabis industry. It started out as a reimagining of cannabis industry, you know, just, it was kind of a, why don't we just discuss, debate every cannabis market expansion idea that we've heard in the last five years and we'll whittle it down to what is acceptable to the

[Rep. Rebecca Holcombe (Member)]: Senate.

[James Pepper (Chair, Vermont Cannabis Control Board)]: And it was five-zero out of committee, voice vote in favor on the floor. The provisions are it increases the per package THC limit in cannabis products, currently set at 100, proposes to raise that to 200. There's a one ounce transaction limit currently. So a customer who's checking out a cannabis can only purchase up to an ounce of cannabis or its equivalent in cannabis products at a time. This increases that to two ounces. It establishes a cannabis event pilot, which has a fee involved. So this may wanna just think about this fee. Is essentially, it says it's a pilot. The cannabis board can establish rules and procedures and issue up to 20 permits a year, 10 for public events, 10 for private events that can include the sale and consumption of cannabis and cannabis products. The fee is $500 50% would go to the cannabis regulation fund, which pays our bills, and 50% would go to the municipality that's hosting the event. It also establishes a delivery pilot, a delivery permit for licensees, either they focused on cultivators and manufacturers can get a authorization to do deliveries to physical addresses. It proposes to reduce outdoor cultivation fees by half. However, the appropriations committee put a little contingency on that in a floor amendment saying, only if we actually appropriate the money to pay for this, which they did not do. So I don't know what that is gonna mean. We'll see. So then expands the municipal authority over certain cannabis establishments, just giving the kind of full gamut of bylaws and ordinances so that municipalities can regulate the kind of location and time, place, manner of cannabis establishments. It included expanded access to business force, authorizes the governor to negotiate or execute interstate commerce compacts. We discussed that earlier. And then it precludes landlords from prohibiting consumption of non lit cannabis products in a residential lease agreement. The other one that I needed to mention is the empty portion of the miscellaneous agricultural bill. So this one, because of that federal change, is very up in the air as to how this is gonna turn out. Everything kinda hinges on what happens in November, but I can just rewind a little bit. The Agency of Agriculture used to regulate hemp cultivators and hemp processors. They stopped doing that in 2022, leaving these folks without a regulatory halt. And meanwhile, you see all the kind of explosion of hemp infused products. So these people are operating in Vermont, they're making these products, but when they try and get business insurance or get a bank account or enter into agreements with distributors, they run into some serious problems that they're handling cannabinoids. Are they marijuana or are they hemp? And so they have been requesting from legislators, including the chair of the Senate Agriculture Committee, that they want a regulatory home. They need someone in the state that has some visibility over their operations to ensure that they are purely hemp processors and not cannabis, and they don't have to worry about two eighty B, they don't have to worry about surplus on insurance, they don't have to worry about increased banking costs, etcetera. So what this does is it shifts the existing statutory authority from the Agency of Agriculture to the CCB, and authorizes the same kind of traditional rulemaking with a lighter touch on the kind of hemp processing, the licensing, the testing, labeling, types of additives that can go into a hemp product. And then it establishes these three fees that are up on the board. And then because we really don't know whether after November, the hemp industry is gonna be purely intrastate like the cannabis marketings, because the products they're producing will be illegal for per se commerce, or whether those kind of Snoop Dogg and Seth Rogen products, edible arrangements are still gonna be able to be shipped into Vermont. It allows us to define what a craft processor is and waive regulations, waive fees for those craft processors. So for instance, if this was an interstate market where we have the big players involved in Vermont, they have access to our market, a company with 50 employees that's Vermont based, although it doesn't matter if it's Vermont based for the purposes of the dormant commerce laws, but might be considered craft compared to Willie Nelson with his thousand employees.

[Rep. Emilie Kornheiser (Chair)]: Is the idea that the waiving of that $75 or $500 fee is gonna make the difference in their battle with edible arrangements? Awesome.

[James Pepper (Chair, Vermont Cannabis Control Board)]: So the idea here is that this allows us to, after November, and we know whether this law is gonna go into effect or not, not, adjust the scope and scale of the regulations, depending on whether we're dealing with large multinational corporations or just a local Vermont craft network. So I think that's it.

[Rep. Bridget Burkhardt (Clerk)]: Well done, Pepper. It

[Rep. Rebecca Holcombe (Member)]: seems like there's a lot coming up across the country regarding hallucinogenics. I'm just wondering if you've heard any rumblings if that's something cannabis control board would take on as well. It looks to me like there's a few states that have done it for municipal purposes, medicinal purposes. Have you heard?

[James Pepper (Chair, Vermont Cannabis Control Board)]: Think that there's a working group on this, and they're considering doing it at the Department of Health. But there is a psychedelics division at Colorado Marijuana Enforcement Division. So it's one of these things when you're moving something off the schedule and saying it's legal in the state or it's federal or legal, you gotta put it somewhere. And the cannabis board is an attractive place to put it because we don't accept any federal money. So there's no worry that it's gonna draw the attention of

[Rep. Rebecca Holcombe (Member)]: the federal government.

[James Pepper (Chair, Vermont Cannabis Control Board)]: But I think we're just politically just a ways away from doing that. Just because I don't think the working group has made recommendations or if they have, I don't know.

[Rep. Rebecca Holcombe (Member)]: Yes.

[Rep. Emilie Kornheiser (Chair)]: Yeah, Representative Branagan. Went through

[Rep. Carolyn Branagan (Member)]: a ton of information fairly quickly, so I'll

[James Pepper (Chair, Vermont Cannabis Control Board)]: keep an

[Rep. Carolyn Branagan (Member)]: hour, but thank you for sharing all this. I wasn't really clear on regarding the medical use of cannabis, if there's any health insurance to cover that cost.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Interestingly, if that's a good word to use here, that Trump executive order about rescheduling also suggested that CMS, Medicaid, cover up to $500 worth of CBD products. Medicaid. And so Doctor. Oz released some kind of guidance on how to do that. I don't know if it's effective or not, but it's not around cannabis products. It's around CBD products.

[Rep. Carolyn Branagan (Member)]: I've said this before to the committee, but in my opinion, I think it's an act of mercy to allow these folks who are sick with chemo or whatever to make use of this product. It really does help.

[James Pepper (Chair, Vermont Cannabis Control Board)]: It absolutely does. The federal government under the Biden administration, when they proposed rescheduling the schedule three, they were in a catch 22 because all of the evidence you would need to present to the Department of Justice to suggest that something should be lowered in the schedule, they were prohibited from accessing because it's Schedule I. You can't research cannabis in order to have the type of information that you need to show that it has a therapeutic use, a medical application. So they had to actually change the analysis for the Department of Justice, and they moved from a five factor analysis to a two factor analysis. And they just said, Listen, we have 6,000,000 registered patients around the country. We have 40 states with adult use programs. We have over 30,000 physicians who are qualified to sign off on medical cards. And they found that the kind of general consensus is that cannabis is an effective treatment for pain and for appetite stimulation for people that are going through chemotherapy and nausea. Exactly.

[Rep. Carolyn Branagan (Member)]: Right, I know that in Vermont, for patients who are suffering from those, especially initiated by chemotherapy, they are

[James Pepper (Chair, Vermont Cannabis Control Board)]: able to find some. Sometimes

[Rep. Carolyn Branagan (Member)]: it takes me out of members' town, which they can get.

[James Pepper (Chair, Vermont Cannabis Control Board)]: It's just

[Rep. Carolyn Branagan (Member)]: that they have to pay for it. For someone that's a problem.

[James Pepper (Chair, Vermont Cannabis Control Board)]: Yeah, and that I think was really the motivation behind the medical use of doors, because what it felt like to the legislature, and we were kind of presenting evidence, patients are not being held harmless. They are losing their access to products and services with the advent of adult use. And so you guys stepped in and we're actually, I did have a slide on it, disappeared some now. We're actually seeing an increase in the number of patients for the first time since 2017.

[Rep. Charles Kimbell (Ranking Member)]: One question on hemp manufacturers and the cultivators, hemp cultivators, because I remember when that became came through the legislature because it wasn't really permissible even for hemp manufacturers at that point. So I'm

[James Pepper (Chair, Vermont Cannabis Control Board)]: wondering if they're formally regulated by the

[Rep. Charles Kimbell (Ranking Member)]: agency of agriculture firms and

[James Pepper (Chair, Vermont Cannabis Control Board)]: markets or? Just the growers? Yeah. So growers themselves, the agency sent their regulation to USDA, and it's gonna stay USDA. More What concerned about are not the people that are actually getting their hands in the soil. They're taking that cannabis, converting it into the distillate, and then pumping it into products. Because that's the real rub here. That's the part of the supply chain where there's no regulation.

[Rep. Charles Kimbell (Ranking Member)]: So that's those license fees on kind

[James Pepper (Chair, Vermont Cannabis Control Board)]: of growers for the company. Right, and you saw that there was a grower fee of $50 it's really because for a large stage of the growth cycle of a plant, hemp and cannabis are indistinguishable from one another. So we need to just have some ability to distinguish them. So that $50 fee is really, if you look at what the authorization in rulemaking is for that, it's just for us to be able to go on and test the plants to make sure that they're actually hemp and not cannabis.

[Rep. Emilie Kornheiser (Chair)]: Thank you so much for your time today.

[James Pepper (Chair, Vermont Cannabis Control Board)]: That was so delightfully thorough and Thank you. If there's any, I mean, james. Pepperbromont dot gov, if there's ever any follow-up questions. Thank you.

[Rep. Emilie Kornheiser (Chair)]: We're going to take a very brief stretch break, folks, and then be back here in five minutes to talk