Business

Tobacco wholesalers want in on recreational marijuana

A demonstrator smokes a joint during the the "Grow your rights" rally in Santiago, demanding the depenalization of marijuana on June 03, 2017. / AFP PHOTO / Martin BERNETTIMARTIN BERNETTI/AFP/Getty Images

MARTIN BERNETTI/AFP/Getty Images

Plenty of companies are angling to get in on the coming legalized pot bonanza. Some, however, are lobbying the state to carve off a piece just for them: cigarette wholesalers.

The companies that track, deliver, and tax all the cigarettes sold in Massachusetts are seeking a similar monopoly on recreational marijuana when sales begin in 2018. They’ve asked state officials to require marijuana producers to sell all their pot products through them — just as most alcohol has to pass through a wholesaleron its way to bars and package stores.

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The tobacco businesses argue they have experience safeguarding a sensitive product through the supply chain, using sophisticated tracking technology that makes it difficult for bootleggers to pass off untaxed, smuggled cigarettes and easy for inspectors to verify a pack has come through legitimate channels. By doing the same for the marijuana industry, they believe they can keep the black market at bay.

“My members are willing to collect all the taxes on behalf of the state and stamp any marijuana product being distributed for sale,” said Paul Caron, a former state representative from Springfield and executive director of tobacco trade group the Northeast Association of Wholesale Distributors. “Rather than reinvent the wheel, let’s use the most successful, proven encrypted tax stamp program we have: the one assigned to cigarettes.”

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Marijuana proponents reacted angrily to the proposition. They accused tobacco wholesalers of trying to replicate the alcohol industry’s controversial structure, in which retailers are locked into long-term business relationships with wholesalers whose role as middlemen is mandated by law.

“The last thing this state needs is another three-tiered commerce system that gouges consumers and enriches middlemen,” said Jim Borghesani, communications director for the Yes on 4 coalition, which led the recreational pot ballot effort.

In other states where pot has been legalized, dispensaries typically buy directly from cannabis producers or grow their own supply. Cannabis companies in those states are required to use tracking systems specifically made for legal marijuana, and Massachusetts is expected to designate a logistics vendor to implement a similar system here.

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Borghesani said the marijuana-specific systems in other states are effective enough that Massachusetts has no reason to grant a monopoly to a group of wholesalers here.

The tobacco trade group has made its pitch both to Massachusetts legislators and state Treasurer Deborah Goldberg, who would oversee the new Cannabis Control Commission under the current law. According to documents obtained by the Globe, Caron also asked to be appointed one of the three members of the commission, which will develop and enforce new regulations for the sale of recreational pot.

Caron said his plan has the support of SICPA, the Swiss company hired by the state to provide the digital, counterfeit-resistant excise stamps applied to every pack of cigarettes sold in the state.

Its system, which includes automated weighing and stamping machines, digital stamps, and scanners used by investigators in the field, is designed to prevent retailers from buying bootleg cigarettes and evading Massachusetts’ high tax of $3.51 per pack.

But Will Luzier, another marijuana campaign official, argued it makes little sense to turn the distribution of marijuana over to wholesalers when retail sales become legal in the summer of 2018. That’s because the initial wave of licenses will likely go to current medical marijuana dispensaries, which are required to grow their own cannabis.

If the tobacco companies get their way, those “dispensaries would have to sell the product they grew as a cultivator to these distributors, and then buy it back from them as a retailer on the other end,” Luzier said. “I don’t see any sound public policy reason why it’s important to do that, other than to benefit the tobacco industry.”

He added that licensed cannabis producers should only have to sell through distributors if they want to.

Caron framed his meetings with state officials as “defensive,” saying tobacco distributors weren’t necessarily demanding a role in the pot industry, but “didn’t want to be caught flat-footed if, at the last minute, someone says, ‘Hey, the cigarette system works, let’s extend it to marijuana.’ ”

The Springfield lobbyist left little chance of that, however. Public records obtained by the Globe indicate that Caron e-mailed Goldberg on Nov. 10, just two days after voters approved recreational marijuana.

In the e-mail, Caron asked the treasurer to appoint him as a commissioner of the state cannabis commission, and offered to “share any information that I can provide regarding the nuances of the Wholesale Distribution Industry, and of the highly sophisticated ‘track & trace’ systems that we use to monitor, record, and collect Cigarette Excise Tax revenues for the Commonwealth.”

Goldberg tersely replied, “Paul . . . don’t take this the wrong way, but you are way ahead of the game.”

The push by tobacco companies comes amid declines in their business. In 2000, Massachusetts retailers sold nearly 361 million packs of cigarettes. By 2016, after various public health campaigns and sharp hikes in taxes on cigarettes, annual sales fell to 174 million packs.

The state’s marijuana business, meanwhile, is projected to surpass $1 billion by 2020 and continue growing into the foreseeable future.

A key lawmaker seemed cool to the pitch from the tobacco wholesalers. State Senator Patricia Jehlen, who chairs a legislative committee rewriting the marijuana law and has met with Caron, said Massachusetts should initially adopt a system similar to the ones used in other states.

The cannabis commission, she said, could consider using the cigarette wholesalers’ system at a later date, “but it doesn’t seem like something the industry is in need of.”

Colorado uses radio-frequency identification (RFID) technology that follows each plant over its life cycle, logging entries when it is moved, harvested, or bagged for sale. The system assigns each marijuana plant a unique ID number that, along with the name of the strain and the cultivator’s license number, is encoded on a yellow RFID tag strapped to the plant’s stem. Packages of marijuana derived from the plant are printed with corresponding barcodes indicating their provenance.

A Massachusetts Treasury official, who asked not to be named in order to discuss internal policy deliberations, said regulators are skeptical the SICPA system that tobacco wholesalers use could handle marijuana products.

While cigarettes come in uniform cartons, the official said, marijuana products come packaged in an infinite variety of forms that would be difficult for one type of machine to process for tax stamps.

Moreover, the official added, the Massachusetts marijuana law stipulates taxes will be collected at the retail level, and be based on the items’ market prices, which fluctuate daily. Cigarettes are consistently priced and subject to a flat tax assessed at the wholesale level. Using that system for marijuana would require constantly adjusting the value of a stamp for each product and retailer.

This isn’t the first time companies in other so-called vice industries have tried to get into the burgeoning marijuana market.

Nevada, which like Massachusetts voted to legalize recreational pot last November, had initially required all legal cannabis to be delivered by alcohol wholesalers, but later rescinded that mandate.

The wholesalers then sued, and in late May, a state judge granted their request to freeze the rollout of retail marijuana sales. In Massachusetts, meanwhile, some package store owners said earlier this year that they’d like to sell marijuana once retail sales are legal.

Dan Adams can be reached at daniel.adams@globe.com. Follow him on Twitter @Dan_Adams86.
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