Do first cannabis tax collections understate the size of the hemp-derived edibles business?

The first taxes collected from Minnesota’s new cannabis tax that took effect July 1 show that the hemp-derived market is smaller than estimated, or a lot of people selling edibles and beverages have not yet reported their taxes.

In the first month, the 10% sales tax brought in $594,461 from 571 businesses. That means total sales were $5.94 million. Of the total, $119,000 will be distributed to local governments and $475,000 to the state. The Department of Revenue (DOR) notes that those numbers reflect what had been received by Aug. 21, and additional filings are likely.

The first month collections are close to, but still less than, estimates released in June by the state Department of Revenue, which assumed the new tax would raise $10.6 million in the first 12 months of collections. By the time the recreational market is fully in place, the DOR estimates that the cannabis tax will raise $68.6 million a year.

When the low-potency hemp-derived edibles law took effect last July, there was no direct way of knowing how many businesses were selling edibles and beverages because that law required no registration and lacked taxation separate from the general sales tax. With the May passage of House File 100, the hemp-derived program shifted from the Board of Pharmacy to the Department of Health. In addition, the first taxation of the industry started on July 1. By Oct. 1, any business involved in hemp-derived products, including both manufacturers and sellers of edibles and beverages, must register with that department.

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Then, when the new Office of Cannabis Management finishes setting itself up and rules are approved to govern the industry, recreational cannabis, medical cannabis and hemp-derived products will all be under the new office. At that point, licenses will be required, and the state will have a more exact way of knowing the size of the cannabis business in Minnesota.

During a briefing last week on the implementation of HF 100, Chris Tholkes, the director of the Office of Medical Cannabis, said as of last week, 500 have registered, but “just from being out in the field a bit with our inspectors, we know there are many, many more that need to be registered.”

Bob Galligan, the legislative director for the Minnesota Craft Brewers Guild, which includes members who make and sell THC beverages, said the first collection numbers provide the first glimpse into the size of the fledgling market. About 30 of his members make THC beverages.

“It’s good to finally have some metrics to begin to work on,” Galligan said. “It’s nice to know how many actual retailers there are.”
Galligan said the numbers are slightly below what he would have estimated but “sound generally in line with how I would imagine things were going.”

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Tholkes’ office took over regulation of the industry from the Board of Pharmacy, and field inspections began on July 31. The board had complained that it didn’t have the staff or expertise to regulate the industry and asked to be relieved of the job.

Who must register? Sellers of hemp-derived cannabinoid products, including exclusive liquor stores, retailers and manufacturers, including those that sell directly to consumers, such as breweries that make hemp-THC beverages, and out-of-state manufacturers that sell online or to businesses in Minnesota.

Tholkes said the office has seen hemp products sold in a range of businesses, including smoke shops, restaurants, liquor stores, stand-alone hemp stores, breweries and distilleries, convenience stores, gas stations, beauty salons and barber shops and pet food stores. Tholkes said the inspectors are taking an educational approach for now, rather than fining sellers for violating the new law.

“The inspection philosophy as we get out in the field in these initial visits is to have conversations with the retailers, talk about what makes a product compliant, what they would need to do to get that product into compliance, and if they can’t bring it into compliance, how to destroy the product,” Tholkes said.

Correction orders are used to let the sellers know what they need to do, and staff will re-inspect later.
Vapes, for example, are not allowed. Neither are capsules, raw hemp flower that is treated with a THC spray, edibles that aren’t individually wrapped in 5 mg. servings and beverages that contain more than 10 mg. of THC in two or more servings. The inspectors are also looking for products that appear to be aimed at children, such as edibles that look like fruit, animal, cartoon or “a real or fictional person.”

“We’re taking a look at the THC per serving, the THC total per package, looking at non-compliant products, non-compliant forms of THC … looking at product labeling, product packaging and product placement,” she said.

Eventually, the office can order products seized and embargoed and issue administrative fines of up to $10,000.

Editor’s Note: Peter Callaghan wrote this story for MinnPost.com, originally posted on Aug. 23.

Callaghan covers the state government for MinnPost.

MinnPost is a nonprofit, nonpartisan media organization whose mission is to provide high-quality journalism for people who care about Minnesota.