On February 28, the Virginia General Assembly passed House Bill No. 698, which would legalize sales of recreational marijuana at retail in the Commonwealth. It now heads to the desk of Governor Glenn Youngkin, where its future is uncertain. In this blog post, we highlight key provisions of the proposed framework related to licensing, taxes, testing, and labeling.

Legal Marijuana in Virginia: Background

Adult possession and sharing of marijuana has been legal in Virginia since 2021, but current law prohibits most practices resembling retail transactions. Several statutory sections already exist in the Virginia Code related to the development of a recreational market, but they are not in effect. These provisions were only set to take effect if reenacted by the 2022 General Assembly session — however, they were not.

Administration by Virginia Cannabis Control Authority

In addition to introducing entirely new provisions, HB 698 builds on the dormant provisions by reenacting and amending several key sections thereof. The bill would empower the Virginia Cannabis Control Authority (VCCA) to regulate the recreational marijuana market.

As under the dormant provisions, the bill instructs VCCA to develop and maintain a “seed-to-sale” tracking system that accounts for marijuana from the seed or infant plant stage until it is sold to a customer at a retail marijuana store. This tracking system would inform VCCA’s enforcement of the provisions discussed below.

Licensing Framework and Preference for “Micro Businesses”

VCCA would establish an application process for the licensure of marijuana establishments — a term which includes marijuana cultivation facilities, marijuana testing facilities, marijuana processing facilities, marijuana transporters, and retail marijuana stores. Operating without the appropriate license would constitute a Class 6 felony.

The bill also sets conditions under which VCCA must or may refuse to grant a license, or suspend or revoke an existing license. It also provides procedures for appeals of such refusals, suspensions, and revocations.

So-called “micro businesses” would receive preferential treatment in the licensing process, reduced application and license fees, access to a low-interest business loan program, and waived requirements to demonstrate proof-of-funds. The “micro business license” provisions would replace the “social equity license” provisions from the dormant provisions.

A “micro business” applicant is one who has at least 66% ownership and direct control of the business, and one of the following applies:

(i) The applicant has been convicted or adjudicated delinquent for any misdemeanor under Virginia law related to:

• Illegal manufacture, sale, giving, or distribution of marijuana;
• Possession with intent to manufacture, sell, give, or distribute marijuana; or
• Simple possession of marijuana or marijuana paraphernalia.

(ii) The applicant is the parent, child, sibling, or spouse of a person who has been convicted or adjudicated delinquent for any of the above misdemeanors in item (i).

(iii) The applicant has resided for at least three of the past five years in a “historically economically disadvantaged community.”

(iv) The applicant has attended a public elementary or secondary school located in a “historically economically disadvantaged community” for at least five years.

(v) The applicant has received a federal Pell Grant or attended a college or university for at least two years, at which at least 30% of the students, on average, are eligible for a federal Pell Grant.

(vi) The applicant is a veteran of the U.S. armed forces.

The bill would define “historically economically disadvantaged community” to include (a) jurisdictions in which marijuana possession offenses occurred in excess of 150% of the statewide average between 2009 and 2019, according to U.S. Census Bureau data; and (b) “underutilized business zones” as defined under federal law.

Types of Licenses

Marijuana Cultivation Facilities

These licenses would authorize a facility to (i) cultivate, label, and package marijuana; (ii) purchase or take possession of marijuana plants and seeds from other cultivation facilities; and (iii) transfer possession of or sell marijuana, immature marijuana plants, and marijuana seeds to marijuana retail stores, marijuana transporters, other marijuana cultivation facilities, or marijuana processing facilities. The bill would establish five tiers of cultivation licenses, which allow indoor cultivation with maximum canopy sizes ranging from 2,000 to 70,000 square feet.

Marijuana Processing Facilities

These licenses would authorize a facility to (i) process, label, and package marijuana and marijuana products; (ii) purchase or take possession of marijuana from a marijuana cultivation facility or another marijuana processing facility; (iii) transfer possession of and sell marijuana and marijuana products to retail marijuana stores, other marijuana processing facilities, or marijuana transporters.

Retail Marijuana Stores

These licenses would authorize a store to (i) purchase or take possession of marijuana, marijuana products, immature marijuana plants, or marijuana seeds from a marijuana cultivation facility or marijuana processing facility; (ii) take possession of marijuana, marijuana products, immature marijuana plants, or marijuana seeds from a marijuana transporter; and (iii) sell marijuana, marijuana products, immature marijuana plants, or marijuana seeds to consumers on premises approved by VCCA.

Delivery service, internet sales, drive-throughs, and vending machines would not be permitted under this license. The bill specifically provides that retail marijuana stores may only sell marijuana, marijuana products, immature marijuana plants, and marijuana seeds to consumers in a direct, face-to-face exchange. Further, the bill limits consumer sales to 2.5 ounces per person per transaction limit (or an equivalent amount of marijuana products as determined by VCCA).

Marijuana Transporters

These licenses would authorize the licensee to (i) take possession of marijuana, marijuana products, immature marijuana plants, and marijuana seeds from a marijuana cultivation facility, marijuana processing facility, retail marijuana store, or another marijuana transporter; (ii) transfer possession of marijuana, marijuana products, immature marijuana plants, and marijuana seeds to a marijuana cultivation facility, marijuana processing facility, retail marijuana store, or another marijuana transporter; and (iii) transport marijuana, marijuana products, immature marijuana plants, and marijuana seeds from one licensed establishment to another.

Marijuana Testing Facilities

These licenses would authorize the licensee to develop, research, or test marijuana, marijuana products, and other substances. They could develop, research, or test marijuana and marijuana products for itself, another licensee, or a person who intends to use the marijuana or marijuana product for personal use as allowed under state law.

Taxes: State, Sales and Use, and Local

The bill would impose an 8% tax on the sale of any marijuana, marijuana products, or marijuana paraphernalia in Virginia — not including sales between marijuana establishments. State sales and use taxes would apply to sales of such items at a rate of 1.125%. Localities would also have the option to levy an additional 2.5% tax on these sales. The seller of the marijuana, marijuana products, or marijuana paraphernalia would be responsible for collecting these taxes and filing a monthly return alongside payment.

Testing of Marijuana

HB 698 would require VCCA to establish a testing program for marijuana and marijuana products that requires licensees to submit a representative sample of their marijuana or marijuana product before selling or distributing. Testing would determine if the sample exceeds the maximum allowable quantity of certain harmful constituents, such as heavy metals, microbiological contaminants, mycotoxins, and pesticide chemical residue.

Labeling and Packaging

Marijuana and marijuana products offered for sale to consumers would require labels showing the type of marijuana or marijuana product, license numbers of the various marijuana establishments involved, net weight, all ingredients, information related to extraction chemicals used, instructions on usage, a specific statement that the product may only be sold to adults at least 21 years of age, a universal symbol for marijuana, and a certificate of analysis from a licensed marijuana testing facility stating the total THC concentration therein. The bill would also allow VCCA to establish additional labeling requirements.

Regulation by Localities

The bill authorizes Virginia localities to either prohibit retail marijuana stores altogether or regulate the time of day in which such stores can sell marijuana or marijuana products. The bill expressly prohibits localities from adopting any other ordinances or prohibitions related to marijuana cultivation, processing, possession, sale, distribution, handling, transportation, consumption, use, advertising, or dispensing.

Referendum on Retail Marijuana Stores

Localities could determine whether retail marijuana stores are allowed to operate within their respective jurisdictions at all. A locality could, by resolution, petition the local circuit court for a referendum on the issue. The vote must occur within 90 days of the circuit court’s order to proceed with the referendum. If a majority votes to prohibit retail marijuana stores, the prohibition would be effective January 1 of the following year.

Time of Sale Ordinances

Localities could adopt ordinances to set specific hours during which marijuana or marijuana products may be sold. Localities could also establish fines and other penalties for violations of these ordinances, and such violations would be treated as Class I misdemeanors under state law.

What It Means

Whether or not HB 698 is signed into law, its passage through the Virginia General Assembly is a meaningful signal of legislative support for establishing a functioning recreational market in the Commonwealth. Potential industry entrants should watch this bill closely, as its passage represents a significant step toward a recreational market.