If Recreational Marijuana Is Approved in Michigan in November, what will really happen?
In November 2018, Michigan has a major ballot proposal that can impact our state in a significant way economically and in the area of civil liberties, which is the Recreational Marijuana ballot initiative. If the initiative passes, it sets the stage for great changes within our state and creates a new potential tax revenue stream that can provide State, County and Local governmental agencies with a second new tax capture revenue stream (Medical marijuana is the first new tax capture revenue stream since Casino Gaming in 2000). These impacts will provide State Government & the local adopting bodies with their first raises since Proposal A and the Headlee Amendments restricted the ability for governments to raise revenues to match the rate of inflation & Consumer Price Index, which impact the cost of services provided.
While this provides significant opportunities for Michigan, the adoption of, transition to and implementation will not be as fluid or chaotic as some predict. The Commercialization of Cannabis (Marijuana) in the Medical and Recreational markets will be very complex and will take multiple years to create two separate and fully functional commercial regulatory models. So, you wonder, why do so many have different ideas, thoughts and theories on the matters? I can only speak to what the practical applications are and provide a projected model of the roll out and its implications.
So, here’s a few of the myths about the Recreational Marijuana Ballot proposal (Michigan Regulation and Taxation of Marihuana Act — MRTMA) and its impact on both the Michigan Medical Marihuana Act (MMA) and the Medical Marihuana Facilities Licensing Act (MMFLA)
Local Government Opt In or Opt Out — Who decides if we want or don’t want Commercial Marihuana businesses?
There’s a lot of confusion about the ability for Michigan communities to allow or deny medical or potentially recreational marijuana businesses within their city. I just saw a recent article on the issue, from the Cadillac News on 9/19/18. In the article, Michigan Municipal League Legislative Associate Jennifer Rigterink is cited as providing following information on both laws:
“The way the current medical marijuana law works is that municipalities can choose to allow the operation of certain facilities, such as provisioning centers and grow operations by passing an ordinance. If they don’t want medical marijuana facilities operating within their borders, they simply do nothing.
If the referendum passes, it would be the opposite situation, with municipalities having to pass ordinances that prevent the operation of marijuana-related businesses.
Rigterink said this matters because under the Michigan Medical Marihuana Act, municipalities can pick and choose what types of facilities, if any, can do business. Under the referendum, all facilities are permissible.”
This interpretation is incorrect on the compulsion of action by a community on the issue of Marijuana. The MMFLA law for Medical Marijuana states in Part 2, Sec. 205 subsection 1, that a Marijuana facility shall not operate in a municipality unless a municipality adopts an ordinance to authorize that type of facility. The municipality can adopt ordinances governing the number of, types of and zoning for Marijuana facilities. Nothing allows or provides for the conversion of MMA Caregivers to Marijuana Facilities and/or requires affirmative or prohibitive action by a municipality. The MRTMA (the ballot proposal) in section 6.1 states that a municipality may completely prohibit or limit the number of Marijuana establishments within it’s boundaries except as provided in section 4. Section 4 doesn’t have any enabling language that addresses the operation of or establishment, transitioning or grandfathering of any type of Marijuana establishment regulated under this act. Section 4.2 holds both the MMA and MMFLA laws harmless from impact from this act, if adopted by the voters, but nothing enables free establishment of Marijuana establishments nor requires action to affirmative or prohibitive action by a municipality.
In concise terms, neither the MMFLA nor MRTMA requires action by a local community nor establishes an automatic adoption in lieu of action due to the existence of the MMA under the MMFLA or both the existence of MMA or MMFLA under the MRTMA. Communities have local control preserved under all three acts. The key relevant sections under both Commercial Marijuana statues are listed below:
Medical Marihuana Facilities Licensing Act
PART 2. APPLICATION OF OTHER LAWS
Sec. 205. (1) A marihuana facility shall not operate in a municipality unless the municipality has adopted an ordinance that authorizes that type of facility. A municipality may adopt an ordinance to authorize 1 or more types of marihuana facilities within its boundaries and to limit the number of each type of marihuana facility. A municipality may adopt other ordinances relating to marihuana facilities within its jurisdiction, including zoning regulations, but shall not impose regulations regarding the purity or pricing of marihuana or interfering or conflicting with statutory regulations for licensing marihuana facilities. A municipality shall provide the following information to the board within 90 days after the municipality receives notification from the applicant that he or she has applied for a license under this act:
(3) A municipal ordinance may establish an annual, nonrefundable fee of not more than $5,000.00 on a licensee to help defray administrative and enforcement costs associated with the operation of a marihuana facility in the municipality.
Michigan Regulation and Taxation of Marihuana Act
Sec. 6. 1. Except as provided in section 4, a municipality may completely prohibit or limit the number of marihuana establishments within its boundaries. Individuals may petition to initiate an ordinance to provide for the number of marihuana establishments allowed within a municipality or to completely prohibit marihuana establishments within a municipality,
2. A municipality may adopt other ordinances that are not unreasonably impracticable and do not conflict with this act or with any rule promulgated pursuant to this act and that:
3. A municipality may adopt an ordinance requiring a marihuana establishment with a physical location within the municipality to obtain a municipal license, but may not impose qualifications for licensure that conflict with this act or rules promulgated by the department.
4. A municipality may charge an annual fee of not more than $5,000 to defray application, administrative, and enforcement costs associated with the operation of the marihuana establishment in the municipality.
Recreation Law changes, terminates or modifies MMFLA or MMA laws
In the same article that I cited, it was stated that “Cadillac City Manager Marcus Peccia recently informed the Cadillac City Council that the recreational marijuana ballot item has the potential to “up-end” any medical marijuana ordinance already on the books”.
The truth, the MRTMA will not replace, override or negatively impact the current MMFLA law or MMA laws. Both Statues have language that define the application to and non-interference of their predecessor companion laws. The MMFLA Part 2, Sec. 204 and MRTMA Sec. 4.1 sub-section 2 provide clear guardrails to separate the laws and their related impacts. Additional guidance, for the administration of two separate Commercial regulated marijuana markets is provided for in the MMFLA Sec. 206 and MRTMA Sec. 8.1. Both further codify the lines of demarcation between the 2 industries. The key relevant sections under both Commercial Marijuana statues are listed below:
Medical Marihuana Facilities Licensing Act
PART 2. APPLICATION OF OTHER LAWS
Sec. 204. This act does not limit the medical purpose defense provided in section 8 of the Michigan medical marihuana act, 2008 IL 1, MCL 333.26428, to any prosecution involving marihuana.
Sec. 206. The department, in consultation with the board, shall promulgate rules and emergency rules as necessary to implement, administer, and enforce this act. The rules shall ensure the safety, security, and integrity of the operation of marihuana facilities, and shall include rules to do the following:
Michigan Regulation and Taxation of Marihuana Act
Sec. 4. 1. This act does not authorize:
2. This act does not limit any privileges, rights, immunities, or defenses of a person as provided in the Michigan medical marihuana act, 2008 IL 1, MCL 333.26421 to 333.26430, the medical marihuana facilities licensing act, 2016 PA 281, MCL 333.27101 to 333.27801, or any other law of this state allowing for or regulating marihuana for medical use.
Sec. 8. 1. The department shall promulgate rules to implement and administer this act pursuant to the administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to MCL 24.328, including:
How will licensing be impacted by the Recreational Ballot Proposal?
In another article I found, regarding the November ballot proposal passage and it’s impact on Northern Michigan and the Upper Peninsula. In the article, a common refrain that I’ve heard in meetings, forums and other events, was stated regarding licensing. One of the cited experts stated that “if recreational marijuana passes, he expects many of the businesses set up to supply and sell medical marijuana will simply shift to recreational marijuana”. This is another misperception that can lead applicants astray. Neither act provides for grandfathering or cross transition of licensing from the Medical to the Recreational nor Recreational to the Medical markets. Businesses that are licensed and approved under the MMFLA act will have to apply separately for licensing under the MRTMA (Sec 9.6). Now upon the opening of the State application period, MMFLA licensed businesses will have a minimum 1 year advantage in the ability to submit applications for Marijuana retailers, Class B and Class C Growers, Processor and Secure Transporter licenses before out of state applicants or Michigan based, non-licensed applicants can apply.
Additionally, both laws provide for the compliance with & the opportunity for local communities to enact their own application approval process. The local community can enact an application as a part of their enabling ordinance under Sec. 205 and Rule 6 under the emergency rules for the MMFLA. The MRTMA addresses the local licensing/application process under section 6.3 of its potential statue. The key relevant sections under both Commercial Marijuana statues are listed below:
Medical Marihuana Facilities Licensing Act
PART 4. LICENSING
Sec. 401. (1) Beginning 360 days after the effective date of this act, a person may apply to the board for state operating licenses in the categories of class A, B, or C grower; processor; provisioning center; secure transporter; and safety compliance facility as provided in this act. The application shall be made under oath on a form provided by the board and shall contain information as prescribed by the board, including, but not limited to, all of the following:
Emergency Rules — Rule 6.Application requirements; complete application.
(1) A complete application for a state operating license must include all the information in Rule 5 and all the following:
(d) An applicant shall submit confirmation of compliance with the municipal ordinance as required in section 205 of the act and these rules. For purposes of these rules, confirmation of compliance must be on an attestation form prepared by the department that contains all of the following information:
Michigan Regulation and Taxation of Marihuana Act
Sec. 9. 1. Each application for a state license must be submitted to the department.
6. The department shall begin accepting applications for marihuana establishments within 12 months after the effective date of this act. Except as otherwise provided in this section, for 24 months after the department begins to receive applications for marihuana establishments, the department may only accept applications for licensure:
· for a class A marihuana grower or for a marihuana microbusiness, from persons who are residents of Michigan;
· for a marihuana retailer, marihuana processor, class B marihuana grower, class C marihuana grower, or a marihuana secure transporter, from persons holding a state operating license pursuant to the medical marihuana facilities licensing act, 2016 PA 281, MCL 333.27101 to 333.27801;
· and for a marihuana safety compliance facility, from any applicant.
One year after the department begins to accept applications pursuant to this section, the department shall begin accepting applications from any applicant if the department determines that additional state licenses are necessary to minimize the illegal market for marihuana in this state, to efficiently meet the demand for marihuana, or to provide for reasonable access to marihuana in rural areas.
Sec. 6. 3. A municipality may adopt an ordinance requiring a marihuana establishment with a physical location within the municipality to obtain a municipal license, but may not impose qualifications for licensure that conflict with this act or rules promulgated by the department.
Will Michigan abandon the MMFLA for the MRTMA based upon Tax Revenue?
Lastly, there’s a significant level of debate on the future of Commercial Medical Marijuana once Commercial Recreational Marijuana is legal and operational. Experts from other States that I’ve talked with believe that Michigan will wind down the Commercial Medical Marijuana market to take advantage of the higher tax revenue from Recreational Marijuana. Some compare the difference in excise tax between Medical Marijuana Provisioning Center transactions (3%) and Marijuana Retailers transactions (10%) and the fact that the 3% Medical excise tax will go away 90 days after the adoption date for the MRTMA. The reality is that both Medical and Recreational Marihuana businesses will generate local, county, State and educational tax revenue on a broader scope than just the excise taxes. That new revenue is greatly needed by local, county and school districts, to help fund infrastructure investment, increasing public safety staffing, paying down debts and obligations. This is needed because as Michigan’s state revenues increased by nearly 30 percent during that decade, the revenues the state provides for local services plummeted by more than 56 percent, the league reports.
The State 6% sales and use tax is applicable to both of the commercial provisioning center and retailer transactions and generates tax revenue for Michigan schools and local revenue sharing. Communities that charge both the municipal income tax on their businesses and individual resident & non-resident employees will also assess these taxes on their Marijuana businesses. All Marijuana businesses that are C Corps and defined as a Corporation federally will have to pay the 6% Corporate Income Tax which generates revenue for local and county revenue sharing & the State’s general fund. All Michigan Marijuana businesses will pay property taxes and since they aren’t principal residents, they will also be assessed the non-homestead levy for local school operating millage for their host community. Lastly, both the MMFLA and MRTMA allow local communities to assess the annual local license registration and renewal fee of $5,000 per licensee.
In effect, having a dually functional Medical and Recreational Marijuana business sectors provides Michigan locals at all levels with mutual tax benefits from each sector, unlike other states. It would be against Michigan’s interest, fiscally, to limit the market to only one viable market. Establishing a regulatory framework that maintains the duality of both and further delineates the two sectors is a logical expectation from both the State Legislature and local governmental agencies. The key relevant sections under both Commercial Marijuana statues are listed below
Medical Marihuana Facilities Licensing Act
PART 6. TAXES AND FEES
Sec. 601. (1) A tax is imposed on each provisioning center at the rate of 3% of the provisioning center’s gross retail receipts. By 30 days after the end of the calendar quarter, a provisioning center shall remit the tax for the preceding calendar quarter to the department of treasury accompanied by a form prescribed by the department of treasury that shows the gross quarterly retail income of the provisioning center and the amount of tax due, and shall submit a copy of the form to the department. If a law authorizing the recreational or nonmedical use of marihuana in this state is enacted, this section does not apply beginning 90 days after the effective date of that law.
Provisioning Center Excise Tax:
25% of the 3% excise tax — Tax receipts to the municipalities in which a marihuana facility is located, allocated in proportion to the number of marihuana facilities within the municipality,
30% of the 3% excise tax — Tax receipts to the county in which a marihuana facility is located, allocated in proportion to the number of marihuana facilities within the county
5% of the 3% excise tax — Tax receipts to the county sheriff — to counties, in which a marihuana facility is located, allocated in proportion to the number of marihuana facilities within the county. Money allocated under this subdivision shall be used exclusively to support the county sheriffs and shall be in addition to and not in replacement of any other funding received by the county sheriffs. ()
30% of the 3% excise tax to state — Beginning October 1, 2017, for deposit in the first responder presumed coverage fund created in section 405 of the worker’s disability compensation act of 1969, 1969 PA 317, MCL 418.405.
5% of the 3% excise tax to the Michigan commission on law enforcement standards (M-COLES) for training local law enforcement officers.
5% of the 3% excise tax to the Michigan Department of State Police.
Michigan Regulation and Taxation of Marihuana Act
Sec. 13. 1. In addition to all other taxes, an excise tax is imposed on each marihuana retailer and on each marihuana microbusiness at the rate of 10% of the sales price for marihuana sold or otherwise transferred to anyone other than a marihuana establishment.
15% to municipalities in which a marihuana retail store or a marihuana microbusiness is located, allocated in proportion to the number of marihuana retail stores and marihuana microbusinesses within the municipality;
15% to counties in which a marihuana retail store or a marihuana microbusiness is located, allocated in proportion to the number of marihuana retail stores and marihuana microbusinesses within the county;
35% to the school aid fund to be used for K-12 education; and
35% to the Michigan transportation fund to be used for the repair and maintenance of roads and bridges.
Other taxable opportunities from Cannabis businesses for Michigan Governmental Agencies
Michigan Corporate Income Tax (CIT) was signed into law by Governor Rick Snyder on May 25, 2011. The CIT imposes a 6% corporate income tax on C corporations and taxpayers taxed as corporations federally.
Municipal Corporate Income Tax (2% tax on net profits of businesses within the municipal taxing authority — City Income Tax Act (Excerpt) Act 284 of 1964 141.614 Excise tax on incomes; taxable net profits of a corporation, definition. Sec. 14 ),
Employee Income Tax (City Income Tax Act (Excerpt) Act 284 of 1964–141.611 Excise tax on incomes; rates. and 141.612 Excise tax on incomes; application to resident individuals. and 141.613 Types of nonresident income to which tax applicable; extent and basis of tax)
Michigan Baseline Property Tax & Net increased property tax revenue from purchased & redeveloped Cannabis properties (minimum 17.46% positive property value impact) and neighboring commercial/industrial properties (Increased Spin-off Property Tax Income Capture of 5.82% (1/3 of net property tax income capture increase on primary building)
Non-Homestead Property Tax — The Revised School Code (Excerpt), Act 451 of 1976
380.1211 Mills levied for school operating purposes; (1) Except as otherwise provided in this section and section 1211c, the board of a school district shall levy not more than 18 mills for school operating purposes or the number of mills levied in 1993 for school operating purposes, whichever is less. A Principal Residence Exemption (PRE) exempts a residence from the tax levied by a local school district for school operating purposes up to 18 mills. Section 211.7cc and 211.7dd of the General Property Tax Act, Public Act 206 of 1893, as amended, addresses PRE claims.
The 6-percent retail sales tax is applied to the retail sale of medical marijuana also, which funds revenue sharing and the School Aid Fund. The revenue from Michigan’s 6-percent sales tax is allocated to the School Aid Fund, local municipalities and revenue sharing (separate from the 3-percent in HB 4209 and 4210)
Distribution of 6-percent tax on gross retail income of provisioning centers — School Aid Fund (72.8%)
Distribution of 6-percent tax on gross retail income of provisioning centers — State General Fund (15.9%)
Distribution of 6-percent tax on gross retail income of provisioning centers — Local Revenue Share (10%)
Distribution of 6-percent tax on gross retail income of provisioning centers — Transportation/Airport/Health Fund (1%)
Local annual regulatory assessment fee
Medical Marihuana Facilities Licensing Act
(3) A municipal ordinance may establish an annual, nonrefundable fee of not more than $5,000.00 on a licensee to help defray administrative and enforcement costs associated with the operation of a marihuana facility in the municipality
Michigan Regulation and Taxation of Marihuana Act
4. A municipality may charge an annual fee of not more than $5,000 to defray application, administrative, and enforcement costs associated with the operation of the marihuana establishment in the municipality.
Local permitting fees for new construction or renovation of existing facilities
So what happens on January 1, 2019?
If and when the MRTMA passes in November, there will be no immediate commercial impact. A person without a Medical Marijuana card will not be able to go to a Provisioning Center to buy Marijuana. Licensed Medical Marijuana Facilities will not start selling recreational marijuana. People or business groups will not be able to start applying for local and state licenses to produce, test, transport or sell recreational Marijuana. On January 1, 2019, the only change that will take effect immediately is the personal ability to grow recreational Marijuana for yourself only. You will not be able to sell, give away or conduct any kind of commercial activity.
The commercial rollout of the MRTMA, will take roughly at least 18 months to potentially 30 months. The state has twelve months to set up rules after the adoption date and start accepting applications. If the adoption date is set at January 1, 2019, administrative rules won’t be established until December 2019.
Sequentially, local communities have to opt in or get petitioned to opt in by either potential applicants who want to apply for State licensing and advocates that want their municipalities to opt in. This will take place over a multiple months process if moved through local legislative review, public hearings and voting process. If movement happens through a ballot initiative, you can only hold elections on the 4th Tuesday in February or 1st Tuesday after the 1st Monday in May, August and November and petitions have to be gathered and submitted for review and verification before the issue is placed on the ballot and zoning would have to be settled after passage because you can’t enact zoning by ballot initiative or referendum. Either option will take time and doesn’t lend towards an immediate adoption process on a local level.
Once local adoption and State administrative rules are established, you will have to complete new State & local administrative process for local application and approval. As stated in the MRTMA statues, current medical cannabis companies cannot be grandfathered in, but will have to apply for licensing approval. Vetting will take time and the State application process will potentially mirror the current 2 Step application process, so it is very fair and reasonable to project that the first State and local license approvals under the MRTMA won’t take place until early fourth quarter of 2020.
Approval doesn’t mean full operations yet. In recreation law, the same testing laws apply and secure transport is required to move between growers, processors, and retailers. So if no testing labs are approved at the time that Growers, Microbusinesses, Retailers and Processors are approved, growers can’t sell; processors and dispensaries won’t get product and Microbusinesses can’t offer their products without testing. And everyone must ship out product through the Secure Transporter to be tested before it can be sold. Prediction: No recreational business may be fully operational with all aspects of the supply chain being approved until early 2021.
One likely move, upon passage of the MRTMA would be for the Legislature to eliminate the MMFLA excise tax sunset provision, which would maintain the 3% tax on transactions at provisioning centers. There may also be an effort to extend the Use Tax model to tax transactions within the licensed industry supply chain, i.e. when a Grower sells product to a Provisioning Center or a Safety Testing Facility is hired to provide services for a Processor.
Michigan’s Medical and Recreational Marijuana industries have the potential to generate great returns for operators and governments and tremendous benefits for patients in addressing various health issues. While being a great opportunity, it’s an evolving market and has a number of key segments that will have to be worked out. Let us at Banks & Company, through our Cannabis Practice Group division, guide you through the regulatory environment and help you avoid the downturns and maximize the opportunities over the next 3 years. Please feel free to call me at 248–996–5553 or 877.95.CANNA (22662), email myself at eric@bankscompany.us or visit our website at www.cannabispracticegroup.com
About Banks & Company and Cannabis Practice Group
Banks & Company provides successful market driven solutions for clients through our Government, Energy, Healthcare, Non-Profit and Cannabis Practice Groups, advising leaders on their most critical issues and opportunities: strategy, marketing, diversity & inclusion, coalition building, reputation management, information technology, community and government relations, public relations, and communications across all industries and geographies. The fastest growing practice has been its Cannabis Practice Group.
Cannabis Practice Group is a full service consulting firm that can serve as your one stop shop for licensing, regulation and compliance, ordinance development, supply chain, taxation & financial strategies, banking solutions & operational services for getting you through the licensing process, keeping you compliance after obtaining your license and addressing regulations to make the regulatory environment more effective and viable for you to make money and grow.
Our team that includes legal, CPA’s and Accountants, Lobbyists, public policy experts, real estate professionals, architects, engineers, marketing experts, human resource, inventory, supply chain and procurement management experts, technology experts and administrative staff to coincide with Cannabis specific staff that are critical to your operation. Please feel free to call me at 248–996–5553 or 877.95.CANNA (22662), email myself at eric@bankscompany.us or visit our website at www.cannabispracticegroup.com