On February 10, Michigan Gov. Gretchen Whitmer released her “Mi Road Ahead” Plan to “fix the damn roads”—echoing her 2018 campaign slogan. To the consternation and fear of the cannabis community, the Mi Road Ahead Plan proposes creating a new 32% wholesale tax on cannabis products.
The Mi Road Ahead Plan characterizes this proposed $470 million tax as closing a “loophole” exempting marijuana products from a wholesale tax, suggesting that the marijuana industry has been exploiting some gap in the state’s existing tax policy. This is plainly not the case. When Michigan voters legalized adult-use marijuana in 2018 by passing the initiative for the Michigan Regulation and Taxation of Marihuana Act (“MRTMA”), they did not vote to assess a wholesale tax on adult-use marijuana. Instead, they levied a 10% excise tax at the point of retail sale (in addition to Michigan’s 6% sales tax).
The Mi Road Ahead Plan implies that a tax on wholesale transactions is a part of Michigan’s tax regime. It absolutely is not—Michigan’s Treasury Department makes it very clear that typical transactions taxes in Michigan do NOT apply to sales at wholesale. What the Mi Road Ahead Plan references is Michigan’s Tobacco Products Tax Act (“TPTA”), which was enacted in 1993—25 years before marijuana was ever legalized. The TPTA does not contain a “loophole” for marijuana products; it addresses an entirely different product and industry. Quite simply, the Mi Roads Plan proposes levying a new 32% wholesale tax on the marijuana industry.
We are still awaiting details of howthe proposed tax would be enacted. Although an amendment to MRTMA requires a three-fourths supermajority in each chamber of the Michigan Legislature, an amendment to the TPTA only requires a simple majority. Given that MRTMA leaves room for other taxes (e.g., sales and income taxes on marijuana businesses), proponents of this new tax will likely argue that no change to MRTMA is needed, never mind the voters’ real intent.
The implications of a new marijuana wholesale tax obviously depend upon the specifics of how it would be implemented, which are yet to be revealed (or perhaps even developed). But, assuming that the proposed new tax would mirror the wholesale tobacco tax, some issues immediately come to the fore.
First, the assessment of an across-the-board wholesale tax on marijuana products will almost certainly be borne entirely by retail consumers. The Governor’s release highlights exponential growth and record-breaking sales in the cannabis industry as justification for the wholesale tax. However, the economic reality of the Michigan industry is that most operators are in tremendous financial distress, and profitability is extremely challenging. To put it mildly, we are not anecdotally aware of any grower or processor that sees close to a 32% net margin and could internally absorb a wholesale tax without raising prices. Even though the proposed tax would presumably be remitted by wholesalers, the cost will be passed from wholesalers to retailers, who will pass on the increased costs to the end customer. Not surprisingly, an already teetering cannabis industry has reacted with vociferous opposition.
Second, the assessment of a wholesale tax would most likely radically restructure industry business practices. The TPTA requires wholesalers to remit the tax to Treasury on a monthly basis, and the tax is generally precollected. Treasury also has the regulatory authority to require payment before sale. Accordingly, a wholesale tax regime could effectively force wholesalers to require cash on delivery terms for all sales to retailers. On the surface, this might seem beneficial to industry participants beset by widespread nonpayment or delayed payment of wholesale invoices. But with retail margins already extraordinarily thin or nonexistent, making such a change may be impossible for some retailers.
Third, expansion of the TPTA would force the industry to adapt to an entirely new regulatory and enforcement scheme, at the same time that the industry is dealing with a comprehensive rewrite of the rules of the Cannabis Regulatory Agency. Penalties under the TPTA are severe, providing for the seizure of allegedly contraband products and the imposition of severe fines. Extension of the TPTA, though, would give the State a greater financial incentive to crack down on the illicit market and bad actors in the legal market, and because the TPTA makes selling untaxed product a five-year felony offense, a new threat against illicit actors. However, we are regularly hearing complaints from clients that today’s enforcement focuses on minor technical issues, while allegations of importing tons of unregulated marijuana and producing vape carts with Vitamin E Acetate appear to have gone unstopped for years. Given the complexity and nuance of the TPTA, it would be reasonable to question whether enforcement would appropriately focus on those whose actions undermine the market or simply target those trying to be compliant but making mistakes.
The specter of a wholesale tax on the marijuana industry raises a number of other challenging questions that will need to be answered, such as:
- How would the tax be levied and assessed on vertically integrated businesses?
- Would marijuana retailers be exempt from the wholesale tax when making their own pre-rolls?
- The TPTA prohibits transfers between retailers, but MRTMA explicitly permits transfers between retailers. How would this conflict be addressed?
- The TPTA imposes different standards for licensure and ownership than MRTMA, such as by requiring officers and directors of companies to be U.S. Citizens or eligible to work in the United States. Given the intersection of federal prohibition and immigration law, application of this requirement from the TPTA to the marijuana industry could effectively prohibit Canadians or other foreign citizens from serving in executive roles—and could potentially prohibit ownership of marijuana businesses by Canadian publicly traded companies.
- If the State is intent on levying a wholesale tax, should the Legislature amend the TPTA to cover marijuana? Or is a new standalone statute preferable?
- What role, if any, will the Michigan Cannabis Regulatory Agency play in this process? Or will the wholesale tax be solely within the purview of the Michigan Department of Treasury?
- And, finally, what impact will just the proposal of this new tax have on the already faded willingness of cannabis industry investors to deploy capital to Michigan?
The Dykema Cannabis Industry Group will continue to monitor and provide updates as we learn more about the Mi Road Ahead Plan. If you have any questions, please contact Lance Boldrey, John Fraser, or your Dykema relationship attorney.
R. Lance Boldrey’s practice focuses on tribal and commercial gaming, and on Indian law (with an emphasis on economic development and state-tribal relations). He represents tribes, developers, banks and other non-tribal businesses, as well as state and local governments, and is a frequent…
Fraser provides cannabis businesses with the regulatory guidance and counsel they need to secure and maintain licensure. He has organized, guided, and secured state and local licensure for dozens of cannabis businesses of all sizes and types throughout Michigan.
This article was used with permission of R. Lance Boldrey.