Michigan’s adult-use initiative: What you need to know

Medical licensees will gain an early foothold in rec market

Charles Murphy.

Will Michigan voters legalize adult recreational use of cannabis when residents head to the polling booth on Nov. 6, 2018? A February poll conducted by EPIC-MRA showed 61% of likely voters approve of adult-use legalization, with 35% opposed and 4% undecided.

The Michigan Regulation and Taxation of Marihuana Act, an initiative petition submitted for the November ballot by the Coalition to Regulate Marijuana Like Alcohol, would legalize the possession, use, cultivation and sale of marijuana and industrial hemp for people 21 and older.

Coalition spokesman Josh Hovey says the proposal is based on the best practices from other states and will establish a new industry in Michigan. The organization’s internal polling shows strong support in every area of Michigan, consistent with the earlier EPIC-MRA polling.  The main opposition group is Healthy and Productive Michigan, funded by the Washington, D.C.-based Smart Approaches to Marijuana.

Michigan voters legalized medical marijuana in 2008; the market was commercialized by the 2016 Medical Marihuana Facilities Licensing Act (MMFLA) and has been expanding rapidly. The MMFLA allows provisioning centers, processors and large-scale growers, and the state has approximately 270,000 registered medical marijuana patients.

With a population of slightly fewer than 10 million people, Michigan has about twice as many residents as Colorado. Adult-use legalization in Michigan will expand the potential market from 270,000 to about 6.9 million adults. Cannabis sales in Colorado in 2017 reached $1.3 billion, in a market 50% smaller than Michigan.

If you are interested in the Michigan market, there are opportunities and challenges in the proposal that you need to plan for. First, the Department of Licensing and Regulatory Affairs (LARA) may not limit the number of any type of state licenses. That is left to the discretion of municipalities that opt in. Municipalities may completely prohibit or limit the number of cannabis establishments. You should monitor or lobby municipalities regarding their plans for adult-use cannabis. The right to initiative for local authorization of adult-use cannabis is granted by the ballot measure. Be wary about investing in municipalities saturated with licenses since your rate of return may be affected by excessive competition.

Six types of licenses are allowed: retailer, safety compliance, secure transporter, processor, microbusiness (where you can grow up to 150 plants, process the plant and sell the marijuana at that location) and growers. There are three types of grower licenses: Class A (100 plants), Class B (500 plants) and Class C (2,000 plants). LARA may authorize additional types of licenses, including licenses that allow for sale and consumption in designated areas accessible only by people over 21 years of age (marijuana cafes), or for special events for a limited time, like concerts and festivals.

Second, the ballot measure has a specific preference for 24 months for existing licensees under the MMFLA.

For two years after the effective date of the initiative, LARA may only accept applications for either a Class A cultivation license or microbusiness from Michigan residents; or for a retailer, processor, Class B and C grower, and secure transporter application only from people holding an MMFLA license. LARA is presently accepting applications for five types of licenses under the MMFLA. If you plan to set up recreational marijuana establishments in Michigan, you should apply now for an MMFLA license, or you will be precluded from the adult-use market initially.

The proposal includes a right to vertical integration at one location. If a municipality opts in, it may not prohibit a grower, processor and retailer from operating within a single facility, or from sharing a location with a marijuana facility operating pursuant to the MMFLA. Municipalities may not prohibit growing cannabis outdoors or in greenhouses, and if they limit the number of marijuana establishments, they must decide among competing applications by a competitive process. If LARA drags its feet in implementing the application process, you can submit your application to a municipality which has opted in, and if the municipal license is granted, it has the same force and effect as a state license.

Curiously, the ballot measure makes no mention of stacking Class C licenses, which would allow up to 2,000 plants. Emergency Rule 22 under the MMFLA allows for the stacking of Class C grow licenses, which, under the MMFLA, are 1,500 plants. Under the MMFLA, large-scale growers can stack 10, 20, 30, 40 or more Class C licenses for one location. LARA has rule-making authority and will likely allow stacking, as it did under the MMFLA.

But the proposal contains a vague provision stating that no person who holds an ownership interest in a marijuana establishment can hold an ownership interest in more than five marijuana growers, or in more than one marijuana microbusiness prior to Jan. 1, 2023. Even after that date, LARA must promulgate a rule authorizing such ownership interests.

Does this mean that an applicant cannot have an ownership interest in more than five Class C marijuana grower licenses that would allow up to 10,000 plants? If that interpretation is correct, it would limit industrial-size grow operations until LARA promulgates a rule allowing expansion of this ownership limitation after Jan. 1, 2023. Or does this mean that a person cannot hold an ownership interest in more than five marijuana growers, but that each of those growers is allowed to stack its Class C licenses? This part of the initiative may lead to controversy and litigation.

The measure liberalizes the eligibility requirements for applicants compared to the MMFLA. Applicants with shareholders or members who have a prior conviction solely for a marijuana-related offense, unless the offense involved distribution of a controlled substance to a minor, are eligible. This a change from the MMFLA, which deems ineligible any applicant with a marijuana-related misdemeanor within the past five years or a marijuana-related felony within the past 10 years.

Unlike Internal Revenue Code 280E, which limits deductions for normal business expenses to costs of goods sold, the Regulation and Taxation of Marihuana Act allows a marijuana establishment to deduct from its state taxes all ordinary and necessary business expenses paid or incurred during the taxable year, like Oregon. In addition to the state sales tax of 6%, an excise tax is imposed on each marijuana retailer and microbusiness at the rate of 10% of the sale price for cannabis sold or transferred to anyone other than a marijuana establishment. Products subject to this excise tax may not be bundled in a single transaction with a product or service that is not subject to the tax.

Nov. 6, 2018 is fast approaching and opportunities for this significant new marijuana market await.

Charles Murphy of Clark Hill PLC has a substantial cannabis practice advocating for industry clients on legal and regulatory policy; counseling on licensing applications and litigating scoring; real estate transactions; zoning litigation; drafting ordinance proposals (Detroit opt-in initiative ballot proposal); election law (compelling Detroit to place opt-in ordinance on ballot); entity structuring and offerings; and licensing agreements. The views expressed are those of Charles Murphy and not necessarily of Clark Hill PLC.

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