Independence Day for Michigan Cannabis Industry

March 1, 2001 marked the day that the recreational Adult-Use state licensing process became available to everyone, independent of whether a company already has a Medical MJ license. Proposal 1 was approved by voters in 2018, and it was designed to offer a lifeline to all the pioneers of the industry, who were already mired in the legislature’s Medical Marijuana licensing scheme, by restricting most Adult Use licensing to companies that already had a medical marijuana facility license in place.

This head start ended March 1, and now anyone can apply for a state facility license for their location, so long as they are not locked out by local ordinances and zoning.

There are still significant issues that MJ businesses face, like the IRS 208E drug trafficking rule which disallows normal tax deductions for MJ businesses, and the pesky fact that MJ is still illegal under the federal CSA. Under the CSA, cannabis is classified as a Schedule I substance, determined to have a high potential for abuse and no accepted medical use.

Those issues are subject to political pressure to reform the federal system to respect the rights of the many states that have legalized (or at least decriminalized) Cannabis. Further, like other states before us, Michigan companies are suffering from instability in supply and price of wholesale marijuana. These uncertainties will have wise actors beware of making a commitment to a disruptive industry that is seen as a trap for the unwary, but the new independent Adult Use market is another step in the right direction.

Now that March 1st has come and gone, the only other legal obstacles that stand in the way of thousands of companies that want to join in this industry are local licensing and zoning. Proposal 1 (MRTMA) provided for local control of the MJ business by allowing Michigan municipalities to prohibit or regulate MJ businesses.

Michigan has 276 cities, 257 villages, and 1,240 townships, and in 2019 some reefer-madness political operatives successfully co-opted the Michigan Township Association into a tool to keep cannabis prohibition in place, town by town, by creating sample opt-put ordinances that towns could simply enact to prevent MJ businesses from coming to town.

The understandable doubts and concerns that municipal leaders were bound to have, after almost 100 years of anti-cannabis propaganda, were exploited by these operatives who were spreading false alarms that towns had to opt-out immediately or would forever lose the power to do so. Most municipalities temporarily opted-out of MJ business licensing, waiting to see how the system played out before they entered the field, and the road back from this new prohibition has proved slow for many.

A main roadblock has been the perception that Marijuana revenue sharing would not provide any tangible benefits to local governments. Municipalities can charge $5,000 for each license each year, but until this week the promise of a 15% share of all excise taxes to each municipality and each county that have retail MJ sales establishments remained speculative.

However, the state released on March 4, 2021 a list of details of the tax revenue sharing that just took place, showing that every county and every city with licensed retailers received $28,000 from the state for each store in their jurisdiction.

For instance, Chesaning allowed 2 stores and just got $56,000, which also earned Saginaw county government a matching sum of $56,000. Bay county has 15 establishments that pay the excise tax, and so just received $420,000, with each city in Bay County that has retail stores also receiving $28,000 for each shop. Genesee county received $280,000.

All combined, Michigan cities received revenue sharing for 2020 as follows:

38 Cities with 115 total stores received           3,220,151.80
7 Villages with 11 total stores received             $308,014.52
21 Townships with 52 total stores received  $1,456,068.64
38 Counties with 178 total stores received   $4,984,234.96
Total $ to Local Governments             =          $9,968,469.92

Now that the money is flowing to local governments, the great many municipalities that have been doubting the financial benefits that Cannabis stores bring to their communities are seeing these revenues come in next door and now having to defend to their own voters why their own community cannot share in the spoils of the 10% excise tax on all recreational marijuana sales.

Other municipalities have seen their property values rise faster than market prices too - the Village of Chesaning saw about $20,000 price increase per home, without similar increased in nearby communities, due to the job opportunities that MJ businesses brought to town. Municipalities that have been watching and waiting will see the new revenue sharing report as a sign that the cannabis business has crossed the financial threshold that makes them revenue enhancers for their towns.

The cost of applying for recreational licenses has also been slashed for many businesses. The state has imposed a so-called “social equity” discount program to promote and encourage participation in the marijuana industry by people from communities that have been disproportionately impacted by marijuana prohibition and enforcement and to positively impact those communities. In practice this program has developed to provide substantial discounts to companies with owners who live in certain places, practices as “caregiver growers” for at least 2 years, and to people with past Marijuana convictions.

Residency in a disproportionately impacted community for at least 5 cumulative years within the past 10 years gets you a 25% fee reduction. A prior marijuana misdemeanor gets you 25% fee reduction, and a prior MJ felony gets you 40% off. Acting as a registered caregiver grower for at least 2 years between 2008 and 2017 gets you another 10% discount.  These discounts don’t just apply to your step 1 pre-qualification fees of $6,000 – they apply to the first 2 years of annual state licensing fees, which are $25,000 for retailers and $40,000 for Class C growers and processors. Altogether an applicant who qualified for all the discounts could save 75% on state application and regulatory fees, without costing their municipality any revenue sharing.

Persons who wish to jump into the cannabis market will first need to apply for a step 1 prequalification license approval, which is based on a person’s background. Litigation, Criminal records, regulatory history, and tax compliance are the keys to the step 1 process, and these approvals usually take about 2-3 months to be completed. The main business and each stakeholder in the business submit applications during this process, which costs $6,000. You do not need to know where you will put your business to achieve prequalification status, which is good for two years.

Next, a business must find a municipality that will not prohibit your business, and that is complicated and requires site planning and construction drawings. First one needs to get a commitment to sell or lease a property for the MJ business, usually a lease or purchase agreement that is contingent upon local license approval. Then an application for local license is submitted and tentatively approved subject to zoning commission approval and site planning.  There is really no escaping the use of engineers/architects during this phase, and the state now offers a paid service through the Michigan BFS (Bureau of Fire Safety) service so that a business can make sure their building plans comply with state law before a state Facility License Application is to be submitted.

This is especially important because BFS does not accept plans for preapproval until after the business submits its Step 2 Facility License Application, at which point the application is on a fast track of 90 days for approval or denial. In practice, applicants are encouraged not to submit a step 2 application until they are sure that the facility will pass final BFS inspection withing 60 days of the submission. Therefore, companies that use contractors who have either successfully built facilities that have already been approved, or who are willing to use the paid BFS consulting service, will have a distinct advantage in this final license stage.

Review Magazine has stayed at the forefront of the cannabis issue for many years and encourages interested persons to learn more about the licensing process. In order to serve this community better, the Review will host a free zoom seminar on this topic in the coming months if enough interest is registered within the community.

Please write to us at   https://www.review-mag.com/contact to let us know if you would be interested in learning more.