Cannabis Law | Fraser Blog

Michigan House Committee Advances Bill to Regulate delta-8 THC

On May 18, 2021, the Michigan House Regulatory Reform Committee unanimously approved a package of bills, including House Bill 4517, requiring hemp-derived delta-8 tetrahydrocannabinol (“THC”) to be regulated by the Michigan Marijuana Regulatory Agency (“MMRA”).

Delta-8 THC is a cannabis compound that has gained in popularity because of its similarity to delta-9 THC prevalent in marijuana plants. Delta-8 is produced by extracting CBD from industrial hemp and then using acetic acid to turn it into THC.

Producers of delta-8 THC argue that the product is legal under the federal 2018 Farm Bill, which legalized hemp extracts and other hemp products. However, the U.S. Drug Enforcement Administration (“DEA”) issued an interim final rule in 2020 declaring: “All synthetically derived (THC) remain Schedule I controlled substances.” The Hemp Industries Association and a South Carolina CBD manufacturer initiated a lawsuit against the DEA challenging the rule.

Currently, delta-8 THC is unregulated in Michigan. The new bills, which have been sent to the full House of Representatives for consideration, would bring the delta-8 THC within the MMRA’s regulatory framework.

The move to regulate delta-8 THC has the support of the Michigan Cannabis Manufacturer’s Association (“MCMA”). In a statement, MCMA executive director Stephen Linder said: “Any product considered medicine should adhere to the same health and safety standards as medicines dispensed in pharmacies. Currently these products are available to anyone and can be found in gas stations, party stores and smoke and vape shops.”

Michigan is not the only state to take action to crack down on access to delta-8 THC. According to Hemp Industry Daily at least 12 states have imposed bans on the product.

We will continue to keep you updated about developments with respect to the delta-8 THC legislation. In the interim, if you have questions, please contact Fraser Trebilcock shareholder Paul Mallon.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Michigan Marijuana Regulatory Agency Expands Eligibility for Adult-Use Licenses

Effective March 1, 2021, applicants for multiple classes of adult-use marijuana (i.e., recreational marijuana) licenses are no longer required to hold an active medical marijuana permit to be eligible.

The Michigan Marijuana Regulatory Agency announced that the eligibility requirement has been removed for five license types:

Marijuana retailer
Marijuana processor
Class B marijuana grower
Class C marijuana grower
Marijuana secure transporter

In short, as of March 1, 2021, more opportunities to become eligible for licenses became available to more competitors in Michigan fast-growing adult-use marijuana industry.

A Brief Summary of the Two-Step Application Process

The application process involves two steps. Step one is prequalification. The main applicant and any supplemental applicants must submit prequalification applications. Thereafter, background checks are conducted on the main applicant and all supplemental applicants.

The “main applicant” is the entity (e.g., limited liability company, corporation, partnership) or individual (sole proprietor) seeking to hold the marijuana establishment license. A $6,000 nonrefundable application fee is due during step one.

Once prequalification is obtained, a main applicant can move to step two and submit applications for all adult-use marijuana establishment state licenses it seeks to hold. At this time, the MRA will vet the proposed marijuana establishment.

The MRA’s vetting process includes business specifications, proof of financial responsibility, municipality information, and general employee information. Among other requirements, the establishment to be used for marijuana operations must pass an inspection by the MRA within 60 days of submission of a complete application.

In addition to comply with the MRA’s process, applicants will need to concurrently ensure compliance with any and all local regulations and permitting requirements relating to the operation of businesses within the unit of local government in which they seek to operate.

If you have any questions about the application processes—at the state and/or local level in Michigan—for either medical or adult-use marijuana, please contact Paul Mallon, Jr.

Paul C. Mallon, Jr. is Shareholder and Chair of Fraser Trebilcock’s cannabis law practice. You can reach him at pmallon@fraserlawfirm.com or (313) 965-9043.

Michigan Municipal Adult-Use Marijuana Licensing Processes Give Rise to Lawsuits

In December, 2019, Michigan authorized the sale of adult-use marijuana (i.e., recreational marijuana). Michigan municipalities are thus automatically deemed to permit adult-use businesses without restriction unless they pass ordinances restricting or prohibiting them within their jurisdictions.

The legalization of adult-use marijuana has resulted in the establishment of procedures for businesses to become licensed to sell in accordance with local regulations and restrictions on the number and types of businesses that qualify. These procedures and restrictions apply in addition to the Michigan Marihuana Facilities Licensing Act (MMFLA) and Michigan Regulation and Taxation of Marihuana Act (MRTMA).

Under MRTMA, a municipality is authorized to limit the number of marijuana establishment licenses. If a municipality does impose limitations, and the limit prevents the state from issuing a state license to all applicants, then “the municipality shall decide among competing applications by a competitive process intended to select applicants who are best suited to operate in compliance with [MRTMA] within the municipality.” MRTMA permits restrictions that go beyond limiting the number of licenses allowed within an area as long as such restrictions are not “unreasonably impracticable.” To avoid being unreasonably impracticable restrictions must not “subject licensees to unreasonable risk or require such a high investment of money, time, or any other resource or asset that a reasonably prudent businessperson would not operate the marihuana establishment.”

The process of establishing criteria for businesses seeking marijuana licenses, and reviewing business applications for licenses, is complex. There is a lot of money at stake. And unsurprisingly, in many municipalities across Michigan, the licensing process has led to significant and costly litigation.

In November, 2020, the City of Detroit announced its rules for allowing licensed adult-use marijuana sales, which included controversial provisions meant to give “social equity applicants” a competitive opportunity. Applicants are entitled to preferential treatment if they have lived in Detroit for:

15 of the last 30 years
13 of the last 30 years and are low-income
10 of the last 30 years and have a past marijuana-related criminal conviction, or
Have parents who have a prior controlled substance record and still live in the city

These rules gave rise to a lawsuit filed on March 2, 2021, in Wayne County Circuit Court, by a plaintiff who has been a Detroit resident for 11 of the past 30 years who intends to apply for an adult-use retail establishment license.

The lawsuit alleges that the “licensing scheme favors certain Detroit residents over other Michiganders based on the duration of their residency.” The plaintiff argues that the ordinance violates the U.S. Constitution’s commerce clause because it “discriminates against out-of-state residents and punishes people for moving between states.”

Detroit is not the first (and almost certainly won’t be the last) municipality to have its licensing process challenged.

In November, 2020, Traverse City was ordered by a judge to refuse to accept applications for adult-use marijuana retail and microbusiness establishments in light of pending lawsuits. One of the primary issues being litigated in the Traverse City lawsuits is whether existing medical marijuana retailers have the automatic right to sell recreational marijuana as well.

In December, 2020, the Oakland County Circuit Court issued a preliminary injunction in a case brought against the City of Berkley, enjoining Berkley from issuing licenses to marijuana establishments pursuant to the MMFLA or MRTMA. The court enjoined Berkley based on the likelihood that its process for scoring and awarding licenses violates the requirements of MRTMA.

The process of establishing rules and reviewing license applications for adult-use marijuana will remain a contentious one. Given that adult-use sales in Michigan totaled nearly $440 million in the first full year of the program, there is a lot to be won (or lost) in the process.

For assistance in the application process, or any other issues related to operating a marijuana business in Michigan, please contact your Fraser Trebilcock attorney.

Up in Smoke – Section 280E’s Buzz not Harsh by Excessive Fines Clause: Northern California Small Business Assistants, Inc. v Commissioner

A tax provision that blocks marijuana companies from claiming federal business tax deductions is constitutional ruled the U.S. Tax Court on October 23^rd. Northerner California Small Business Assistants, Inc. v Commissioner, 153 TC No. 4 (No. 26889-16, October 23, 2019).

Northern California Small Business Assistants, Inc., a California medical marijuana business, claimed $1.5 million in ordinary and necessary business expenses for its 2012 tax year. The IRS disallowed the company’s tax deductions under Section 280E of the Internal Revenue Code. That provision blocks companies that are involved in drug trafficking from claiming business deductions and credit that are available to businesses not engaged in trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).

Cannabis companies that are organized and operated legally under state law, face what amounts to a federal income tax on their gross receipts – with effective tax rates as high as 70% because for federal purposes, those companies are considered to be trafficking in the illegal drug trade. Some types of marijuana businesses are able to reduce the amount of their income subject to tax based on their inventory costs.

The Company claimed that Section 280E violated the prohibition on excessive fines contained in the Eighth Amendment. The Excessive Fines Clause guards against abuses of the government’s ability to punish civil or criminal infractions. Specifically the company argued that:

The Eighth Amendment applied to corporations,
That Section 280E operates as a penalty through the tax laws on the company’s gross receipts, and
That this “penalty” is excessive.

The Tax Court held, however, that Section 280E does not violate the Constitution because it is not a penalty provision. “Despite efforts by several States to legalize marijuana use to varying degrees, it remains a Schedule 1 controlled substance within the meaning of the Controlled Substance Act,” wrote Judge Joseph Goeke. “Unlike in other context where the Supreme Court has found a financial burden to be a penalty, disallowing a deduction from gross income is not a punishment,” said the Court. The court noted its holding was consistent with the only Circuit Court of Appeals decision on this point.

The company also argued that, assuming Section 280E is constitutional, that it should be applied more narrowly than as interpreted by the IRS. According to the taxpayer, while Section 280E may be appropriately applied to limit ordinary and necessary business expenses, other provisions, such as depreciation deductions, and the deductions for state and local taxes should be excluded from Section 280E’s reach. The Tax Court declined this invitation, stating, “Congress could not have been clearer in drafting this section [280E] of the Code.”

Perhaps most interesting, is that there were two dissenting opinions. Judge Gustason, dissenting in part, wrote that he believed Section 280E unconstitutionally exceeded Congress’ power to impose an income tax under the Sixteenth Amendment. “I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than the taxpayer’s ‘income’.”

Judge Copeland, agreeing with Judge Gustafson’s dissent, also wrote a partial dissent of her own, insisting that Section 280E is a penalty and urging further analysis of whether it violates the Eighth Amendment.

Read full opinion here.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Medical Marijuana: State of Michigan Outlines New Procedures and Requirements for Medical Marijuana Facility Licensing

In less than a week, the state of Michigan will start accepting medical marijuana license applications. The Department of Licensing and Regulatory Affairs (LARA) released emergency rules on Monday, December 4, 2017, outlining procedures and requirements for potential licensees. The emergency rules are effective for at least the next six months, and could be extended for another six months as LARA continues the promulgation process for permanent rules.

Many of the items addressed in the rules have already been discussed by the Bureau of Medical Marihuana Regulation (BMMR) during licensing board meetings occurring earlier this year. Nevertheless, and by way of background, last year the state enacted its Medical Marijuana Facilities Licensing Act (MMFLA) to regulate dispensaries and clarify the legality of edible products in Michigan. The law allows licensed dispensaries to operate in communities that choose to allow them. Growers, processers, testing facilities, and transporters are also subject licensure and regulation under the act.

While the MMFLA took effect last year – December 20, 2016 — it included a built-in delay in implementation of 360 days to enable the state to establish the licensing system required by the Act. A person cannot apply to the state for a license of any kind under the MMFLA until Friday, December 15, 2017. And, no one can apply to the state for a license of any kind under the MMFLA unless the municipality where the person is located adopts an ordinance authorizing that type of facility.

Applying for a Medical Marijuana Facilities License

First and foremost under the newly released emergency rules, those seeking a license under the MMFLA will be able to submit applications on December 15, 2017. Applicants will have to pay a $6,000 fee per license application and undergo extensive background checks for anyone who has ownership interest. The background checks will include submitting fingerprints and a handwriting exemplar to the state.

The rules require licensee to meet certain capitalization requirements. The requirements range from $150,000 to $500,000. A retail operation — called a provisioning center – carries a $300,000 capitalization requirement, which must be proven through attested financial statements.

Only 25 percent of the capital required needs to be in liquid assets, cash or cash equivalents – easily converted to cash. Up to 15 ounces of usable marijuana or 72 marijuana plants may be used toward the capitalization requirements.

LARA has broad authority to deny a license. A licensee can be denied if an applicant fails to comply with the rules or if the applicant is operating a facility after December 15 without a license. That said, facilities that are operating in a municipality that has licensed them can operate after December 15, may be permitted to continue operations, but must submit documentation showing the local municipality allowed them to operate. The rules provide no mechanism to appeal an adverse licensing decision, or to contest the imposition of fines and penalties.

Currently operating facilities with municipal licensure must apply for a state license no later than February 15, 2018. If those facilities do not have a state license by June 15, 2018, their operation will be considered unlicensed activity and could be referred to law enforcement. Although the rules do not address the situation were licensure is not met by June 15 due to government delay.

Details on Licensing

Licenses will be up for renewal annually. Applicants and licensees will be required to report a variety of information to LARA, including changes of location, contact information, members, managers and adverse reactions to a medical marijuana product. Theft or other criminal activity on the premises will have to be reported to the department within 24 hours of occurrence.

LARA has sweeping authority to inspect, examine and audit records of the licensee and enter the facility without notice to inspect. The department is allowed to charge civil fines of up to $5,000 for an individual and $10,000 or an amount equal to daily gross receipts against a licensee for violations. Given the number and various requirements regarding inventory control and the specifications for the physical facility itself, the risk of fines and penalties is no insubstantial.

During the first 30 days a state-operating license is issued to a licensee, marijuana products will need be entered into a statewide monitoring system and inventory will need to be tagged and packaged.

Class C grower licenses, which would allow 1,500 plants, for example, may be stacked under the rules. And licensed growers, processors and provisioning centers will be permitted to operate at the same location.

Security Requirements for Marijuana Facilities

Applicants will be required to submit security plans. Facilities will be required to maintain an alarm system and a 24-hour video surveillance system. Licensed-facilities will also have to maintain visitor logs.

Advertising Stipulations for Marijuana Facilities

Licensees will not be permitted to advertise any marijuana products in a way that is visible to the general public. However, that does not apply to advertisements that are not about a specific product.

Products also will be prohibited from being marketed toward minors, and edible products cannot be associated with cartoons or other things that would appeal to minors. Edible products also cannot be easily confused with commercially sold candy.

Federal Regulation of Marijuana Facilities

Of course, while specified medical use of marijuana is permitted under state law, its use is still illegal under federal law, and we don’t know for sure what the federal government will do in the future with regard to these specified uses. The status quo is that federal attention is diverted away from uses that are “authorized” by and operated in compliance with state laws. Attorney General Jeff Sessions, however, has made his view clear: “Good people don’t smoke marijuana.” On the other hand, the industry seems to be growing at a pace that exceeds the federal government’s ability (time and resources) to do much about it.

Fraser Trebilcock understands the regulatory aspects of the marijuana industry along with the legal risks. Our attorneys are available to advise you on issues related to state law and compliance.

Fraser Trebilcock attorney Michael P. Donnelly has years of experience handling matters ranging from major insurance fraud to intellectual property disputes. He formerly served three years as the President of Fraser Trebilcock and is currently the Managing Partner of the Detroit office. He can be contacted at 313.965.4968 or mdonnelly@fraserlawfirm.com.

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