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Five Things to Know About Adult-Use Marihuana Establishments in 2022

Almost four years have passed since Michigan voters approved the Michigan Regulation and Taxation of Marihuana Act (“MRTMA”), which became effective December 6, 2018. The MRTMA authorized adult-use marihuana within Michigan, including licensure to operate adult-use marihuana establishments. Since the enactment of the MRTMA, the legal landscape continues to change as municipalities work to implement the MRTMA and market regulation matures. Already this year, several significant changes have occurred within the adult-use marihuana industry that many municipalities should know about. Not only did the Marihuana Regulatory Agency (“MRA”) change names, but municipalities continue to learn the pitfalls of “competitive” licensing of adult-use establishments. Initiated petitions are also still being sought by the marihuana industry and citizens’ groups, while the Department of Treasury again releases substantial sums to those municipalities with licensed and operating marihuana retailers and micro-businesses. This E-Letter highlights five changes that townships should know about adult-use marihuana in 2022.

The Marihuana Regulatory Agency Changes Name Again

The Marihuana Regulatory Agency (“MRA”) was preceded by the Medical Marihuana Licensing Board (“MMLB”). With the election of Governor Gretchen Whitmer, the MMLB was abolished through executive order. See Executive Order 2019-07. The MRA assumed the responsibilities of the MMLB, including the state licensing of commercial medical marihuana facilities and recreational use marihuana establishments.

In addition to the MRA’s authority to regulate the marihuana industry, industrial hemp was also expanded as a lawful activity under the Michigan Regulation and Taxation of Marihuana Act (“MRTMA”). Few items were fleshed out within the MRTMA regarding industrial hemp, except the Act made clear it would be legal under state and local law. Initial pilot programs through the Michigan Department of Agriculture and Rural Development (“MDARD”) focused on permitted cultivation, subsequent testing, and processing. Since then, interests appear to have peaked regarding industrial hemp’s ability to be processed for other materials and oils that are not reliant on high THC concentrations. Industrial hemp, by definition, has one major identifying component—that is that it contains 0.3% or less of THC. See MCL 333.27953.

With industrial hemp processing and handling increasing, Governor Whitmer signed another Executive Order renaming the MRA as the Cannabis Regulatory Agency (“CRA”). With that change, the Governor also transferred to the CRA the powers and duties related to licensing and regulating processor-handlers under the Industrial Hemp Act, while transferring to MDARD the powers and responsibilities related to the cultivation of industrial hemp. This change will likely see a continued move towards consistent regulation by the CRA of cannabis processing and handling—whether coming from medical, adult-use, or industrial hemp licensees. It also signals that industrial hemp processing, as well as medical and adult-use marihuana processing, are distinguishable from traditional agricultural farming. Further supporting such distinction, MDARD, which administers various agriculture laws within the State, will oversee the growing of industrial hemp.

Treasury Distributes Marijuana Payments Exceeding $42.2 Million

The MRTMA authorizes a 10% excise tax on sales of marihuana at retailer establishments and microbusinesses. MCL 333.27963(1). This tax remains effective and is distributed differently than the prior MMFLA tax. Only 15% of the recreational marihuana tax revenue will be distributed to municipalities and then only to those in which “a [recreational] marihuana retail store or a marihuana microbusiness is located.” MCL 333.27964(3)(a) (emphasis added). The MRTMA did not provide for any specific formula as to how excise tax revenue would be distributed to municipalities.

In spring 2021, the Department of Treasury distributed nearly $10 million to more than 100 municipalities and counties. The Treasury divided the funds by the number of licenses—transmitting approximately $28,000 for every licensed retail store or microbusiness. These excise tax revenues were created by more than $341 million in adult-use sales.

This spring, the Treasury announced distributing four-fold that amount to more than 150 municipalities. For fiscal year 2021, the Treasury is distributing $56,400 for every licensed retail store or microbusiness. The total market exceeded $1.1 billion. The list of recipients and totals can be viewed here: https://www.michigan.gov/treasury/-/media/Project/Websites/treasury/Delta/7/FY21__MRE_Web_Report_of_Distribution_03-24-22_750383_7.pdf?rev=4210676e7095459b8f296c1e583a9c24&hash=7C6EA16886883D9A208339BC1E49EC62 . As this news has been received, some municipalities will likely again consider the extent to which offering retail sales can be an additional revenue source for their community. As discussed below in this E-Letter, municipalities should consult with their legal counsel if considering adopting an ordinance allowing adult-use marihuana to reduce the risk of unnecessary litigation expenses and uncertainty in the local market.

Municipal License Selections in Desired Markets Remain Hotly Contested

The MRTMA also creates ambiguity in how local municipalities regulate the commercial licenses created under the Act. The MRTMA allows for local municipalities to adopt ordinances regulating such licenses, but restrictions stated elsewhere in the Act raise red flags as to what is intended by the plain language of the Act.

Section 6(2) of the MRTMA provides that, in addition to prohibiting or limiting the number of establishments within its boundaries, a municipality may also adopt “any other ordinance” addressing recreational marihuana establishments, provided that the ordinance is not “unreasonably impractical” and does not conflict with the MRTMA or any rules promulgated thereunder. The MRTMA defines “Unreasonably impracticable,” in Section 1(u), but the definition provides minimal insight as to its meaning since it uses various terms, such as “high investment of money” and “reasonably prudent businessperson.” This definition does not impose any bright line rules, so it remains unknown at this time whether a given ordinance restriction or framework would qualify as “unreasonably impractical.”

Notably, municipalities may not adopt an ordinance that “restricts the transportation of marihuana through the municipality or prohibits a marihuana grower, a marihuana processor, and a marihuana retailer from operating within a single facility or from operating at a location shared with a marihuana facility operating pursuant to the [MMFLA].” Section 6(5) (emphasis added). This is especially important for municipalities that already have commercial medical marihuana licensees to consider when expanding their regulations to include adult-use marihuana.

If a municipality elects to so limit the number of recreational marihuana establishments, the MRTMA endorses a competitive review process. Section 9(4) states: “If a municipality limits the number of marihuana establishments that may be licensed in the municipality . . . and that limit prevents the department from issuing a state license to all applicants . . . the municipality shall decide among competing applications by a competitive process intended to select applicants who are best suited to operate in compliance with this act within the municipality.” As with other provisions, there is no guidance as to the scope of the review process, nor what criteria is authorized.

As a result, municipalities that are capping the maximum number of licenses available for any specific license type have largely adopted a “competitive process.” “Competitive process” is not defined within the Act or any rules, however. Thus, many municipalities have derived a list of factors or standards in which they use to review applications and select those applications that qualify for the limited number of permits.

These processes have created additional litigation for municipalities by those licensees who are not selected for a license. Current cases pending now demonstrate several areas that municipalities should carefully consider in reviewing their own process or in developing one:

  • Verifying that those necessary portions of the licensing review and selection are complete in a public meeting and compliant with the Open Meetings Act;
  • Be cautious of relying on a committee or staff that is conducting reviews and performing recommendations outside of the public meeting (note that nothing prevents municipalities from using staff or a committee in their process, but consideration of the Open Meetings Act should be included in reaching a decision on a lawful process);
  • Consider opportunities for applicants to have a hearing and their own opportunity to present the qualifications of their applications before the final selection;
  • Carefully evaluate any factors or standards that are used for competitive review and seek guidance on the extent to which they comply with MCL 333.27959(4);
  • Decide before receipt of applications how a municipality may confront and resolve questions from prospective applicants about language in the ordinance or the process; and
  • Weigh the benefits of including an internal administrative appeal process within the municipality’s ordinance to first hear any grievances that occur during the licensing selection process.

Even with a lawful, fair, and balanced review of competing applications, there exists a risk of litigation from applicants who do not receive a permit or whose applications are rejected. Because of this, some communities are exploring a zoning-only approach with separation from sensitive uses to avoid establishing a maximum license-type permit cap.

At this juncture, there is no right or wrong method as the MRTMA provides flexibility in allowing municipalities local control in how they administer their licensing process. The key is to be deliberate and thoughtful in reviewing or creating a competitive licensing process to comply with the MRTMA, as well as applicable constitutional and statutory authority.

Initiated Petitions Under MTRMA Continues to Cast Uncertainty in Local Markets

The MRTMA provides local residents an opportunity to force the issue of marihuana license types and number on the ballot. This opportunity exists via a petition for adoption of an ordinance either providing for the number of marihuana establishments allowed or completely prohibiting them within the municipality. Section 6(1). This petition must be signed by 5% of the votes cast for governor. If such a petition is successfully made, an ordinance will be submitted to the voters at the next regular election.

The MRTMA provides little other guidance to municipalities on how this petition right is exercised for years to come. Upon adoption of the MRTMA, many opined the initiated right would benefit the marihuana industry, who could use the statutory right to ask the voters to decide on whether an ordinance allowing marihuana establishments should be adopted within the municipality. Since its adoption, however, the reverse has also been true. Citizen groups that are against the industry being permitted within their municipalities have used Section 6(1) to initiate ordinances prohibiting marihuana establishments.

Extensive litigation has ensued by licensees who have already been licensed in the area to stop the placement of the ballot initiative before the voters. One of the key areas focused upon has been a local clerk’s authority and scope of review when determining the validity of MRTMA petitions. Given the heavily contested nature of these petitions, clerks should seek guidance on review of the petition form, the petition signatures, and the extent to which review of a proposed ordinance is part of the pre-election petition determination.

Until recently, Michigan courts have taken the position that “substantial compliance” was sufficient in relation to petitions. Under this view, a ballot initiative petition could be legally acceptable even if some aspects of the law were not followed precisely. For instance, a petition would have substantially complied if it missed a minor requirement, such as a required font type size, but otherwise fulfilled all relevant requirements, particularly those related to more “important” things like the number of signatures.

In 2012, the Michigan Supreme Court ruled that “substantial compliance” cannot be a consideration in determining whether petitions complied with the Election Law. Stand Up v Sec of State, 492 Mich 588 (2012). The Court found that the particular requirements for petitions within the Election Law were mandatory and that the legislature would have added language about substantial compliance if that is what it intended, as it did in other sections of the law. This places a burden on both the petitioners organizing the ballot initiative and the township tasked with reviewing petitions for compliance with the law to closely scrutinize every requirement.

Marihuana Establishments are not Exempt as AG Under the State Construction Code

Licensed adult-use establishments require various building needs once authorized within a local municipality. As the industry matures, some grow licensees have acquired facilities that were previously used for the production of certain foods, such as tomatoes, flowers, cucumbers, mushrooms and lettuce. In growing those foods in Michigan, many of the buildings are permanent greenhouse-styled buildings. Not all of these buildings, prior to being acquired as a grow facility, were constructed under a building permit. Instead, these buildings were constructed under the agricultural exemption to the State Construction Code Act. However, once used as a marihuana establishment, some licensees are suggesting that the agricultural exemption should apply for purposes of alterations and use of the facility for medical and adult-use marihuana.

This position, however, ignores the CRA’s promulgated rules that require marihuana facilities and establishments to comply with the applicable Michigan construction codes. Rule 420.206(1) indicates that a cultivator’s building shall have a “building permit pursuant to R 420.208.” Similarly, under R 420.208, “An applicant’s proposed marihuana business and a licensee’s marihuana business are subject to inspection by a state building code official, state fire official, or code enforcement official to confirm that no health or safety concerns are present.”

Accordingly, municipalities should be deliberate in assessing whether such facilities, once used for commercial production of marihuana, require a building permit. Based on language within the CRA’s promulgated rules, the State’s intent would be that commercial production and processing of marihuana does not satisfy the agricultural exemption under the State Construction Code and proper construction code permits should be required.

Conclusion

The adult-use marihuana industry continues in constant flux as the CRA works toward administering rules for medical marihuana, adult-use marihuana, and industrial hemp process handlers. Those municipalities that have authorized retailers and micro-businesses have had the opportunity to receive disbursements for two years now. Even with such financial incentives, there are many issues to consider related to adult-use marihuana. Local ballot initiatives continue to complicate issues for municipalities. And for those that have authorized adult-use licenses, some municipalities continue to see licensing and regulation issues, including processing licenses within a “competitive” framework and verifying local code compliance. With numerous cases now pending before the Michigan Court of Appeals, those decisions will provide additional case law to assist municipalities in regulating adult-use marihuana. Until then, municipalities should consult with their legal counsel on how best to comply with the MRTMA when regulating and licensing adult-use marihuana.

 

— Chris Patterson

Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.

Copyright © 2022 Fahey Schultz Burzych Rhodes PLC

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