This story was reprinted with permission from Crain’s Detroit.
Gov. Gretchen Whitmer’s road funding plan would take a tire iron to Michigan’s legal cannabis industry.
The plan outlines $2.2 billion in new taxes, including adding a wholesale tax to marijuana sales to generate $470 million.
Whitmer called the new tax closing a “loophole” that exempts marijuana from the wholesale “sin” tax implemented on certain tobacco products. The administration has yet to define what the wholesale tax on marijuana would be, but using the $470 million figure, the back-of-the-napkin math hints it would be close to the 32% wholesale tax on tobacco.
Adult-use marijuana currently faces a 10% excise tax and the standard 6% sales tax, paid at the point of sale.
While details of the wholesale tax implementation are scant, there’s little question it will raise marijuana price for consumers and put further strain on cultivators and processors in an industry devastated by oversupply and the cheapest prices in the country, according to operators and experts.
“(The plan is) disproportionately unfair to wholesalers – a death knell if implemented in current market conditions,” Brandon Kanitz, CEO of Grand Rapids-based Fluresh LLC, doing business as Tend.Harvest.Cultivate, told Crain’s. “There are better ways to raise revenue.”
Actively wilting
Legal market cultivators like Fluresh are battling record-low cannabis prices that have all but evaporated margins and left a wake of business closures.
Last week, Bay County marijuana operator Pincanna temporarily shuttered 31,500-square-feet of its grow facility and laid off employees to mitigate losses. The Chicago-based PharmaCann shuttered its 207,000-square-foot LivWell Michigan cultivation site in Warren, laying off 222, in January. And in November, Fluresh shuttered its $46 million 105,000-square-foot grow facility in Adrian.
“It cost me more to grow in Adrian than I could sell on the market,” Kanitz said.
Oversupply of cannabis is a prime driver of low prices. Michigan is an unlimited licensure state, meaning any party seeking a state license to grow, process or sell marijuana can do so as long as it meets state regulator criteria and also get local municipality licensure.
There are 2,834 active cultivator licenses in Michigan as of Dec. 31, according to Michigan Cannabis Regulatory Agency data. And the industry is using about 63% of its adult-use growing capacity and 13% of its medical marijuana growing capacity, which can be transferred to the adult-use market at will under current rules.
The oversupply has cratered prices – adult-use marijuana prices plummeted nearly 26% between the start and end of the year to an average of just $69.20 for an ounce of adult-use marijuana flower in December.
And there’s no sign prices will stabilize soon.
The industry, however, blames the oversupply problem and the subsequent low prices on the state’s inability to remove illicitly grown and sold marijuana from the legal market.
“The people who have invested in this industry in Michigan the right way need to be protected from all of this illicit product from the continuous bad actors in our state that just get slaps on the wrist,” said Aric Klar, CEO of Birmingham-based Quality Roots, which has 10 retail stores across the state. “We need the governor’s help to clean up our industry and naturally more funding would come from the industry. Higher prices result in more tax revenue. This proposal is a stretch that will have massive pushback from all regulated operators who have invested hundreds of millions of dollars into the state.”
Mark Passerini, vice president of president of business development for Lansing-based Redemption Cannabis, is circulating an AI-made song called “Raise up the Block” about the wholesale tax plan.
The chorus is: “Hey Whitmer, listen to our plea / Businesses fallin’, economy ain’t free / Stop the hike, let the green leaf be / Don’t crush dreams, unplant the tree.”
Who’s left with the bag?
But the industry’s belief that the wholesale tax would lead to a reckoning is likely unfounded, said John Fraser, partner and leader of the cannabis practice for Detroit-based law firm Dykema Gossett LLP.
“The industry reaction is going to be oppositional because nobody wants to pay more taxes,” Fraser said. “But this is the type of tax that would just end up getting passed onto the end consumer.”
The question of its impact is going to be whether a 32% increase in retail prices is enough to drive consumers to the black market.
A 32% increase at the dispensary would raise the December average ounce price about $22.14 to $91.34.
“The concern is what it does to demand,” Fraser said. “I don’t know that much of an increase in pricing is going to drive folks to the black market or decrease sales.”
Where the wholesale tax, and subsequent higher prices, could have the greatest impact for retailers in border towns, which rely heavily on out-of-state buyers crossing the border to buy cheap Michigan weed.
At Quality Roots Monroe shop, more than 30% of sales come from out-of-state consumers. But even with the higher costs from the wholesale tax, Michigan remains cheaper than other states.
In December, an ounce of marijuana cost roughly $210 in Ohio and more than $275 in Illinois, well below the estimated $91.34 in Michigan with the tax increase.
“We’re aware that negotiations are ongoing between the governor and the Legislature and we’ll continue to monitor it as the process plays out,” David Harns, spokesperson for the CRA, wrote in a statement to Crain’s.
While Klar disagrees with the wholesale tax, he doesn’t believe it will impact those critical out-of-state buyers thanks to their own high prices. And Ohio is weighing raising its excise tax for cannabis to 15% from 10%, raising prices further.
Michigan’s adult-use market has a 10% excise tax and the standard 6% sales tax paid at the point of sale. The new wholesale tax would be an additional tax to help Whitmer pay for roads funding.
Rep. Mark Tisdel, R-Rochester Hills, chairs the House Finance Committee, which considers tax-related legislation.
“What Michigan has done on cannabis is the right thing — a relatively low excise tax today,” Tisdel said. “As you increase the price of legally available cannabis, it makes it more available for black-market competitors to come in. The higher the price, it covers their risk of being in an illegal business. So you have to be very careful if you’re raising the excise tax on cannabis that you’re not opening the door for the black market to be price competitive.”
Tisdel noted that marijuana prices have tumbled in Michigan, contending that a tax hike is “playing with fire.”
He said he generally sees “no need” to raise taxes to boost road and bridge funding, saying there are “all sorts of places” to find savings in the budget to pay for road maintenance.
The proposed wholesale tax would, however, complicate the already tenuous relationships between cultivators and processors with retailers, Fraser said.
Right now, growers and processors are struggling to get paid with 45-day to 90-day payment terms. Given the wholesale tax would likely need to be paid monthly, as with similar taxes, waiting 90-days to receive bulk payment from retailers would cause insolvency across the system, Fraser said.
“If I have to remit the tax, I need to be paid to do so,” Fraser said. “These companies are not sitting on huge piles of cash right now. Retailers can’t keep using cultivators as lines of credit with this wholesale tax. They simply can’t afford to pay 32% out of pocket for those taxes.”
Fraser urged the CRA to adjust rules to force cash on delivery in the wholesale market, alleviating this issue.
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