Second Legal Challenge Targets Michigan's Controversial Cannabis Wholesale Tax

LANSING — The Michigan cannabis industry has filed a second lawsuit challenging the state's 24% wholesale tax, arguing the levy creates unconstitutional "tax pyramiding" that violates the state's 6% sales tax cap.

The Michigan Cannabis Industry Association (MiCIA) filed the new complaint against the Michigan Treasury late last week, seeking an immediate end to the wholesale tax and reimbursement of taxes already paid since the levy took effect Jan. 1.

"This tax is creating a situation in which cannabis is taxed multiple times," MiCIA spokesperson Rose Tantraphol said. "That results in something called tax pyramiding."

The Tax Pyramiding Argument

The industry argues the wholesale tax essentially functions as a sales tax, meaning the burden is unlawfully higher than the 6% sales tax cap that voters approved in the 2018 medical marijuana law.

Under the previous tax structure, a $100 marijuana purchase would cost consumers $116. Under the new wholesale tax structure, that same purchase would cost $143.84, according to the lawsuit complaint.

When consumers pay 6% sales tax and 10% excise tax on top of the inflated retail prices, the lawsuit contends those taxes are effectively increased as well.

"What has happened here is a tax levied on a tax, which results in an unconstitutional over-taxation of Michiganders," Tantraphol said. "This type of tax pyramiding imposes an unlawful burden on consumers, and this lawsuit seeks to end that practice."

Road Funding at Stake

The Legislature passed the new tax with bipartisan support to balance the state budget and generate projected $420 million to be lumped in with $2 billion earmarked for road projects.

The Michigan Cannabis Industry Association and another marijuana company first sued the state, Treasury Department and top officials in October, arguing the tax was improperly rushed through the Legislature and should have required a three-quarters vote because it effectively altered the voter-approved 2018 legalization law.

Court of Claims Judge Sima G. Patel declined to block the tax from taking effect but allowed portions of that lawsuit to proceed. In her January order, Patel said the 2018 law intended to curb black market sales. If evidence shows the new tax is driving customers back to the black market, that could be evidence that the new tax is subverting the original will of the voters, the judge said.

Bipartisan Opposition

The 24% tax is facing attacks outside of the court as well. A bipartisan group of state senators proposed a bill to repeal the tax in February. It has been referred to the Committee on Government Operations.

Legislation faces an "uphill climb," according to bill co-sponsor Sen. Jeff Irwin, D-Ann Arbor.

"But I think as members start to reckon with, not just the damage that is being done to the industry — but also the businesses that are being shuttered, the jobs that are being lost, and the revenue that we are not seeing to schools and local governments," Irwin said. "When all those chickens come home to roost, I think there might be some members who change their minds."

Industry Revenue Already Down

Opponents believe the new tax will lead to significant sales decreases, especially along the border where out-of-state shoppers have traditionally traveled to Michigan for cannabis due to a friendly tax structure and low overall pricing.

Adult-use marijuana revenue in January and February of this year was the lowest for those months in the past two years and ranked as the second- and third-lowest monthly totals overall in the last three years.

If sales continue to decline, critics say the tax revenue will fall well short of the original projections.

Road Funding Implications

The County Road Association helped negotiate the tax and warns that if it is struck down, the consequences could be dire.

"That would be a 42% reduction to the neighborhood roads fund, or nearly 50% reduction to the three road groups that are going to benefit by that revenue," County Road Association Chief Deputy and Legislative Director Ed Noyola said. "MDOT's been planning on that revenue and so have the municipalities."

Ultimately, if a court orders an injunction halting the tax, Noyola said some road projects may be forced to stop in their tracks.

Next Steps

As the state Treasury prepares for the first quarterly payments due this month, the legal standoff is widely expected to reach the Michigan Supreme Court.

The initial lawsuit from the Michigan Cannabis Industry Association filed last year is heading to trial in September.