The Real Impact Of Michigan's New Wholesale Marijuana Tax

Takeaways

• The law would tax a tax, creating a spiraling effect that significantly increases costs for growers, retailers, and consumers.
• New rules would effectively force cash-on-delivery sales, putting financial strain on retailers who can't access immediate capital.
• Independent, family-owned, and social equity businesses are at higher risk of failure under the proposed tax model.

After failing to enact annual appropriations bills by the start of the new fiscal year, Michigan legislators have taken the unprecedented step of passing a short continuation budget. Nevertheless, legislative leaders and the governor are trying to keep a new 24% wholesale tax on marijuana. It hasn't passed yet, and legal challenges are certain, but it's worth taking a look to see the damage that will be done if the tax does go into effect.

First, the effective tax will be more than the nominal 24% rate House Bill 4951 would levy on the wholesale price of marijuana. This is because the “wholesale price of marihuana” is defined as the actual price paid by the retailer, including “any tax, fee, or other charge.” It's a tax that taxes itself.

In practice, a grower charging $500 per pound would be responsible for paying $120 in wholesale tax. Even successful Michigan growers operate close to the margin, so they will look to pass the tax cost on to the retailer. At $500 per pound, one would expect the grower to now charge the retailer $620. However, the basis for the wholesale tax is the total paid by the retailer, including tax, so the wholesale tax would now apply to $620, making the amount due $148.80. For the grower to pass along the entire tax hit, the break-even wholesale price would need to be $658 (24% tax is $158), the point where the tax burden is equal to the price + tax increase.

Michigan, though, isn't done taxing a tax. At the consumer level, there's a 10% excise tax that applies before the calculation of another 6% sales tax. Thus, if the retailer passes along the $158 tax cost to consumers, they will pay an additional $15.80 in excise tax and $.95 in sales tax. Passing the wholesale tax down the chain ultimately leads to $174.75 in new taxes on what was a $500 wholesale transaction. 35%, not 24%.

Second, there's a cold reality to face. The above analysis doesn't capture current practices in Michigan's fragile market, and only holds true if the tax impact can be passed down the chain without altering supply and demand. Only a small subset of Michigan retailers pays for product upon delivery, and growers and processors typically need to give discounts for those up-front payments. (The wholesale tax will be applied to the non-discounted price.)

Since no grower or processor can afford to pay the new tax without getting paid first, the new tax burden effectively forces cash on delivery. Many, if not most, retail operators aren't prepared or able to access funding to pay cash on delivery, especially in the short timeframe the new tax would require. Those retailers who can't pay cash on delivery (which likely includes a disproportionate share of independent, family-owned, and/or social equity businesses) can therefore be expected to fail. And as growers and processors compete for a smaller pool of retailers, what happens to wholesale prices? Do they actually drop? There are only a couple of certainties. One, projecting the ultimate impact and revenues is an exercise in chaos math. (Making the State's “$420 million” revenue projection even more of a sick joke than it already was.) Two, there will be real losses among the businesses whose owners chose to invest in Michigan and the tens of thousands of Michiganders who work in the industry.

Stay tuned to Dykema's Cannabis Law Blog for further updates.

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