January 1 For Michigan Cannabis: A New Year, A New Headache

Takeaways

• Michigan's new 24% wholesale cannabis tax is in effect on January 1; however, Treasury's last-minute guidance raises significant compliance, pricing, and litigation risks for licensees.
• Treasury's use of a blanket "average wholesale price" based on assumed markups—not actual transaction data—may conflict with statutory and constitutional requirements.
• With constitutional challenges pending and more litigation expected, cannabis businesses should prepare now for audits, disputes, and rapidly evolving enforcement positions.

As the new year is upon us, Michigan's wholesale cannabis tax takes effect on January 1. A mere 35 hours beforehand, Michigan's Department of Treasury published the "average wholesale price" to be used for affiliate transfers and updated its FAQ's. Treasury has also prepared a draft Revenue Advisory Bulletin—although Treasury has not made this public on their wholesale marijuana tax webpage.

The tax, explained in a prior post, is fairly straightforward on its face: 24% of the sale price on the first sale from a grower, processor, or medical provisioning center to an adult-use retailer. Sales price is the actual price for sales between unaffiliated parties (inclusive of all invoiced amounts, no discounts allowed), and an "average wholesale price" published by Treasury for sales between companies under common control. Predominantly, social equity "microbusinesses" pay 24% on all product they produce, also using the average wholesale price.

Average Wholesale Price

The devil is in the details, and the most critical of those is the "average wholesale price." The law commands that average wholesale price be calculated "based on the best available information." The law also provides for the use of Michigan's Administrative Procedures Act to promulgate rules to implement the tax and "prescribe a method and manner for payment and collection of the taxes imposed under this act." Treasury is ignoring both of these dictates.

Michigan's cannabis regulatory rules (R 420.203(2)(f)) require all licensees to maintain detailed records of sales, and newly proposed Rule 420.22(3) adds to the current requirements. But instead of relying on a survey of actual wholesale transactions, Treasury is instead pulling data based on retail sales information compiled by the Cannabis Regulatory Agency and then assuming a 50% mark-up on every product category. Treasury's assumption of a 50% mark-up is not explained or justified in any meaningful way. Treasury's categories also fail to make any sort of qualitative distinctions, for example, treating outdoor flower the same as premium indoor flower.

FAQ's

Treasury has also added to and modified its FAQ's section of its website. We previously reported that several "answers" do not appear to have any statutory basis. Again, Treasury may be overstepping, as one new FAQ provides that shipping charges are included in the actual price, when the law only provides that charges from the wholesaler to the retailer are included—presumably allowing shipping costs to be excluded if they are paid from the retailer directly to the secure transporter. Most critically, the new FAQ's deleted Treasury's statement that the tax would not be collected until January 2027. Now, the FAQ's state that, "Treasury is currently working to determine how quickly the quarterly filing and payment rules can be implemented. More information will be available soon." And the draft RAB published by Treasury suggests that Treasury may be prepared to require quarterly returns as soon as Q3 of 2026.

Tax Planning and Ramifications

Michigan's licensees are engaging in a variety of strategies to minimize the tax paid and the competitive disadvantages that will be created by use of an average wholesale price for affiliate transactions and the actual price for unaffiliated transactions. Not surprisingly, licensees are already planning to add licenses and change relationships to provide the flexibility to structure sales so the lower price is used for determining tax. We fully expect to see many more retailer-to-retailer transactions beginning in 2026. Whether these gambits will be successful remains to be seen, and licensees should consult with their attorneys and CPA's in devising means to handle the tax. Licensees should remember that there are serious criminal and civil penalties for those who evade taxes or assist others in doing so.

Outside of tax law issues, there may be antitrust concerns presented by some strategies being discussed, particularly any that can be characterized as competitors agreeing on pricing or collection approaches. We also anticipate that the advent of the wholesale tax will trigger considerable M&A discussions to provide licensees in all segments of the supply chain with greater flexibility in tax strategy (this may also be true as a result of the apparently imminent rescheduling of marijuana at the federal level, as we have previously discussed).

Finally, wholesale licensees should give thought to how they will hold revenue collected through passing the wholesale tax along to retailers. If these taxes are not going to be remitted for months into the future, licensees could have massive cash balances in their accounts—money that can become a target for creditors. If past is prologue, we would also expect some significant diversion of cash collected, especially since it is less than clear that this tax meets the legal standard for personal liability to be imposed on owners, officers, or directors.

Legal Challenges

As the tax is going into effect, constitutional challenges to the means by which the Legislature enacted the tax continue to play out in the courts. (Disclaimer: this firm is co-counsel with the Honigman firm in the suit brought by the Michigan Cannabis Industry Association.) Although the Michigan Court of Claims ruled for the State on several substantive grounds while setting one issue for trial, MiCIA has asked the Michigan Court of Appeals to take the case up now, and that court has ordered expedited briefing over whether to hear the matter before trial.

Now that the tax is actually being implemented, expect additional challenges to be brought in court and through administrative avenues. Areas ripe for litigation will include whether the Michigan Constitution's requirement for uniformity in taxation is being violated, whether certain Treasury mandates are legitimate without formal notice and comment rulemaking, whether Treasury is adding to or altering the law, and whether Treasury is acting arbitrarily and capriciously.

Buckle up—it's going to be a rocky ride!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.