Oct. 12 2016 10:53 AM

Regulations will give big business control of Michigan’s marijuana industry

For decades, marijuana has been illegal, hidden in a black market and distributed clandestinely, often with criminal overtones. Now, and rapidly, it is emerging from back alleys into the daylight through medical marijuana regulation, a precursor to legalization.

At stake are millions of dollars in newfound revenue for an emerging big-business enterprise, well positioned to deal with the complex tangle of cultivation, processing, distribution, and finance being developed to regulate marijuana in Michigan.

The state last month passed legislation allowing deep pocketed entrepreneurs to grow up to 1,500 marijuana plants at a time. Previously, growers were limited to just 72 plants.

“I think in some aspects it will be certainly easier for people who are better financed to find the real estate, do the build-outs, qualify for the regulatory systems and obtain the licenses,” said Robin Schneider, legislative director for the National Patient Rights Association. “I think they’ll have more opportunity.”

Some in the fledgling marijuana industry see a future that parallels the way Michigan regulates alcohol, with a few big companies controlling sales and distribution throughout the state. Republican State Sen. Rick Jones of Grand Ledge helped push the legislation through the Senate. Some opponents of the legislation have accused him of buckling to political cash interests. He denied that “approximately $20,000” in campaign donations had any impact on his work.

“Absolutely nobody buys Rick Jones,” he declared in an interview. “Absolutely nobody.”

Yet opponents indicate those donations paved the way for the legislation to favor big business interests. Jones denies this.

“I tried everything I could do to write this so anybody could get into this business,” he said. “Anybody who wanted to get into this and compete could.”

The state has over a year to establish regulations for issuing licenses for three tiers of marijuana grow operations — 500- plant, 1,000-plant and 1,500-plant operations — secure transporters, labs to test it, processing centers and dispensaries. The cost of those licenses will be established along with the regulations, but there is one limit in the new law: The state can’t charge more than $10,000 for a 500-plant grow operation license. Local governments can’t charge more than $5,000 for a local license.

Lansing, which is hammering out its own licensing and regulation rules, also seems to be tipping the pot industry towards big business interests.

The ordinance under consideration would impose a fee for a licensed operation at $3,000. On top of that, the ordinance would require that operators prove to city officials that they have $25,000 in liquid assets. The state legislation also requires that applicants prove they have the financial wherewithal to succeed. What that proof might look like will be up to the state to determine.

Liquid assets may be a serious issue for the small supplier. Banks are prohibited by federal law from handling pot money, which makes having a bank account difficult.

“We’re hoping in the future that the federal government may change,” said Jones. “If not, I believe Michigan credit unions and banks that aren’t under federal control, will step up and they’ll make some sort of arrangement.”

Until the banking issues are worked out, the state system will likely favor those applying for licenses who are not currently in the medical marijuana industry, said Schneider.

“It is going to be difficult for them to demonstrate that their money was legal,” said Schneider. “They’ll be looking to find out if have they paid their taxes and where did this investment money come from. People who potentially have made money in the industry but because of the gray area in the law maybe didn’t claim the money would have a difficult time demonstrating to the new state department where the money came from and that it was made legally.”

Lansing City Councilwoman Carol Wood, who chairs the Committee on Public Safety, has been trying to move a new ordinance through the Council for months. She defended the $25,000 liquid asset test in the ordinance, comparing it to a provision for new liquor licenses. Those require $75,000 of improvements in the building they seek to license for alcohol sales.

Wood said the provision shows the business owner is capable of fulfilling his or her business obligations.

The result of both the state and Lansing laws would be the creation of a two-tier growing system. Large growers would be the only legal suppliers to the dispensaries, and the small growers — the caregivers who now provide marijuana to up to five patients — will be cut off from the distribution system. The seed to sale tracking system established by state law will assure that small growers will be unable to feed their excess, or overage, into the dispensary system.

Jones said caregivers should surrender their caregiver cards and line up for licensing of up to 500-plant operations, “so they can make some real money.”

With such high financial buy-ins, caregivers are unlikely to have access to such licensing provisions, or a way to dispose of excess product.

Although it's illegal, they are taking the overage to the local dispensaries and selling it. That would remain illegal under state law. If their patients can’t take it, the caregiver is expected to destroy it.

But advocates agree that is unlikely to happen.

"They will either have to find a way to grow less, or process less or they are going to send to the black market,” said Joshua Covert, an attorney at the Nichols Law Firm in East Lansing who specializes in marijuana defenses. “And frankly, I think they are going to send to the black market. It's been thriving for 80 years."

Jones acknowledges that might happen. The new state law also imagines local control in the process. No state license will be issued without the permission of the local jurisdiction the licensee is planning to operate in. To grease that skid and encourage local governments to pave the way to regulate and approve medical marijuana businesses, the new law also provides a tax sharing provision. The law will charge a 3 percent sales tax on medical marijuana sold at a dispensary. Of that, 25 percent will go back to the local jurisdiction and 30 percent to the county where that jurisdiction is located. The state gets the rest.

But Lansing has stumbled in trying to get an ordinance in place. Wood and the Public Safety Committee have reviewed at least 15 drafts of an ordinance designed to regulate and licensce provisioning centers. The discussion has been driven, in part, by a petition from neighborhood groups asking the city to regulate the explosion of marijuana shops popping up across the city.

Earlier versions of the ordinance used just zoning, but they provided no licensing and regulatory framework, Wood said.

“What we have heard, over and over again, is that people want a licensing process,” she said. She noted that a zoning enforcement proposal would be difficult to enforce because of funding issues.

“We have two people in zoning right now. There’s no way they can investigate all those businesses to make sure they meet whatever zoning rules we adopt,” she said. She noted that under a zoning proposal, there is no revenue generated until the department has determined there are violations. At that point, tickets and fines are issued.

The most recent draft of the ordinance establishes both a licensing scheme and zoning restrictions. Council referred the ordinance to the Planning Board for a hearing and action. It voted last week to table it.

Planning Board members expressed concern that the zoning regulations were too restrictive, something advocates like Schneider have been telling the Council. A map produced by Sue Stachowiak, the city’s zoning administrator, appears to show that only small areas in the city would qualify as locations for dispensaries because of their proximity to schools, parks, schools, substance abuse treatment facilities and daycare centers.

Wood counters that the zoning map is misleading.

“I spent an entire day looking at those areas, one at a time,” she said. “While that shows a very small area and appears to provide no real access to put a business, when you zoom in on it, you see that there are many properties in that small area.”

To address the “exclusionary zoning,” Schneider said she would favor capping the number of dispensaries in the city. She said 20 to 30 would be appropriate for the city. Some estimate Lansing has 50 to 70 today.

Wood noted that when the ordinance was originally drafted, city attorneys told her a hard cap was not legal. Under the new legislation, a cap is allowed.

Jim Smiertka, the city attorney who wrote the ordinance, has requested an additional 60 days to review the ordinance in light of the adoption of the new state law. Effectively the ordinance is dead for this legislative year.

But the city still has a 2011 licensing law on the books. After that licensing ordinance was passed, the city attorney determined it was unenforceable under state law. With the passage of the new state law, which requires local municipalities to have licensing laws, that 2011 law could be used, Smiertka told the Council on Monday. An attempt to set a public hearing to repeal the ordinance failed Monday night.