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While the constitutionality of Michigan's new marijuana wholesale tax is being reviewed by the Michigan Court of Claims, the Michigan Department of Treasury has released what Treasury is calling "preliminary information" and FAQs about the administration of the tax. (Disclosure: Dykema is co-counsel with Honigman Miller for the Michigan Cannabis Industry Association's challenge to the tax.) Those FAQs include reassurances about some industry concerns with the tax, and state that even though the tax takes effect January 1, 2026, it won't be collected until January 15, 2027. Unfortunately, Treasury's "preliminary information" is not only essentially meaningless, but it also demonstrates that Treasury is just making things up as it goes along.
How Treasury Provides Binding Guidance
A brief refresher on the structure of Michigan's government helps in understanding the Treasury's powers. Michigan's Constitution begins by stating that, "All political power is inherent in the people. Government is instituted for their equal benefit, security and protection." Subject to numerous guardrails and reserving the power of initiative and referendum, the people delegated to the State Legislature the power to make laws. Laws are rules of conduct that alter rights, duties, or relations of those subject to the State's legislative power.1 Thus, a requirement that citizens obtain a license to sell cannabis, or pay taxes, must come from a law.
In the Constitution, the people delegated to the Governor the power to execute laws, i.e., to implement and enforce what the Legislature has enacted. However, the Legislature doesn't always detail exactly how that must be done, and often grants executive branch departments the power to fill in the gaps by making rules. That process is governed by the Michigan Administrative Procedures Act (APA), which defines a rule as:
An agency regulation, statement, standard, policy, ruling, or instruction of general applicability that implements or applies law enforced or administered by the agency, or that prescribes the organization, procedure, or practice of the agency, including the amendment, suspension, or rescission of the law enforced or administered by the agency.
The APA then lists a number of items that are not rules, including:
A form with instructions, an interpretive statement, a guideline, an informational pamphlet, or other material that in itself does not have the force and effect of law but is merely explanatory.
A decision by an agency to exercise or not to exercise a permissive statutory power.
Except for emergencies when public health, safety, or welfare is at risk, a rule can only be promulgated after a lengthy process, with mandatory public hearings and opportunities for comment. As the Michigan Court of Appeals recently reminded Treasury when overturning some of Treasury's rules, an agency's rules cannot exceed the authority given to the agency in the law the agency is implementing.2
The Legislature has also given Treasury the power to issue formal bulletins that tell taxpayers how Treasury will apply specific taxes. Bulletins are binding on Treasury and can be relied on by taxpayers until the bulletin or law is modified. As Treasury explains in Revenue Advisory Bulletin 2016-20, though, if an appellate court finds a bulletin to be inconsistent with the law, the bulletin is retroactively revoked. Taxpayers who relied on the bulletin are then liable for any increased tax liability, with interest.
Finally, as Treasury explains in RAB 2016-20, Treasury can also provide guidance by notices, brochures, FAQs, and other informal methods. Treasury is careful to note, however, that these types of guidance are "for informational purposes only." Taxpayers cannot rely on them, and they can be changed at any time.
Treasury's Wholesale Marijuana Tax "Preliminary Information" and FAQs
Let's now turn to Treasury's information and FAQs about the wholesale marijuana tax and see what all of this means in practice. With the wholesale marijuana tax set to take effect in less than a month, Treasury hasn't even engaged with the industry or begun the formal notice and comment rulemaking process required by the APA. Instead, they've only published minimal preliminary information and FAQs, any of which can be changed by whim. Here are the highlights.
1. Collection Date
Unless overturned or enjoined by the courts, the new Comprehensive Road Funding Tax Act (CRFTA) takes effect January 1, 2026. It appropriates $3 million for the current state fiscal year ending September 30, 2026, to a new neighborhoods road fund, and specifically delegates to Treasury the ability to set the times for remittance of the wholesale marijuana tax.
Treasury's FAQs state that while the tax goes into effect January 1, payments will not need to be remitted until January 15, 2027. While at first glance, this looks to be inconsistent with the requirement to expend revenues in the current fiscal year, the new "comprehensive road funding fund" is not going to be funded entirely by the marijuana tax, but is also set to receive $688 million from income tax changes this year. Thus, Treasury appears within its rights to delay collection until January of 2027—although nothing stops Treasury from changing this date.
The delay in remittance, though, makes little difference to the cannabis industry. Michigan cannabis businesses don't have margins to set aside a 24% wholesale tax, but will have to start putting money aside beginning next month. Given behaviors we've seen regarding other taxes, it's fair to say that there will be plenty of bad actors who either don't collect the tax or pocket what they do collect, and then close the doors at the end of 2026 instead of paying the State. Yes, there's personal liability for those who take that path, but that hasn't dissuaded tax cheats.
2. Calculation of Wholesale Tax
As we've previously written, the language of the CRFTA imposes the wholesale tax on everything paid by a retailer to a wholesaler, including "any tax." So passing along the wholesale tax means the passed-along tax is taxed as well. Treasury's FAQs address this concern.
FAQ: The definition in the new law of "wholesale price" applicable to transactions between non-affiliated persons states the defined price "includes any tax, fee, or other charge reflected on the invoice... evidencing the sale or transfer of the marihuana." Does "any tax" include the Wholesale Marihuana Tax itself, causing a spiraling effect and increasing the effective rate of the tax? No, the new 24% wholesale marihuana tax does not "tax itself". The inclusion of other taxes and fees in the definition of "wholesale price" captures taxes and fees that are or may be imposed by other laws, including federal law. The provision mirrors a similar, long-standing definition in the Tobacco Products Tax Act (see MCL 205.422(ii)), and also prohibits reduction of the wholesale marihuana price due to any rebate, trade allowance, or similar discount.
Sounds great. But what Treasury doesn't say is that the reason tobacco tax doesn't "spiral" is that the TPTA expressly allows wholesalers to reimburse themselves by adding the amount of the tax to the price they charge (without it counting as part of the price)3, something the CRFTA doesn't do. Not only is Treasury making distinctions not found in statute, which the Michigan Court of Appeals has told them they cannot do, they're also contradicting their own legal argument. In claiming that the Legislature can impose a tax via the CRFTA, avoiding the three-fourths vote needed to amend the Michigan Regulation and Taxation of Marihuana Act (MRTMA), Treasury relies on the broadest possible construction of the phrase "all other taxes" in MRTMA.But in interpreting CRFTA, they're narrowly construing the phrase "any tax" in CRFTA to somehow exclude the wholesale tax itself. Bottom line, while Treasury's FAQ is favorable to the industry, it can't be relied upon.
3. Calculation of Average Wholesale Price
Because vertically integrated companies don't have market-based wholesale transactions, CRFTA requires Treasury to determine an "average wholesale price" to apply to transfers between affiliated growers and processors to their affiliated retailers (and to microbusinesses). How Treasury makes that calculation will have massive implications for the industry. Treasury still has not provided any information on how it will do that. Presumably, the methodology as tohowTreasury intends to calculate an "average wholesale price" each quarter should be the subject of notice-and-comment rulemaking under the Michigan Administrative Procedures Act.
4. Application of Wholesale Tax to Microbusinesses
The same is true of Treasury's FAQ on how the "wholesale tax" applies to microbusinesses.
FAQ: The definition in the new law of "wholesale price" applicable to transactions between non-affiliated persons states the defined price "includes any tax, fee, or other charge reflected on the invoice... evidencing the sale or transfer of the marihuana." Does "any tax" include the Wholesale Marihuana Tax itself, causing a spiraling effect and increasing the effective rate of the tax? No, the new 24% wholesale marihuana tax does not "tax itself". The inclusion of other taxes and fees in the definition of "wholesale price" captures taxes and fees that are or may be imposed by other laws, including federal law. The provision mirrors a similar, long-standing definition in the Tobacco Products Tax Act (see MCL 205.422(ii)), and also prohibits reduction of the wholesale marihuana price due to any rebate, trade allowance, or similar discount.
All marijuana cultivated or processed by a microbusiness is cultivated or processed for retail sale—microbusinesses cannot sell at wholesale. Setting the point of taxation at packaging provides somewhat of a break, but ignores that MRTMA defines the terms "cultivate" and "process" as actions that stop short of the act of packaging, and CRA's rules treat packaging as a separate act that comes only after passing testing. While favorable to the industry, Treasury's interpretation is inconsistent with the language of the CRFTA. And given that microbusinesses often sell all of their packaged product, Treasury's position also gets mighty close to putting the tax on retail sales.
5. Provision for Returns
The CRFTA taxes the sale or transfer of marijuana to a retailer, but does not have any provision for returns. Treasury's FAQs address this as well.
FAQ: What happens if a retail marihuana product is returned to the wholesaler and the wholesaler refunds the purchase price, but the wholesale tax charged on the transaction has already been remitted to Treasury? Will Treasury refund the amount of tax paid? If retail marihuana product is returned, the wholesaler should return or credit the retail licensee's entire purchase price, including the wholesale tax. The wholesaler should then deduct the amount of tax refunded or credited on its next wholesale tax return, provided the merchandise was voluntarily returned, and the return was made within the time period for returns stated in the wholesaler's refund policy or 180 days after the initial sale, whichever is earlier. This is similar to how sellers account for refunds of Michigan's general sales tax made to purchasers when products are returned.
While Treasury's "preliminary information" benefits the industry on this point, the CRTFA taxes the sale to the retailer, not the sale less any later returns. And just like the "spiraling" tax FAQ, Treasury's interpretation—and in this case, very specific parameters for returns—comes from statutory language in Michigan's General Sales Tax Act. While the Legislature included this language in the Sales Tax Act, no such language is even impliedly included in the CRFTA.4
Fool's Gold
It's clear that Treasury is considering the implications of the CRFTA and signaling some interpretations that are favorable to industry participants. Perhaps the old adage "don't look a gift horse in the mouth" should apply here. But Michigan's cannabis businesses need to recognize that what Treasury has said to date is both subject to change and legally dubious. And most importantly, the industry needs to loudly advocate for a seat at the table as Treasury makes decisions that will mean life or death for many businesses.
Stay tuned to Dykema's Cannabis Law Blog for further updates.
Footnotes
1. Taxpayers of Michigan Against Casinos v State, 471 Mich 306, 685 NW2d 221 (2004).
2. Emagine Entertainment, Inc. v Treasury, 334 Mich App 658, 965 NW2d 720 (Mich App 2020).
3. MCL 205.427(10).
4.T reasury's history of administering the TPTA also gives reason for pause. In an analogous situation, Treasury refused to allow refunds for tobacco taxes paid on uncollectible accounts. The Michigan Court of Appeals ruled against Treasury and required refunds—but did so based on specific provisions in the TPTA that, once again, are not in the CRFTA. See, S. Abraham & Sons v Treasury, 260 Mich App 1, 677 NW2d 31 (2003).
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