With the 2024 Legislative Session rapidly approaching, MACo is profiling some significant issues that stand to gather attention in the General Assembly. Ambiguous restrictions on local zoning, incommensurate revenue sharing, public health, and public safety are all top of mind for county governments.

As previously reported on Conduit Street, as of July 1, adult-use cannabis is legal under Maryland law. All existing medical dispensaries (approximately 100 locations statewide) have converted their licenses and can sell medical and adult-use cannabis products to adults 21+ with valid government identification.

HB 556/SB 516 of 2023 imposes a sales and use tax on the sale of adult-use cannabis in Maryland. The tax rate is 9 percent of the purchase price of any product containing cannabis.

The Department of Legislative Services profiles this issue in its annual compilation of Issue Papers:

 

Legalization and Regulation of Adult-Use Cannabis

Chapters 254 and 255 of 2023 established the adult-use cannabis industry in the State by (1) requiring all existing medical cannabis licensees to convert to adult-use cannabis businesses; (2) attributing cannabis-related duties to the Alcohol and Tobacco Commission and renaming it the Alcohol, Tobacco, and Cannabis Commission (ATCC); (3) establishing the Maryland Cannabis Administration (MCA) as an independent unit of State government that is responsible for the regulation of adult-use cannabis; (4) creating a licensing framework for the regulated sale of cannabis; (5) establishing a sales and use tax on the sale of adult-use cannabis; and (6) creating the Office of Social Equity in MCA and the Social Equity Partnership Grant Program in the Office of Social Equity. The sale of adult-use cannabis began on July 1, 2023.

Regulations Effective July 1, 2023

MCA proposed emergency regulations that took effect on July 1, 2023, which are supplemental to the existing medical cannabis regulations. The adopted emergency regulations (1) carry out the requirements for licensure of cannabis businesses, including implementing procedures related to applications, licenses, and registrations; (2) assist the Comptroller in the collection of taxes imposed on the sale of adult-use cannabis; (3) implement inventory management and tracking; (4) establish operating requirements for cannabis licensees or cannabis registrants; (5) establish limits on the maximum potency of cannabis products sold in the State; and (6) establish child protections, including child-resistant packaging and prohibitions on advertising to children.

Regulations Required by July 1, 2024

Chapters 254 and 255 require that the July 1, 2023 emergency regulations be followed by nonemergency regulations adopted by MCA by July 1, 2024. These regulations must govern Internet sales of cannabis; implement and supplement packaging and labeling requirements for cannabis products; establish procedures for the use of point of sale technologies by dispensaries for all transactions that verify a consumer’s age using a driver’s license or other valid identification; and establish health, safety, security, and tracking requirements for the packaging and repackaging of cannabis by a dispensary. Additionally, MCA must adopt minimum standards for licensed growers to protect the rights of growers and employees.

New Licensing Round

The initial business licensing round for new cannabis growers, processors, and dispensaries closed on December 12, with more than 1,700 applications submitted across all three license categories. This application round marked the first cannabis licensing round in the nation that was exclusively open to qualifying social equity applicants.

A social equity applicant is an applicant that has at least 65 percent ownership and control held by one or more individuals who lived or went to public school in an area disproportionately impacted by the criminalization of cannabis or attended a four-year institution of higher education in Maryland where at least 40 percent of enrollees were eligible for a Pell Grant.

Any applicant who meets the minimum requirements for licensure on a pass-fail basis will be placed in a randomized lottery based on license type (grower, processor, or dispensary) and county or region for which the application was submitted.

Under the Cannabis Reform Act, the MCA will conduct the lottery on or before January 1, 2024.

Distribution of Standard Dispensary Licenses

Growers, Processors, and Micro Licenses:

For the remaining license types, the state is divided into four regions:

• Western Region: Allegany, Carroll, Frederick, Garrett, Montgomery, and Washington.
• Southern Region: Anne Arundel, Calvert, Charles, Prince George’s, and St. Mary’s.
• Central Region: Baltimore, Baltimore City, Cecil, Harford, and Howard.
• Eastern Region: Caroline, Dorchester, Kent, Queen Anne’s, Somerset, Talbot, Wicomico, and Worcester.

Equal numbers of each of the remaining license types are available:

Local Revenue Share Smallest in the Nation

While implementation across jurisdictions has been a variable as different states have taken various approaches, one commonality is that virtually all states have empowered a meaningful local revenue source to support local services. Some have fully authorized local excise taxes where rates are set and collections are overseen locally. Others have authorized local sales taxes at either standardized or variable rates locally.

For example, in New York, there is both a 13 percent excise tax (9 percent state and 4 percent local) on cannabis sales (paid by consumers and remitted by retailers) and a potency-based tax (remitted by distributors). Oregon levies a 17 percent excise tax on cannabis sales paid by consumers and remitted by retailers. Local governments can also levy up to a 3 percent tax on the retail price.

This means that on a single purchase of $100 of cannabis in those states, the local government would receive $3 in Oregon and $4 in New York. Those states recognize that public services, including those connected to implementing and overseeing the newly legalized marketplace, are supported by a combination of state and local governments.

While there are no local cannabis taxes in Maryland, the state does levy a 9 percent excise tax on any product containing cannabis. But, a mere five percent of state cannabis tax revenue goes to local governments. That translates to local governments receiving a mere 45 cents for a single purchase of $100 of cannabis- the smallest in the nation.

Municipalities receive half of the local revenue share for transactions within municipal boundaries (counties retain the other half on such transactions). In addition, 35 percent of the tax proceeds go to the Community Reinvestment and Repair Fund, a new fund for local organizations that support marginalized communities.

The beginning of the sale of adult-use cannabis on July 1, 2023, resulted in $51.3 million in total retail sales of adult-use cannabis for July. In September 2023, total retail sales of adult-use cannabis reached $54.3 million.

MCA is projecting $600 million in the first year of adult-use cannabis sales. Based on a 9 percent sales and use tax rate for the sale of adult-use cannabis, this would generate $54.0 million in tax revenue. By fiscal 2027, the Department of Legislative Services projects that annual adult-use cannabis sales will reach $1.6 billion, generating approximately $146.6 million in sales and use tax revenue.

Local Zoning

Most states implementing adult-use cannabis have granted deference to local jurisdictions who, through local enactments, decline to play host to certain facilities (either growing/cultivation or retail/dispensary). Even the most well-known states like Colorado and Washington – seen as vanguards of “legal cannabis” – took measures to ensure community input and a process for opting out.

However, HB 556/SB 516 includes no such provision, effectively denying this level of local flexibility. Voter support for the broadly worded measure to legalize the use of cannabis, motivated by any number of reasons, does not necessarily translate to voter support for the placement of facilities across each jurisdiction, district, precinct, or neighborhood. MACo argued that local governments, through their public-driven processes, should retain the right to guide this implementation (facility location) at the local level.

Under the bill, local governments may establish reasonable zoning requirements for cannabis businesses. A local government may not (1) establish zoning or other requirements that unduly burden a cannabis licensee; (2) impose licensing, operating, or other fees or requirements on a cannabis licensee that are disproportionately greater or more burdensome than those imposed on other businesses with a similar impact on the area where the cannabis licensee is located; (3) prohibit transportation through or deliveries within the political subdivision by cannabis establishments located in other political subdivisions; (4) prevent an entity from converting a medical cannabis license that complies with all relevant medical cannabis regulations; or (5) negotiate or enter into an agreement requiring a cannabis licensee or applicant to provide money, donations, in-kind contributions, services, or anything of value to the political subdivision.

However, some of the bill language about local zoning does not match the legislative intent. For example:

From the final enrolled bill (page 70):

…that last item, C, was added on… as drafted, it says counties can push dispensaries closer to sensitive places. But the floor discussion on the amendment was the exact opposite… that a county could adopt an ordinance requiring dispensaries to be more than 500 feet from a sensitive place. The legislative intent was to authorize counties to INCREASE that spacing requirement (within reason), but the amendment fails to match the intent. It’s a glaring, obvious fix waiting to happen if the General Assembly chooses to open the door to do so.

Actions to Address Health Effects of Cannabis Legalization

Chapter 26 of 2022 included several requirements related to the health impacts of cannabis legalization. Chapter 26 required the study of methods to reduce the use of cannabis by minors, including best practices regarding requirements related to advertising, potency, packaging, labeling, and other methods to reduce the appeal of cannabis to minors. It also required a comprehensive baseline study of cannabis use in the State and established the Cannabis Public Health Advisory Council and the Cannabis Public Health Fund.

What’s Next?

As previously reported on Conduit Street, lawmakers will face considerable budget challenges that could drive spending cuts, tax increases, or other remedies to resolve significant structural deficits projected through fiscal 2029.

As such, the General Assembly could consider raising the tax rate on cannabis transactions — especially because Maryland’s tax rate is on the low end compared to other states with adult-use cannabis sales. If the General Assembly opens that door, MACo will advocate for a more equitable share of cannabis tax revenues for local governments.

In addition to addressing zoning language that does not match the legislative intent, while the law makes an apparent effort to grant zoning authority to local governments,  its wording may leave that intention subject to legal challenge.

For example, the bill specifies that a local jurisdiction may “establish reasonable zoning for cannabis businesses” but also includes language specifying that a local jurisdiction may not “establish zoning or other requirements that unduly burden a cannabis licensee.”

These phrases introduce undefined terms that would effectively defer to the courts to set the proper standard for what is reasonable or unduly burdensome. Therefore, the General Assembly could consider legislation to clarify local zoning provisions. MACo will continue advocating for greater flexibility for local governments — through their public-driven processes — to guide this implementation (facility location) at the local level.

Read more about cannabis regulation in the DLS Issue Papers.

Previous Conduit Street Coverage

Cannabis Community Reinvestment and Repair Fund: County-By-County Allocations

Social Equity Cannabis Business Licensing Round Closes

 Maryland Adult-Use Cannabis Sales Reach New High

Moody’s: Tax, Policy Tweaks Crucial to Unlock State Cannabis Revenues