How Regulation Eliminates the Black Market for Marijuana in Michigan

How Michigan Municipalities Can Eliminate the Black Market

In addition to deciding whether to prohibit licensed facilities under the Medical Marihuana Facilities Licensing Act (MMFLA) and the Michigan Regulation and Taxation of Marihuana Act (MRTMA), municipalities must also make the important decision whether to allow the black market to continue to thrive.

The decisions are related to one another. If more municipalities continue to ban licensed facilities from existing in Michigan, then the black market will have a greater chance of surviving for a longer period of time rather than becoming fully absorbed by the MMFLA and MRTMA.

In other states that have adopted medical and recreational cannabis laws, it is clear that the black market is captured more efficiently by the regulated market where there are greater numbers of legitimate, licensed locations for individuals to purchase products at reasonable prices. On the other hand, the black market thrives where there are unnecessary barriers to entry, fewer legitimate storefronts to supply the market, and the price on the black market is more affordable for individuals.

Before making a reckless decision that negatively impacts the health, safety, and welfare of its residents, each municipality should think twice about opting out of the MMFLA and MRTMA since prohibiting licensed facilities locally will only serve to benefit the black market to the detriment of patients, business owners, and the people of Michigan.

From the Patient-Caregiver Model under the MMMA to the MMFLA and MRTMA

In 2008, the people of Michigan voted to adopt the Michigan Medical Marihuana Act (MMMA). The law established a patient-caregiver model where one (1) caregiver can connect to up to five (5) patients to cultivate up to twelve (12) plants per patient. The framework under the MMMA was solely intended to be a closed-loop system where the only allowed transfer is between an individual caregiver and his or her connected patients. However, due to patients’ needs for different strains and demand for product variety, it did not take too long for the system under the MMMA to prove itself ineffective and the black market started to flourish.

From 2008 through the effective date of the MMFLA in 2016 (and beyond), hundreds of “gray market” storefronts existed in Michigan where patients could obtain medical marijuana from caregivers. Based on unclear and unsettled law, these locations were often established with (or without) local approval and existed as a “fix” to the MMMA’s broken system by providing locations for patients to visit that had additional sources of medicine and a greater range of products.

To supplement the broken system established by MMMA, the MMFLA was eventually passed by the Legislature in 2016 to allow for licensed commercial medical marijuana facilities necessary to serve the needs of patients. In November 2018, the MRTMA was adopted and established a similar framework for the adult-use cannabis market in Michigan. However, based on the way the two laws are structured, obtaining municipal approval is key to establishing a successful industry and fighting the black market.

Municipal Control under the MMFLA and MRTMA

Under Section 205 of the MMFLA, municipalities have complete control over whether facilities can exist within their boundaries. A medical marijuana facility simply cannot receive a state-operating license unless it is zoned properly and first receives local approval. The MRTMA similarly vests municipalities with the authority on where adult-use marijuana establishments may be located (if any) and, if so, how many are allowed.

Many municipalities have already decided to “opt out” of the MMFLA and MRTMA due to cannabis’ continued status as a controlled substance and federal illegality, as well as perceived safety concerns, the potential risk of increased crime rates, and fear that product in the system will somehow be diverted to the black market. Other municipalities have decided to take things slowly by adopting the “wait and see” approach. However, each municipality’s decision to “opt out” ultimately has a negative impact on the overall industry as a whole and creates an environment where the black market will prosper.

Eliminating the Black Market by Opting In

As more municipalities are tasked with the decision on whether to “opt in” or “opt out” of allowing facilities for the medical and adult-use cannabis industry, it is important to keep in mind the following as it relates to the decision to “opt out” and black market:

Acknowledge the Existence of the Black Market

• The black market existed prior to the MMMA and will continue to exist despite the passage of the MMFLA and MRTMA.
• The size of the black market is determined by policy: the market consists of activities and conduct that our laws/rules consider to be “illegal” and depends on the risk/reward associated with performing those activities.
• If there are legal avenues (and incentives) for individuals to exit the black market, then it makes sense to unless there are limitations or barriers to entry that allow the black market to continue.

Trust the Process

• The MMFLA and MRTMA both create a closed-loop system with seed-to-sale tracking which is specifically designed to prevent diversion to the black market.
• Licensed facilities are required to comply with all applicable laws, rules, regulations, and local ordinances regarding inventory tracking and recordkeeping, security, safety, product testing, and nuisance mitigation.
• Failure to comply with all legal and regulatory requirements, including diverting product to the black market, may result in the fines, suspension, or license revocation.

Barriers to Entry

• The requirements of the MMFLA and MRTMA prohibit certain individuals from entering the industry, such as the minimum requirement for capitalization based on license type. There are also additional costs associated with compliance and higher excise taxes that may discourage entry into the industry.
• The application process is lengthy and has taken over eight (8) months for a decision on an application from submission to decision.
• The Licensing Board has been inconsistent in approving/denying applications based on its the reasons for the denial and what’s in the record.
• Municipalities have been artificially restricting the supply of licenses by (a) imposing overly restrictive zoning ordinances and strict distance requirements or (b) opting out entirely.
• The overall result is that fewer licensed facilities have been entering Michigan’s market.

Growing Pains

There will be growing pains in both the medical and adult-use cannabis industry until more facilities are operational and the supply of licensed locations (and products/pricing) reach an equilibrium with demand.

There will be a learning curve for licensed facilities to get accustomed to the new laws, rules, and regulations. For example, there will be more product recalls as growers and processors become familiarized with the regulatory requirement. This will likely create a shortage of supply. There will also be fewer safety compliance facilities and secure transporters required to test and transport product within the system.

The black market will continue to thrive in this environment due to the low supply of legal product and higher prices, which will result from the relatively lower number of licensed facilities in existence throughout Michigan.

Every Municipality’s Goal Should Be to Eliminate the Black Market

While the health, safety, and welfare of its residents should be of the utmost concern for a municipality in deciding whether to “opt in” or “opt out,” every municipality should also take into account how to best eliminate the black market for marijuana in Michigan. A greater number of licensed facilities throughout Michigan will lead to more options and lower prices for individuals. This will most likely lead to a reduction (and eventually a full absorption) of the black market, and a win-win for municipalities.

Due to the strict language in the MMFLA and MRTMA prohibiting the diversion of product to the black market, it is unlikely that a licensed facility will risk losing its license by attempting to sell product outside of the seed-to-sale system. Additionally, the numerous risks of selling product in the black market and violating federal and state law frankly do not outweigh the short-term rewards. For those reasons, municipalities should not be concerned about allowing licensed facilities within their boundaries.

For individuals who could not, or did not, enter the legal licensing and regulatory framework of the MMFLA or MRTMA, it may be more attractive to consider participating in the black market, especially in locations that did not “opt in” since the black market will have a monopoly in those locations. There will always be demand, but it’s a question for every municipality to consider: should our citizens be allowed to purchase this product from a licensed facility or from the black market?

For the health, safety, and welfare of the citizens of Michigan, more municipalities need to understand the consequences of “opting out” and how the black market would be more easily defeated if more jurisdictions started allowing licensed facilities within their jurisdictions.