The Cannabis Control Commission recently approved an initial draft of new regulations, with the stated intent to “level the playing field for entrants into the Commonwealth’s legal industry, increase access for small businesses and those from communities that have been disproportionately harmed by marijuana prohibition, and ensure compliance with the state law.” The CCC has already issued a press release with a summary of the changes in the draft regulations, but today’s post will focus on just what exactly the CCC means by “ensure compliance with the state law.”
The state law being referenced, is Massachusetts General Laws Chapter 94G, “Regulation of the Use and Distribution of Marijuana not Medically Prescribed,” and it is the statutory framework for Massachusetts’ recreational cannabis industry. The lack of compliance the CCC is attempting to address relates to limits on what terms can (and cannot) be included in the Host Community Agreements (“HCAs”) that every cannabis business in the Commonwealth is required to execute with its local municipality. 94G § 3(d) permits a municipality to impose a “community impact fee” as a condition of the HCA, so long as the fee is “reasonably related to the costs imposed upon the municipality by the operation of the marijuana establishment” and it does not exceed “3% of the gross sales of the marijuana establishment”. Nevertheless, in practice most municipalities use 3% of revenue as a baseline minimum payment, regardless of whether such payment is “reasonably related” to any actual municipal costs, and many municipalities also demand additional payments in the form of “mandatory charitable donations”, “gifts”, “grants”, and “community benefit payments”.
In August of 2022 the state legislature took decisive action to curb these excessive fees by amending 94G to clarify that no HCA can impose an impact fee that is calculated as a percentage of sales; instead, impact fees must be based on the municipality’s actual documented costs, and the licensee has the right to recover damages, attorneys' fees and other costs that result from an impact fee that is not reasonably related to the municipality’s actual costs that result from the licensee’s operations. Additionally, the amendments to 94G prohibit a municipality from circumventing the limits on impact fees by imposing fees with other names; the impact fee must encompass all payments and obligations imposed upon the licensee. Most importantly, 94G now provides the CCC with authority to conduct annual reviews of each HCA and issue notices of deficiency for those HCAs that are not in compliance with the law. As part of this new authority, the CCC has a statutory mandate to finalize new regulations by November 9, 2023.
The draft regulations that the CCC approved last week are the public’s first look at how the CCC intends to enforce the requirements of 94G. In many ways, the changes in the draft regulations mirror the changes to 94G, but with additional details and clarity to dispel any lingering ambiguity in the state law. For instance, the draft regulations also require an impact fee to be reasonably related to actual costs imposed upon the municipality by the licensee’s operations, but the draft regulations go on to provide a detailed definition of what constitutes “reasonably related”, and clarify that an HCA cannot come up with its own definitions of a valid impact fee. The draft regulations also go beyond the specific requirements of 94G in certain crucial ways, such as requiring every impact fee assessment to be reviewed by the CCC for certification that it is “reasonably related” to the licensee’s operations.
All of this should come as good news to cannabis businesses that have been forced to accept HCAs with terms that clearly conflict with state law. Beginning May 1, 2024, the CCC will review each HCA as part of the initial license application and at each annual license renewal. This means that even existing HCA’s will need to be brought into compliance with the updated regulations.
However, there is also a new risk that is implicit in such a major change: without the incentive of revenue generating impact fees, certain municipalities may become substantially less hospitable to cannabis businesses, particularly those businesses on the production side, which don’t even generate the local sales tax that municipalities can expect from retail cannabis operations. Municipalities have broad (although not unlimited) discretion to choose whether or not to enter into an HCA with a new cannabis business, or to renew an HCA with an existing cannabis business. In theory, a cannabis business that has invested millions of dollars into their build-out, and that has been operating for years, could still be at risk of being shut down by a hostile municipality that is angry that it can no longer collect 3% of the cannabis business’ revenue. Even if an existing HCA is not due to expire for many more years, if the CCC determines that the HCA is not compliant with state law, the draft regulations allow the host community to unilaterally “discontinue relations” with the licensee, making it impossible for the licensee to renew its state license.
Impact fees may have initially been a necessary concession to win over a skeptical public that was worried about increased crime, traffic and health problems. At this point, however, most communities have now recognized that such fears were unfounded, and the actual impact of a cannabis business is primarily positive, even without the impact fees. Therefore, even if the CCC’s proposed draft regulations are adopted as final regulations in November, it seems unlikely that there will be a municipal purge of existing cannabis businesses. Nevertheless, this new change will certainly put pressure on prospective cannabis businesses to communicate all of the other benefits that they can bring to their community, and existing businesses will need to remain more focused than ever on building a positive relationship with their community.
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