The Pitfalls of the New Michigan Cannabis Excise Tax

The new 24% cannabis excise tax is set to take effect on January 1, 2026. Between now and then, much speculation will arise regarding its impact on Michigan’s legal cannabis market.

Most industry pundits would welcome improved infrastructure, but hinging the future of an entire industry on that hope could be problematic, to say the least.

Here are some of the primary pitfalls that we have recognized after analysis of the new tax:

Misleading revenue expectations

Proponents of the tax estimate it will generate $420 million in revenue. Compared to the $3.29 billion cannabis market, this might suggest a modest ~13% price increase if passed directly to consumers. However, to maintain current margin percentages, retailers will likely need to raise prices by closer to ~24%.

For example, a product purchased for $10 and sold for $15 currently costs the consumer $17.50 after existing sales and excise taxes. With the new tax, the retailer’s cost rises to $12.40. To maintain a 33% margin, the product would need to be sold for $18.50, resulting in a final consumer price of $21.60,a ~24% increase. Of that $21.60, the state would collect $5.50, or ~26%, making Michigan one of the highest-taxing states in the country for cannabis.

Flawed transfer pricing for affiliates

Transfers between affiliated entities will be taxed based on an average wholesale price set quarterly by the Treasury. This price will likely be derived from METRC data, which is notoriously unreliable. Users of METRC know the system is prone to human error and does not account for discounts or returns. Also, it includes transactions that don’t reflect fair market value and fails to distinguish between indoor and outdoor flower. As a result, the average wholesale price may not reflect reality.

If set too low, vertically integrated businesses gain an unfair advantage; if too high, they suffer undue penalties, neither outcome being a result of their own actions. Moreover, this average price could be used by other agencies, such as the IRS, to determine intercompany pricing for 280E purposes, potentially creating significant income tax inefficiencies.

Unrealistic pricing for unrelated parties

For transactions between unrelated companies, the tax is based on the actual price. However, this price is not adjusted for common industry practices such as discounts, rebates, or other reductions offered by marijuana establishments. Once again, the tax is applied to figures that do not reflect the economic reality of the transaction.

Cash flow challenges for wholesalers

Unlike retail taxes, which are collected in cash at the point of sale, growers and processors typically offer payment terms, often exceeding 90 days due to current market conditions. Depending on the collection frequency set by the Treasury, operators could face severe cash flow issues during the initial months of implementation. Anything less than quarterly submissions could be catastrophic.

Disproportionate impact on premium brands

Brands that command higher prices due to consumer popularity will be disproportionately affected. With a price-sensitive market constantly seeking deals, these brands risk being priced out of reach. Boutique growers, whose cost structures don’t allow for price reductions, may face existential threats.

Potential silver lining

The tax appears to apply only to adult-use marijuana establishments, as suggested by the state’s position on 280E expense deductibility for medical licensees (RAB 2022-26). While a 10% discount may not have been enough to incentivize medical purchases, perhaps a ~25% price increase in adult-use products might just be the ticket.

Conclusion

While the full consequences remain to be seen, one thing is clear: this tax appears to have been implemented with little to no consideration for the business realities of the industry.  It could lead to further erosion of the legal cannabis market, job losses, or expansion of the black market.  What this new tax likely won’t lead to, despite congressional promises, is better roads.