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New Legislation Provides Support for Social Equity & Requires Transparency in HCAs
An Act Relative to Equity in the Cannabis Industry (the “Act”) was signed into law on August 11, 2022 by Governor Charlie Baker after he vetoed one section requiring a study on medical marijuana in schools. The Act has been touted as “the most significant change to Massachusetts cannabis law since the legalization of adult-use marijuana in 2017.”* The Act amends various statutes related to cannabis, including taxes, Host Community Agreements (“HCAs”), social consumption establishments, social equity, and criminal records expungement.
Taxes:
The Act makes sweeping changes to allow certain tax deductions (at the state level) for marijuana businesses. These include deducting: a portion of wages or salaries paid or incurred for the taxable year and amounts paid or incurred during the taxable year in carrying on the trade or business of a marijuana establishment or a medical marijuana treatment center that would have been deductible, but for section 280E of the federal tax code. Permitting these deductions is a huge step forward for cannabis businesses who have historically been unable to receive the tax deductions that any other legal business can otherwise receive.
Also, as an incentive for municipalities to allow more social equity businesses to operate, the Act includes language that each municipality with at least one adult-use Marijuana Retailer that is operating as a “social equity business” will receive 1% of the total sales of each social equity Marijuana Retailer operating in the municipality.
Host Community Agreements (HCAs):
The Act provides for significant changes to permissible terms and the process for entering into HCAs between medical and adult-use licensees and their host municipalities. Whereas a “Community Impact Fee” was permitted under the former legislation to offset the costs imposed upon the municipality by operating marijuana businesses such as compliance enforcement, under the new law, municipalities may still include a fee, but must adhere to new restrictions in order to promote transparency and equity. The new law requires that any Community Impact Fee:
Must only commence on date Cannabis Control Commission (“CCC”) issues a Final License;
Must not have the first annual fee payment due prior to first annual license renewal by the CCC;
Must be reasonably related to costs imposed on host municipality by the marijuana business’s operations;
Must not mandate certain percentage of total or gross sales;
Must not exceed three percent (3%) of licensee’s gross sales;
Must not be effective after licensee’s eighth (8th) year of operation; and
Must not include any additional required payments or obligations, including charitable contributions to the host community or any other organization.
Furthermore, host communities must keep and be able to provide cost records documenting the costs on the municipality in order to justify the Community Impact Fee imposed upon the licensee. This documentation is required to be a public record and must be provided to the licensee within 1 month after annual license renewal. If the host community fails to provide this documentation, the licensee may bring a breach of contract civil action against the host municipality to recover damages, attorneys’ fees and other costs not reasonably related to actual costs.
Finally, the CCC must review and approve each HCA within 90 days of receipt as part of a cannabis business’s license application and at each license renewal. The CCC will not approve a Final License application unless the HCA is in compliance with the new statutory requirements.
Social Consumption:
The Act established a process for municipalities to authorize on-premises Social Consumption Establishments. There are two alternative routes by which municipalities can authorize social consumption, either through a local voter initiative/ballot question or by directly adopting a local ordinance or by-law. Social Consumption Establishment licenses are limited exclusively to Economic Empowerment Priority Applicants, Social Equity Program Participants, Microbusinesses, and Craft Marijuana Cooperatives for 3 years after the first Social Consumption Establishment begins operations.
Social Equity:
To promote social equity efforts in the Massachusetts cannabis industry, the new legislation also requires the CCC to create minimum standards for host communities to “promote and encourage full participation in the regulated marijuana industry by people from communities that have previously been disproportionately harmed by marijuana prohibition and enforcement and to positively impact those communities.” To this point, a municipality who “opts in” to allow marijuana businesses must establish initial policies to promote equity in the cannabis industry no later than July 1, 2023. Municipalities that are not currently a host community to any marijuana businesses must first establish these policies before entering into an HCA. Additionally, if a host community fails to establish the required social equity policies, it will be subject to a monetary penalty in an amount equal to the annual total of all HCA community impact fees received from all marijuana businesses operating within that host
community.
The new law also establishes a Cannabis Social Equity Trust Fund (“CSETF”) to encourage full participation in the regulated marijuana industry by individuals from communities that have been disproportionately harmed by marijuana prohibition and enforcement. The CSETF will be funded by annually transferring 15% of the state Marijuana Regulation Fund and by private sources, including donations from licensees as part of Positive Impact Plan. CSETF funds must be used to make grants and loans to CCC-certified Social Equity Program Participants and Economic Empowerment Priority Applicants. The CSETF will also be regulated and administered by the state Executive Office of Housing and Economic Development, in consultation with a newly established Cannabis Social Equity Advisory Board.
Expungement of Cannabis Criminal Records:
As an additional effort for Massachusetts to increase social equity in its cannabis industry, the Act creates a process for streamlining expungement for certain cannabis offenses. Although legislation from 2018 provided for record expungement, the desired impact has not been achieved. Essentially, the new Act aims to have greater impact by eliminating judicial discretion to deny expungement petitions for decriminalized cannabis offenses and requiring the court to order the expungement within 30 days of receiving a petition. The expedited process is available for criminal records related to certain cannabis possession, cultivation, and distribution offenses that have been decriminalized under Massachusetts state law over the past several years.
To Conclude:
RZA Legal is ramping up our business in Massachusetts and would love to help your business navigate these changes. You don’t want to get stuck in an expensive retainer with a local law firm who does not even speak the lingo of commercial cannabis and pay to get them up to speed on all the legal issues that the cannabis industry presents. We have been representing entrepreneurs and small to medium licensed cannabis businesses since 2015. Whether you are just starting out or wanting to ensure your current business is compliant with the changing regulations, we are here to assist! We proudly offer flat fee pricing and discounts for social equity participants. Please schedule a consultation here. We can’t wait to work with you.
*Ali DiMatteo, Governor Signs Expansive Cannabis Legislation, Mass. Muni. Ass’n. August 12, 2022 https://www.mma.org/governor-signs-expansive-cannabis-legislation/.
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