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Not so High on Pot Company Fees

December 30, 2018

By Trevor Ballantyne

Boston University Statehouse Program

Half-mile traffic jams. Parking shortages. Six-hour lines. At least two reports of public urination.

As thousands converged on the town of Leicester last month to visit Cultivate Holdings LLC and be among the first to legally purchase adult-use marijuana in Massachusetts, frustration from some residents boiled over. Town officials called an emergency meeting.

“Cultivate is paying for everything they need to pay -- they pay the police details, everything that they do as a business is not being borne by the town,” Leicester Town Administrator David Genereux said a week later.

“When the lines and the traffic go away, it’s going to be another business, but it’s a business that is contributing a disproportionate share of revenues back to the town.”

While a boon for the town, the revenues Genereux mentioned are part of a wider trend in agreements between municipalities in the commonwealth and the cannabis companies seeking to operate in them -- a pattern that has drawn scrutiny from cannabis advocates and legal experts who say the practice violates state law and, in some cases, amounts to extortion.

But with the Cannabis Control Commission, the state’s adult-use marijuana regulatory body, not reviewing the contents of these agreements -- and municipalities saying they are allowed under separate state statutes -- it remains unclear if any resolution will be reached.

State law requires a host community agreement be in place to receive a provisional adult-use license. It is meant to foster cooperation between the municipality and the cannabis company and set the framework for their relationship.

Under the law, in addition to a maximum 3 percent local tax on gross revenues, municipalities are permitted to assess a community impact fee.

Like the tax, the impact fee may not exceed 3 percent of gross annual revenues and must be, “reasonably related to the costs imposed on the municipality by the operation of the marijuana establishment.”

The law also says any payments made to a municipality must be recorded and kept as a public record and the initial agreement can last no longer than five years.

“The costs and impacts of hosting a Marijuana Establishment will understandably vary from municipality to municipality and negotiated HCAs should reflect the particular impacts on the host community,” a CCC guidance document says.

Under the agreement signed by Leicester and Cultivate President and founder Sam Barber in April, the company agreed to pay a 3 percent annual community impact fee of no less than ”$75,000 and shall not exceed $250,000,” a copy of the agreement obtained from the town shows.

“We felt that having a floor of $75,000 -- with $50,000 towards economic development and $25,000 to the town’s parks -- was a good bottom line,” Genereux said. “And we felt that $250,000 on the top end made a lot of sense as well.”

Any money not used to cover costs related to Cultivate’s operation, or to fund town parks and an economic development plan, will be directed into the town’s general fund.

“I think that would fall outside the bounds of the statute,” attorney Blake Mensing said of the payment’s required minimum. “You have to incur a cost, it can’t be forward-looking.

“The community impact fee is meant to offset impacts actually incurred costs to the community, up to 3 percent, so there is not minimum amount. I am not saying there won’t be, but if there are no impacts, the statute does not allow the town to collect a single dime.” he said.

Geoff Beckwith, executive director and CEO of the Massachusetts Municipal Association, sees things differently.

“This was not created as part of a revenue scheme on the part of state government or local government.”

The MMA is a member organization representing the 351 cities and towns in Massachusetts and the municipal officials who run them. It “works to bring municipal officials together to develop and advocate for unified policies and to work together to increase efficiency and effectiveness of municipal government.”

“The ballot question (passed by voters in 2016) made provisions for a tax but that was refined by the Legislature and actually there is a much higher state tax and a much higher revenue stream that will be going to state government than local government,” Beckwith said in a phone interview.

Every adult-use cannabis sale made in Massachusetts is subject to a 10.75 percent excise tax and the state’s 6.25 percent sales tax in addition to a cannabis-specific state tax up to 3 percent of the location’s gross annual sales.

Lawmakers updated the “local control” section of the state’s adult-use marijuana law last summer. In addition to raising the maximum allowable tax at the local level from 1 percent to 3 percent, lawmakers included a provision allowing municipalities to assess a community impact fee with strings attached.

“Having one of these essentially commercial franchises, to sell marijuana in a limited marketplace -- they are extremely valuable” from a municipal perspective, Beckwith argued. “So, it makes sense for the community to appropriately negotiate host agreements that have other ancillary aspects that are in the public interest.”

While Mensing acknowledged the benefit presented to a municipality by cannabis company’s operations, he said the statue related to local agreements is not “ambiguous.”

“That may be a municipal concern. That is not what the statutory underpinnings are, this industry is intended to benefit (all) Massachusetts citizens and residents.”

An analysis of dozens of local host agreements obtained through Freedom of Information Act requests shows Leicester’s HCA is not an outlier and municipalities with agreements already in place are using community impact fees in ways that Mensing and other advocates believe go beyond what the law allows.

Scheduled to open Dec. 17, Alternative Therapies Group Inc. operating in Salem will contribute 3 percent of its gross revenues to a local tax.

An additional 1 percent of each transaction is designated as a “voluntary contribution to a Transit Enhancement Fund, once such fund has been established,” reads the agreement signed by Salem Mayor Kimberley Driscoll and CEO Christopher Edwards in June.

Signed on April 13, 2018, the town of Franklin’s agreement with New England Treatment Access, Inc. states that, “commencing on July 1, 2018, and for each subsequent year, the Company shall make a minimum annual payment to the Town in the amount of $300,000.”

Sira Naturals Inc. in Milford will pay the town an amount, “that is equal to $250,000 each year throughout the term,” of its agreement signed by CEO Michael Dundas and Town Chairman William Kingkade Jr. in March.

Central Ave Compassionate Care, Inc. agreed to a one-time payment of $12,000 for a “Welcome to Ayer” sign with an inscription on the back that reads, “funds for this sign provided by revenue generated by the legalization of cannabis.”

“State law itself authorizes cities and towns to have the ability to negotiate contracts, but negotiate on behalf of the local citizens,” Beckwith said referring to another chapter of Massachusetts law that grants powers to cities and towns to enter into contracts with companies who wish to operate there.

As an example, he noted that if Comcast or another cable provider wants to offer service to a community, the municipality has legal authority to negotiate provisions such as adding Wi-Fi coverage to public areas, or technology and wiring for public schools.

“That is analogous with the situation here with marijuana. There’s a cap on the dollar amount on the fee that’s called the host community agreement, but communities clearly have the authority to negotiate other aspects that are in the general public interest.”

Attorney Mensing disagrees. “There is absolutely a law that preserves a municipality’s right to enter contracts. However there is a provision in that law that says that power to contract is limited by all other state laws.”

Mensing, whose firm’s website say it is the first legal and business advisory firm dedicated solely to cannabis in state, also disputed Beckwith’s characterization of HCAs as “voluntary agreements.”

“I have been involved in a great number of host community negotiations and every single one of them has been a take it or leave it proposition from the town,” Mensing said.

“I have had one town administrator tell me over the phone, “if you put one red line on our contract, we won’t sign it’ -- that’s not arm’s-length negotiations. That is extortion.”

Appointed by Gov. Charlie Baker, Attorney General Maura Healey and State Treasurer Deborah Goldberg, CCC social justice commissioner Shaleen Title has advocated for increased scrutiny of HCAs on the part of the regulatory body she sits on with four others.

“From my perspective, it was clear from the beginning when they started drafting the initiative in 2015 that the municipal role would be important,” she said, sipping her coffee at a locally owned cafe near the commission’s downtown Boston office.

“We ended up with a law where the municipality and the business come together, created this agreement and ensured that they’re cooperating,” Title said. “But, what the law included was a limit to prevent a bidding war where a municipality can just decide to limit licenses and issue the licenses to whoever pays the most.”

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