Will Medical Marijuana open a new revenue stream for municipalities? Early indications are that some OMAG members believe that it will, and in more areas than just sales tax collections. OMAG cautions its members against enacting excessive permit or licensing fees as those fees cannot be used for revenue generation.
License and Permit Fees Cannot Be Revenue Generators
Oklahoma municipalities may exercise police powers and the power to tax. The power to tax is restrictive and typically requires a vote of the people. The power to protect the health and welfare of the public, on the other hand, is largely left to the discretion of the municipality.
The Courts have upheld the charging of permit and license fees as a valid exercise of police powers when the municipality is seeking to defray or recover its actual costs in issuing licenses or permits and any costs directly associated with regulating the occupation.[i] If the amount of the fee is not limited to the "necessary or probable expenses of issuing the licenses and the necessary supervision and regulation of the business", it will not be considered a valid exercise of police powers and will be invalidated.[ii]
A common, pre-election objection to SQ 788 was that Medical Marijuana would lead to an increase in crime necessitating an increase in the cost of law enforcement. The increase in the cost of general criminal law enforcement cannot be considered as a cost of regulation for the purpose of recovering that cost via a fee.[iii] Unless the cost relates to the issuance, investigation or enforcement of business regulations, it is not recoverable in a fee. If a given business attracts a criminal element that results in a greater need (and associated cost) for law enforcement, that is not a cost that can be recovered by a license or permit fee.
SQ 788 vests jurisdiction for the regulation and ongoing inspection of the commercial marijuana industry in the Department of Health. Little room is left for independent municipal regulation of the industry. It is thus difficult to identify what costs a municipality will incur above the normal costs for licensing a routine business that would justify the charging of higher (or, in some cases, much higher) license or permit fees for marijuana Growers, Processors or Dispensaries.
OMAG strongly recommends against the charging of higher permit fees for the marijuana industry unless your municipality can show what added costs it expects to incur that directly relate to the issuing of a license or permit and the lawful investigative and enforcement efforts related to that industry. If marijuana is to become a cash crop for Oklahoma municipalities, it will have to be by way of sales tax and not license or permit fees.
Marijuana and Sales Tax
There remains a serious question as to whether municipalities may impose a sales tax on Medical Marijuana. 63 O.S. §426 created a special sales tax for the State without any language making that tax the exclusive tax applicable to Medical Marijuana. The issue remains whether this section merely created a special (higher) rate for Medical Marijuana or whether it created a new kind of tax that municipalities are not currently charging. OMAG believes the most logical reading of this section is that it merely imposes a higher sales tax rate at the State level and that, absent express language to the contrary, the retail sale of marijuana would also be subject to existing municipal sales tax rates. OML has noted on their website that they are " currently working with the Oklahoma Tax Commission to verify municipalities' ability to immediately collect sales tax once SQ 788 becomes effective."
i. City of Shawnee v. Reid Bros. Plumbing Co., 1949 OK 82, 207 P.2d 779 quoting McQuillin-Municipal Corporations Revised, Sec. 1089.
ii. City of Hartshorne v. Marathon Oil Co., 1979 OK 48, 593 P.2d 97.
iii. Red Slipper Club, Inc. v. City of Oklahoma City, 1979 OK 118, 599 P.2d 406 distinguishing Jack's Supper Club v. City of Norman, 1961 OK 82, 361 P.2d 291 by noting that, in Jack's, cops engaging in routine regulatory (not law enforcement) inspections - the cost of which could be recovered in a license fee.
DISCLAIMER: OMAG has reviewed SQ 788, existing OK statutes and case law as well as statutes and case law from other states that have legalized marijuana to some degree. OMAG cannot predict how our Legislature or Courts will respond to SQ 788 and can only offer our best advice on the subject. OMAG members seeking legal advice on SQ 788 should be aware that there may not be clear-cut answers on some of the issues for some time. OMAG offers this guidance to help your municipality make informed decisions about policies and procedures, directly or indirectly related to medical marijuana, until some of the issues can be decided by the Legislature or the Courts.