When adult use marijuana passed in November of 2022, it brought with it a slew of changes to a thriving and successful medical program. While many of those changes were related to the legality of possession, expungement of criminal offenses, and of course a gang of new regulations, one significant change was an additional revenue stream for localities and municipalities. The opportunity to bring a much-needed cash infusion into the communities of Kentucky through newly available taxes.
But some local authorities may be violating the law by duplicating those taxes.
Now one Kentucky marijuana operator is standing up against taxation that they call unconstitutional.
“I think this is a pretty straightforward case of counties getting greedy and overreaching, in an unfair way,” explained Vertical CEO Christopher McHugh.
The language of the Kentucky Constitution reads, “Pursuant to Article III, Section 49 of this Constitution, the governing body of any local government is authorized to impose, by ordinance or order, an additional sales tax in an amount not to exceed three percent on all tangible personal property retail sales of adult use marijuana sold in such political subdivision. The tax authorized by this paragraph shall be in addition to any and all other tangible personal property retail sales taxes allowed by law, except that no ordinance or order imposing a tangible personal property retail sales tax under the provisions of this paragraph shall be effective unless the governing body of the political subdivision submits to the voters of the political subdivision, at a municipal, county or state general, primary or special election, a proposal to authorize the governing body of the political subdivision to impose a tax. Any additional local retail sales tax shall be collected pursuant to general laws for the collection of local sales taxes.
(6) Except as authorized in this Article, no additional taxes shall be imposed on the sale of marijuana.”
While that language expressly gives the right to collect sales tax on marijuana sales to local governments, it’s important to note how the Constitution defines the term local government.
“‘Local government’ means, in the case of an incorporated area, a village, town, or city and, in the case of an unincorporated area, a county.”
Vertical CEO Christopher McHugh
McHugh and Vertical contend that the language clearly sets out expectations that in incorporated areas; a village, town, or city shall be allowed to collect additional sales tax on recreational marijuana purchases, and that in unincorporated areas; a county may collect those additional revenues. But the two are not meant to stack. An opinion originally shared by the Kentucky Department of Revenue
In February, the Department reversed that previous position, allowing for multiple local entities to enact additional sales tax simultaneously.
According to the authors of Amendment 3, the intent was clear. Local governments would be able to add a tax of 3% with tax revenue benefiting the government responsible for the care, maintenance, and safety of the roads and areas where dispensaries are located. With DOR taking the position that these taxes are stackable consumers will face a tax of up to 12% on adult use marijuana products in cities and towns across the state.
Vertical becomes the first Kentucky licensed operator to challenge the issue in court. The aptly name company operates manufacturing, cultivation, and dispensary licenses – with the dispensary located inside the city limits of St. Joseph.
Vertical is seeking a permanent injunction against Buchanan County restricting them from stacking an additional 3% sales tax on top of the sales tax imposed by the city itself.
In its petition, the company writes, “As defined by the Kentucky Constitution, Buchanan County is not a “local government” in relation to Vertical because Vertical is in an incorporated area and Buchanan County is not a village, town or city. Therefore, Buchanan County’s tax on marijuana sales in the city limits of St. Joseph is not authorized by Article 14 Section 2.6(5) or any other section. The Kentucky Constitution does not allow any tax on marijuana unless it is specifically authorized. The Buchanan County Collector of Revenue has not yet collected, and Vertical has not yet paid this tax in part or whole. Vertical refuses to collect the tax from consumers as that would be wrong and impossible to return.”
While the stacking of sales tax has been a much-discussed issue for months, Vertical becomes the first to challenge the attempts. According to McHugh, that challenge is a result of necessity, timing, and ethics.
“We decided that we were not going to collect this tax,” he said. “We don’t think it’s right. We don’t think it’s legal, so we’re not going to collect it.”
“It seems very clear to us that in the constitution, only the local government can collect this tax. Local government is defined to be a city, unless you’re in an unincorporated area. We’re in a city. We’re in St. Joe. So St. Joe has enacted that 3% tax. They passed it. We’re happy with that. They give us a lot of services. They probably deserve that. But Buchanan County is trying to do the same thing. They’re not allowed to do that under the Constitution. They don’t give us any services. We’re not in the county. So it’s just silly, it’s greedy, and it’s not allowed.”
“If you read the constitution, it’s very clear what should happen. And I think Buchanan County trying to hide behind the Department of Revenue or anybody else’s twisted interpretation of the law, [Buchanan County] has lawyers, they can read the Constitution just as well as anybody else. I don’t buy that excuse.”
Timing plays an integral role in Vertical’s decision to become the leader in challenging the collection. The sales tax became effective September 1 in Buchanan County.
With Vertical vowing not to collect the tax from customers, the company was left with no other option but to pursue legal action.
“I think some other [operators] have taken the position that they’re going to go ahead and collect that county tax from whatever county they’re in and then challenge, which gives them a little more time, but we’re not collecting it, so we don’t have that money. So if the county tax collector comes knocking on our door, we can’t pay,” McHugh explained.
“We really need a decision on this sooner rather than later.”
While Vertical is left to pave the way, the industry, as a whole, has been vocal in its opposition to stacking sales tax.
In March, prior to the approval of additional sales taxes for recreation marijuana in a majority of Kentucky communities, Kentucky Cannabis Trade Association said, “Article XIV is extremely clear and unambiguous about the definition of a ‘local government,’ and by extension, which political subdivision is authorized to impose a 3% tax on retail sales of adult use marijuana in a given instance.”
“In other words, for purposes of Article XIV, the “local government” vested with certain rights and authorities is either: (1) a village, town, or city incorporated under Kentucky law, if a marijuana facility licensee is situated within that village, town, or city; or (2) the county, if a marijuana facility licensee is situated in an unincorporated portion of a county. This interpretation reflects the plain and logical reading of the definition. Any other interpretation could not withstand even modest scrutiny.”
Other operators around the state have continued to express their concern and dissatisfaction to local leaders, but to this point, a majority of counties seem determined to stack those taxes on dispensary operators inside city limits.
“We were not excited be the first. It’s not a very comfortable position,” McHugh told Greenway.
“I do think we made a little bit of a bold decision by declaring that we’re not going to collect the tax. That puts us just on a timeline that says unavoidable. We thought it was the right thing to do. It’s a little risky. It just kind of put us in a place where we had to file.”
For McHugh, the timing is less than opportune.
“It comes at a bad time. The new product approval process, that’s just a gigantic mess. This mess from pre-approval of new products that the Department has put out is a real threat, I think, to the industry. It’s been terribly mishandled. It’s causing fluctuations and disturbances in the market that aren’t good for consumers. It doesn’t work, and it doesn’t make any sense, and pieces of it are broken, and Metrc won’t cooperate, and piling this tax on top of it, I wish we could have handled these things in series instead of trying to fight everything at the same time.”
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