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Daily Tax Report: State

Glitch in Illinois Weed Law Could Delay Towns’ Tax Revenue

Sept. 16, 2019, 7:02 PM

A drafting error in the law legalizing recreational marijuana in Illinois starting in January may mean counties and towns have to wait an extra nine months before gathering their share of potential revenue bonanza.

The delay has been attributed to a drafting glitch in the municipal cannabis retailers’ occupation tax (MCROT) that will prevent municipalities from collecting taxes until Sept. 1, 2020. MCROT was a prominent feature of H.B. 1438, which made Illinois the 11th state to legalize recreational marijuana.

The state has previously estimated that legalization could bring in more than $1 billion in revenue over five years. Local governments’ share of that prize remains unclear because municipal participation will evolve over time.

Mayors and aldermen across the state are now scrambling to enact local tax ordinances ahead of a soft Oct. 1 deadline that could grant them taxing authority on day one of the state program. They have also been making appointments to lobby legislators during the six-day General Assembly veto session, which starts Oct. 28. Municipal leaders hope to set up MCROT regimes and amend the cannabis law to permit tax collections beginning Jan. 1.

“This could be an issue that is raised for clarification in follow up legislation this fall,” said Brad Cole, executive director of the Illinois Municipal League (IML).

Despite the flurry of municipal rulemaking, it remains unclear whether state lawmakers will lend support to the local governments and move up the tax’s start date. Some lawmakers fear high local taxes could interfere with cannabis sales as the program gets started.

“There has been a request to make that change but no decision has been made yet,” said Rep. Kelly Cassidy (D), one of the architects of Illinois’ cannabis statute.

$1 Billion Over Five Years

Illinois’ law permits cities, towns, and villages to impose MCROT on state-authorized purchases of adult-use cannabis at a rate no more than 3% of the purchase price. Counties are authorized to impose the tax at a rate of 3% in incorporated areas and 3.75% in unincorporated areas. The Illinois Department of Revenue is designated to administer and collect the taxes, and remit payments to municipalities.

The department has estimated state revenue from the tax features of the broader statute would total $140.5 million in FY 2021, $253.5 million in FY 2022, $323.5 million in FY 2023, and $375.5 million in FY 2024.

Revenue department spokesman Sam Salustro said the law directs municipalities to implement MCROT ordinances and register with his agency before June 1 of a given year, in order to start collections on Sept. 1 of that year. As a practical matter, he said, the statutory language prevents the department from collecting MCROT when adult-use cannabis goes live on New Years Day.

“We won’t begin enforcing and administering it until the first day of September 2020, so that’s almost a year from now,” he said.

Rushing to an Artificial Deadline

The IML—the lobbying voice of Illinois’ nearly 1,300 towns and cities—in July began telling Illinois’ municipalities to act quickly. It also circulated a model ordinance that members could enact quickly.

Chicago attorney Michael Marrs, who advises dozens of Illinois towns on municipal law, said the IML’s directives have caused dozens of communities to take action ahead of the artificial deadline.

In recent weeks the cities of Urbana and East Peoria enacted ordinances permitting the imposition of MCROT at a rate of 3%. The Chicago City Council is expected to take similar action before the end of the month. At the same time, several cities, including Naperville, Morton, and Murphysboro, have voted to ban sales of adult use cannabis.

“The reason people are rushing now is in anticipation of there possibly being an amendment to the legislation before January,” said Marrs, a partner with Klein, Thorpe and Jenkins Ltd.

“Proceed With Extreme Caution”

Despite this activity, Cassidy and three other lawmakers championing the cannabis program are cautioning towns and cities to rein in their expectations, which could color any debate in the General Assembly for an MCROT move-up date.

The lawmakers have grown increasingly concerned that local taxes might interfere with cannabis sales, ceding much of the marijuana game to black market sellers.

In a local government toolkit released over the summer, the lawmakers counseled communities to, “proceed with extreme caution and avoid immediately taxing to the cap.”

Cassidy and her colleagues added, “it’s vital to allow the marketplace to mature before increasing tax rates. This has been a huge issue around the country as states and locals have often found that street markets lower prices to compete and maintain market share, so it’s critical to allow the new market to gain traction before increasing consumer costs through taxation.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com