Oregon Municipalities Seek to Tax Recreational Marijuana, But Can They?

Oregonians will vote this fall on whether to legalize marijuana for adult/recreational use through Initiative 91. Oregon cities are already preparing themselves by implementing local ordinances addressing the siting and zoning of recreational marijuana businesses. Though to a certain extent Oregon cities being proactive about recreational marijuana regulations is a positive thing, many Oregon cities are turning the heads of marijuana entrepreneurs with their local marijuana ordinances, and not in a good way.

A growing number of Oregon cities are enacting ordinances that impose (additional) local taxes on recreational marijuana businesses — in some cities, as much as 10% on recreational marijuana sales — and many other cities are considering doing the same. It is not clear that Oregon cities have the authority to tax marijuana since Section 42 of Initiative 91 expressly reserves taxation of recreational marijuana businesses exclusively to the State. Initiative 91 also provides that “Sections 3 to 70 of this Act, designed to operate uniformly throughout the state, shall be paramount and superior to and shall fully replace and supersede any and all municipal charter enactments or local ordinances inconsistent with it … [s]uch charters and ordinances hereby are repealed.”

The cities that have enacted their own marijuana taxes are under the impression that their tax ordinances can withstand the Initiative if the taxes are enacted before the Initiative passes. In other words, they believe that their tax votes and the taxes themselves will be grandfathered in and that the Initiative’s prohibition on local taxes simply will not apply to them. We are highly dubious about this “legal” analysis, especially since the Initiative is clear about taxing authority, provides for no grandfathering, and ensures that it will preempt any local ordinances that conflict with it.

Oregon cities seem to believe they are entitled to generate revenue from recreational marijuana given that they will need to spend local funds policing much that will happen when recreational marijuana becomes legal in Oregon. Initiative 91 allocates 10% of the total tax revenue from recreational marijuana to municipalities for local law enforcement, which itself is another legal argument against cities going it alone. The Initiative contemplated how much cities should get in tax revenues from recreational cannabis, and it allocated for that. If Initiative 91 succeeds at the polls, the voters will have spoken not just about legalization, but also about taxation.

After Initiative 91 passes, there will no doubt be many lawsuits against the taxing cities. Initiative 91 allows cities and counties to enact “reasonable time, place and manner regulations of the nuisance aspects of establishments that sell marijuana to consumers if the city or county makes specific findings that the establishment would cause adverse effects to occur.” This means that cities and counties are free to enact reasonable regulations regarding marijuana business  hours of operation and loitering rules. Initiative 91 states that this grant of “nuisance mitigation powers” is in addition to, and not in lieu of, the authority cities and counties already have to regulate businesses within their borders. Oregon cities and counties are also likely to be free to require marijuana businesses secure and pay for conditional or special use to locate in their jurisdictions. We saw these sorts of fees in Nevada where Clark County charged $5,000 for a marijuana special use permit.

Oregon cities have marijuana revenue on their minds. The question is what mechanism they will use to get that revenue and which of those mechanisms will ultimately be found legal. It seems “pay to play” is going to be the new theme for Oregon’s recreational marijuana industry.