On the last day of its spring legislative session, the Illinois General Assembly adopted House Bill 1438, the Cannabis Regulation and Tax Act (the Act), legalizing the sale, possession and use of marijuana for recreational purposes by adults over age 21 starting Jan. 1, 2020. The Act passed in a flurry of late-session activity and procedural maneuvering that allowed it to be adopted by the Senate and the House in the space of three days. If Gov. J.B. Pritzker signs the bill as expected, Illinois will be the first state to legalize the recreational use of cannabis by legislative action rather than by public referendum.
The Act significantly amends multiple provisions of Illinois law and will impact numerous sectors of the state economy. This alert focuses on how legalization will impact local governments in Illinois.
In the coming weeks, Holland & Knight will provide additional analysis and guidance on specific areas of the Act, including zoning and licensing authority, employment policies, and management of law enforcement records.
The Act legalizes the sale, possession and use of cannabis by persons 21 and older for recreational purposes and provides for a rapid expansion in the number of cannabis retailers. The Act sets tax rates on both wholesale transactions by cultivators and retail sales by dispensaries. It also authorizes counties and municipalities to impose local taxes on retail sales. Primary licensing authority for cannabis businesses is reserved to the state, while local governments are granted limited authority to regulate cannabis businesses through zoning. The Act also tasks state and local law enforcement agencies with expunging decades of criminal records involving minor cannabis offenses.
The Act underwent significant changes since it was first introduced earlier this spring as Senate Bill 7. Most importantly, the right of unlicensed private citizens to grow cannabis for personal use in their own homes was removed. Under the Act, only persons who are registered as qualifying patients under the state's existing medical cannabis program may participate in "home grow." This was a major area of concern for law enforcement and local governments that feared the proliferation of illegal grow operations in residential areas. Another area of concern from public safety agencies was addressed when the legislative sponsors reinstated language authorizing employers to enforce "zero-tolerance" and "drug-free" workplace policies. The provisions of the Act requiring expungement of minor cannabis offenses were narrowed to exclude felony convictions and the time period to complete the expungement process was extended. One surprising late addition was the ability for cannabis businesses to allow on-premises consumption subject to local permission. These issues and more are discussed below.
As of Jan. 1, 2020, Illinois residents over age 21 will be allowed to possess up to 30 grams of raw cannabis, 5 grams of cannabis concentrate or cannabis-infused products containing up to 500 milligrams of THC. All permitted cannabis products must be purchased from a licensed dispensary. Adults 21 and over will be allowed to consume cannabis on private property away from minors and certain prohibited areas.
There are currently 55 cannabis dispensaries and 20 cannabis cultivation centers in Illinois serving the state's 46,000 medical cannabis patients. It is expected that the majority of these facilities will apply to the state for "early approval" licenses to allow them to supply the recreational market starting on Jan. 1, 2020. In addition, existing dispensaries will be permitted to apply for a "secondary site" license to open a second dispensary location within the same regional area. Applicants for "secondary site" licenses will be required to demonstrate that their proposed use complies with local zoning rules.1 The issuance of "secondary site" licenses could double the number of licensed dispensaries in the state by Jan. 1, 2020. After that, the Illinois Department of Financial and Professional Regulation (IDFPR) will have the authority to issue up to 500 total dispensary licenses on a staggered basis through 2022. In addition to significantly expanding the number and capacity of licensed dispensaries and cultivation centers, the Act establishes new categories of business licenses for cannabis transporters, infusers, processors and craft growers, which are smaller-scale cultivate operations that can also operate an on-site dispensary.
Although the sale and use of cannabis will be legal on Jan. 1, 2020, possession and consumption will still be regulated. The following activities will continue to be prohibited under the Act and existing provisions of Illinois law.
As with alcohol-related offenses, the enforcement and prosecution of most cannabis offenses will be the responsibility of local governments.
The preamble of the Act declares that the regulation of recreational cannabis sale and consumption is a matter of statewide concern, effectively preempting local governments, including home-rule units, from imposing regulations that conflict with, or are more stringent than, the Act. Nevertheless, the Act does grant local governments limited authority over certain aspects of recreational cannabis.
First, and most importantly, a municipality may "prohibit or significantly limit" the location of cannabis businesses by ordinance. It is expected that this provision will be interpreted to allow municipalities to impose a generally applicable prohibition on recreational cannabis businesses2 from locating in any zoning district. This authority includes the ability to allow certain classes of cannabis businesses (e.g., cultivation centers or processors) while prohibiting others (e.g., dispensaries).
If a municipality chooses to permit cannabis businesses to locate and operate within its borders, it may also enact reasonable zoning regulations that are not in conflict with the Act. This authority would include permitting cannabis businesses to locate in certain zoning districts but not others, and imposing generally applicable off-street parking requirements.
Further, the Act explicitly authorizes municipalities to impose limits on the "time, place, manner, and number" of cannabis business by requiring the businesses to obtain conditional or special use permits. These limits must be reasonable and may not conflict with the requirements of the Act.
Although requiring cannabis businesses to obtain a conditional or special use permit will be useful to local zoning authorities, determining whether a local restriction conflicts with the Act may be more difficult than the drafters anticipated. For instance, the Act allows dispensaries to operate between 6 a.m. and 10 p.m. It is uncertain whether a municipality would be allowed to require shorter hours of operation as a condition of issuing a conditional use permit for a dispensary. Similar questions arise with regard to separation requirements. The Act prohibits new dispensaries from locating within 1,500 feet of another dispensary. Whether a municipality could require a greater separation distance is not clear. Finally, the ability to limit the "number" of cannabis businesses through a conditional use permit process raises the question of whether a municipality could impose a hard numerical cap on the number of conditional use permits the municipality would be willing to issue.
Although licensing of cannabis businesses will be the exclusive domain of state agencies such as the Department of Agriculture (cultivation centers, processors, infusers, transporters, and craft growers) and the IDFPR (dispensaries), local governments may still enforce generally applicable business registration requirements for cannabis businesses and conduct inspections of premises to ensure compliance with local building codes.
One area in which municipalities appear to have been granted broad regulatory authority is on-premises consumption. Early versions of the Act only allowed for consumption of cannabis in private residences, but the final version allows for on-premises consumption of recreational cannabis in a licensed cannabis business, subject to local permission and regulation. Bill author and principal sponsor Rep. Kelly Cassidy clarified that this would permit smoking lounges as accessory uses to dispensaries, but the decision of whether, and to what extent, to allow them would be left to local governments.
If a municipality chooses to allow on-premises consumption through the grant of a local license or permit, it is expected that the municipality could impose significant restrictions on the location, security, and environment in which such consumption would occur. Requiring cannabis dispensaries to obtain a local "on-premises consumption" license will also provide municipalities with a legitimate justification to periodically inspect the licensed premises to ensure compliance with local regulations.
The Act provides municipalities with the authority to locally regulate possession and consumption of cannabis by private citizens in a manner consistent with the Act. Accordingly, municipalities should evaluate whether to adopt the prohibitions and penalties of the Act into their local codes. This will give the local governments the ability to enforce and prosecute these offenses (with the exception of DUIs) through local adjudication or the circuit court, so long as the penalties do not exceed those provided for in the Act. These avenues for enforcement will become increasingly important if state's attorneys' offices follow the lead of Cook County and decline to devote ongoing resources to prosecution of low-level cannabis offenses by individuals.
Recreational cannabis will be subject to multiple layers of taxation, on top of existing state, county and local sales taxes. In addition to state taxes on wholesale cannabis sales by cultivation centers and retail sales by dispensaries, counties and municipalities may impose local retailer occupation taxes on dispensary sales. Non-home rule counties are authorized to impose a tax of up to 0.75 percent in incorporated areas and 3.75 percent on sales emanating from unincorporated areas. Cook County, the only home-rule county in the state, is authorized to impose a tax of 3 percent regardless of whether the sale occurs in an incorporated or unincorporated area. Municipalities are likewise authorized to impose a 3 percent retailer occupation tax on final sales to consumers. All local taxes will be collected by the state and deposited into dedicated funds that will be protected from budgetary sweeps. These revenues will be disbursed to local governments in the same manner as local sales tax revenues.
In addition to local tax revenues, the Act earmarks 8 percent of state taxes collected on cannabis sales to the Local Government Distributive Fund for the purpose of funding crime prevention programs, law enforcement training and drug interdiction efforts.
The Act maintains important protections for employers previously established under the Compassionate Use of Medical Cannabis Pilot Program Act of 2013 (Medical Cannabis Act), including the ability to enforce reasonable workplace policies such as "drug free" or "zero tolerance" policies and to impose discipline up to, and including, termination if an employee is impaired or under the influence of cannabis while in the workplace. The Act's final language resolves ambiguity caused by earlier drafts that did not expressly authorize "drug free" and "zero tolerance" policies.
The Act's employment provisions differ from the Medical Cannabis Act in two main respects. First, the Act precludes employees from being impaired or under the influence of cannabis not only in the workplace, but also if they are "on call." Employees are considered to be "on call" if they are scheduled to be on standby with at least 24 hours' notice or otherwise responsible for performing work-related tasks. Second, the Act amends the Illinois Right to Privacy in the Workplace Act, which protects employees from adverse employment actions related to their use of "lawful products" outside of working hours, to clarify that recreational cannabis is considered a "lawful product." It is unclear how this provision is intended to interact with the Act's authorization for employers to impose "zero tolerance" policies, so Holland & Knight will carefully monitor how courts will strike a balance between the competing rights of employers and employees.
As part of its broad social justice focus, the Act mandates that certain criminal records must be automatically expunged by law enforcement agencies and creates a process for expunging many other records that do not qualify for automatic expungement. The Act's expungement provisions differ significantly from the expungement provisions that were in previous version of the Act.
The Act mandates that the Illinois State Police and other law enforcement agencies automatically expunge all criminal history records of an arrest, charge not initiated by arrest, order of supervision, or order of qualified probation for a "minor cannabis offense" if:
"Minor cannabis offenses" are violations of Section 4 or 5 of the Cannabis Control Act concerning not more than 30 grams of any substance containing cannabis, provided the violation did not include a penalty enhancement under Section 7 of the Cannabis Control Act and is not associated with an arrest, conviction or other disposition for a violent crime as defined in subsection (c) of Section 3 of the Rights of Crime Victims and Witnesses Act. Because "minor cannabis offenses" are defined as violations of the Cannabis Control Act, the automatic expungement mandate does not appear to include local ordinance violations.
The Act provides that law enforcement agencies must automatically expunge qualifying records pursuant to the following schedule:
Therefore, it appears that law enforcement agencies will have significant time to automatically expunge decades worth of qualifying records. That said, it is unclear how these deadlines will interact with the state's standard expungement processes which require an order from a circuit court before a law enforcement agency is required to expunge its records.
The Act provides two other avenues for persons who are not eligible for automatic expungement. First, the governor is authorized to grant pardons and order the expungement of arrest records for offenders who were actually convicted of minor cannabis offenses. Second, offenders who were arrested for, charged with or convicted of more serious violations of the Cannabis Control Act may petition the circuit court for expungement.
The legalization of cannabis for recreational use will impact local governments across Illinois. Holland & Knight attorneys are ready to advise you on the following issues, and any others that may arise:
1 Interestingly, dispensaries seeking "early approval" licenses for their existing locations will not be required to demonstrate to the state that they will be allowed to sell cannabis for non-medical purposes under their current zoning. This may result in conflicts between the state licensing agencies and municipalities that have narrowly defined dispensaries solely as medical facilities.
2 The Illinois Compassionate Use of Medical Cannabis Pilot Program Act still requires municipalities to allow medical cannabis facilities to locate and operate pursuant to reasonable zoning restrictions.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
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