Minnesota Lawmakers, Cities And Businesses Raise Alarm Over State’s Pending Marijuana Contracts With Tribal Nations

“If they don’t have to play by the same rules or compete in the same market, that disrupts the entire market.”

By Peter Callaghan, MinnPost

People interested in the recreational cannabis market who are not Gov. Tim Walz (DFL) or leaders of the state’s tribal nations have been asking when, where and how they can present their views on imminent state-tribal cannabis compacts.

The answer is: They can’t. The pending compacts that are now expected to allow the state’s tribal nations to enter the legal cannabis business outside of their reservations will not be made public until they are signed by Walz and the tribes. Once signed, they would be the first state-tribal cannabis compacts in the U.S. to allow tribal enterprises to operate outside of reservation lands, and they can’t be amended without mutual agreement.

That leaves lawmakers, local governments and potential cannabis business people to raise issues publicly with little expectation that they will be considered by state negotiators. Walz endorsed the basic tenets of the deal—that the tribes would get a large chunk of the off-reservation market and be allowed to open their stores well before non-tribal stores can open.

“They’re great partners in this. They know how to do this,” Walz said. “Many of them are ahead, obviously enough to set up for them and their sovereignty, to be cultivating. So I think we’re in good shape, and I think they’ll be executed in the near future. And I think that’s the first step in a broader market that is going to be big, and it’ll shake itself out over time.”

He said having tribal stores open first “lets us get out there.”

“I think we’re in a good spot. I feel confident with them,” the governor said.

While the 2023 recreational cannabis law set up nation-to-nation talks between Walz and tribal leaders, the negotiations appear to be led by Eric Taubel, who had been the chief counsel for the Office of Cannabis Management and is now the acting director, as well as outside legal counsel Mark Levitan. Levitan is a California-based attorney with expertise in tribal law and cannabis law. The existence of compact talks was first reported by MinnPost in May 2024.

While both the state and tribes involved in the closed-door talks say a leaked copy of a compact is not final, it appears from comments shown in the document that it is at the editing stage, not the negotiating stage.

Tribal expansion

And several tribes are moving ahead with plans for off-reservation businesses that will be authorized by the agreements. A cannabis company associated with the White Earth Band of Chippewa has announced a store in Moorhead with plans to expand in Mankato and Rochester. And the Prairie Island Indian Community this week announced a cannabis growing and manufacturing project it said would provide cannabis products for its existing on-reservation store “and eventually to the wider Minnesota market.”

At a recent hearing where Taubel gave an update on the implementation of the legal market, he was asked about the compact talks and a possible agreement with the tribes.

Sen. Zach Duckworth (R-Lakeville) said cities in his district are concerned about the proposed deal that exempt tribal stores from local cannabis ordinances and enforcement, such as requirements to register and be subject to local inspections. He was also concerned that the tribal stores might not have to charge sales taxes and the 10 percent cannabis tax that other stores must collect.

“Will the public be surprised by the compact when it is signed, or will it be made public to all of us beforehand and maybe be presented to the Legislature for feedback or questions?” Duckworth asked. “At the end of the day, our cities and counties don’t like surprises.”

In response, Taubel said, “The compacts themselves by operation of statute will be public upon signature and posted on a public website as the law states.”

The compact negotiations were required by the 2023 recreational cannabis law and are between the state and the tribes, similar to the gambling compacts struck after passage of the federal Indian Gaming Regulatory Act in 1988. Nothing in the law requires the state to negotiate off-reservation sales and, if signed, they would be the first state-tribal compacts in the nation to do so.

The cannabis compacts are not subject to legislative approval or public comment. Negotiations have been in private, and the content of possible deals were secret until a draft of one compact was leaked earlier this month.

Under the draft compact language, obtained by MinnPost, tribes that create regulatory agencies—essentially tribal versions of OCM—can then approve what are called tribal enterprises that can operate retail stores, grow cannabis and manufacture cannabis products. While each tribe can authorize more than one tribal enterprise, each tribe is capped at five off-reservation retail stores and up to 30,000 square feet of plant canopy.

However, there are no caps on the amount of plant canopy tribes can have on their reservation land and there does not appear to be limits on how much of that product can be sold to non-tribal licensees operating off reservation.

The tribal enterprises approved under the compacts would have to have at least 51 percent tribal ownership and would be prevented from operating on-reservation and competing with cannabis retailers owned by tribal governments. Non-tribal licensees that qualify as social equity applicants—a status that was to give them advantages in licensing and grant eligibility—must own at least 65 percent of businesses.

The cannabis aspects of the tribal enterprises would be regulated not by the state OCM but by tribal regulatory agencies created by tribal governments.

The compact draft also would allow the 10 tribes involved in negotiations (the one tribe not taking part is the Upper Sioux Community) to do business with other tribes and with non-tribal businesses licensed by OCM. That means cannabis products grown and manufactured by a tribal entity or tribal business could be sold to non-tribal retail stores, microbusinesses or mezzo businesses.

That said, the compacts make several references to agreements that many of the limits and other controls on tribal businesses would match those adopted by OCM. And it includes this language: “Tribal Enterprises operating outside of Tribally Regulated Land are not by this Compact made exempt from any generally applicable non-Cannabis related State law or regulation.”

No state taxes can be collected on sales on reservation, just as tribal casinos cannot be made to share revenue with the state and don’t in Minnesota. But the draft compacts do envision some tax collection in tribal stores operating off reservation.

“The Tribe and State agree that a tax agreement, as authorized under Cannabis Act Art. 2, Sec. 2, subd. 6 for sharing of sales and gross receipts tax collected from any Tribally owned cannabis business that operates off-Reservation, may be negotiated between the Tribe and the Minnesota Department of Revenue in the future,” it states. But the word “may” means it is allowed but not required.

The compact details that have been available, not by the state or the tribes but because of the leaked draft, have worried some lawmakers, local government officials and people who have hopes to enter the legal cannabis market.

‘A bit unsettling’

One local government representative, who asked to not be identified for fear of angering the Walz administration or the tribes, noted that local governments had to fight for any role in cannabis regulation. They are allowed to cap the number of stores based on their population and can conduct basic health, safety and compliance inspections, including sting operations to catch underage sales.

None of that would apply to tribal stores. The current law provides some money from the cannabis tax to help cities and counties pay for that work, though Walz’s proposed budget would end that program at a savings of $13 million in the next two-year budget period.

“Local governments already have had a significant amount of authority removed from them when it comes to the cannabis industry,” the official said. “It’s a bit unsettling to many communities to think the state is further negotiating critical aspects of the industry without any updates or input from locals, particularly when the end result could impact our ability to register businesses, collect taxes and potentially even inspect to ensure compliance with age verification requirements and more.”

Rep. Nolan West (R-Blaine) is the House GOP lead on the issue of cannabis and sports betting and is one of the only Republicans to have voted yes on cannabis legalization. But after reading about the proposed compacts, he said they are so unfair to non-tribal cannabis entrepreneurs that he will halt his work on legalizing sports betting.

“Yesterday, news broke that the Walz-Flanagan administration is giving the tribes a pseudo-monopoly on Minnesota’s cannabis market, jeopardizing hundreds of millions of dollars of investment into our state. If this is how the administration is going to function in negotiations, I am discontinuing my efforts to legalize sports betting in our state,” West said in a statement released February 11.

This week, West said he has multiple concerns about the deal and has questions about the lack of clarity about taxation. Cannabis retailers must assess both state and local sales taxes but also add in the 10 percent cannabis tax.

“I would be shocked if they’re not paying sales tax and the 10 percent excise tax,” West said. “I would think at minimum that would be a requirement of the negotiators who are supposed to represent the people of Minnesota.” But there will still be a price advantage for tribal sales because only tribal enterprises will be allowed to grow, manufacture and sell at a large scale.

“On manufactured products—gummies, edibles, the beverages, the tinctures—I expect the tribal governments to have an outrageous price advantage,” West said.

West also questioned whether campaign contributions from tribal donors to Walz influenced the governor’s willingness to give tribes an advantage in the cannabis industry.

“Everyone knew they’re sovereign nations, they can operate on the reservations,” West said. “I understood that they would be ahead of everyone. But at no point did I think the governor would make a deal that they get to sell off-reservation before everyone else. That is beyond the pale.”

Unfair advantage?

In a letter to the Fargo Forum, Steven Rosenfeldt of Moorhead describes how his own hopes to enter the legal cannabis market are threatened by the tribal compact with the White Earth Band. Rosenfeldt, a former pharmacist, has a hemp store that he had hoped to convert to a recreational cannabis store once licenses were made available.

But a White Earth entity has purchased a building across the street and has announced plans to open a cannabis dispensary there once the compacts are final.

“I held firm in my understanding that once the State of Minnesota completed a regulatory framework for the sale of cannabis, I would have the opportunity to transition into a full cannabis dispensary,” Rosenfeldt wrote. “I comported with Moorhead city ordinance, Minnesota state law, and worked over two (2) years to operate a small business in my home community.

“Now, after nearly 2 1⁄2 years and without ever having been contacted, the State of Minnesota is allowing the White Earth Nation to open a dispensary across the street from my business all but ensuring my business will close,” the letter says. While the state’s first license lottery will not be held until June, the tribal store can open as soon as March, he said.

“They did not get a ‘head start,’” Rosenfeldt wrote. “They got to run the first half of this race by themselves.”

Nathan Young also has a low-potency THC business that operates five Twin Cities stores under the name Hemp House. He was involved in the cannabis business in Washington state when it was legalized in 2012 and moved to Minnesota in 2020. But after considering a move into recreational cannabis, Young has decided to stay on the hemp side of the business after seeing the hurdles placed in front of those seeking cannabis licenses.

Still, Young said he thinks the compact gives tribes an unfair advantage not only on timing but on price. Other states such as Nevada and Washington have signed tribal compacts that do not open the off-reservation legal market to tribal enterprises. And being allowed to grow, manufacture and sell under one business entity—the type of vertical integration not permitted for non-tribal cannabis businesses—will allow tribal enterprises to undercut what non-tribal stores must charge. And that doesn’t account for taxation which is left unclear in the draft compacts.

“The pricing advantage from vertical integration alone is going to be nearly insurmountable for others to compete against,” Young said. “If you add in a tax advantage as well, that’s the whole ballgame.”

“It’s no skin off of my nose. I’m staying in hemp,” Young said. “But it is disappointing, and I think a lot of hearts are going to be broken. I think a lot of folks who cashed out their 401k or dumped their life savings into this and who were assured by the state that they would have a level playing field were sold a bill of goods. It will be nearly impossible for them to compete. I hope I’m wrong, but I just don’t see it in the math I’m looking at right now.

“I don’t think anybody would really have any challenge with tribes being able to produce cannabis and sell it into state-regulated markets,” Young said. “It’s essentially the state’s position that tribal law extends to tribal dispensary properties outside of tribal land. That is the big problem. Because if they don’t have to play by the same rules or compete in the same market, that disrupts the entire market.”

This story was first published by MinnPost.

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Photo courtesy of Chris Wallis // Side Pocket Images.