It's informally called the Llama Loophole.

But a legal oddity named for the tall, wooly mammal is now raising concerns in a far different realm: that of marijuana grow-ops and municipal taxes.

Mayors across British Columbia have long warned of a conflict between how properties are zoned municipally and how they are assessed for tax purposes by provincial authorities. With a flood of new grow-ops expected, the issue has taken on new urgency: Municipalities fear that due to the inconsistency, grow-ops could avoid paying nearly all property taxes.

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The loophole was revealed in 2012 when a Chilliwack, B.C., business owner placed llamas on his land and successfully argued to the province that his commercial property was being used for agriculture. The province assesses property taxes by use, not zoning.

According to city records, the tax bill for Chilliwack's Trackside Holdings fell from $156,800 in 2012 to $1,400 the following year – a 99-per-cent drop. Incensed city officials maintain the llamas were only on the property on a "temporary" basis.

On May 8, a group of 33 B.C. municipalities voted unanimously to demand that the provincial government close the loophole and stop reclassifying business lands as agricultural, regardless of their current use. The lobby group for the province's municipalities will also consider the motion at a meeting in September.

Health Canada is reviewing 168 applications from B.C. businesses looking to open grow-ops in the province. B.C is second only to Ontario in such applications under federal legislation that came into effect on April 1.

Under the new federal rules, marijuana production has been centralized in larger secured facilities where plants must be grown indoors and storefronts are prohibited. Local officials say the rules favour construction on sites currently zoned as industrial. "It puts a strain on our financial resources when lands are being taxed based on use and not zoning," said Jason Lum, a Chilliwack councillor who is championing the motion to the province.

The largely rural municipality has created a special industrial zone to manage new marijuana grow-ops alongside slaughterhouses and a waste treatment plant. The councillor said it "wasn't unreasonable" to ask that large-scale marijuana grow-ops be classified as industrial or pharmaceutical. Unless provincial authorities respect the special zone, Mr. Lum said the city's efforts would be wasted and large swaths of industrial land formerly paying high taxes could be reclassified as agricultural. The difference in property taxes is substantial: Officials say taxes on farmland are only 10 per cent of what they are for other uses, while taxes on farm buildings are only 12.5 per cent of the business rate.

"It's known as Llamagate around here," said Bruce Banman, the mayor of neighbouring Abbotsford with a chuckle. "What we don't want to happen is that all of a sudden a lot of people start using this loophole. If you speak with most municipalities, they'll say this is a loophole that needs to be tightened up."

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B.C. Assessment, the provincial agency at the centre of the llama case, still maintains that its inspectors did the right thing in 2012 and that the business, "met all the requirements to be classed as farm."

Tim Morrison, spokesman for B.C. Assessment, said businesses need to show that a certain amount of their income is derived from farm activity, which is monitored to ensure compliance. As for the influx of marijuana, municipalities looking for an industrial designation may have reason for concern. "If they are growing a product, just like any other plant, it's agricultural," Mr. Morrison said.

Any changes to the current system would need to be legislated by the ruling B.C. Liberals. The agency doesn't have the power to alter its assessment structure.

James Poelzer said the debate is guided by old stereotypes. The COO of Agrima Botanicals hopes to soon have permission to begin growing medical marijuana at a modern, nondescript facility in Maple Ridge, B.C., built to fit in with the surroundings. Under federal law, it's barred from emitting any smells or pollen. The high-tech security and fire-suppression system is reviewed by federal inspectors. All byproducts are composted on site. "This isn't a great big grow-op with smells and crime. It's quite the opposite," he says. "Some municipalities have a preconceived notion of a grow-op. We're working really hard to get rid of that stigma."

While some cities are looking to place grow-ops in small industrial areas, Mr. Poelzer is happy to have Agrima on agricultural land in a city that was glad to welcome the business and its 30 employees.

"I'm not sure if this is a play by municipality to force these operations onto industrial land," he says. "Everything we do is agricultural. Our only waste is leaves and roots."