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Since joining Harris Bricken in 2010, Hilary has earned a reputation as a fearless advocate for local businesses. Hilary’s clients—start-ups, entrepreneurs, and companies in all stages of development—value her bold approach to business strategy.

Canada cannabis marijuanaMaking good on Prime Minister Justin Trudeau’s 2015 campaign promises, Canada’s Liberal Party-led government last week announced a suite of bills to legalize recreational marijuana use throughout Canada. Also last week, I was on “To the Point” with Warren Olney to try to answer two big questions regarding Canada’s legalization plans: How will Canada legalize and what impact will that have on the United States?

First though, some history.

Canada already has legalized medical marijuana and its production, including production of “non-dried marijuana,” and some of its current producers, such as Tweed and Tilray, are well-recognized brands both within and outside Canada. What is little known about Canada’s medical cannabis regime, however, is that Canada never legalized medical marijuana distribution or dispensaries; Canadian medical marijuana patients order and receive their medical marijuana through Canada’s mailing system. Despite dispensaries being illegal, many operate relatively freely due to local law enforcement tolerance in certain Provinces. All of that will change when Canada legalizes marijuana, and the pending legalization bills are widely expected to pass.

With a desired goal of July 1, 2018 to get legalization off the ground, Canada is nothing if not ambitious. The legalization bills contain many interesting restrictions and standards, including the following:

  • The legal age to purchase up to an ounce of marijuana will be 18, but the Provinces are free to set higher age limits.
  • Individuals 18 and older can grow up to four plants per household for personal use.
  • Tourists cannot bring cannabis into Canada, but they can purchase and use it while there.
  • The provinces will almost exclusively regulate retail and marijuana distribution, as well as the retail price of marijuana. They can even own their own retail establishments if they wish.
  • Provinces will be able to decide whether alcohol and marijuana can be sold at the same retail location.
  • According to the federal government’s own press release, “those jurisdictions that have not put in place a regulated retail framework, individuals would be able to purchase cannabis online from a federally licensed producer with secure home delivery through the mail or by courier.”
  • Marijuana vending machines and self-service displays are banned.
  • The federal government will regulate marijuana producers.
  • Advertising, promotions, and marketing cannot appeal to children and they will be heavily regulated by the federal government, including the possibility of no branding at all on the production side.
  • Regulations regarding packaging and labeling are mandated, but they need to be debated by government first.
  • No federal taxes or licensing fees are contained in the bills.
  • Cannabis cannot be used to infuse alcohol, nicotine, or caffeine and vice-versa.
  • More than 2 nanograms of active THC in the blood is a criminal driving offense punishable with a fine and the presence of more than 5 nanograms is a more serious offense, and officers will test driving impairment by using “fluid” samples, including saliva and blood samples.

As these cannabis bills make their way through Canada’s Parliament, there will no doubt be robust debates among lawmakers and regulators on everything from potency limitations to the kinds of cannabis products that will be available to quality assurance testing requirements. One of the most grueling debates will likely be over whether the Provinces should be the ones running all marijuana retail establishments.

To date, the U.S. only has one city-owned marijuana retail store. Needless to say, the idea of government owned and distributed marijuana hasn’t taken off in the U.S., both because it’s still federally illegal here and because we simply do not have a tradition of government ownership of anything retail. So even if Canada does embrace a “government weed” model, it’s unlikely this will cause the U.S. to influence our own state-by-state legalization scheme with private marijuana markets.

Sacramento cannabis permits

If you are looking to secure a California cannabis business license you should start getting ready now for some seriously tough regulatory regimes. Our cannabis lawyers have had to wade through massive bureaucratic red tape in securing marijuana business licenses for our clients in many different states and in even more counties and cities, but we see California — under its Medical Cannabis Regulation and Safety Act and its Adult Use of Marijuana Act — as likely leading the country in red tape. And of all the California counties and cities, Sacramento is right now leading the pack in tough local law marijuana regimes. Marijuana operators should expect to pay a serious premium if they want to operate in the capital of the Golden State.

On February 2, 2016, the Sacramento City Council adopted Section 17.228.127 of the Sacramento City Code allowing non-residential properties to be used for commercial cannabis cultivation with a Conditional Use Permit.  As defined in Title 8 of the City of Sacramento City Code, cannabis cultivation means “to plant, grow, harvest, dry, cure, grade or trim marijuana.”  Cannabis cultivation can only be done indoors within a fully enclosed building not visible from a public right-of-way.  

On November 22, 2016, Sacramento adopted Ordinance No. 2016-0051 to regulate marijuana cultivation businesses. Under this 44-page ordinance (among its many provisions on security, management, record keeping, signage, and general facility restrictions) cultivation permits may be issued for the following three different cultivation permit types:

  • Class A for indoor cultivation of no more than 5,000 sq. ft. of total canopy size
  • Class B for indoor cultivation of no more than 10,000 sq. ft. of total canopy size
  • Class C for indoor cultivation sites up to 22,000 sq. ft. of total canopy size

Cannabis cultivation will be allowed only in Agricultural, General Commercial, Heavy Commercial, Light Industrial, and Heavy Industrial zones.

As of April 3, 2017, prospective marijuana cultivation businesses can begin requesting appointments with the Planning Division at the Community Development Department to file for the required Conditional Use Permits (“CUP”). Contemporaneous with filing for the CUP, applicants must also file for a Business Operating Permit (BOP) with the City’s Revenue Division. Getting your CUP and BOP for cultivating marijuana will be no small task.

You will be required to provide the following for the CUP:

  1. A completed “Planning Entitlement Application”;
  2. A draft Security Plan, Community Relations Plan and Odor Control Plan;
  3. A written description of the project being proposed for development, which must include a description of the project and detailed scope of work for which the CUP review is being requested and how the project will address any potential negative
    effects on the community. A Design Concept Narrative is also required for Site Plan and Design Review entitlement.
  4. Multiple scale developmental plans that are incredibly detailed and are to include site plans with vicinity map, building elevations, landscape plans, floor plans, reduced plans, streetscape drawings, and color photos of the proposed facility, all of which are subject to a design review by the Planning Division.

You will also be required to submit the following for the BOP:

  1. A Marijuana Cultivation Business Permit Application;
  2. Proof of non-profit status (until state licenses issue in the future);
  3. A Neighborhood Responsibility Plan;
  4. A business operations plan, which must include:
    1. Business Plan;
    2. Community Relations Plan;
    3. State Licenses (once issued);
    4. Tax Compliance;
    5. Insurance;
    6. Budget;
    7. Price List;
    8. Floor Plan;
    9. Site Plan;
    10. Security Plan;
    11. Water Efficiency Plan;
    12. Lighting Plan;
    13. Odor Control Plan;
    14. Energy Efficiency Plan; and
    15. Owner’s Statement of Consent.
  5. Criminal History/Background Check Forms and fingerprinting, which apply to all “interested parties,” none of whom can be convicted felons and which Sacramento defines as follows:
    1. Persons with at least a 10% interest in the marijuana cultivation business;
    2. Partners, officers, directors, and stockholders of every corporation, limited
      liability company, or general or limited partnership that owns at least 10%
      of the stock, capital, profits, voting rights, or membership interest of the
      marijuana cultivation business or that is one of the partners in the
      marijuana cultivation business;
    3. The managers of the marijuana cultivation business; and
    4. The staff of the marijuana cultivation business.

And now for the fees–fees for the CUPs range from $16,640.24 at the Zoning Administrator Level if not making any changes to an existing building or site to $33,610.28 for Planning and Design Commission Site Plan and/or Design Review on buildings 125,000 square feet or greater. Fees for the BOP range from $9,700 for a Class A grow to $28,910 for a Class C grow. And all of these fees have corresponding renewal fees. The bottom line? It’s not going to be cheap or easy to secure a license to operate in Sacramento as a grower.

Applicants have until June 30, 2017 to submit their completed CUPs and BOPs. With the volume of information and compliance proof required, you should begin now if you want a future cultivating cannabis in Sacramento.

California cannabis lawyersIt started in Oregon with the breaking of “A Tainted High.” It then moved to Colorado with 19 marijuana and marijuana product recalls in 19 weeks in 2015. Washington then overhauled its pesticide program to prevent illegal pesticides on its regulated cannabis products (which eventually led to the state adopting recall rules). Now, California is finally learning how dangerous its cannabis can be, and its only a matter of time before California state regulators use the Medical Cannabis Regulation and Safety Act (“MCRSA“) and Adult Use of Marijuana Act (“AUMA“) to institute regulations to reduce the use of toxic and harmful marijuana pesticides.

Since none of California’s existing medical marijuana laws mandate any kind of quality assurance or pesticide testing, California cannabis patients have been taking their chances that their medicine is safe for consumption. You will be hard-pressed to find medical marijuana dispensaries in California that follow Proposition 65, which added marijuana smoke to its list of potentially cancer-causing products in 2009.

But that’s all about to change.

AB 266 of the MCSRA requires medical cannabis be tested:

Medical cannabis and medical cannabis products shall be tested by a registered testing laboratory, prior to retail sale or dispensing, as follows: Medical cannabis from dried flower shall, at a minimum, be tested for concentration, pesticides, mold, and other contaminants.
And AB 243 of the MCRSA states as follows:
The United States Environmental Protection Agency has not established appropriate pesticide tolerances for, or permitted the registration and lawful use of, pesticides on cannabis crops intended for human consumption pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 136 et seq.). The use of pesticides is not adequately regulated due to the omissions in federal law, and cannabis cultivated in California for California patients can and often does contain pesticide residues. Lawful California medical cannabis growers and caregivers urge the Department of Pesticide Regulation to provide guidance, in absence of federal guidance, on whether the pesticides currently used at most cannabis cultivation sites are actually safe for use on cannabis intended for human consumption.

Under the MCRSA, California’s Department of Pesticide Regulation (DPR), in consultation with the Department of Food and Agriculture (DFA), is charged with developing standards for using pesticides in cannabis cultivation and “the maximum tolerances for pesticides and other foreign object residue in harvested cannabis.” And the DPR, in consultation with the State Water Resources Control Board, must promulgate pesticide regulations for indoor and outdoor cultivating of medical cannabis equivalent to existing standards of the Food and Agricultural Code.

All of this will eventually make California the most conscientious state on both marijuana pesticides and cannabis’s impact on the environment. Each regional water board and the State Water Resources Control Board may address water waste and discharge of  pesticides and herbicides, which is far more than any other state has done, despite cannabis’s obvious environmental impacts. As far as adult use cannabis pesticide testing goes, the AUMA mandates compliance with the pesticide regulations set forth under the MCRSA by the Bureau of Medical Cannabis Regulation.

We do not yet know what California’s pesticide and testing regulations will look like in final form, but we’re sure to find out in late April when the Bureau will release its first set of draft MCRSA regulations. But our cannabis lawyer’s vast experience in regulated marijuana states tells us that you should, at minimum, expect mandatory analyses of the following:

  1. Microbiological screenings;
  2. Foreign matter inspection;
  3. Residual solvent tests; and
  4. Pesticide and other chemical residue and metals screening.

Though pricey for both the state and for marijuana businesses, mandatory cannabis testing is necessary to give California’s cannabis customers confidence in the state’s marijuana marketplace. The State of California will set the floor for consumer safety through quality assurance testing (and packaging and labeling rules) and all California marijuana businesses should prepare now for the consequences of potentially faulty testing, products liability claims (including against retailers), and start developing their own recall plans.

Cannabis business lawyersIn a multitude of marijuana-regulated states, certain individuals and companies cannot own or even finance a marijuana business due to state regulations on residency and criminal and financial background checks. This means the cannabis business lawyers at my firm often get clients interested in getting involved with an ancillary cannabis business so as to avoid these heavy regulations.

Whether it is technology, real property development, or consulting,  how you structure your services or licensing agreement can control whether the ancillary company violates applicable state marijuana regulations. And marijuana equipment leases are no different. Done right, leasing expensive equipment to marijuana producers and processors is a great way to service state licensed marijuana businesses without violating state rules. However, just like real property lease agreements, garden variety off the shelf boilerplate marijuana equipment lease agreements will not cut it in the cannabis space. So here’s what you need to know when leasing equipment to a licensed or permitted marijuana business in a heavily regulated marijuana state:

  1. Marijuana Regulations: How the Lessor Gets Paid. Every equipment lease agreement must be structured so as not to violate applicable marijuana rules in a given state. This usually means the lease agreement must clearly address how the lessor will get paid and that payment plan cannot violate state law. In a number of states, if the lessor takes an equity interest in the marijuana company in exchange for lease payments, or if the lessor is entitled to receive net or gross profit from the marijuana business, or if the lessor’s equipment lease payments hinge on the marijuana business’s financial performance or harvest or manufacturing yield, the lessor must be disclosed to and vetted by the relevant government agency. Most states require a fixed fee for rental payments and anything different will likely lead the state to believe the lessor is really a hidden profit sharer. The higher the lease payments, the more likely regulators are to think there’s some unlawful profit sharing taking place. Be sure you can defend your above-market-rate charges.
  2. Marijuana Regulations: Lessor Control Over the Marijuana Company. In addition to lease equipment payments, state regulators also want to know and approve of any person or company exercising any control over the marijuana company. States don’t usually fully define what constitutes an impermissible level of control, but you can assume the definition will be fairly broad and will be analyzed on a case by case basis. In the context of an equipment lease, an impermissible control provision would be the lessor restricting the marijuana business from renting equipment from another equipment lessor. And if the lessor wants to throw in some consulting services as a supplement to leasing the equipment, the lessor’s control over the staff of the marijuana business regarding the use of the equipment may also create a control violation if lessor oversight goes too far.
  3. Marijuana Regulations: Contract Rules. As an equipment lessor, you have to make sure your lease doesn’t violate any applicable state law contract rules. For example, in Washington State, the term of the contract cannot be indefinite — it needs a termination date. This stems from state regulations prohibiting third parties from locking marijuana businesses in too long to term contracts that could create “undue influence” over the licensee. We constantly see equipment leases that violate this simple rule.
  4. Security Interests. Make sure your security interest in your equipment is valid. In most states, state regulators should have no issue with a lessor’s security intern est in its equipment. However, if the lessor tries to maintain a security interest in marijuana inventory or ithe licensed business itself, it is going to have a control problem. State receivership proceedings may be another collection option, but you need to make sure that’s a realistic scenario in your state and that your equipment lease carefully details how that will happen.
  5. Defaults. The rules governing cannabis businesses are unpredictable and ever-changing and this means you as the lessor must stay on top of the rules and make sure you remain in compliance with them. This also means your equipment lease needs to account for very specific events of default that should include the marijuana business having to maintain good standing with regulators and any permissible appeal/cure period if the marijuana business is hit with a marijuana regulation violation that carries shutdown or crippling fines as penalties.
  6. Access to the Equipment. You can’t just come and check up on your equipment whenever you want. All states control physical access to the marijuana business itself, so be sure your equipment lease takes that into account. Most times, you’re going to have to consent to applicable security procedures, including scheduled visits, the donning of ID badges, and being escorted at all times by an employee of the marijuana business.
  7. Disputes and Repossession of Equipment. Because many marijuana businesses fail in their first year, you need to be ready for the eventuality of a default on your equipment lease. Your contract should include the right laws and the right venue for your dispute. Since marijuana is still federally illegal, you should consider private mediation and/or arbitration of your disputes and you should ensure that any court filings go through state court, which is more likely to recognize and honor your equipment lease than would a federal court. We sometimes use provisions mandating state court and prohibiting removal to federal court. You’ll also want to give yourself an easy route to repossess the equipment, so don’t ignore the benefit of providing for self-help repossession methods in your equipment lease agreement, so long as they don’t violate applicable marijuana rules.

Just as is true of cannabis commercial property leases, your cannabis equipment leases need to account for all sorts of cannabis-specific situations.

Marijuana and cannabis safety standards ASTMASTM International recently announced plans to launch a new committee on creating technical standards and guidance materials for the full life cycle of cannabis products. The new ASTM cannabis committee initially plans to focus on developing voluntary consensus standards related to cannabis in the following six technical areas:

  • Indoor and outdoor horticulture and agriculture
  • quality management systems
  • laboratory
  • processing and handling
  • security and transportation
  • personnel training, assessment, and credentialing

The development of uniform standards for cannabis related products, systems and services is critical to the cannabis industry because there is no currently no consensus on how cannabis products should be produced and processed to ensure product quality and safety. Because cannabis and its derivatives are still illegal under federal law, federal agencies such as the Food and Drug Administration (FDA) have not enacted anything that resembles the regulations it has implemented for tobacco products or medications or food. Some states, such as Colorado and Washington, have some quality control and assurance rules, especially regarding the safety of edibles and the use of pesticides. However, many aspects of cannabis remain wholly unregulated at the state level, and the patchwork of state regulations introduced thus far by various states have been inconsistently drafted and implemented.

ASTM International is one of the world’s largest voluntary standards developing organizations and it has helped develop over 12,000 industry standards for materials and products ranging from aluminum to zippers. ASTM International draws input for proposed standards from volunteer members from around the world that represent a broad range of industry stakeholders such as producers, users, consumers, government and academia. ASTM standards are voluntary, but many government regulators cite to them in their laws, regulations and codes, thus giving them the force of law. They also are commonly referred to in court cases.

The process of drafting, reviewing, and approving ASTM standards for the cannabis industry will take time. Once a technical committee for cannabis is established, ASTM will establish subcommittees to address individual technical areas. Each subcommittee will establish a task group responsible for researching and drafting a proposed standard. The draft standard will then be reviewed and voted upon by the technical committee and then it will go to the full ASTM membership. Depending on the committee and subject matters, ASTM standards can be drafted, reviewed, and approved in as little as nine months, or can take more than a year.

This process of developing industry standards for cannabis presents an opportunity for a data-driven conversation on how the cannabis industry should evolve and mature. Identifying objective standards for best-practices in the processes of growing, producing, processing, transporting, and packaging cannabis products will be a necessary step if the cannabis industry is going to mature and sustain itself on a broader (and potentially international) scale. When railroads were first introduced in the United States, locomotives and railroad tracks used different gauges in different parts of the country because the railways initially were built only to serve local needs. The cannabis industry is in a similar early stage of development, with individual states drafting and implementing cannabis regulations that are inconsistent with others in other states. Ultimately, the development of industry standards is a necessary step that will help the cannabis industry grow beyond its current state limits and speed up the day when our country sees cannabis as just another legal product.

American lawyer in BarcelonaI spent last weekend in Barcelona attending Spannabis. Our Barcelona lawyers constantly get inquiries from serious international businesspeople wanting to start a cannabis social club or some other sort of cannabis business in Spain. And with more than 200 medical marijuana social clubs in Barcelona alone, I wanted to go there to meet with key industry players to learn more about what is going on with marijuana in Catalonia’s capital city and in the rest of Spain.

Barcelona and medical marijuana felt to me like some combination of California, Oregon, and Washington seven years ago. Namely, it feels like an unregulated, quasi-commercial gray market chalk full of “collective” non-profits and rotating patient members, unclear laws and inconsistent enforcement of those laws. For a breakdown on the current medical marijuana laws in Spain and in Barcelona, go here. This unclear and pioneer atmosphere was also in full force at Spannabis, which was in many respects just like pretty much every other marijuana trade show/expo I’ve attended in the United States: light on serious education about marijuana laws and regulations and heavy on promoting marijuana consumption and on seeking to preserve the counter-culture. But with cannabis cups and consuming events dwindling in the U.S. from increasing state marijuana regulations, I would be remiss if I did not mention how the Spannabis fairgrounds managed to maintain a steady cloud of overhanging marijuana smoke from its more than 3,000 attendees who openly and consistently consumed despite the presence of law enforcement.

Spannabis had only a single panel on the legality and rules surrounding Barcelona’s (mostly medical) marijuana social clubs and the panelist gave little detail or explanation about the law that enables cannabis clubs to operate. That panel was made up of one criminal defense attorney telling attendees about the national and local government’s conflicting policy positions on health and law enforcement and the rights of individuals to consume cannabis for medical use. Needless to say, since our cannabis lawyers represent the business side, I didn’t this panel very helpful. More importantly, this panel served as just another indication that Barcelona and Spain as a whole have just not yet really “arrived” yet as destinations for those seeking to form and operate a cannabis business fully compliant with local (in this case Barcelona), provincial (Catalonia) and federal (Spain) laws. Fortunately, our Spain lawyers mostly focus on representing ancillary cannabis businesses and CBD businesses, along with the standard fare of helping foreign companies in all industries seeking to form a business in Spain and make a go of things there.

But as many in the industry there were quick and emphatic about telling me, the cannabis scene in Barcelona and in Spain is slowing maturing and slowing getting “more legal.” As we wrote just last week, the regional Parliament of Catalonia has proposed reforms in line with a 2014 initiative advocated by Regulacion Responsible in advance of the 2014 Spain national elections. The initiative’s aim was to create a framework for the national reform of cannabis laws to permit regions like Catalonia and cities like Barcelona to set their own cannabis policies. Though the 2016 legislative initiative stalled, it has recently reemerged and anticipation is building for a revised version of this bill that would mean increased regulation for legalized marijuana businesses on a regional basis. Given the inconsistent enforcement of current laws (within both Catalonia and Spain) and the lack of meaningful or comprehensive business regulations, such reforms cannot come soon enough to better protect and give more structure to those cultivating and distributing marijuana for and to patients. Patients would also benefit from such regulation as it would increase both transparency around the sourcing of cannabis products and cannabis quality assurance standards.

Even though marijuana social clubs in Spain exist in a risk-laden gray area, it’s clear that manufacturing and distributing CBD is a popular and, more importantly, legal practice in Spain and Barcelona (in contrast to the United States). Indeed, the majority of booths on the exhibitor floor at Spannabis focused on hemp seeds (there was even a company there from Humboldt County) and CBD-based products. Manufacturing and distributing cannabis paraphernalia or equipment used for consuming, cultivating or handling are also legal and ancillary companies are alive and well in Barcelona, just like in most of the U.S. This is why foreign investors looking at Spain are mostly focusing on financing, starting, managing or assisting ancillary companies and not so much on marijuana social clubs, all of which are non-profit because of existing laws prohibiting commercial “trafficking.” The Arcview Group (well-known for angel investments in ancillary marijuana businesses) held an investor meeting in Barcelona for the first time last week.

Barcelona’s medical marijuana marketplace remains immature and risky (these were the words used by many of those with whom I spoke while I was in Spain), but it no doubt has tremendous potential. Once local governments in Spain are given the freedom (and they might soon) to take the reigns on cannabis regulation and to create a better business atmosphere for cultivators, manufacturers, and distributors, Barcelona will no doubt quickly become a major marijuana city in terms of popularity, investment, and access. The lawyers in our Barcelona office can hardly wait.

Cannabis tax lawyer 280EWhen folks in the medical and adult use marijuana industries hear “280E,” they tent to shudder since they know it means a large protion of their revenues will be going to the IRS without the usual deductions. However, just this week, Grover Norquist, a GOP political advocate and the well-known president of Americans for Tax Reform (which favors repealing 280E), opined that our GOP-led Congress may enact sweeping tax reform this year that would reduce the stress of 280E on state-legal marijuana businesses by lowering corporate income tax rates.

In case you missed it, 280E is the provision of the Internal Revenue Code creates such an onerous tax burden for cannabis businesses because it provides as follows:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Congress passed 280E in 1982 in response to a Tax Court ruling that a taxpayer could deduct expenses relating to his sales of cocaine, amphetamine, and marijuana. Deductible expenses included the costs of packaging, travel, and even scales used to weigh the illegal substances. This is no longer possible in the world of 280E.

Since cannabis is a Schedule I controlled substance, the IRS uses 280E to disallow marijuana businesses from deducting their ordinary and necessary business expenses. The result is that marijuana companies — regardless of their legality under state law –face higher federal tax rates than similar companies in other industries. There are differing opinions on the level of tax rates imposed on marijuana companies – from 40% to 70% to as high as 90% – all of which are higher than the 35% corporate tax rate paid by most other businesses in the United States.

But if Norquist’s predictions are accurate, there may be a bit of light at the end of the 280E tunnel for cannabis businesses. though if Norquist’s predictions are accurate. In an interview with MJ Business Daily, Norquist stated:

There’s a big tax bill this year – the tax reform package that takes corporate rates to 20% – which solves some of the problem for marijuana producers because now you’re paying 20% on all your sales instead of 35%. But we still need to get normal and reasonable and legal deductions made legal and normal for the marijuana industry, as well as for all other industries. Marijuana could get into that package if some of the libertarian Republicans made that a condition of voting for the whole package.

*  *  *  *

So, as we build support for a fix, we need to build support state by state, where we say, “Look, you don’t want federal tax law used to gut the effectiveness of federalism. Because you could say something can be legal at the state level, but if the federal government is going to tax it into oblivion, you really haven’t allowed federalism at all.

Norquist then went on to predict these tax law changes will occur within the “next few years.” Though our cannabis tax lawyers do see cannabis tax changes coming, they are less confident than Norquist on timing. There has been no successful standalone 280E fix bill in Congress and the current presidential administration’s back and forth policies on marijuana legalization make predicting such federal action difficult. But with legalization in California and marijuana reform in 28 other states and more coming soon, the odds of Congress rectifying this tax situation are increasing. We cannot and should not expect favorable 280E changes from either the Tax Court or the IRS unless and until Congress mandates such changes. It is therefore good to know that such changes are at least on the table.

Cannabis due diligence
Know the red flags and find them.

Our marijuana business attorneys handle lots of purchase transactions for marijuana businesses. These deals often involve two sides rushing to complete a transaction handled by a business broker who doesn’t know or care about the applicable marijuana laws. The worst case scenario is when a company asks us to review a purchase agreement drafted by the seller without having done any due diligence on the potential purchase. Buyers of businesses (like investors) take the lion’s share of risk, which is why buyer due diligence is key. Before buying a cannabis business you should know exactly what assets and liabilities you will be taking on.

The below are the top 5 due diligence items you need to protect yourself and your money (for sellers, check out Preparing to Sell Your Marijuana Business):

  1. State and local law compliance. This is by the number one due diligence item for buyers. State and local law compliance varies greatly by state and by county and by city and you have to know what state and local licensing or permitting is required for a given marijuana business before you purchase it. I cannot tell you how many times we have had buyers come to us thinking they are buying a licensed marijuana business only to find out that the license is only pending and has not actually been issued or that the cannabis business is facing license revocation for rule violations, or that the municipal law has changed and the business must re-locate to continue operating. Before buying a cannabis business you should, at minimum, confirm that the company you will be buying is in good standing with the Secretary of State and the regulators and you should review its proof of licensing and permitting and its history of administrative violations, including any written warnings. If you fail to do this, you may find yourself with a cannabis business without a license to legally operate or that is about to lose it.
  2. State law procedures for ownership changes. Marijuana businesses are heavily regulated and there are onerous state law procedures in place for changes in ownership. Generally, the seller must disclose the buyer to the state and the buyer must be successfully vetted by the relevant regulators. Buyers and sellers of cannabis business cannot undertake these sales like any other business. No matter what any seller or broker may tell you as the buyer about the ease of the transaction, you as the buyer should ensure that the sale can comply with applicable state law requirements for changes in ownership and that the purchase and sale agreement accounts for the timing of performance obligations set forth in that purchase and sale agreement. We have had company’s come to us after the fact that have lost their earnest money for not closing quickly enough on deals where the closing date was impossible to meet from day one.
  3. Corporate authority. Ownership disputes are common in the marijuana industry because many marijuana operators still neglect (to their detriment) to put their corporate and contractual relationships in writing. We often see cannabis business buyers who (based on the word of a single seller in a multi-owner entity), believe they are free and clear to purchase all the stock in a corporation or all of the membership units in an LLC when they actually are not. Purchasers must get copies of all bylaws and subscription agreements when contemplating buying a corporation and they must get a copy of the current operating agreement for an LLC to know whether the seller has authority to sell their (or all of the) membership interests in the business. Failing to secure this authority will violate the seller’s corporate obligations and the sale can likely be undone. If all of the existing owners do not agree to the buy-out or transfer or there is a right of first refusal on sales or transfers, the buyer (and the seller) are going to have serious issues enforcing the purchase agreement.
  4. Real property. When you buy a business, you typically buy all of its assets, including any real estate it owns or has an interest in. Buyers therefore need to get a list of all real property owned and leased by the business that is to be sold. Most importantly, you want to know if the company you are seeking to buy is locked into a long-term lease or whether you’ll be able to re-locate it upon buying it. Many buyers have their own property on which they want to run the cannabis business and for these buyers, the ability to move the business can be key. If there is a lease, you want to know its terms and whether you can or want to comply with it. And because boilerplate leases don’t cut it in this industry, you need to make sure that lease sufficiently covers your issues when it comes to state and local law compliance and the federal law conflict.
  5. Financial liabilities. Again, because too many marijuana business owners don’t memorialize their business and corporate relationships in writing, you as the buyer must thoroughly vet the business’s financial liabilities. You want an agreement that requires the seller to have disclosed every handshake deal with every consultant, investor, and service provider so you know what you’re getting and to whom you’re financially obligated and so that if an undisclosed problem arises, it is the seller’s financial problem, not yours. This should include any instrument that grants a security interest from the cannabis business you are buying to a third party.

To mitigate against anything your due diligence investigation might miss, you need comprehensive and solid seller representations and warranties in the purchase and sale documents. But even skillfully crafted representations and warranties may not be enough to capture all of the liabilities that fall through the cracks, especially if your seller lacks the financial wherewithal to pay for them. So, do your due diligence or buyer beware.

Cannabis laws on public eventsI’ve said it before and I’ll say it again–more state regulation of marijuana is going to lead to fewer and fewer cannabis cups and similar marijuana events and this in turn will force the purveyors of such events to get creative. Case in point: the 2017 High Times Cannabis Cup on the Moapa Band of Paiutes reservation in Nevada near Las Vegas. The most recent update on this particular Cup is that despite receiving two warning letters from U.S. Attorney David Bogden, the Tribe is moving forward this Saturday with the Cup as planned.

The High Times Cannabis Cup, and others like it, revolve around events that assess the cannabis and cannabis products submitted to them by local competitors. At their core, these cups are commercial boons for the sponsors who use them to increase their brand recognition and for the local marijuana businesses that perform well and can use their good performances to tout their products for months and years down the road. Having the right to label your cannabis products as a “High Times Best In (fill in the blank)” is not an honor to be taken lightly in the marijuana industry where such accolades can and do influence cannabis buying decisions.

Even cannabis-friendly states have myriad prohibitions against selling or even gifting cannabis without specific state operational licenses. And virtually all states prohibit consuming cannabis in public and even quasi-private spaces. For example, High Times had to cancel its cannabis cup in Seattle in 2015 because such an event would have violated Washington State’s “sampling” laws that allow only state-licensed marijuana businesses and not consumers to “sample” cannabis products. High Times also had to cancel its Cup in both Denver and Pueblo, Colorado last year because Colorado restricts public cannabis consumption. I assume High Times chose to host this upcoming event on Moapa tribal lands because Nevada’s medical marijuana laws would not allow for such an event and because the Tribe can enact its own ordinances allowing for such Cups.

Given the Wilkinson statement regarding Tribal cannabis from and the Cole Memo regarding federal enforcement of its cannabis laws, it’s easy to see why the Moapa Indians are trying their hand at hosting this Cup. Nonetheless, tribes that have tried to legalize or “medicalize” marijuana on their lands have been met with mixed reactions and enforcement by the federal government (see here, here, here, here, and here). The Moapa are no exception.

On February 16th and 23rd, U.S. Attorney Daniel Bogden sent “warning letters” to the Tribe concerning this upcoming cannabis cup, reiterating that marijuana remains federally illegal and that the Tribe has an “incorrect interpretation” of the Cole Memo and Wilkinson statement. Bogden’s letters also reminded the Tribe that neither the Cole Memo nor the Wilkinson statement alter the power of the federal government to enforce federal laws on tribal lands. At no point in his February 16th letter did Bogden threaten to shut down the Cup. But Bogden’s February 23rd letter states that his office communicated with tribal officials and his understanding is that no cannabis or cannabis products will be present at the Cup. He also writes that High Times’ promotion of this event mentions nothing about the prohibition on cannabis and he asks the Tribe to confirm their understanding on this prohibition matches his. Given that the heart of these High Times Cannabis Cups are the competitions for best cannabis products, one has to wonder if there’s any advantage to High Times having the Cup on tribal lands at this point.

Since Bogden’s warning letters come on the heels of White House press secretary Sean Spicer’s comments about the likelihood for increased federal enforcement in states with recreational marijuana programs, many are wondering if Bogden’s actions are the beginning of what “increased enforcement” may look like. We do not believe so; we think this federal intervention is just another example of the Department of Justice’s continued unpredictable treatment of tribes and cannabis and its varying regional positions on cannabis.

Time will surely tell…

Recreational marijuanaWhite House Press Secretary Sean Spicer spoke today at a press conference on how he expects the Department of Justice to handle state-legal marijuana in America. In response to a question on how the Trump Administration will handle recreational marijuana, Spicer had this to say:

Well I think that’s a question for the Department of Justice . . . I do believe you’ll see greater enforcement of it. Because again there’s a big difference between the medical use … that’s very different than the recreational use, which is something the Department of Justice will be further looking into.”

There’s a big difference between [medical marijuana] and recreational marijuana, and I think when you see something like the opioid addiction crisis blossoming in so many states around this country, the last thing we should be doing is encouraging people. There is still a federal law that we need to abide by when it comes to recreational marijuana.”

Regardless of Spicer’s factually wrong take on the relationship between marijuana and opioid use, marijuana industry folks should not fret just yet.  Out of everything Spicer had to say, the key point is that marijuana enforcement falls on the Department of Justice and Attorney General Jeff Sessions. The job of the Press Secretary is “to act as spokesperson for the executive branch of the United States government administration, especially with regard to the President, senior executives, and policies” and the fate of the marijuana industry is not going to be decided in one White House press conference by the White House Press Secretary. The Department of Justice has so far declined to comment on Spicer’s briefing. It also bears mentioning that the Cole Memo setting out how the Department of Justice will treat state-legal marijuana (both medical and recreational) is still alive and well.

The bottom line. Though it is certainly unsettling to listen to Spicer predict increased enforcement of recreational marijuana businesses and to use stupid opium trope to boot, it is not time to lose heart or cash out. Will the jobs-focused Trump Administration really want to shut down cannabis businesses in multiple states and add a slew of hard-working people to the unemployment rolls? I don’t think so, but of course only time will tell.