Recreational Marijuana

Buying and selling cannabis businesses We like to blog about buying and selling pot businesses. It’s a rich topic and the transactions can be memorable for both entrepreneurs and attorneys. In our recent posts, we have canvassed subjects from diligence items for buyers to checklist items for sellers. We also have covered important transactional topics such as how much your cannabis business may be worth and what you can actually sell. Today’s entry covers a structural part of many business sale agreements: the earn-out.

An earn-out is a contractual provision that entitles a seller to additional compensation in the future, if the business achieves stated financial goals. Earn-outs are used when the asking price for a business is more than a buyer is willing or able to pay up front. A well drawn earn-out can bridge the valuation gap between an optimistic seller (pretty much all of them) and a skeptical, cash-strapped, buyer (just some of them). It can also provide a buyer with additional financing. In an industry where hard money is the rule and bank loans are not available, that can be compelling.

The primary objective in an earn-out is to allow the buyer to make payments over time. The earn-out may also require the seller to step into a consulting role post-sale, and actually “earn” the post-transaction payments. In those cases, it is important to clearly outline the parties’ expectations. This scenario makes for a less clean break, but sometimes a seller has invaluable expertise and experience—particularly in a local marijuana market—that can be passed along with the sale.

In addition to seller support, there are many factors to consider in negotiating an earn-out agreement. Five important ones include: (1) the earn-out period; (2) payment structure; (3) payment schedule; (4) performance matrices; and (5) accounting standards. Earn-out payments may also be capped or uncapped, and the parties can stipulate that future events (like federal enforcement action, for example) will offset earn-out payments. Depending on the type and size of the deal, and the parties’ personalities, an earn-out can be simple or extremely complex.

If the goal is to keep things simple from both a payment and audit perspective, the parties will choose an easy-to-peg accounting and payment metric. For example, sellers often suggest an earn-out based on sales, because this line item is never disputed and the calculation is simple. A buyer, on the other hand, may push for an earn-out based on net income, as this metric accounts for all nuances of a business’ operations. A middle road would peg the earn-out at a multiple of EBITDA, usually over a certain number and in each relevant year. Ultimately, simpler calculations mean fewer disputes.

Given the nature of federal law, the earn-out metric for a pot business must also consider factors mainline businesses needn’t entertain. One of these is the oppressive effect of IRC 280E, the tax code provision that cuts into marijuana business profits. Another is licensing implications at play in the relevant state: readers of this blog know that states have strict rules on who can hold a financial interest in a pot business, and how that interest may be postured.

At the end of the day, many deals in the cannabis industry are structured to account for a lack of institutional financing. Like the marijuana sale-and-leaseback or the ubiquitous seller carry, an earn-out may be a way for a cash-light market entrant to gain a toehold in state-legal cannabis. We expect that earn-outs will remain an attractive option for the industry until things change at the federal level. Given the current shape of things, that could be a while.

Happy 4/20.

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.

Oregon cannabis laws

We recently discussed proposed legislation to prevent Oregon marijuana retailers from recording, retaining, or transferring any information “that may be used to identify a consumer,” such as a consumer’s name, birthday or address. Some marijuana retailers had been collecting and storing this information for marketing purposes, often without their customers’ knowledge. The Oregon legislature was concerned that this practice would create a paper trail the federal government could use against cannabis consumers in a federal crackdown on recreational marijuana.

As we predicted, the legislature moved quickly. Yesterday, Oregon Governor Kate Brown signed SB 863 into law less than two months after the bill was introduced. In a strong signal to Oregon’s marijuana businesses and consumers, the bill enjoyed broad bipartisan support and passed the Oregon Senate by a vote of 21-6 and the Oregon House by a margin of 53-5. The bill requires all Oregon recreational marijuana retailers to destroy existing customer personal information within 30 days and it prevents cannabis retailers from collecting personal information in the future without the customers’ informed consent.

The bill is an explicit response to the Trump administration’s recent comments calling for a crackdown on the recreational marijuana industry and it is widely viewed as part of Governor Brown’s commitment to protect Oregon’s marijuana consumers from federal intervention or harm. SB 863’s streamlined journey from bill to law was helped by Section 4 of the bill, which declared that the Trump administration’s regressive statements regarding marijuana legalization have created a state of emergency requiring immediate action to preserve the public peace, health and safety.

Oregon’s consumers can now rest a bit easier, knowing their local retailer will not be maintaining a database of personal information to which an unfriendly federal government may someday have access.

Marin County MarijuanaThough I just wrote about Marin County as part of our Cannabis Countdown series a few weeks ago, there have been major changes since then that warrant this update. Let’s start with a quick recap. In December of 2015 Marin County passed an ordinance (effective in February of 2016) giving its Board of Supervisors authority to license medical cannabis dispensaries in unincorporated Marin. This ordinance allowed up to four dispensaries in two zoned areas. Ten applications were submitted to the Marin County Board of Supervisors and open to public hearings.

I attended those meetings and left with the impression that most of the applicants were not properly prepared to deal with the public opposition they faced. The applicants were outmatched on issues like dispensary location and partner selection and they clearly had not invested sufficient time in garnering support from the local community. The County Administrator, Matthew Hymel, obviously felt the same way as he rejected all ten of the applications for a Marin County medical cannabis dispensary per the following statement:

After reviewing 10 vendor and site locations, the County Administrator has not approved any of the applications and has recommended a revised approach to licensing medical cannabis dispensaries in unincorporated areas.

After reviewing license applications and considering comments from the public, a volunteer advisory committee, and County staff, the County Administrator notified all the applicants that he was not approving their applications. Hymel said he plans to recommend that the Marin County Board of Supervisors consider a revised ordinance that would disconnect the selection of the operator from that of the location. In addition, he is recommending that the Board explore a delivery-only dispensary model to address concerns raised by residents at public meetings and via submission of written comments.

“This decision illustrates the challenge in finding the right combination of operator and location to provide patients with safe access to medical cannabis locally,” Hymel said.

The Community Development Agency (CDA) received 10 applications in designated locations where a medical cannabis dispensary could be permitted, and residents voiced opinions at three public meetings hosted this winter by CDA staff and members of the advisory committee. Of the 10 applications, eight were in the Highway 101 corridor zone and two were in the Central/West Marin zone. The 101 corridor applications included three in the Black Point area east of the Novato city limits, one in Santa Venetia near the San Rafael city limits, and four in the Tam Shoreline area between Mill Valley and Sausalito. The Central/West Marin applications included one in San Geronimo Valley and one in Marshall.

Although cannabis is considered an illegal drug by the federal government, Proposition 215 ensures that seriously ill Californians have the right to obtain and use cannabis for medical purposes upon receiving a recommendation from a physician. The County’s ordinance is consistent with the state’s Compassionate Use Act and Medical Cannabis Program. A licensed dispensary would have to be least 800 feet from schools, public parks, smoke shops, and other cannabis dispensaries to qualify for a license.

Medical cannabis dispensaries remain prohibited in unincorporated Marin, and none are open or permitted in any of the county’s towns or cities. The ordinance establishes a regulatory framework to license nonprofit patient collectives to meet the medical needs of local patients, many of whom have voiced the need for local dispensaries before the Board of Supervisors.

Though a big (perhaps fatal) setback for these ten applicants, these rejections open the door for businesses and individuals that want to operate a medical cannabis dispensary in Marin and are willing to invest the time and resources to obtain County approval. It’s important to note that 73% of Marin residents voted in favor of the Compassionate Use Act and nearly 70% approved the Adult Use of Marijuana Act so it’s clear Marin County amply supports medicinal and recreational cannabis, at least for those applicants who do not take that support for granted.

As we have often write on here, if you are looking to snare any sort of cannabis license, it is incumbent upon you (or at least your counsel) to know the sensitive local government and local populace issues in play. We’ve seen cities and counties time and time again change their minds on interim and permanent cannabis ordinances, each of which can tremendously impact our client’s bottom-lines. To position yourself to know when these changes are coming and to be able to influence them, you need to get to know your city or county council/commission’s voting agenda and make yourself a part of the local lawmaking process. Doing this can give you a place at the table in drafting or effect change on pending ordinances while at the same time enabling you to stay on top of potential and actual changes. Staying on top of local laws requires action and vigilance. If you are not going to stay alert so as to benefit your cannabis business, hire someone to do that for you.

Whenever a city or county is about to start issuing cannabis licenses for the first time, there will be a vocal part of the community that will come out forcefully against marijuana or against marijuana in their neighborhood. Fortunately, just being loud is not always going to be a winning position against a cannabis business that has spent the time engaging with the community in which it hopes to operate. There will eventually be cannabis businesses in Marin County, but first some fences need to be mended.

Oregon cannabis lawyersLast month, the Oregon State Police Drug Enforcement Section published a report titled “A Baseline Evaluation of Cannabis Enforcement Priorities in Oregon.” It’s a great read. The big takeaway, as reported by The Oregonian, is that Oregon remains a top source for black market pot— despite our legal cannabis programs. Those familiar with the industry have long known this fact, of course, and the problem has been exacerbated as of late for various reasons. These include: state and local regulatory hurdles, high start-up costs, and increased federal uncertainty.

We have been been writing about the unsanctioned Oregon market for quite some time. To be clear: there has always been a black market in Oregon, and will be for a while. There is also a dark gray market, an off-white market, and many shades between. As a general concept, the further that weed gets from the grower, the darker the market. This is especially true in poorly regulated systems like the Oregon Medical Marijuana Program.

Right now, Oregon probably grows four or five times the amount of cannabis that is consumed in-state. (It’s not that consumers aren’t trying; there’s just too much pot.) The Oregon State Police study estimates that just 30 percent of all pot transactions are state-approved. Much of the surplus weed goes from sea to shining sea, but especially to hubs like Illinois, Minnesota, New York, and Florida. Because Oregon weed is an excellent brand, demand is high nationwide.
The lion’s share of Oregon’s exported weed is grown in two southern counties: Jackson and Josephine. And much of that weed is straight-to-black market—e.g., a pound of local weed may sell for $1,000 here, and re-sell somewhere like Texas for $7,000. Other transactions may be grayer and comparatively benign—e.g., a pound of weed grown under the medical program may be sold to the cardholder’s friend, at friendly prices.
As with any commodity, the blacker the market gets, the higher the price for cannabis. This is because buyers compensate dealers for increased risk of arrest, the cost of turf, and so on. One day, when pot becomes legal nationwide, the black market will probably look similar to those for other controlled substances, like tobacco and booze. Today, a few people still buy loosies and moonshine, but most of us go to the store.

It will be a while before Idaho, Texas, and other miserable states change their laws, so Oregon attempts to moderate the black market in three primary ways: law enforcement, supply, and taxation. Oregon needs to improve its enforcement, and turkeys like Jeff Sessions point to this as evidence that the program must end altogether. This argument ignores the demand side, though, where federal prohibition has created an irrepressible national market for Oregon weed.

On supply, the state is doing better. The goal here is to have enough legal weed so that no Oregonian needs to go off-system. Oregon is close on that one, but issues with state-mandated testing and license approval have caused temporary shortages. Recently, we have seen a spike in client requests for requirements contracts that cover the sale of cannabis even before it is grown—at least in the OLCC system. This should even out by 2018.

As for taxation, the goal is to generate revenue but keep prices low. When prices drop and stay below the black market, the black market disappears. The last people to leave will be the heaviest cannabis users, who are generally most price-sensitive and accustomed to informality. When all of those folks are finally going to the store, the black market will be gone—at least for Oregon sales. When the national laws change, the black market will dissipate altogether.

Over the past few months, our clients who have weathered the storm and resisted the urge to retreat to black and grey markets–and thereby remained our clients–have reaped dividends. Demand for state-sanctioned weed is robust among Oregon consumers, and we expect prices to remain high throughout the supply chain for a while. The Oregon Sate Police report is a helpful snapshot of where the state of the market today. Where it goes next is the fun part.

Editor’s Note: A version of this story originally appeared in the Portland Mercury’s “Ask a Pot Lawyer” column, also by Vince Sliwoski.

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.

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.

Tribal CannabisOver the past couple of years, we have written about tribal cannabis and the efforts by various tribes in Oregon, Washington and elsewhere to roll out marijuana programs. Last week, at the Cannabis Law & Policy course I teach, we had the great pleasure of hosting Pi-Ta Pitt from the Confederated Tribes of Warm Springs here in Oregon. Mr. Pitt is the tribe’s Cannabis Program Coordinator, and he offered some valuable insights for tribes rolling out cannabis programs. Based on that discussion, here are some key takeaways for tribes.

  1. The Wilkinson Memo is still in effect, and confusing as ever.

Way back in October of 2014, the federal Department of Justice issued its “Policy Statement Regarding Marijuana Issues in Indian Policy.” Like the Cole Memo before it, the Wilkinson memo provides that eight enumerated federal priorities “will guide United States Attorneys’ marijuana enforcement efforts in Indian County,” including where “sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country.” It all comes back to prosecutorial discretion, and the current administration has yet to comment on the Wilkinson Memo specifically.

In the past few years, federal attorneys have watched warily as Warm Springs and other tribes have explored the cannabis space. While these attorneys have seemed tolerant, to an extent, of the tribal initiatives, the take on cannabis events on tribal lands seems to have touched a federal nerve. Because events are disfavored, tribes looking to legalize cannabis production and sale may wish to steer the focus away from festivities.

  1. Tribes subject to Public Law 280 have a tougher go.

Public Law 280 is a federal statute allowing states to “assume jurisdiction over reservation Indians.” The Act mandated a transfer of federal law enforcement authority within tribal nations to state governments in six states: California, Minnesota (except the Red Lake Nation), Nebraska, Oregon, except the Warm Springs Reservation), Wisconsin (except the Menominee Indian Reservation), and, upon its statehood, Alaska. Other states were allowed to elect similar transfers of power if the affected Indian tribes consented. Since 1953, Nevada, South Dakota, Washington, Florida, Idaho, Montana, North Dakota, Arizona, Iowa and Utah all have assumed some jurisdiction over crimes committed by tribal members on tribal lands.

Tribes not subject to Public Law 280 don’t have to worry about states attempting to shutter their cannabis programs. Although it may behoove those tribes to have good relationships with their neighboring states, local enforcement is not a possibility – even if the adjacent states are anti-cannabis. Tribes subject to Public Law 280, however, may face immediate local barriers, in the form of law enforcement.

  1. Conversations are key.

Even where Public Law 280 is not at play, it is critical for tribes to dialogue with the states, along with federal officials. The Warm Springs Tribe and the Suquamish Tribe, for example, each have entered into an inter-governmental compact with Washington and Oregon, respectively, regarding their cannabis efforts. This is critical for any distribution of pot off of the reservation, which is where the tribes stand to reap significant economic benefit, but also where states regulate cannabis commerce extensively.

Federal conversations may be even more important. Most tribes already are very familiar with local U.S. attorneys, but conversations around the topic of legalizing cannabis are unique. Any tribe considering a cannabis program would be wise to dialogue with the relevant U.S. attorneys, and to get a read on how that office may respond. To this point, U.S. attorneys may view a tribal program as more “legitimate” if the program is borne of a referendum taken within the tribe itself. And that’s yet another, local conversation.

  1. This could go any number of ways.

Twists and turns are inevitable during the design and implementation of a sovereign’s cannabis program. It happens with states; it happens with tribes. Like states, tribes need to maintain flexibility and build coalitions as they attempt to launch a pot venture. Tribes also need to be realistic about timelines and the roles of current collaborators. For example, what will the tribe’s current bank or credit union think of the effort? What about its other stakeholders?

In all, cannabis can be incredibly attractive to tribes as a revenue source and job creator – especially to those tribes on resource-poor land, and to tribes far from interstate highway corridors, which are unable to contemplate casinos or tourism. In all, cannabis may present a unique opportunity for certain tribes, given the right approach.

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 lawyersJust about whenever Attorney General Jeff Sessions speaks, the cannabis industry panics. Stop it people.

This week Jeff Sessions gave an interview where he was asked about possibly using the federal Racketeer Influenced and Corrupt Organizations (RICO) Act to tackle legal marijuana. The media (the cannabis media in particular) have covered that interview as though it sets forth a roadmap for federal cannabis policy. And since that interview, probably every single cannabis lawyer at my law firm (in California, Washington and Oregon) has received at least one client call seeking an opinion on it.

Stop it everyone. Just stop it. Really. Sessions didn’t do anything in this interview but muse about a seldom used federal statute.

In this interview, Sessions hinted that he might be open to using RICO to pursue cannabis businesses in cannabis legal states:

INTERVIEWER: One RICO prosecution against one marijuana retailer in one state that has so-called legalization ends this façade and this flaunting of the Supremacy Clause. Will you be bringing such a case?

SESSIONS: We will, marijuana is against federal law, and that applies in states where they may have repealed their own anti-marijuana laws. So yes, we will enforce law in an appropriate way nationwide. It’s not possible for the federal government, of course, to take over everything the local police used to do in a state that’s legalized it. And I’m not in favor of legalization of marijuana. I think it’s a more dangerous drug than a lot of people realize. I don’t think we’re going to be a better community if marijuana is sold in every corner grocery store.

Of course he might be open to using RICO to pursue federal criminal law violations by cannabis businesses. I actually do not believe Attorney Generals Holder and Lynch, who were the Attorney Generals during the Obama Administration) would have answered this question substantively much differently. You are not going to get an Attorney General to say, “yes, we have this really important law on the books, but nobody worry because we will never enforce it. Just go ahead and violate it.” Really?

And if you listen to the entire interview here, you will hear Sessions poo-poo the benefits of bringing a RICO action against state-legal cannabis businesses:

INTERVIEWER: [I]t would literally take one racketeering influence corrupt organization prosecution to take all the money from one retailer, and the message would be sent. I mean, if you want to send that message, you can send it. Do you think you’re going to send it?

SESSIONS: Well, we’ll be evaluating how we want to handle that. I think it’s a little more complicated than one RICO case, I’ve got to tell you. This — places like Colorado — it’s just sprung up a lot of different independent entities that are moving marijuana. And it’s also being moved interstate, not just in the home state.

RICO was designed to pursue the mafia and other organized crime groups. RICO provides powerful criminal and civil penalties against people who engage in a “pattern of racketeering activity” and have a relationship to an “enterprise.” “Racketeering activity” includes roughly a hundred different offenses, including violations of the Controlled Substances Act. A “pattern” is established when an offense occurs more than one time in a given statutorily defined time period. An “enterprise” includes any individual, partnership, corporation, association, or other legal entity, and any group of individuals associated together even if they are not in a formal business relationship.

The broad interpretation of “enterprise” means that on a technical legal basis, RICO could pose a significant risk to cannabis businesses. The production and sale of cannabis is prohibited by the CSA and, therefore, regular sales of cannabis could serve as the predicate offense for a RICO charge and all those involved with legal cannabis sales, including vendors, contractors, landlords, lawyers, accountants, and even state officials could arguably be in an enterprise engaging in illegal activity.

But nobody should panic about this, not even close. RICO is a powerful but seldom used tool and that is because both prosecutors and judges view it as a very powerful weapon that should only be used in limited circumstances. The RICO statute has been around since 1970 and I cannot recall a single cannabis case having been brought under it. I am not saying there has never been such a case, but I am saying that it has been used sparingly in dealing with cannabis, if at all, including during Nixon’s “War on Drugs” and Reagan’s “Just Say No” administrations. In this same interview Sessions noted that the federal government has limited resources and it cannot simply commandeer local police forces to pursue RICO charges against cannabis users. RICO cases take a massive amount of effort to prosecute criminally and apparently not even Jeff (“good people don’t smoke cannabis“) Sessions deems this would be money and time well spent.

It also bears mentioning that a few years ago, some private citizens brought RICO claims against marijuana businesses and non-cannabis businesses alleged to have been operating in concert to sell cannabis. As we wrote here, the federal court dismissed those claims.

There is though one important thing cannabis businesses should take from this interview. Sessions is concerned about cannabis businesses that move marijuana from state to state. Note how he brings this up when he says: “it’s also being moved interstate, not just in the home state.” This IS important. The states are mostly in charge of prosecuting criminal activities that happen entirely within their own state borders. A robber in Portland or Seattle or San Francisco will almost certainly be prosecuted by state-city prosecutors; but a robber who brings stolen goods from Seattle to San Francisco could very well be prosecuted federally. The same has always been true of illegal drugs, including cannabis. If you are caught with weed in Newton, Iowa, you risk city or state prosecution. But if you are caught transporting cannabis from Iowa to Illinois, you risk federal prosecution.

So if you want to panic based on this Jeff Sessions interview, you should if you are planning to transport cannabis across state lines. The federal government has never liked interstate cannabis transport and it has always made this clear, as have we, in the following posts:

In Marijuana Law Myths. Not Everything Changes With Legalization, in Myth #2, we explain why it is so dangerous to fall for the myth that you can legally transport cannabis from one legal state to another and why this myth is so dangerous:

2. Now that marijuana is legal in Washington, Oregon, and Alaska, it is legal to sell Washington-grown marijuana in all three states. We hear this one ALL the time, mostly from marijuana businesses that intend to do this, believing it to be legal. It isn’t and please, please do not do this, unless you want to go to federal prison. The same holds true for Washington D.C., where marijuana was just legalized. You cannot just take your “legal” marijuana there and start selling it.

Taking legal pot across ANY state borders by boat or by car or by air is a big deal as it amounts to unlawful interstate drug trafficking.

More importantly, taking marijuana from one marijuana legal state to another is a federal crime. Marijuana is still a Schedule I Controlled Substance. The U.S. Constitution gives the federal government the authority to regulate interstate commerce. This means that it can (and does) prosecute people for transporting marijuana across state lines, even if the transport is from one marijuana legal state jurisdiction to another.

We are not saying that you should expect FBI agents to be sitting at the borders waiting to arrest people for going from one state to another with marijuana, but this is to say that traveling from state to state with marijuana is not advised, particularly by boat or by airplane. More importantly, a business plan that assumes this is legal is a business plan that will set you up to fail, especially if you publicly reveal that your business does this.

This is also a good time to remind you that if you are going to drive from state to state, clear out your cars, your boats, your airplanes, your clothes and your luggage before going from a cannabis legal state to one that is not. State troopers in states like Nebraska, Kansas, and Idaho (and even Nevada where cannabis is legal for medical us but not recreational) love making easy money by arresting and fining people entering with marijuana from Colorado and Washington.

Transporting a Schedule I Controlled Substance, including marijuana, across any state line is a federal felony. This is the case even if your medical marijuana patient card is honored in the next state over, and even if you are moving between jurisdictions that have legalized recreational marijuana. Keep and consume your cannabis in the state where you purchased it, or you run the risk of federal criminal charges for transporting a controlled substance.

So yeah, moving cannabis across state lines (yes, even from one cannabis legal state to another) is a really bad idea.

Oh, and one more thing, many (even some in the cannabis industry) are acting as though one RICO case would do what this interviewer says and “send the message” to all those in the cannabis industry to terminate all their employees and shut down their state-legal cannabis businesses. In other words, many are acting as though one RICO claim would be “lights out” for legalized cannabis all across the country.

This is absurd. The federal government has been trying to shut down cannabis for more than one hundred years, and for much of that time, it had overwhelming popular support for doing so. Today though, the majority of Americans favor legalization and those numbers keep getting better. Were the federal government to pursue “just one” RICO claim, it would likely be against a really large cannabis business that transported cannabis across state lines and I do not believe such a lawsuit would lead to a single state-legal cannabis business shutting down. If anything, it would be more likely to galvanize our country to legalize cannabis once and for all.

So please, nobody panic.