California Cannabis Cultivation in old greenhouses. It's complicated
California Cannabis Cultivation. It’s complicated.

There has been surge of interest in converting old flower-growing greenhouses in Monterey County to cannabis cultivation. Though this has brought a welcome increase in real estate values and, in some cases, a lifeline for family-owned greenhouses hit hard by the growing international flower trade, prospective buyers or commercial tenants looking to convert these properties to cannabis grows should take a hard look at the legal landscape and the suitability to the locality before jumping in.

In many ways, dilapidated greenhouses and cannabis cultivation would seem to be a perfect fit. Greenhouse owners see increased property values and a seller’s market. Cannabis cultivators see rural or semi-rural commercial space prebuilt for optimal plant cultivation conditions. And local governments see increased tax revenue and a welcome improvement of rundown properties.

However, such deals are far from turnkey transactions, as there remain important existing controls at the municipal, county, state, and federal level that must be considered and accounted for before putting pen to paper. Here are a few of the many things to consider as part of your real estate business plan:

  1. Local Regulations. This remains by far the most important factor for determining the viability of real property for medical cannabis business use. Under California’s Medical Cannabis Regulation Safety Act (MCRSA), local governments retain control over whether, how, and when cannabis businesses can operate and this is in addition to traditional local controls over zoning, land use, building safety, and occupancy. Monterey County (which has had an interesting history with cannabis regulation), has decided to allow old greenhouses to be converted to medical cannabis indoor cultivation operations, but under a strict set of requirements. Applicants must obtain a commercial medical cannabis permit and a use permit, which is allowed only for greenhouses within certain specific zoning districts and only under certain conditions related to on-site renewable energy generation, water conservation, offsite plant visibility, and security measures, among others.
  2. State Regulations. As we’ve been writing about for a while now, California is in the process of enacting a massive new regulatory regime for all types of medical cannabis businesses, including cultivation. If you intend to operate in California as a state-licensed cannabis cultivator and you haven’t yet formulated a business strategy for making that happen (e.g. corporate form, financing, local code compliance, environmental review, etc.) you are already behind the curve. Under MCRSA, California will not issue you a state cannabis license unless you can demonstrate local approval.
  3. Land Financing. Though some California banks, savings and loans and credit unions are dipping their toes into providing cannabis businesses with banking services, your chances of getting a traditional mortgage on a property that will be used for cannabis are slim to none. Consequently, most land deals end up being either all-cash deals or supported by secured notes. If a purchaser with a standard mortgage later leases the property to a cannabis business, because of federal cannabis illegality and anti-money laundering laws, the bank can call the loan, putting both the landlord and the tenant at risk. Bottom line: do not expect standard financing options if your greenhouse will be used for any kind of commercial cannabis activity.
  4. Commercial Lease Considerations. Commercial leases in the cannabis industry are not only unique in their requirements, they are now part and parcel of both the local and state licensing schemes because to get a state license as a tenant you need to show that your lease allows you to use the space for cannabis. It is essential for both landlords and tenants to have a properly drafted commercial lease that is tailored specifically to the proposed cannabis use and to the locale.
  5. Federal Enforcement. Cannabis remains federally illegal in all forms and uses. The recently renewed Rohrabacher-Farr amendment and current controlling case law prevent the federal government from enforcing the Controlled Substances Act against medical cannabis businesses in compliance with state law, but this is hardly a guarantee against federal civil asset forfeiture. One interesting effect of this federal-state legal purgatory is the protectionist benefits given to cannabis businesses. Whereas a Monterey greenhouse flower business would find it hard to compete with imported flowers, a cannabis cultivator in that same greenhouse benefits from the prohibition on interstate commerce in cannabis. In other words, because cannabis cannot legally be transported across the border (or even across state lines), cannabis businesses in California are NAFTA-proof.

Bottom Line: The cannabis industry, real property, and California state and local regulations are a complicated mix of legal issues, and whether you’re buying or renting, you need to invest real time and effort into sorting these things beforehand to prevent worlds of trouble down the road.

Oregon Cannabis Grow OperationsSo far in this series on how to open a recreational grow operation in Oregon we have discussed the importance of due diligence when locating your grow op, the process for informing the OLCC about your property and the people behind your company, and meeting your security, power, and water requirements. Now it is time to tell the OLCC how you plan to keep the public, and especially minors, away from your product. Then we will discuss the various site maps you will need to include in your application.

Preventing Public Access. You will need a plan to prevent public access to any indoor areas, all outdoor areas used for cultivation, and also any outdoor areas where cannabis may be stored, even on a temporary basis.

The application packet provides two favored options:

  • Enclose all outdoor areas (and exterior paths between indoor areas and greenhouses) in at least a six-foot tall fence or wall; or
  • Enclose all cultivation areas with at least a six-foot tall fence or wall, and ensure cannabis is only outside the enclosed areas while in the possession of one of your representatives for the limited purpose of transportation between enclosed areas.

In either case, any fences should be constructed of “rigid wooden or metal posts securely anchored to the ground and a woven or welded wire mesh such as ‘chain-link’ fencing or by a solid, rigid barrier, such as wooden fencing planks or similar material.”

You also have the option of creating your own plan, but you will need to specifically detail all the actions and methods you will use to prevent public access. This may subject you to delays as the OLCC can reject your plan or request additional information and clarification.

Minor Control Plan. In addition to your public access plan, you will also need to provide a detailed description of your proposed methods for preventing access to your cannabis by minors, such as identification, perimeter security (physical and personnel), employee screening, and what you will do if you find a minor on your premises. The OLCC conveniently provides an example plan in the application packet:

All doors and gates will be locked at all times. Prior to allowing any person access to the property, age will be verified by checking ID. Employee IDs will be checked prior to hiring and no person will be employed who does not have a valid marijuana worker permit. Signs will be clearly posted at all entry points indicating that minors are not permitted on any portion of the premises. If a minor attempts to gain access to the premises, they will be immediately told to leave and if they do not, law enforcement will be contacted.

Premises Map & Floor Plans. You will need to submit a few maps of your entire cannabis grow property and more detailed floor plans of all structures. The first is sometimes referred to as a Premises Map or Premises Sketch, and the second as the Premises Floor Plan(s).

Premises Map: This map (example here) must include your entire property and must show, at a minimum, the following:

  • The boundaries of your tax lot;
  • The perimeter of the licensed premises (labeled with “Limited Access Area” along the perimeter line);
  • The location of any residences on the property;
  • Dimensions of each structure on the property;
  • Labels showing other activities on the property, such as farming or livestock;
  • Fences and walls;;
  • Labeled compost/waste areas;
  • Labeled canopy areas (cultivation areas); and
  • All entry/exit points for the premises.

You must also include a tax lot map marked to show your premises (which can be obtained from the County Assessor), and an aerial map identifying the area to be licensed (from Google Maps, for example).

Premises Floor Plan(s): You must prepare a separate plan for each structure that includes, at a minimum, the following:

  • A label for the structure;
  • An indication of which floor of the building is shown in the plan (there should be a separate floor plan for each level of each structure);
  • The boundaries of the structure that will be licensed (if you aren’t using the entire structure);
  • All areas where cannabis may be located at any time;
  • All doors, windows, and permanent fixtures;
  • All walls, partitions, counters, and windows;
  • Clear labels for each room, such as “storage area”, “surveillance room”, “trimming”, etc; and
  • All ways in and out of the enclosure.

Make sure your labeling is consistent across your security plan, your premises map, and your floor plans.

At this point you should have everything you need to submit your OLCC application. In part five, we discuss canopy sizes, the new medical bump-up canopy program, and some typical requests for additional information you may receive from the OLCC after you submit your Oregon grow application.

 

California cannabis edibles: just say no to butter
California cannabis edibles: just say no to butter

If you missed our webinar last week on California’s new medical cannabis rules and you just can’t wait for us to publish the recording here on the blog (coming soon!), this post will deal with California’s proposed medical cannabis manufacturing rules for edibles, on which we received a ton of great questions. To get started, a couple of key definitions from the rules:

“Manufacture” means the production, preparation, propagation, or compounding of cannabis products. The term “manufacture” includes the following:

  • Extraction processes;
  • Infusion processes;
  • Packaging or repackaging of manufactured medical cannabis or medical cannabis products.

“Edible Cannabis Product” means manufactured cannabis intended to be used, in whole or in part, for human consumption.

In addition to extensive sanitation, recall, customer complaint and operational requirements for edibles manufacturers, the proposed rules include quite a list of prohibited products and based on our experience in other states with regulated cannabis, we anticipate the list will only grow over time. Here is a sampling of some of the products that will not be allowed under the proposed manufacturing rules:

  1. Cannabis-infused alcoholic beverages;
  2. Cannabis products containing any non-cannabinoid additive that increases potency, toxicity or addictive potential, or that would create an unsafe combination with other psychoactive substances, including nicotine and caffeine;
  3. Cannabis products that must be held below 41 degrees Fahrenheit to be safe for human consumption;
  4. Vacuum packed products;
  5. Canned cannabis products;
  6. Cannabis-infused juice;
  7. Perishable bakery products that must be held at temperatures below 41 degrees Fahrenheit, including cream or custard-filled pies, pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings, or meat-filled pies or pastries;
  8. Dairy products of any kind (yes, this appears to include butter);
  9. Meat products;
  10. Seafood products.

For obvious reasons, the issue of whether or not cannabis-infused butter will be allowed is a big one. Though cannabis butter would be prohibited under the current draft rules, we’ve seen other states, like Washington, carve out exceptions for products  made with cannabis butter. However, even Washington prohibits selling cannabis butter as a stand-alone product.

One other glaring omission from the current rules is a prohibition on cannabis products that appeal to children, although this legislation is likely coming down the pipeline. Many states prohibit products like gummy bears and lollipops that mimic candies appealing to children. Though California seems to be taking a less restrictive approach than other states in which my firm’s cannabis lawyers work, it’s highly unlikely it will leave this issue completely unaddressed. In this vein, California’s proposed rules do prohibit licensees from manufacturing cannabis products by applying cannabinoid concentrate or extract to commercially available snack candy or food items. Though the definition of “commercially available” is not entirely clear, at least part of the intent here is to prevent consumer confusion between cannabis-infused and non-cannabis products present in many homes – children are often the ones confused in this manner.

Ultimately, many California cannabis manufacturers will need to rethink the types of products they offer for sale once they begin operating with a state license. Many of the products currently on the market here simply will not comply with the new rules, and a thorough understanding of what products are prohibited will be critical to developing a viable business plan as a cannabis manufacturing licensee.

 

 

Oregon cannabis In the past six months or so, we have begun to see an increase in consolidation throughout the Oregon marijuana industry. Large companies from other states are moving in, and Oregon companies are buying each other’s assets or stock and integrating to form verticals. In business parlance, we have entered the scaling portion of the inevitable consolidation curve. This development should make for a lively second half of 2017.

Generally speaking, there are three primary structures that acquisitions follow: (1) stock purchase; (2) asset purchase; and (3) merger. Each comes with a raft of legal and tax implications, and each is discussed very briefly below:

  1. Stock purchase. Stock purchases tend to be favored by sellers. In these transactions, the buyer purchases some or all of the seller’s shares (or, in the case of an LLC, its units or membership interests). Sometimes, a buyer will purchase only a majority of the shares, and later force a sale of the remaining shares by statutory short-form merger, or simply as permitted under internal company documents. Unlike a buyer in an asset sale, a buyer of stock is purchasing the target company’s assets and liabilities.
  1. Asset purchase. Asset purchase agreements tend to be favored by buyers. Under an asset purchase agreement, the buyer purchases the seller’s assets and assumes no liabilities, unless the parties agree otherwise. Assets can be both tangible (e.g., inventory and equipment) and intangible (e.g., intellectual property and goodwill), but generally do not include cash. Unlike with a stock purchase, an asset purchase allows the buyer to “step up” the company’s depreciable basis in its assets, within IRS guidelines. From a taxation perspective, that can be crucial.
  1. Merger. In a merger, two entities combine to form one upon the issuance of a “certificate of merger” by the State of Oregon. The surviving company (purchaser) assumes all liabilities and receives all assets of the disappearing company (seller). We have seen fewer mergers in the cannabis space than stock purchases or asset purchases; the exception would be “downstream” mergers where the holding company absorbs its wholly owned subsidiary.

Before a transaction can be consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The attorney will then draft a term sheet or a letter of intent, to present to the target company. Once the parties have negotiated and executed that foundational document, the purchaser will be ready to undertake the time and expense of performing due diligence on the seller and any related parties.

If the due diligence checks out, the purchaser may form a wholly owned subsidiary to purchase the target business, and to further insulate itself from liabilities of the purchased entity. In Oregon cannabis, there are also critical state licensing strictures related to consolidation. Those conversations are important to facilitate early on: in this way, the purchaser will not find itself sitting on unproductive assets after putting a bow on the transaction.

Acquisitions can be an intense process, and the blizzard of documents and disclosures can feel dizzying at times. Ultimately, though, these transactions tend to be memorable experiences for clients and attorneys alike. And in certain instances, an acquisition is crucial for a company to achieve its ultimate goals.

Stay tuned for Part II of this series, where we will discuss the cannabis acquisition term sheet, a critical document in these transactions.

California cannabis seminar: june 22 and 23
California cannabis seminar: June 22 and 23

On June 22nd and 23rd in Santa Monica, Canna Law Blog’s own Hilary Bricken will be chairing and presenting at a day and a half long continuing legal education (CLE) event called “Medical and Recreational Cannabis in Southern California.” This will be Hilary’s third year heading up and presenting at this event. Robert McVay from our firm will also be speaking there. The roster of speakers lined up for this CLE is better than any previous year and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, go here.

Hilary’s talk will be on how California has borrowed from Washington and Oregon in creating its new cannabis regime. Hilary is particularly qualified to discuss this topic as she is licensed in both Washington and California and she often consults with our Portland, Oregon office on high level cannabis regulatory matters. Hilary began her career as a cannabis lawyer way back in 2010 in Seattle and she now heads up our California practice out of our Los Angeles office.

Robert’s talk is entitled, Investing in the Cannabis Industry, and it is described as follows:

How to raise money in California’s marijuana industry? Can entrepreneurs even raise funds under the current MCRSA or Proposition 64 regulatory rules? If they can, how do they do that? What should a solid marijuana PPM contain? What should the “Disclaimer” section disclose? What liability exists for investors? What kinds of questions should investors be asking? How should an investment deal be structured in the marijuana industry? Is that deal the same in every state? Are Kickstarter or other crowd funding sources possible for the marijuana industry? If not, why not?

It is amazing to see the pace at which California is attacking regulation of commercial cannabis activity under its Medical Cannabis Regulation and Safety Act. Even though the state is just beginning to take public comment on its initial rules, those rules already show great attention to detail. For our take on what you need to know and do now in California if you are looking to start a cannabis business there, check out 10 Reasons Why You’re Already Behind on California Medical Cannabis Licensing.

California cannabis attorneys and potential license applicants alike need to familiarize themselves with California’s unique regulatory concepts and industry dynamics and this seminar will help with that. These concepts include the licensing schemes under the Medical Cannabis Regulation and Safety Act and the Adult Use of Marijuana Act (with an analysis of Governor Brown’s Trailer Bill), an analysis of the licensing models in Oregon and Washington from which California has already borrowed, government relations, emerging litigation trends and topics, and practical approaches to working with and in the cannabis industry through contracts. All of these issues will be addressed at this event and if you want to know what is happening and what is likely to happen with California’s cannabis industry, you shouldn’t miss it.

Please join us in Santa Monica on June 22nd and 23rd for a day and a half survey of California medical cannabis that will be both broad and deep. And if you are a Harris Bricken client, a friend of our firm or a steadfast Canna Law Blog reader, click here to request a promotional discount code, which can be applied to either the webcast, or to your in-person attendance.

We are proud to have so many clients among the pioneers in California’s brave new world of regulated medical cannabis (and, eventually, adult use cannabis) and we hope to see you soon in Santa Monica.

Legalize cannabis

Of course Jesse Ventura is right. Cannabis is both an invaluable resource medicinally and a boost for the economy. Cannabis generates huge tax revenue (which will only continue to increase), and creates a vast number of jobs. It has been projected that by 2020, the cannabis industry will have created a quarter of a million jobs, and that’s with only eight states having legalized recreational cannabis. If we, as Jesse Ventura suggests, legalize cannabis in all fifty states, we would create millions of new jobs.

The other thing Ventura gets right here is the need to destigmatize cannabis. Even in places with state-legal cannabis, the stigma remains — the product of decades of Reefer Madness-esque propaganda and the inane drug policies of the War on Drugs. We need to make sure the Trump Administration’s anti-cannabis bias from perpetuating and adding to the stigma. Ending the stigma and legalizing the plant go hand and hand and we need to work at both.

You agree, right?

On June 1st, three of our Los Angeles and San Francisco attorneys, Hilary Bricken, Alison Malsbury, and Habib Bentaleb, put on a webinar on California’s new MCRSA rules. Nearly 1500 signed up for this. Topics covered include cannabis licensing issues for California Retailers, Distributors, Transporters, Manufacturers and Cultivators, and audience questions.

You can find the handouts distributed during the webinar here and here.

Enjoy!

Los Angeles Cannabis rulesThe long-awaited proposed regulations under Proposition M for L.A.’s current and future medical (and recreational) marijuana operators are finally out. The 51 pages of initial regulations (that are now in a 60-day public comment period) cover the governance of cultivators, manufacturers, distributors, testing facilities, transporters, retailers, and microbusinesses in significant detail under Proposition M. If you forget what Proposition M is, see here. Though most of these initial regulations identically track initial state regulations under the Medical Cannabis Regulation and Safety Act (“MCRSA“), there are certainly some nuances that will affect medical cannabis businesses differently than in other jurisdictions. Equally important is that L.A. also issued its proposed zoning regulations, so we know where the city expects all operators to locate, which is incredibly important for those looking for eligible real property.

Here are the highlights from the proposed operator rules (we will cover L.A. zoning under Proposition M in a subsequent post):

  1. The City of Los Angeles Cannabis Department (“Department”) is going to issue Commercial Cannabis Activity Certificates of Compliance in four phases as follows: (1) Proposition M Priority eligible applicants (i.e., the ~135 Pre-ICO cannabis collectives currently operating in the City under Prop. D immunity from prosecution), (2) Non-Retail Registry eligible applicants, (3) a restricted phase “in which the number of Certificates of Compliance issued to General Public applicants may not exceed the number of Certificates of Compliance issued to Social Equity Program applicants”, and (4) an unrestricted phase “that commences after the Social Equity Program has been fully funded and implemented as determined by the City Council. City of Los Angeles Cannabis Department.”

This means Prop. D compliant dispensaries will have a lock on L.A.’s retail cannabis market unless and until general public applications are allowed in phase 3, which will only happen after non-retail applicants and social equity program applicants are approved, which could take years. And the number of additional Certificates that may issue in phase 3 is dependent upon and restricted by the number of Certificates that issue to applicants in the social equity program, which hasn’t been created yet.

  1. Prop. M Priority applicants or “Existing Medical Marijuana Dispensaries” (“EMMDs”) will have only 60 days from the date applications become available to get their applications into the Department and then that application window will forever close (if you don’t meet the 60-day deadline, you’ll be treated as a new retail applicant). Further, EMMD applicants will only be allowed to apply for Retailer Commercial Cannabis Activity, which may include Prop. D-compliant on-site cultivation. If one of these applicants also applies for on-site cultivation, it cannot expand its existing grow in any way and the current grow canopy size depends on its size documentation (if any) in the existing lease or in a Certificate of Occupancy issued to the applicant by the City prior to January 1, 2017. All on-site cultivation has to end on or by December 31, 2024 if the EMMD’s premises are not within a zone that allows for Indoor Cultivation Commercial Cannabis Activity. This combination of cultivation may also be problematic for EMMD applicants that don’t also apply for a Producing Dispensary permit from the state (where other combinations of cultivation and retail are not allowed under the MCRSA, though they will be under the Adult Use of Marijuana Act (“AUMA”) and if the Governor’s Budget Trailer Bill passes).
  2. EMMDs that can demonstrate “substantial compliance” with Prop. D will be allowed to continue operating at their one designated location while their application with the Department is pending, but they can’t make any changes at all to their structure or operations during that time. And “any mitigating circumstances due to gaps in operations, ownership change, location change or closure, tax payments, etc. must be described in detail for the Department to consider eligibility” for priority processing. If the City finds you’re not compliant with Prop. D. and, therefore, not eligible for priority processing, its decision is final.
  3. Retailers may possess up to three Certificates of Compliance, and that includes Certificates for Delivery. Though the City did not officially cap the number of dispensaries that may apply for Certificates from the Department in the future, that number will be curtailed by the number of approved Certificates issued to applicants in the social equity program, the rules for which haven’t been established by the City.
  4. All non-retail applicants “that were conducting Indoor Cultivation Commercial Cannabis Activity or Manufacture Commercial Cannabis Activity in the City of Los Angeles prior to January 1, 2016 . . . may continue to operate while their application is pending approval if a completed application is submitted to the [City of Los Angeles Cannabis] Commission within 30 days of the first date [on which applications are] made available to the public, the continuing operations of the applicant are the same activities in which the applicant is seeking a Certificate of Compliance for indoor cultivation or manufacture, the location or premises meets all of the adopted or proposed land use and sensitive use requirements of the City of Los Angeles and other eligibility requirements as listed, and the Department approves eligibility.” The Department will then close the Non-Retail Registry processing window permanently. To prove continuous operation by January 1, 2016, the City will ask for the same documentation as the state for priority licensing approval. Just like with EMMD applications, if the City makes a final determination that you’re not eligible for non-retail application processing, its decision is final. There’s no City cap on the number of Certificates a non-retail applicant can hold.
  5. There will be no volatile (Type 7) manufacturing in Los Angeles. Only non-volatile (Type 6) manufacturing will be allowed. And outdoor and mixed-light cultivation are also not allowed.
  6. There’s a robust list of background and financial information all applicants must supply to the City in their applications for Certificate of Compliance including, all “Owner” information, a list of all non-controlling owner information, your lease or right to occupy your real property for your license type, your hiring plan (which must include a plan for hiring L.A. locals), a premises diagram and security plan, and your business’s organizational structure.
  7. Any person convicted of illegal volatile cannabis manufacturing is banned for 10 years (from the date of conviction) from Commercial Cannabis Activity within L.A., and anyone who’s been convicted for violating any law involving wages or labor laws is banned for 5 years (from the date of conviction) from Commercial Cannabis Activity within L.A.
  8. No foreign companies (i.e., out of state or international) can apply for a Certificate from the City.
  9. As for operational standards, no business can provide physician recommendations to anyone, there can be no on-site consumption, no special parties or events can be held on-site, there are strict records retention requirements (including retention for no less than 7 years for all financial records), all businesses must follow the track and trace system for seed-to-sale, and retailers can be open only from 6 a.m. to 9 p.m.
  10. L.A. is finally going to allow delivery (which has been a long embattled issue in L.A.), and its regulations basically track those of the state (i.e, a brick and mortar dispensary can be the only one to deliver under the MCRSA and no specific distinction was made for delivery under the AUMA — yet). Deliveries cannot take place outside of the City without the City’s express approval.

These initial regulations will certainly change (at least a bit) as a result of stakeholder feedback and debate. But though you can’t take these regulations to the bank yet, they do provide valuable insight into how the City of Los Angeles sees the future of its cannabis market. I still maintain that if the City does not allow significantly more retail dispensaries in the near future, it will not reach its maximum market potential.

We’ll see how things play out over the next two months and we will definitely keep you posted in the meantime.

Oregon cannabis lawIn January, we put together a summary of 30 or so draft bills up for consideration in the 2017 Oregon legislative session. As predicted, many of these bills have fallen by the wayside; others have been revised or consolidated. As of today, Oregon has enacted four new laws related to marijuana, with three more bills pending. In addition, three draft bills wait in the wings, regarding industrial hemp.

Today, we are one month away from the state’s constitutional deadline for adjournment sine die, which is Monday, July 10. Everyone goes home at the end of that day, and if a bill hasn’t been approved by both chambers, we say “so long” until 2018.

Below is a summary of Oregon’s four new marijuana laws, its three proposed marijuana laws, and its three proposed hemp laws.

Oregon’s New Marijuana Laws

Senate Bill 1057

A few weeks back, we gave a comprehensive overview of Senate Bill 1057, the most impactful bill to date, and another large step in combining Oregon’s medical and recreational marijuana programs. The bill has since been signed into law by Governor Brown and because it was an “emergency” bill, it took effect on May 30.

Senate Bill 302

This bill quietly became law back on April 21. It removes provisions related to marijuana offenses from the state Uniform Controlled Substances Act. It also removes and/or reduces various criminal penalties related to marijuana crimes by unlicensed operators. The thrust of this bill was to treat marijuana crimes more like alcohol crimes, and it achieves that purpose. Because penalties for marijuana offenses were scattered throughout the Oregon statutes, this one has an enormous amount of tedious, conforming amendments, to something like 125 statutes.

Senate Bill 303

This law is similar in nature to SB 302, albeit much shorter, and it also took effect back on April 21. The takeaway here is the amendment, clarification, and reconciliation of statues related to minors possessing and purchasing both marijuana and alcohol. Pretty basic stuff.

Senate Bill 863

This one concerns consumer privacy, and it serves as a further attempt by Oregon to shield its citizens’ information from the federal government. The new law prohibits marijuana retailers from recording, retaining and transferring “information that may be used to identify a consumer.” This bill was short, sweet and non-controversial: it was signed into law by Governor Brown on April 17.

Oregon’s Proposed Marijuana Laws

House Bill 2197

This is a classic “gut and stuff” bill, which started out as a measure to promote cannabis research, but now, in its fourth proposed amendment (“Dash 4”), deals with intergovernmental taxation as to the state and Indian tribes. Specifically, it would allow the Oregon Department of Revenue to enter into agreements with the governing body of federally recognized Indian tribes (read: The Confederated Tribes of Warm Springs). Under those agreements, the state would make rebate payments to the tribes for the estimated tax on marijuana items sold by tribes. This one left the Joint Committee on June 5, and was referred to Ways and Means, which is what happens whenever a bill has a fiscal impact. It’s hard to say right now whether a version of this bill will become law, but it seems probable.

House Bill 2198

This bill would establish an Oregon Cannabis Commission, to report back to the legislature on the status and condition of the Oregon Medical Marijuana Program (which the legislature keeps curtailing). The idea here is to find a way to help medical marijuana patients who might otherwise be left behind. Among other things, this bill contains the controversial “20 pound amendment” which would allow designated medical growers to sell up to 20 pounds of excess flower annually into the OLCC market. Like HB 2198, this one also recently made it out of the Joint Committee, and was referred to Ways and Means.

Senate Bill 56

This is the 2017 Oregon cannabis “Christmas tree bill” and it was given a “do pass” recommendation on June 6 by the Joint Committee, following its 39th proposed amendment (“Dash 40”). It’s now in the Senate Committee. The myriad of changes are too lengthy to summarize here, but a few notable planks include: (1) a requirement for the immediate suspension of any marijuana licensee for diversion of product to the black market; and (2) an allowance for limited processing by small, licensed OLCC producers (<5,000 square feet of canopy; water or mechanical extraction only).

Oregon’s Proposed Industrial Hemp Laws

Senate Bill 1015

This bill would allow hemp licensees to deliver hemp to OLCC processors, for non-THC based processing (which will be welcome news to both hemp and marijuana licensees). This bill was passed by the Senate on June 7, and does not create a fiscal impact. This means it will avoid the quagmire of Ways and Means, and should become law.

House Bill 2371

This bill would tidy up the industrial hemp regulatory scheme generally, which is a slender program with many gaps. Among other things, it would create a pilot research program, create a seed certification program, and provide for accreditation of testing laboratories for industrial hemp commodities, as well as products that are ingested, inhaled or topically applied. This bill was referred to Ways and Means on April 26, but seems likely to pass.

House Bill 2372

This bill would create on Oregon Industrial Hemp Commission, and nothing more. Like HB 2371, it was referred to Ways and Means on April 26, but is non-controversial and also likely to pass.

Cannabis tax lawyer
New tax law will impact cannabis businesses

Our cannabis business lawyers are often called on to help clients choose the most effective legal entity for operating their cannabis business. In making this choice, we consider many factors, including the tax impact to investors. See Cannabis Companies and Phantom Income and How To Open A Cannabis Business: For-Profit vs. Not-for-Profit, that is the Question.

Our  cannabis clients usually choose to operate as a limited liability corporation (“LLC”). For federal tax purposes, a LLC with more than one member is treated as a partnership unless the LLC elects to be taxed as a corporation.  Accordingly, any change to partnership tax law applies to LLCs as well.

One important consideration for LLC Partners/Members is identifying who is authorized to represent the partnership in the event of an IRS audit. Under current law, Partners/Members appoint a Tax-Matters-Partner or “TMP.” Though the TMP is the contact point for dealing with the IRS, the TMP function is ministerial.

For tax years beginning in 2018, Congress significantly changed the way the IRS audits partnerships and LLCs taxed as a partnership. Under current law, the IRS must collect tax directly from each Partner/Member. In general, each Partner/Member may defend the audit adjustment as he or she sees fit. The new law requires the IRS collect tax directly from the partnership. In essence, the IRS now has “one-stop-shopping” to collect tax. But there is more. To collect tax from the Partnership/LLC, the new law requires each Partnership/LLC have a “partnership representative.”

There are two significant issues regarding appointment of a partnership representative (“PR”). The first is that the partnership representative (PR) has more power than the TMP. The PR has the sole authority to deal with the IRS and to bind each Partner/Member to the consequences of the PR’s decisions. In other words, the PR ultimately will decide how much tax each Partner/Member will pay as the result of an audit. An odd quirk of the law is that the PR does not even have to be a partner/member of the LLC.

It is important for Partners/Members to choose their PR carefully and in choosing a PR, Partners/Members should consider the following:

  • Who should be the PR?
  • Should election of the PR require a unanimous vote or something less?
  • Should the PR have unlimited authority or should such authority be limited under the partnership agreement or the operating agreement?
  • If the authority of the PR is going to be limited, what will be the scope of the PR’s authority?
  • What will the mechanism be to resolve deadlocks?

These above considerations can and should be addressed when drafting new partnership/operating agreements. Current partnership/operating agreements should be amended, however, the timing on when to do so is dependent on each Partnership/LLC’s specific situation. Because the new law will start applying beginning in 2018, Partnerships/LLC’s have a bit of time to address this issue, however, if you are mending your partnership agreement or operating agreement for other reasons, now is the time to make your PR decisions.

And here is the second issue: the IRS can select your partnership representative if you fail to do so yourself. This portion of the new law is controversial and raises many legal issues, many of which remain unclear. But what is clear is that you can avoid this harsh result by having your partnership/LLC choose its PR in a timely manner. Choosing a PR is one of many tax issues that must be considered when drafting a partnership agreement or operating agreement and as 2018 approaches, this is just one more issue cannabis businesses will need to address.