Photo of Vince Sliwoski

Vince manages Harris Bricken’s Portland office and is a professor of Cannabis Law and Policy at Lewis & Clark Law School. He is a well-rounded attorney with expertise in a wide range of transactional law.

Today let’s talk about Matthew Price, the Oregon marijuana businessman headed to jail for tax crimes. This story got a lot of coverage when it broke last month, partly because it was the first known tax-related prosecution for a licensed pot business owner, and partly because Price was fairly well known in Oregon. He once sat on an Oregon Liquor Control Commission (OLCC) rules advisory committee for cannabis retail, and he owned three dispensaries. Seems like he was off to a pretty good start.

Well, not any longer. In addition to the seven-month lockup, Price was ordered to pay the I.R.S. $262,776 in restitution on the nearly $1 million in taxable income he raked in from 2011 to 2014. He will probably never be allowed to participate in the OLCC program again, given the agency’s recent tightening of the screws, and its authority to bar anyone with a federal conviction “substantially related to the fitness and ability of the applicant” to obtain a license.

cannabis marijuana tax IRS

Generally speaking, marijuana businesses are liable for lots of tax under IRC 280E. As cannabis business lawyers, we work with CPAs and others to attempt to mitigate our clients’ tax liability, but at the end of the day, that liability is always there. Tax obligations do not end at the federal level, of course: Most states have income tax programs, and all states with legal cannabis programs seem to collect additional taxes on the sale of marijuana. In Oregon, for example, that sales tax must be escrowed by OLCC retailers and paid to the state Department of Revenue. As to Matthew Price, the news reporting was silent on whether he was also shirking those payments.

Having advised state-legal cannabis businesses since 2010, we have seen a lot of monkey business when it comes to tax. We have seen bad lawyers advise clients not to pay taxes, on the theory that tax programs violate business owners’ rights against self-incrimination. We have seen businesses attempt to claim “non-profit” status and avoid taxes in that manner, despite the impossibility of receiving an I.R.S. exemption. And we’ve seen lots of “management company” schemes, most of which are nonsense. At the end of the day, a baseline level of tax is unavoidable.

Interestingly and appropriately, the judge in this case didn’t seem to treat Price differently because his income derived from cannabis sales. It was reported that federal prosecutors petitioned the judge to go hard on Price, in order to send a message to the marijuana industry. The judge wasn’t having that:

The fact that the product involved here is marijuana is utterly meaningless to me in passing a sentence,” the judge said. “It’s a tax case to me.”

That didn’t stop the Justice Department from bragging a bit, but it’s encouraging to see cannabis entrepreneurs being treated like everyone else — in theory, anyway — and for better or worse. On that point, we have often said on this blog that just because someone is violating one federal law by trading in cannabis, that doesn’t make it a good idea to violate all the others. And we always advise entrepreneurs to run their cannabis business like real businesses. That includes paying taxes.

City cannabis licensing in action.

Recently, the City of Portland announced that it would lower cannabis business licensing fees. Most notably, retail license fees have been reduced from $4,975 to $3,500, in line with other license types. That is still too steep (especially considering the state licensing fees), and although the City has cleaned up its process over the past few years, it’s still redundant, unnecessary and something of a cluster. Like all cities, Portland should stop licensing cannabis businesses.

It’s been over three years since Portland adopted its poorly written Code Chapter 14B.130, which sets forth license procedures and requirements for marijuana businesses. The oppressive fee schedule adopted at that time placed an outsized burden on retailers to cover the cost of administering the Portland Marijuana Policy Program. In the early days, the program was staffed by functionaries at the Office of Neighborhood Involvement (ONI) who shall go unnamed and mostly seemed to follow each other in circles, sometimes passing applicants back and forth with the Bureau of Development Services (BDS). Most of those folks have moved on.

ONI has since been rebranded as the Office of Community & Civic Life (people still call it ONI) and slotted under a different Commissioner. All of this followed from campaign promises made by Portland’s new mayor, who acknowledged that the City’s relationship with marijuana was a mess. For further reading on how bad it got — from credible estimates that local red tape was costing the industry $22 million per month, to disapproving letters penned by Congressional reps — go here, here, here, here, here, here and here. The City’s actions also caused one of my all-time favorite Oregon cannabis rumors: A class action suit would be filed “any day now” by private industry against the City. It’s been a trip.

Three years later, the Marijuana Policy Program is better run, and the lawyers and paralegals in my office get along with everyone there and push licenses through on the regular. But the question remains: What exactly is the point of having a local regulatory program for cannabis businesses? Everything is redundant to what the state is doing, and when it’s not, it’s usually worse. So why do cities think this is a good idea?

Those are complex and provocative discussions, but the motivation by cities may be some combination of the following: 1) licensing cannabis generates revenues; 2) licensing cannabis generates jobs; 3) licensing cannabis is novel; 4) licensing cannabis may appease people who dislike pot businesses; 5) cities may already be licensing alcohol (although to a lesser extent, invariably); 6) other cities are licensing cannabis; and 7) it’s hard for regulators not to regulate things. All in all, it’s a dismal mix.

Unfortunately, there is not much that industry can do when a city decides it wants to license cannabis. In states where legal marijuana markets exist, cities (and counties) have significant leeway in dealing with cannabis businesses. Some cities opt out entirely; others choose to license. Still others take a middle path, charging a variety of fees and taxes to hapless pot businesses but stopping short of licensure. Although fees and taxes are burdensome, those cities tend to avoid the logjams that prevent many businesses from even getting off the ground.

In all, the Portland experience is not unique. Hilary Bricken has been writing on this blog for some time about City of Los Angeles’ convoluted three-phase licensing protocol, for example, and the unintended consequences that come with it. Others have taken a broader survey, chronicling “extortionate” application, permit and license fees from municipalities nationwide. In comparison to some locales, cities like Portland and Los Angeles don’t seem so bad.

It’s also important to remember that cities can do a lot of good for cannabis, if they skip the licensing step and focus on other things. In August, Portland directed $350,000 in funds toward record-clearing and workforce efforts for communities that prohibition has impacted disproportionately. It also dropped another $150,000 to support equitable cannabis initiatives. Both announcements were met with general approval.

Most recently, Portland rolled out a “Social Equity Program”, which modestly reduces licensing fees to qualifying businesses. Before you get too impressed, though, consider: The better move would be dropping the licensing structure altogether.

We recently wrote about the new Oregon Liquor Control Commission (OLCC) rules for marijuana businesses, and observed that those rules were issued with the stated intent to stave off diversion of cannabis. In addition to its public-facing actions, we have seen an apparent shift in internal OLCC review policies and procedures. A few weeks ago, we covered the apparent adoption of new settlement policies. Today, we cover what appears to be increased scrutiny for each of the following: new license applications (those submitted prior to June 15th), license renewal applications, change in business structure applications, and change-in-ownership applications. OLCC investigators are looking at all of these submissions more carefully than ever.

It was never easy to get an OLCC license. It only felt that way, given the stricter and more tedious requirements faced by cannabis program applicants in other states. In Oregon, the application process was somewhat cumbersome initially (remember the narrative-based forms, released in 2015?), but the state quickly progressed to “check the box” paperwork in combination with its online data entry system. Today, there are a few interesting quirks in that protocol, but it’s navigable and sensible and clean overall.

So what changed? Generally, the administrative environment is different these days. Licensing has existed for a couple of years, OLCC has refined its processes, and investigators are better trained than before. Specifically, investigators have raised the bar for the content of application submissions, and they are looking under rocks that previously would have been left unturned. In many cases, they are finding things.

OLCC marijuana cannabis license
OLCC investigators are taking a harder look.

Gone are the days when an applicant could submit a business document in the belief that, regardless of that document’s contents, the inspector would summarily tuck it into her file essentially unread, and pass the application along to “final review.” OLCC investigators are now actively requesting and reviewing legal documents, and doing a really good job of it. Here is a sampling of investigator questions we have seen in the past month or so, that never would have surfaced even a year ago:

  • “Does this lease’s rent reconciliation provision mean that the landlord is entitled to a percentage of profits? Explain that.”
  • “Was this asset purchase agreement ‘deposit’ escrowed? Or have these funds used in the business operations already?”
  • “Why does this business structure form contain an LLC member who is not listed on the state business registry?”
  • “At what point did the seller transfer these utility bills into the buyer’s name?”

Etcetera. We have seen businesses tripped up (badly) in the both the change-in-ownership and renewal processes by questions like these. In the worst case, these inquiries can result in proposed license cancellation and/or non-renewal by OLCC. Those situations can be incredibly frustrating and stressful for a business, especially one with sunk costs and accumulating obligations. They should be avoided if legitimately possible.

In all, the new licensing paradigm leaves us with a couple of key takeaways going forward. The first is really simple: Run your business like a real business and ensure you have everything in place prior to OLCC submission. This means writing things down, to start, and using appropriate forms to do so. The second takeaway is to enlist help when needed. That doesn’t mean you need to pay an attorney or a consultant thousands of dollars to process your application. In our Portland office, for example, we have experienced marijuana licensing paralegals who process OLCC applications literally all day every day, and who talk with OLCC investigators on the regular. Our cannabis business lawyers only enter the picture to draft documents, or deal with nuanced or delicate matters.

Going forward, we expect OLCC to continue to ratchet up standards for both applicants and licensees on everything from rulemaking to license review to site inspections. That’s a good thing for compliant operators and for businesses that want to do things correctly. Really, it’s exactly how it should be.

Josephine County marijuana cannabis litigation
…another Josephine County setback.

Poor Josephine County.

We have been writing on this blog about the southern Oregon county’s mounting frustrations with cannabis, its successive losses in litigation, and its most recent attempt in federal district court to submarine Oregon’s cannabis programs. We immediately identified this lawsuit as a “stunning overreach” and we predicted the county would lose. To that end, and just before the holiday weekend, a U.S. magistrate judge issued a Report and Recommendation (“Report”) that Josephine county’s case should be dismissed. That will almost certainly occur.

By way of background, we explained back in April that Josephine County wanted the federal court to:

  1. Declare that cannabis production cannot qualify as a pre-existing “lawful use” because of federal prohibition;
  2. Declare that counties can place any restrictions they want, including a full ban, on cannabis businesses because state legal regimes are pre-empted by federal law;
  3. Declare that Oregon’s medical and recreational regimes unlawfully restrict the county’s police powers in light of federal prohibition; and
  4. Enjoin the State from bringing official misconduct charges against any local or county official that ignores their duties under state law.

Well, none of that is happening. The magistrate judge issued a thoughtful, eight-page opinion (no public link available– email me if you want a copy) which rested on two points of law: 1) Josephine County, as a political subdivision of the State of Oregon, lacks standing to sue the state in Federal District Court; and 2) no justiciable case or controversy exists between the parties. Let’s take a quick look at each finding.

Standing. For one party to sue another, it must convince a court of a sufficient connection to, and harm from, the law or action challenged. Here, the Report cited a mountain of Ninth Circuit precedent to the effect that a state cannot be sued by its political subdivisions. In apparent anticipation of this, Josephine County had argued that its “home rule” status creates an exception, but the Report swatted that argument away in two brisk paragraphs. When a party has no standing, the merits of its claims don’t matter.

No Justiciable Case or Controversy. The Report covered this argument almost as an afterthought. The judge found that even if the court could find an exception to the fatal standing issue, the case should be dismissed because Oregon has not prohibited Josephine County from enacting the regulations it wants to enact (restricting marijuana grows on rural residential land). Instead, the county erred by not providing landowners required notice, and that deficiency (rather than any substantive deficiency) was the sole reason a lower court iced the county’s restrictive ordinance. The judge had fun in this section of this Report. He notes that:

On a practical rather than legal note, the Court is unpersuaded by Josephine County’s argument that the State is ‘requiring’ it to ‘aid and abet a federal felony.’ The County has provided no evidence to the Court that it has attempted to ban any and all marijuana use and production, as would be theoretically required by full compliance with the [Controlled Substances Act]. Instead, the County merely seeks to limit the use and production in rural residential zones, while continuing to allow marijuana use and production in other instances. Apparently the County is only worried about aiding and abetting federal felonies on certain kinds of land and not others.”

Indeed! So what happens next? The Report will be referred to a district court judge. The county’s objections, if any, are due within 14 days. After that, the state would have 14 days to respond. Once those windows close, the judge will issue a final opinion, which is almost certain to agree with the Report. Theoretically that ruling could be appealed to the Ninth Circuit Court of Appeals, and ultimately the U.S. Supreme Court. In our opinion, though, it’s unlikely either of those courts would take up the case. We also believe that Josephine County should stop wasting taxpayer funds on ill-conceived litigation and bad press. Who knows if that will actually happen, though.

For more on the Josephine County saga, check out the following posts:

psylocibin FDA depression mushrooms
Just landed at FDA.

Let’s talk about psylocibin today.

Psylocibin is the naturally occurring, psychedelic ingredient found in around 200 species of mushrooms. Like cannabis, it is believed that psylocibin use by humans predates recorded history by at least a few thousand years. Also like cannabis, psylocibin has always been thought to have medical applications; and it has demonstrated promising, preliminary results in formal studies. In Silicon Valley and elsewhere, microdosing of psylocibin and LSD has become a trend, for medical and other purposes.

The fact that people are freely using psylocibin (and writing about it) doesn’t make it legal, though. Like cannabis, psylocibin is a Schedule I controlled substance under the federal Controlled Substances Act (“CSA”), as well as relevant international treaties. This means that psylocibin has “no accepted medical use” and a “high potential for abuse” under the CSA, and a similar status under international law. We don’t see that changing anytime soon.

Because psylocibin is so strictly controlled, it was big news last week when the Food and Drug Administration (FDA) approved a psylocibin trial for treatment-resistant depression. According to a press release by sponsor Compass Pathways, 216 patients with that affliction will participate in the Phase 2 trial. This will be the largest ever trial conducted into psylocibin therapy, and the stakes are incredibly high: Around 100 million individuals suffer from treatment-resistant depression worldwide. This means that nothing works– not antidepressants, not psychological counseling, not even grisly procedures like electroconvulsive therapy.

So who is leading the charge on psylocibin? Compass Pathways (“Compass”) is a life sciences and mental health company backed substantially by Peter Thiel, of PayPal and Privateer Holdings fame. The latter company is probably the largest private equity firm in the cannabis space, and has been for a while. Compass is a different type of outfit than Privateer, in that its purpose is to develop, own and market solutions (including a psylocibin drug), rather than take debt or equity positions in existing brands.

The biggest question of all, though, is what happens next with Compass and FDA. From a products-to-market perspective, Compass is in the second of three “trial” phases. The initially approved trial in this case is a “Phase 2b dose-ranging study” which has the purpose of testing for both efficacy and side effects. Typically, Phase 2 trials last several months to two years. About 33% of Phase 2 trials succeed; the rest fall through due to study failure or lack of funding.

If the Phase 2 trial succeeds, Compass and the FDA would need to agree on how a larger-scale, Phase 3 trial should be done, with 300 to 3,000 volunteers. That leg would last up to four years. Ultimately, if the Phase 3 trial shows that psylocibin is more effective and/or safer than current standard treatments, Compass would submit a “new drug application” to FDA for approval and post-market monitoring. For a detailed look on the whole process, go here.

If everything goes well, we will probably see a psylocibin drug hit the market sometime in the next five to ten years. That’s a big “if”: Once trials start, it’s possible that the findings won’t pan out (although we are optimistic). The fact that FDA recently approved the first non-synthetic cannabis drug, Epidiolex, should give Compass some optimism that its psylocibin efforts have a real shot, and that the decision here will be entirely science-based and free of political considerations.

At some point soon, due to the Epidiolex approval, Congress or the DEA is going to have to re-schedule cannabidiol under the CSA. Perhaps one day they will have to do the same for psylocibin. Before that, who knows: It’s even possible that psylocibin, like cannabis, will be legalized in certain states. That could happen as soon as 2020 here in Oregon.

united nations international marijuana cannabis
Will they get it right this time?

Cannabis prohibition under U.S. federal law is nonsensical and causes many problems, from oppressive taxation to civil rights violations. Under international law, however, things may be even worse. Fortunately, it was reported this week that the United Nations (U.N.) will finally take a closer look at cannabis prohibition this fall. It was also reported that the World Health Organization (W.H.O.), an agency of the U.N., has recommended that cannabidiol (CBD) no longer be controlled under international law. Both developments are terrific news.

For public international law nerds, like me, the question of why international law is more intractable than U.S. law on marijuana is fun stuff. The short answer is that cannabis, along with opium poppy and coca bush, is restricted not just through “scheduling”, but by the core text of the principal treaty at issue. This means that under international law, 185 or so countries are going to have to agree to amend the Single Convention on Narcotic Drugs of 1961 (“Single Convention”) (specifically, Articles 1, 22, 28 and 49) in order to truly end prohibition. Then, cannabis would also need to be removed from the Single Convention’s Schedules I and IV. All of that is no small feat.

Still, it isn’t impossible that the Single Convention would be amended to loosen or abolish restrictions on cannabis. The treaty was amended once before, by the 1972 Protocol, which inter alia amended Article 22 to require nations to actually enforce laws on their books against both poppy and cannabis cultivation. Since 1961, the U.N. has also taken other action on controlled substances, mainly through the Convention of Psychotropic Substances of 1971 (which will need amending one day, too) and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988. So, the U.N. does re-think its stance on controlled substances from time to time, and for better or worse.

Like other international treaties that deal with drugs, the Single Convention is not self-executing. This means that signatory countries must pass domestic legislation to fulfill their treaty obligations. For its part, the U.S. passed the federal Controlled Substances Act (“CSA”) back in 1971. Unlike with the Single Convention, cannabis is not included anywhere in the body of this law. Instead, “marijuana” and other items are listed on separate “schedules” to the CSA. Each schedule then dictates the extent to which those items are controlled. “Marijuana” is a Schedule I drug with “no accepted medical use” and a “high potential for abuse.” That’s not so different than the Single Convention’s placement of “cannabis” at its Schedules I and IV, reserved for drugs that are “particularly liable to abuse and to produce ill effects” and where “such liability is not offset by substantial therapeutic advantages.” It’s important to note that even if the Single Convention were abolished entirely, its legacy would live on in the CSA and other domestic laws of its signatories, until those laws were also repealed.

Because the Single Convention has not been amended with respect to cannabis legality, it is controversial whether the U.S. has acted lawfully in allowing many of its states to promulgate medical and adult use marijuana programs in defiance of that treaty and the CSA. Recent U.S. delegations to UNGASS have made the argument that there is “sufficient flexibility” under the Single Convention to accommodate what has occurred under our federalist system of government. That’s a topic for another day, but suffice it to say that the “sufficient flexibility” argument is a thin one.

Many countries are no longer bothering with legal arguments, and simply ignoring their treaty obligations altogether. Canada and Uruguay are signatories to the Single Convention, and those countries have fully legalized sale and distribution of cannabis. Canada, for one, likely won’t even bother to withdraw from the Single Convention or submit reservations: It will just violate the treaty. Other countries around the world, from Israel to Germany to Columbia to Australia, have also pushed ahead to import or export medical marijuana in recent years. And many more, like the Netherlands and Spain, license or tolerate commercial or quasi-commercial marijuana activities.

Clearly, the Single Convention is outdated when it comes to cannabis prohibition, and global enforcement against licit marijuana economies is both impractical and legally problematic. In the coming months and years, countries will continue to legalize marijuana in abnegation of their treaty obligations, whether for moral or economic reasons. So let’s hope that the U.N. starts by acting on the W.H.O. recommendation to loosen controls on CBD, which shouldn’t be terribly difficult. But most importantly, let’s hope for an enlightened “big picture” approach on cannabis, even if that takes some work.

marijuana cannabis loan
This industry is different, you know.

Many cannabis businesses are funded with debt. Sometimes, the debt is owed to one of the business’s owners, who pursued a debt structure for tax reasons. Other times, the debt is owed to a third party. That party could be a friend or family member, an investor keen on the industry, or even a professional hard money lender. Our marijuana business lawyers have papered a large number of loans in the industry, on behalf of both businesses and lenders. This blog post identifies some considerations for lenders making plays in the industry.

Do Your Diligence.

Before making a loan of any type to a cannabis business, do your diligence. Like so many things related to cannabis businesses, this exercise is different than with standard businesses. There are several reasons for this: 1) cannabis businesses often have short or non-existent operating histories; 2) by extension, cannabis businesses often have limited financial information at hand (tax returns, P&Ls, etc.); 3) the financial projections for cannabis businesses are more speculative than for other businesses, due to market dynamism; and 4) regarding operations, cannabis businesses may be “license pending” and thus offer little to vet.

Altogether, these factors make it supremely important to vet the actual owners of the business, as well as whatever you can get on the enterprise. This means having a look at personal financials and assets, credit reports, asking for personal references and calling around, etc. And when it comes to diligence on the business, make sure you do more than simply run a UCC search and review financials. Ask for company agreements. After all, a business may have an oppressive lease or licensing agreement which makes it less likely to succeed, or it may have similar documents with contingent or springing security interests that diminish your repayment prospects.

Prepare to Be Vetted.

The cannabis business will look into you, of course. But the real vetting is likely to happen by the licensing authority. In Washington, for example, the two groups that must report to the Liquor Control Board are “true parties of interest” and “financiers.” In California, it’s “owners and financial interest holders.” And in Oregon, it’s anyone with a “financial interest.” Each of these terms is defined in each state’s ever-evolving administrative rules, but it’s very likely that as a lender, you will need to be disclosed and vetted by the licensing authority. This may entail submission of information on your business, if you have one, and/or its owners and spouses. It also usually means fingerprints, background checks, and having your name on file as a part of the public record.

Demand Security.

Arms-length loans are almost never unsecured, so this one is a no-brainer, and if a marijuana business pushes back, it should be a dealbreaker. The best type of collateral is something tangible, like real property (land) that is unencumbered by senior interests, or where foreclosure by a senior noteholder would not wipe out all available equity. But there are other types of collateral, too, like personal property (including intellectual property); and there is always the option for a convertible note. Finally, lenders often get creative with deposit control agreements and other collection levers.

In the personal property category, the noteworthy asset when lending to plant-touching businesses is the cannabis itself. Most states have procedures for secured creditors to take control of a cannabis business under provisional licensing authority, for liquidation purposes. But, before you sign up for this, ask yourself: Could I really see myself chopping down cannabis plants one day? Or paying a receiver to do that? If not, and if the business has no other valuable assets, this loan may not be right for you.

Demand Personal Guarantees.

This ties into the diligence and security categories. A personal guaranty is just an extension on whatever security you can otherwise acquire as a part of the loan. Make sure these guarantees are uniformly integrated into the loan documents, and that each guaranty is more than a cursory sentence appended to a promissory note. The personal guaranty should cover various contingencies, e.g.: What happens if the guarantor dies? Are there any allowances for its termination, aside from repayment of the loan? Etc. Also, consider whether your borrower resides in a community property state like Washington or California, where the guaranty may not attach to marital property.

Do Market (and Legal!) Research.

Lenders to the cannabis industry are getting better rates than almost anyone else. They are taking on more risk, and feeding an insatiable capital market. We have seen loans with interest rates up to 50%(!) for relatively quick turns, but we have also seen loans that do not conform with licensing rules, or with state lending and usury laws. The exercise here is to ascertain market norms, look at your prospective borrower’s situation, and consider these factors in the greater context of lending statutes and marijuana licensing program rules. Finally, balance what you think you can get against the decreasing odds of collection that inevitably come with higher interest rates and compact repayment schedules.

In the past year, we have seen a remarkable uptick in individuals and businesses pursuing Oregon industrial hemp production, processing and sale. This accelerated interest has coincided with the CBD craze, and fortunately, Oregon has been working steadily to build out its hemp program over the past year or two. Today’s blog post answers some questions commonly fielded by our Oregon cannabis lawyers, and summarizes the state of the state with regard to hemp.

What is the latest, as far as program rules?

The rules have undergone steady revision for a few years now. The most recent changes are shown in the Oregon Department of Agriculture’s (“ODA”) proposed rule changes, which should take effect very soon. These updates will stem from bills passed by the legislature earlier this year, which we wrote about back in March. A few of the biggest pending changes include the requirement that industrial hemp and seed can only be transferred to another ODA registrant or qualifying Oregon Liquor Control Commission (OLCC) licensee (in accordance with certain OLCC rules), and that any hemp sold to a consumer has to be tested by an OLCC licensed lab.

How easy is it to get a hemp handler’s permit?

It’s not quite as easy as it used to be, but it’s not bad, and it’s still faster and cheaper than getting an OLCC license. In our office, we have paralegals process these applications, and both grower and handler registrations often issue in a month or less when the client is organized.

Who can ODA permittees sell to, in the OLCC system?

ODA handlers can only sell to OLCC processors with a current OLCC endorsement to receive ODA hemp. Those processors can then move the industrial hemp products along the supply chain, to OLCC wholesalers and retailers.

I’m an ODA hemp handler. How do I get an OLCC hemp certificate?

You can’t right now. OLCC stopped accepting applications for the certificates back in April. Once the ODA proposed rule changes are final (hopefully very soon), OLCC should start issuing these applications once again. As to OLCC processors, those entities can still apply for hemp endorsements to add to their licenses.

Once I get an OLCC hemp certificate, how do those sales work?

You will have recordkeeping requirements for all hemp and related products transferred into the OLCC system. This means you will have to log information in the METRC Cannabis Tracking System, like OLCC licensees. Note that hemp products in METRC are not subject to tax, unless they are later mixed with marijuana. Note also that once you transfer hemp to an OLCC processor, it has to stay in the OLCC system. This means you cannot take it back and sell it outside of METRC.

Can I legally ship Oregon industrial hemp to other states?

Oregon does not restrict such sales, but the state does not create a safe harbor from federal law, either. In fact, the new rules will provide that no one participating in the Oregon hemp program is immune from federal law enforcement, even if they are not shipping hemp interstate. So what does federal law say about shipping industrial hemp and CBD interstate? It’s complicated.

Can I apply for an ODA permit on the same tax lot as my OLCC marijuana production? 

Yes, you can. But OLCC is going to require an approved “control plan” describing how the two production facilities will be separated, and ensuring that no industrial hemp winds up on the OLCC premises.

Can I get a bank account?

Yes. Maps Credit Union has announced it will begin servicing both plant-touching and ancillary hemp businesses on August 1. There may be other options in the pipeline as well.

Where can I find more information on all of this?

Aside from checking this blog, the best place to go are the relevant portions of the ODA and OLCC websites. Unlike OLCC, the ODA hasn’t done a great job of aggregating information in FAQ format or issuing bulletins, so you may have to actually read through the administrative rules (fun!), or call ODA itself with questions.

oregon marijuana cannabis subsidyRecently, there has been some talk here in Oregon that the state is not doing enough to support licensed cannabis businesses economically. These businesses generated more than $70 million in state tax revenue in FY 2017, after all. Although that revenue does not yet approach the combined $373 million in average annual revenue for beer, wine and spirits (combined), it appears to be closing the gap quickly, despite no option for interstate sales.

Comparing marijuana and alcohol receipts in Oregon is an awkward proposition, given the fact that Oregon marijuana revenues are collected through sales tax, whereas beer and wine vendors pay the state an excise tax, and liquor is distributed and sold by the state itself. At the end of the day, though, the economic impact of regulated cannabis will continue to gain on–and eat into–the alcohol economy, both in Oregon and nationwide. That is especially true if we factor in industrial hemp.

So what is the state doing to subsidize cannabis businesses in Oregon? Not much. The state did pass House Bill 4014 a few years back, which allows cannabis establishments to deduct business expenses allowable under the federal tax code when filing state returns; but that modest gesture pales in comparison to the institutional support given to craft beer and wine. Specifically, here are a few of the ways the wine industry is supported and subsidized by the state of Oregon:

  • The state created the Oregon Wine Board (OWB) to promote development of the wine industry within the state, and coordinate both domestic and report marketing efforts for the industry. OWB receives administrative support from the Oregon Department of Consumer and Business Services, and spends around $2.2 million annually on promoting the Oregon industry.
  • The state created the Oregon Wine Research Institute, housed at Oregon State University, to support Oregon grape growing and wine production.
  • Oregon statutes offer a tax exemption for the first 40,000 gallons, or 151,000 liters, of wine sold annually by any producer in Oregon, which effectively exempts 90% of them from paying any state excise tax.
  • The state offers grants for vineyards in an effort to increase tourism, as well as OWB grants related to viticulture and enology.
  • Oregon winery license fees are paltry compared to cannabis license fees. (Both licenses are issued and billed through the Oregon Liquor Control Commission.)

The above list is not exhaustive: It represents about five minutes of Google research. And at first glance, the favoritism shown to alcohol by the state feels unfair: As with the local wine industry, the Oregon cannabis industry has a world-renowned product, crowned with distinctive appellations. So why doesn’t the state do much for cannabis, aside from fulfilling its democratic mandate to roll out the program, and defending that program from the feds?

There are probably several factors at play:

  • “Marijuana” remains a Schedule I controlled substance at the federal level. While states may see a path forward to licensing cannabis businesses under the Tenth Amendment (see here and here), actually using public dollars to support specific businesses may feel like a bridge too far.
  • More people oppose the cannabis industry than the alcohol industry, so subsidies would likely face strong pushback from a vocal segment of the population.
  • Many of the Oregon wine subsidies listed above were enacted in periods of greater budget stability for the state, back when timber revenues and related federal subsidies were a real thing, and the state pension system was not $22 billion in the hole. Today, those alcohol subsidies are entrenched (although recent efforts at further subsidies have failed.)
  • The Oregon cannabis lobbies are smaller than alcohol lobbies.
  • The creation of a cannabis regulatory regime has been a heavy legislative lift over the past few years here in Oregon, crowding out other conversations related to cannabis.

With all of that said, Oregon could probably do more for the cannabis industry, and it could be more creative. California has at least explored the idea of a state-chartered bank. Along those lines, Washington has helped its legal businesses to open bank accounts, and Hawaii has announced a cashless system for buying medical marijuana. None of these actions are subsidies, but they do make business operations easier and they ultimately contribute to economic efficiency.

Other jurisdictions have gone even further. Colorado, for example, has had a research grant program going back to 2014. And certain cities, like Oakland and San Francisco, have offered bona fide, traditional subsidies like free rent and incubator programs for select marijuana entrepreneurs. So it is possible to funnel public funding into cannabis businesses — at least certain types of businesses, in certain cases.

Oregon will kick off another legislative session in early 2019. Most likely, the state will discuss important regulatory issues, like our U.S. Attorney’s concern with oversupply, alongside the usual re-tread items, like social consumption and event permits. Although these new business permissions would be marginally helpful, hopefully there is also room for discussion on how the state can support its regulated cannabis industry more directly, as it does with alcohol. Then, when federal prohibition ends in a couple of years, we will want it looking something like this.

cannabis capitalization license
Prepare to describe how the sausage was made.

Over the past few years, we have had many cannabis clients call us during the license application process and ask some version of the following: “The state is asking me to disclose the capitalization of the company. What should I write?” From a lawyer’s perspective, the answer to this question is usually something very simple, such as: “The capitalization of the company should be disclosed as the amount and type of capital you used to start the company.” Makes sense, right? But there is often more to this question than meets the eye.

In most cases, cannabis businesses are built differently than other businesses, as far as funding sources and mechanics. Therefore, we get the capitalization question from business neophytes, seasoned entrepreneurs, and everyone in between. When we dig a little deeper, there may be any of several reasons the question surfaces during the licensing process, some better than others. I’ll run through each of them below.

The owners had to start this business without access to financial services, and therefore do not have bank records of capitalization.

It’s true that most cannabis companies start off unbanked, whether the business starts “from scratch” or is transitioning out of medical or grey market operations. This creates a documentary hurdle in many cases: Unlike with a new generic venture, the cannabis business owners are unable to fund a bank account (creating a record of capitalization) and begin writing checks for business expenses. Therefore, most cannabis businesses have to be extra diligent in tracking business funding and expenses through internal recordkeeping. These records should be immediately producible in the event of a state inquiry, IRS audit, member dispute, potential investor inquiry, or for any number of reasons.

The owners were in a rush to apply for the license, and don’t really care about business formalities. 

If you want to make your lawyer nervous, tell her that you only need a company name because it’s a cannabis licensee requirement. If the lawyer is worth your time, the first thing she will tell you is that you should always run your marijuana company like a real business. That means writing things down and using appropriate forms to do so. Failure to follow basic business formalities can land owners in a world of hurt if anything goes sideways; and in such a case, a company shell will be no defense at all to personal liability.

The owners are nervous to disclose funding and funding sources on the public record.

This is a legitimate concern. Every state has public records laws, and depending on how those laws intersect with cannabis program rules (and administrative policies), public disclosure of funding and funding sources may be unavoidable in response to nosy, third-party requests. If someone makes a public records request related to a licensee file in Oregon, for example, records of funding sources and amounts will be made available (other sensitive information, like security plans, will be redacted). There may be no ideal workaround here, other than describing the source of funds in a general sense, and hoping that further information is not required.

The owners are not sure how much capital will be required to get through the license application process.

This is also a legitimate question. Regardless of business projections, the simplest course is usually to list all financing the business has received to date, and to update the licensing authority if and when new or existing parties with financial ties to the business provide or pledge funds.

The owners are not sure if a funding source or a promised source of funds constitutes capitalization under relevant administrative rules.

This is an area where it is critical to know the rules and how they are interpreted by the governing agency. The question of who and what constitutes a “financial interest” holder in a business is often unclear and varies from state to state. In Washington, for example, the two groups that must report to the Liquor Control Board are “true parties of interest” and “financiers.” In California, it’s “owners and financial interest holders.” And in Oregon, it’s anyone with a “financial interest.” Each of these terms is defined in each state’s ever-evolving administrative rules (for example, Oregon only recently required disclosure of lenders). It’s important to get guidance on these issues because the penalties for nondisclosure can be severe — often including denial or loss of licensure.

The owners are not sure whether a licensing authority prefers to see a certain kind of capitalization (e.g. cash, sweat equity, debt, convertible debt) or if some ratio of the foregoing may be ideal.

In our experience to date, licensing authorities in Oregon, Washington and California do not really care how you have funded your business, as long as the source of funds is legitimate. That said, state reporting should be consistent with company records and tax filings, because the IRS definitely cares how the sausage was made and how you report that information. For example, the IRS may consider a company that is capitalized predominantly with straight debt to be “thinly capitalized.” In determining this, the Service looks at other businesses in the same industry for their debt-to-equity ratios. An old rule of thumb is also that any company with a debt to equity ratio greater than 3:1, or 4:1, is too thinly capitalized. How this analysis might be applied to cannabis businesses is an open question.

When it comes to capitalizing a cannabis company, primary goals should be: 1) structuring and running a legitimate business, and 2) accurate state and income tax reporting. Unfortunately, the former is more challenging in marijuana than in other industries, and the latter takes some knowledge of administrative rules and policy. But it can be done with a little planning and study, and it can be done correctly. At the end of the day, the license will follow.