The Rauner Administration yesterday announced the recipients of licenses under Illinois Medical Cannabis Pilot Program. The announcement came late in the day from Governor Rauner’s general counsel but there has still been no announcement on the official website of the Medical Cannabis Pilot Program at the time of this writing.

The announcement came as a surprise to most of us here in Illinois. A week earlier, the Rauner Administration released some documents under a Freedom of Information Act filing and also issued a statement that his administration would “. . . conduct a thorough legal review of the process used by the Quinn administration . . .”  Most believed that the thorough review would take weeks, if not months. No explanation for the efficient legal review was volunteered on Monday.

The announcement on Monday covered 18 cultivation licenses and 52 dispensary licenses. The procedure for scoring the licenses has not been completed and closed, as the law creating the Program authorized 22 cultivation licenses and 60 dispensary licenses. Some licenses are still on hold. Three cultivation center applicants and 5 dispensary applicants are still undergoing further review.

The announcement by Governor Rauner’s general counsel clarified some issues that arose a week earlier about the scoring done by state agencies during the Quinn Administration. Though the applications were scored through a blind review process, without the applicant’s identity being known, the state agencies subsequently carried out a character and fitness review that disqualified some applicants that had otherwise done well in the blind scoring. The Rauner Administration had doubts about the legality of the disqualifications and plans to allow the disqualified applicants to be heard. We see this as a good thing.

All of this means that patients in Illinois prescribed medical marijuana have at least some reason to be optimistic for the first time in months. It will still be a while before they have their medication in hand, however. It will take about six months for the cultivation centers to grow the plants after operations are constructed. A more important issue to watch in the coming weeks will be how many Illinois residents will qualify for a medical marijuana card. So far, only 650 patients have been confirmed. Certainly, more than this number will be necessary to support a vibrant MMJ industry in Illinois.

But at least we have begun.

As long as marijuana remains illegal under the Controlled Substances Act, there will be those uncomfortable with marijuana businesses, no matter how professional or (state) law-abiding they may be. This stigma is unfortunate, since it may be deterring serious, experienced entrepreneurs from getting into the game. This may be particularly true downstate, which has a deserved reputation for its conservatism.

A number of people I’ve spoken with in the six months since HB0001 was signed have expressed their real concerns that their family, friends, or business associates from their other “legitimate” business endeavors would not condone their participating in a marijuana business, medical or otherwise.

So the question arises — can you be a silent parter in a marijuana business? In Illinois at least, the answer is probably not.

Or at least not without running afoul of the proposed regulations from the Department of Agriculture (governing cultivation centers) and Department of Financial and Professional Regulation (governing dispensaries). Both agencies require disclosure of the ownership structure, breakdowns of ownership percentage, and information on profit/loss sharing and other forms of compensation or return on investment. Both agencies require full disclosure of any direct or indirect “backer.”

The Department of Financial and Professional Regulations broadly defines a “backer” as follows:

“Dispensing organization backer” means any person or entity with a direct or indirect financial interest in the dispensing organization, but does not include a person or entity who holds an interest that does not exceed one per cent of the total ownership or interest rights in the dispensing organization and the person does not participate directly or indirectly in the control, management or operation of the dispensing organization.

Even the smallest financial interest must be disclosed:

“Financial interest” means any actual or future right to ownership, investment or compensation arrangement with another person, either directly or indirectly, through business, investment, or spouse, parent or child in the dispensing organization. Financial ownership does not include ownership of investment securities in a publicly-held corporation that is traded on a national exchange or over-the-counter market, provided the investment securities held by the person, the person’s spouse, parent or child, in the aggregate, do not exceed one per cent ownership in the dispensing organization.

The Department of Agriculture did not provide its own definition of financial interest, but based on the way Ag and DFPR’s rules on financial disclosure mirror one another, it’s a safe bet that Ag views “financial interest” similarly. Although the proposed regulations do not expressly require applicants disclose the individual members or shareholders of an entity backer, I’m willing to bet that information will be required.

Still, it is important to remember that (as far as we know right now) the public will not be privy to the entire contents of an application to obtain a cultivator’s permit or dispensary registration. Certainly the application will be shared among the state agencies dealing with MMJ businesses (including the Department of Revenue, and maybe even the Secretary of State, to the extent any involved entities must be checked up on). But if you are content on trying to make it a little harder for a member of the public to trace your involvement, that might be accomplished through multiple layers of incorporation. Remember — the principles of a corporation or LLC are listed on the SOS’s website, but ownership structure is not disclosed. So, if you buy into an entity (without becoming the president or the secretary, who are listed on the SOS website) that then backs a medical cannabis business, you could fly under the public’s radar.

Based on the broad definitions of “backer” and “financial interest” though, this won’t work with the state.

 

 

Of all the states in which we have licensed lawyers, Nevada is by far the most frustrating. It is frustrating because Nevada voters voted to legalize medical marijuana 14 years ago, yet the state has yet to see “a penny in pot sales,” according to KTNV News. How can that be?

For years, the delay was due to the state’s failure to formulate a legal framework for its cannabis industry. That ended in 2013 when the legislature enacted SB374, which established a framework to make pot available to medical marijuana card holders, and imposed fees and requirements for growers, processors and dispensaries. It also contained provisions to continue to allow home-growing until 2016.

All good, right?  Wrong.

Since the state did its work to get cannabis to the people, local governments have done their work to keep cannabis from the people. As the KTNV News article notes, the Las Vegas city council has “placed a moratorium on all marijuana business applications and zoning permits.”

Our on the ground reports in Nevada tell us that both Las Vegas and Clark County will be getting their acts together on cannabis before the end of this year. It would be about time.

 

Legalized cannabis has so far been confined only to certain states and cannabis remains illegal under federal law. If you have a marijuana business in a state where marijuana is legal, you need to ensure your contracts take into account this state/federal dichotomy. If you don’t, you may find yourself unable to enforce your contract.

Let me explain.

In states where marijuana (be it recreational or medical) is now legal, your marijuana business is now legal. With this legitimacy comes the expectation that you will operate like a legal business. For us cannabis business lawyers, this means that we are constantly drafting all types of contracts for our cannabis business clients. We draft leases. We draft employment contracts. We draft distribution agreements. We draft licensing agreements. We draft purchase and sale agreements for all sorts of items that go with operating a legal cannabis business, including contracts to buy and sell cannabis trademarks and copyrights.

We draft our cannabis contracts to require resolution of disputes in the state in which the medical cannabis business operates, to ensure that the contract will be enforceable. Because of federal prohibition, the federal courts are not likely to enforce most contracts entered into by cannabis businesses, and they certainly will not enforce a contract to buy or sell cannabis. In other words, if you should find your cannabis business in a federal court, (be it a district or bankruptcy court), or in a state court where marijuana is still illegal, there is a good chance the court will deem your contract void and will not enforce it. The same goes for states that have not legalized cannabis.

In real world business terms this means that if your cannabis business is going to use contracts to protect its business interests, (which it should), and you want to be able to enforce those contracts, (which of course you do), you are going to want to avoid the state and federal jurisdictions where marijuana remains illegal. In other words, you need to ensure your dispute will stay in your “home” court. Such forum selection clauses have the added benefit of minimizing the risk that the counter-party on your contract can remove your case to federal court after you sue in state court.

Therefore, you must be certain that any contract you sign on behalf of your cannabis business contains a provision making clear that all claims must be resolved in the state courts of the state in which you operate. Be sure the contract also provides that the contracting parties waive any right they might have had to pursue claims in or remove claims to a federal court.

Bottom LIne: The patchwork of legalization on the state and federal levels creates obstacles for cannabis business at nearly every turn, but finely tuned contracts provide one opportunity to put some predictability into your business relations.

 

With Illinois’s medical marijuana law (the Compassionate Use of Medical Cannabis Pilot Program Act) scheduled to go into effect on January 1, 2014, the state’s regulating agencies, cities, and counties are working to define how the new market will operate.

Illinois will soon be facing the growing pains that come with legalizing a previously illegal substance: dealing with employee rights, marijuana business owners looking to push the boundaries of the law, and cities figuring out how to regulate MMJ businesses.

The city of Naperville has been debating whether to allow dispensaries to offer drive-thru windows. Drive-thrus are convenient and they should not interfere with ensuring that transactions are undertaken with actual medical cannabis patients. Regular pharmacies have been doling out far more dangerous substances than marijuana for years via their drive-thrus. Continue Reading Illinois Cannabis. Would You Like Some Fries With That?

Though the City of Seattle currently has more than 200 medical cannabis access points, it will be getting only 21 retail marijuana licenses under I-502. Seattle City Attorney Pete Holmes recommended to the Liquor Control Board (LCB) on Wednesday that Seattle be given at least 50 retail cannabis licenses. Mr. Holmes is seeking these additional licenses so as to better block illegal marijuana sales in Seattle.

City Attorney Holmes has some other recommendations for the LCB as well, including the following:

  • Change I-502’s method for measuring 1,000 feet from a sensitive area to the “common path of travel” instead of the current “as the crow flies” standard. This would free up more locations for cannabis
  • “Give licensing preference to existing medical marijuana facilities that otherwise comply with – or demonstrate the ability to come into compliance with –I-502 requirements.”

We agree with Mr. Holmes on both counts.  Seattle does need more than 21 retail cannabis stores and if it does not get them, we too are worried about illegal cannabis sales, especially if existing medical cannabis outlets are forced to close. We also think that favoring already existing and responsible medical marijuana operations makes good sense.

Ladies and gentlemen, I-502 licensing is officially open in Washington State.

If you’re pursuing an I-502 license for your cannabis growing, processing or retail business, you will need to file both a BLS application and a marijuana license addendum.

The licensing window is open from November 18 through December 19 (all applications must be post-marked by this date).

Best of luck to everyone with their cannabis licensing efforts!

Governor Jay InsleeIn April 2011 — right when Senate Bill 5073 was about to be passed into law by then-Washington Governor Christine Gregoire — US Attorneys Jenny Durkan (Western District of Washington) and Michael C. Ormsby (Eastern District of Washington) sent Governor Gregoire a “Dear John” letter. Senate Bill 5073 is that infamous piece of legislation that gave the cannabis community the perpetually vague collective garden law.

But Senate Bill 5073 (now RCW 69.51A) wasn’t always such a train wreck. In fact, at one point, like I-502, it provided the state and the MMJ community with a comprehensive regulatory scheme that would have brought order to the cannabis business and legal world. Nonetheless, the US Attorneys made clear in their letter that if Governor Gregoire passed the Senate Bill into law, Washington State employees could expect criminal prosecution for helping to establish such MMJ operations. It does bear noting though that despite this routine Federal threat, there is absolutely no record of any Federal prosecution of either state or municipal employees for implementing cannabis regulatory programs in any state.

Nonetheless, Governor Gregoire got cold feet and whipped out her veto pen, essentially gutting Senate Bill 5073. Governor Gregoire’s veto has wreaked havoc on those trying to operate any sort of marijuana business in Washington and for we cannabis lawyers left to figure out how they should do so. Now, many are wondering what Jay Inslee, Washington’s new Governor-elect will do with implementing the new cannabis laws?

Based on a recent press release from the Governor elect’s office, it appears that things are looking up for marijuana business laws in Washington:

My belief is Washington has worked its will. The voters have spoken. I was not supportive of the initiative but I’m going to be fully supportive of protecting, defending, and implementing the will of the voter—which will essentially allow the use of recreational marijuana in our state.

Though it is encouraging to know that the new Governor of Washington plans to adhere to the will of the people, the key question is how the state government will handle likely opposition from the Feds on I-502. Governor-elect Inslee addressed this scenario by publicly relaying that he will be working towards “rational, mature ways to convince the [Obama] administration that it’s in the best interest, not only of our state, but in our country, to allow our state to move forward in this regard.” The new Governor has made clear why he believes the new cannabis laws should be implemented:

I believe [the execution of I-502] makes sense for the country for this reason: We have a principal of federalism in our country that has worked well. We’ve allowed states to be incubators of new ideas … and I think it’ll serve the nation well to allow the state of Washington and Colorado to serve as incubators of a new policy. And I don’t think there’s any reason that that’s antithetical to national security or interstate commerce.

Governor-elect Inslee went on to advocate for each state being able to regulate marijuana within its own state lines as it sees fit: “This is a local decision of a local state, and we’re going to do everything we can in this administration in that regard and hopefully that’ll happen. I think there’s some positive signs that we’ll be able to prevail.” We obviously are looking forward to seeing the results of this “opening up” policy.

In addition to their other challenges, cannabis businesses must contend with punitive federal tax rules. In 1982, Congress enacted Section 280E of the Tax Code to punish drug traffickers. This provision disallowed all deductions or credits for business expenses related to trafficking of most illegal drugs. The Federal Government classifies marijuana as a schedule I narcotic, so it falls under this rule. In 2007, the US tax court ruled that Section 280E applies to cannabis businesses even where the business activities are legal under state law.

Cannabis taxes are punitive
Cannabis taxes are punitive

Section 280E has a huge impact on a cannabis provider’s bottom line. Take, for example, a marijuana business with deductible expenses of $100,000. If the IRS does not allow the marijuana business to deduct these expenses, it will see a rise in its tax bill of at least $22,000. It is very difficult for medical cannabis providers to sustain a tax hit that large. Congress enacted Section 280E well before medical cannabis had reached its current level of acceptance in the medical community. It is a real threat to the existence of dispensaries and cooperatives in every state. Tellingly, Harborside Health Center, a medical cannabis dispensary out of Oakland, California, is finding out firsthand the damage 280E can cause.

Operators of medical cannabis providers are at least able to mitigate the impact of Section 280E. A business can still deduct the portion of its business expenses not related to actually providing cannabis. If a dispensary or cooperative provides other services, like yoga or massage, it can deduct expenses related to those other services. Co-ops can manage their businesses in a few different ways to take advantage of this rule. A co-op can maximize physical floor space it devotes to other services and minimize floor space it devotes to medical cannabis. It could give employees not directly involved in distribution job descriptions that don’t involve medical cannabis. This way, the co-op can place the greatest amount of expenses in the deductible column. Our cannabis lawyers, working in concert with accountants well-versed in cannabis tax law issues, are constantly working with clients in an effort to minimize their tax “hit.”

The mitigating rule will not help every dispensary or cooperative. Many providers are not set up to provide other services. It also does not address the problem that providers are being taxed unfairly. Trying to shift expenses around increases accounting costs and stress associated with filing tax returns. It also breeds uncertainty. As providers seek to deduct as many of their expenses as they legally can, they run the risk of the IRS disagreeing and demanding a higher tax payment with a penalty.

In the end, cannabis businesses will only have full relief from Section 280E when Congress amends the tax code. Cannabis patients, providers, and allies should engage politically to encourage Congress to amend this out of date and punitive rule.

Despite the unfairness of the rule, it is still a really bad idea to lie to the IRS. Remember that Al Capone did not get convicted of racketeering or bootlegging; he went to prison for tax evasion. The cannabis community benefits overall when its members act within the bounds of the law. With the support of the community, this abomination of a tax rule will fall in due time.