rd annual northwest marijuana law conference: strategies ... av... · rd annual northwest marijuana...
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rd Annual Northwest Marijuana Law Conference: Strategies for a Local and National Industry
November 13, 2015 | WSBA Activity ID#412866 6.25 General CLE and 0.0 Ethics Credits
Agenda 8:00 – 8 30 a.m. Registration and Coffee 8:30 – 8:40 a.m. Welcome 8:40 – 10:15 a.m. Session 1: Marijuana Basics, Part I – Regulated Marijuana Going Forward Stephanie Boehl, KB Law Group
• A review of the Washington State system and changes in Washington's medical marijuana laws in 2015
• Common carrier licenses, research licenses, and other recently created ancillary licensed industries
10:15 – 10:30 a.m. Break 10:30 – 11:30 a.m. Session 2: Marijuana Basics, Part II – Emerging Trends and Challenges James Hunt, The Law Office of James G. Hunt PLLC Dan Bugbee, DBS Law
• Financing, receiverships, and banking • IRS: Taxation of marijuana business and IRC §280E • State Taxation: Exemptions, deductions and unique issues
11:30 – 12:00 p.m. Session 3: Marijuana Attorney Panel – Q&A Moderator: Stephanie Boehl Ryan Espegard, Gordon Thomas Honeywell Teresa Daggett, Gordon Thomas Honeywell Joshua Ashby, Ashby Law Group Christopher Larsen, Ashby Law Group 12:00 – 1:00 p.m. Lunch on your own
1:00 – 2:15 p.m. Session 4: Marijuana Basics, Part III - Local Government David Mendoza, City of Seattle David Galazin, City of Kent Law Department
• The role of local governments in regulating marijuana • Revised building code requirements and zoning • The conflicting goals and attitudes towards marijuana across the state
2:15 – 2:30 p.m. Break 2:30 – 3:15 p.m. Session 5: Marijuana's Future in Criminal Court Kurt Boehl, KB Law Group Carla Lee, King County Prosecutor’s Office
• Driving under the Influence of THC • Priorities of local law enforcement • The role of prosecutors in moving the industry into a regulated market
3:15 – 3:45 p.m. Session 6: The Future of Hemp Joy Beckerman-Meyer, Hemp Ace International, LLC
• Washington's legal position on industrial hemp • The hemp movement nationally
3:45 – 4:30 p.m. Session 7: A Look at the Future Professor Andrew Siegel, Seattle University School of Law Jared Van Kirk, Garvey Schubert Barer
• A nation at odds with itself: how soon will Congress legalize marijuana? • The conflict between federal and state law, and its impact on free speech,
the right to privacy, the commerce clause, etc.
Faculty Biographies Chairperson
Stephanie Boehl, KB Law Group PLLC Stephanie advises marijuana growers, processors, and retailers, as well as other businesses, on critical legal issues in order to maintain compliance with a multitude of growing and changing state rules and regulations. She began advising closely held businesses and start-ups on marijuana regulatory compliance immediately after the passage of Initiative 502 in 2012. Stephanie also helps her clients minimize and comply with state and local taxes. She represents clients in audit, appeals, and litigation. She is a frequent speaker and writer on marijuana regulatory compliance and local taxes. For the last three years, Stephanie was named by her peers as a Washington "Rising Star" in Super Lawyers magazine, she was also featured in the magazine's 2015 issue. Stephanie received her LL.M. in tax from the University of Washington, and her J.D. from Seattle University School of Law in 2007. She co-owns KB Law Group PLLC with her husband, Kurt. This is her third year as the chairperson of the annual Northwest Marijuana Law Conference. Presenters
Joshua Ashby, Ashby Law Group Joshua is the managing attorney at Ashby Law Group PLLC, a business law practice focused on start-ups in high growth and emerging industries. Joshua earned his J.D. from Seattle University School of Law, where he studied administrative, regulatory, tax, business, and international law. After starting Ashby Law Group, Joshua began to focus his practice on Washington’s marijuana market through a business strategy and corporate planning lens. Shortly thereafter, Joshua authored and published "Lost in the Weeds," the first comprehensive reference guide to Washington's new recreational marijuana laws. After being listed for only a few short weeks, “Lost in the Weeds” quickly climbed to #3 on Amazon’s Best Sellers for Legal Self Help books. The Ashby Law Group was recently featured on the cover of Seattle University’s Lawyer Magazine for their work with recreational marijuana companies in Washington State, and has been nominated for Dope Magazine’s “Best Law Firm of 2015.” Joy Beckerman-Meyer, Hemp Ace International LLC Joy is the President of the WA State Chapter of the Hemp Industries Association and Hemp Ace International, as well as the Senior Paralegal at The Li Law Firm / Northern Lights Legal Services. She owned the first hemp store in NY in the early 1990’s in Woodstock, and was appointed by Rep. Fred Maslack to serve as the Secretary of the VT Hemp Council when the first VT hemp bill passed in 1996. Over the last 15 years, Joy developed an extensive dual career as a complex civil litigation paralegal, working with some of Seattle’s most distinguished attorneys at both Dorsey & Whitney and Lee Smart, among other fine firms. Joy is the recipient of the Hemp Industries Association’s 2014 Hemp Activist of the Year Award and is currently best known for her outstanding work educating Governor Inslee and the 147 Members of the WA State Legislature with her Industrial Hemp Edu-Kits, along with the Industrial Hemp Policy-Making Reference Materials Binders currently being distributed to them. Kurt Boehl, KB Law Group, PLLC KURT E. BOEHL is recognized as one of the top criminal defense and marijuana lawyers in Washington State. He is a member of the National Trial Lawyers, an exclusive legal organization composed of 100 trial lawyers from each state. Super Lawyers named Kurt a Rising Star for the past five years, and Seattle Met Magazine named Kurt as one of Washington State’s top criminal defense attorneys. In addition, Kurt was awarded the prestigious Martindale Hubbell AV rating and is ranked Superb by the AVVO attorney rating service. Kurt founded his own law firm, the KB Law Group PLLC, in 2005. Kurt is a frequent speaker on marijuana laws in Washington State. He received his B.A. from Metropolitan State University in Colorado and his J.D. from Seattle University School of Law.
Dan Bugbee, DBS Law Dan Bugbee began his legal career after graduating from the University of Washington in 2009. After starting at the law firm of Karr Tuttle Campbell, he moved to Garvey Schubert Barer where he continued developing his finance and bankruptcy practice. In 2015 he founded DBS Law. At DBS Law, Dan provides a full range of legal services in the finance industry from drafting loan documents to workout negotiations, insolvency proceedings and litigation. Dan represents banks and other financial institutions, private lenders, court-appointed receivers, borrowers and unsecured creditors. Teresa Daggett, Gordon Thomas Honeywell Teresa Daggett works with businesses to help them through all phases of growth, from formation through contracts and mergers and acquisitions. She enjoys working with companies in a wide variety of industries, assisting with the challenges they encounter along the road to success. From inventors to manufacturers, from cannabis businesses to software businesses, she provides primarily business entity and securities legal services designed to bring real, bottom-line value to clients. Teresa holds a J.D. from the University of Washington Law School and a B.A. from the University of Kentucky. She is an active member of the Business Law and Corporate Counsel sections, and a member of the Cyberspace and Securities Committees, of the Washington Bar Association. Ryan Espegard, Gordon Thomas Honeywell Ryan Espegard focuses his practice on litigation and regulatory compliance. He has litigated a wide variety of cases involving business, real estate, land use, construction, and product liability issues. Since the passage of I-502, Ryan has assisted cannabis business licensees and related companies navigate Washington’s regulatory system, develop compliant business strategies, and resolve disputes. He obtained his J.D. from Seattle University and a B.A. in Economics from the University of Wisconsin. David Galazin, City of Kent Law Department David A. Galazin, Assistant City Attorney for the city of Kent, focuses primarily on land use, planning and real property transactions as well as taxation. He received his J.D. from the William S. Richardson School of Law at the University of Hawai’i at Mānoa along with an Environmental Law Certificate, and an LL.M. in Taxation from the University of Washington. He worked as Deputy Corporation Counsel for the County of Maui for 4 years before relocating to Kent in 2011. He has handled a number of controversial local regulatory issues, such as a prohibition on the use of plastic bags and implementation of a new businesses and occupation tax, and also drafted and successfully defended Kent’s ordinance prohibiting medical cannabis collective gardens before the State Supreme Court. He currently advises the city on all matters pertaining to municipal regulation related to I-502. James G. Hunt, The Law Office James G. Hunt PLLC James Hunt is the Managing Member of The Law Office of James G. Hunt PLLC, a practice limited to state and federal tax matters. Jim has over 25 years of experience in advising individuals, non-profit organizations, closely-held businesses and Fortune 100 companies on multi-state tax issues, as well as, federal and state tax controversies. He is a frequent blogger and speaker on state and federal tax issues impacting the Cannabis Industry and currently represents clients in both the recreational and medical cannabis industry. Mr. Hunt is the Chair of the State and Local Tax Committee of the Washington State Bar Association and an active member in the Coalition for Cannabis Standards and Ethics. Prior roles have included: managing federal and state audits and litigation as Director of Tax Controversy for Washington Mutual/Chase; managing complex state tax audits for Amazon.com and GE Capital; and, holding leadership positions in Big 4 and mid-market accounting firms. He holds a J.D. from the University of Iowa, a B.S. from Northern Illinois University. He is licensed to practice law in Illinois and Washington. He holds a CPA certificate from the State of Illinois.
Christopher Larsen, Ashby Law Group Chris is a Washington native and earned his J.D. from Seattle University School of Law, where he studied corporate governance and intellectual property law. As the Editor in Chief of the Seattle Journal of Environmental Law, he led the publication through final accreditation and established its Westlaw presence. Chris graduated with honors from Central Washington University, where he earned Bachelor’s Degrees in both Psychology and Law & Justice. Chris has experience assisting Pacific NW companies with compliance and investigation planning in highly regulated industries, such as unlawful detainers, process service, and government permitting. His practice area is currently focused on assisting 502 companies. Carla Lee, King County Prosecutor’s Office David Mendoza, Seattle City Attorney’s Office David is a Policy Advisor in the Office of Policy and Innovation within the Office of the Mayor of the City of Seattle. Prior to his current position, David served as a Policy Counsel for the House Democratic Caucus in Olympia, WA. He advised Democratic Representatives on issues related to the Labor & Workforce Development Committee and the Government Accountability & Oversight Committee. This latter committee was tasked with liquor, gambling, tobacco and marijuana regulations. His other experience includes working as a Policy Analyst at Puget Sound Sage where he wrote the first research report making the case for a $15 hourly wage at Sea-Tac Airport. His volunteer experience includes serving as a Commissioner for the Seattle Ethics and Elections Commission from 2011-2014 and as the 2014 President of the Latina/o Bar Association of Washington. He is a 2007 graduate of Seattle University School of Law and a 1999 graduate of Pitzer College. Professor Andrew Siegel, Seattle University School of Law Professor Andrew Siegel, the Associate Dean for Planning and Strategic Initiatives, joined the law school in 2007 after five years teaching at the University of South Carolina School of Law. Before entering the legal academy, Professor Siegel served as a law clerk to Judge Pierre N. Leval of the United States Court of Appeals for the Second Circuit and to Justice John Paul Stevens of the United States Supreme Court and practiced as a litigation associate in the New York office of Wilmer, Cutler & Pickering. Professor Siegel graduated summa cum laude from Yale College, has a master's degree in history from Princeton University, and graduated summa cum laude and first in his class from New York University School of Law, where he was also an Executive Editor of the New York University Law Review. Professor Siegel researches and writes about constitutional theory, contemporary constitutional and public law, American legal history, and criminal procedure. He is a nationally recognized expert on the United States Supreme Court, who frequently lectures on that subject in a variety of academic and professional settings. He is a co-author of The Supreme Court Sourcebook (with Richard Seamon, Joe Thai, and Kathryn Watts) and his scholarship has appeared in a variety of journals including the Texas, Fordham, and UC-Davis Law Reviews and the American Journal of Criminal Law. He is currently at work on a variety of projects including an annotated collection of Justice Stevens's writings, a cultural history of the first generation of American law schools, and articles exploring the structure of due process doctrine, the concept of "constitutional culture," and the evolution of thinking about the constitutionality of public school uniforms and dress codes. His writings for the popular press include "Nice Disguise: Alito's Frightening Geniality," (The New Republic, November 15, 2005) and "Farewell to Justice Stevens from those who Knew Him Well" (Washington Post, April 9, 2010) (with Joe Thai and Eduardo Penalver). As Associate Dean, Professor Siegel is responsible for investigating, developing, and overseeing new programs and initiatives including advanced degree programs, collaborations with other schools, and the law school's new satellite campus; for coordinating long-term planning; and for advising the Dean on pressing strategic matters, including regulatory, accreditation, and rankings issues. In his years at SU,
Professor Siegel has chaired the Executive, Faculty Appointments, and Curriculum Committees, coordinated the Faculty Law Firm initiative, and served in a variety of other leadership capacities. Jared Van Kirk, Garvey Schubert Barer Jared Van Kirk is an Owner with Garvey Schubert Barer and a member of GSB’s Cannabis Business Group, a group of experienced attorneys working across multiple disciplines to address the emergent legal needs of the cannabis industry. Jared has been active in addressing legal challenges to I-502 based on the relationship between federal, state, and local laws. Jared is also a member of GSB’s Labor and Employment practice group where he provides his clients with advice and training on compliance with federal and state employment laws and avoiding disputes. As a litigator, Jared defends companies against allegations of discrimination, harassment, and other workplace disputes. Jared received his law degree from Harvard Law School and was a clerk for The Honorable Jerome Farris of the United States Court of Appeals for the Ninth Circuit.
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REGULATED MARIJUANAWHERE WE ARE AND WHERE WE ARE GOING…
• Medical Marijuana in 1998
• I-502 passed by 55.7% of WA voters in 2012
• SB 5052 and HB 2136 passed in summer 2015
• 3 Licenses:
– Producer’s license
– Processor’s license
– Retailer’s license
• Administered by the Liquor and Cannabis Board.
• Significant restrictions on ownership and investing.
WA’S RECREATIONAL MJ – I-502
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• Producer: Grower (cannot package/label flower for consumer)
• Processor: Extraction, baking, packaging.
• Retailer: Sells to consumers (no packaging)
LICENSES
Producer Processor Retailer Consumer
RULES AND LAWS
Revised Code of Washington
Chapter 69.50 RCW
Chapter 69.51 RCW
Washington Administrative Code, Washington State Liquor Control Board (LCB)
Chapter 314-55
Liquor Control Board Policies
http://www.liq.wa.gov/rules/interim-policies
Example: 30% reduction in plant canopy
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INDIVIDUAL QUALIFICATIONS
• 6 months WA residency
• Criminal history
• 21 years of age
• Current on all Washington tax obligations as individual or company in which you are an owner
• Individual limited to an interest in 1 producer and 3 processor licenses OR 3 retail licenses
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• Owners and Spouses
– General/limited partners, members/managers, stockholders, corporate officers, and other owners in a multilevel ownership structure
• Financiers and Spouses
– Financiers must qualify, but not necessarily a true party of interest
– Any person or entity that has made or will make an investment in the licensed business. This includes investment by gift or loan (with or without interest)
• Right to Profits
– Entity/Person who is in receipt of or has a right to receive a percentage of the profits in exchange for a loan or their expertise.
Persons who exercise control of business - The board will conduct an investigation of any person or entity who exercises any control over the business operations. This may include both a financial investigation and/or a criminal history background.
A True Party of Interest in a retail license applicant cannot also be a true party of interest in a producer or processor license applicant
APPLICANT TRUE PARTY OF INTEREST
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• Landlord, if:
– Receives reasonable payment for rent on a fixed basis under a bona fide lease
– Does not exercise control over business or participate in management
• Employees who receive a bonus, if:
– Also receives fixed wage or salary
– Bonus is not more than 25% of pre-bonus annual compensation of bonus is based on a written incentive/bonus program that is not out of the ordinary.
• Person who is contracted to sell the property, if:
– They do not exercise control over business or participate in management
WHO IS NOT A TRUE PARTY OF INTEREST?
LCB’S DEFINITIONS FOR EMPLOYEE AND CONSULTANT
"Consultant" means an expert who provides advice or services in a particular field, whether a fee is charged or not. A consultant who is in receipt of, or has the right to receive, a percentage of the gross or net profit from the licensed business during any full or partial calendar or fiscal year is a true party of interest and subject to the requirements of WAC 314-55-035. A consultant who exercises any control over an applicant's or licensee's business operations is also subject to the requirements of WAC 314-55-035.
"Employee" means any person performing services on a licensed premises for the benefit of the licensee.
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REGULATIONS
Location
Traceability
Security
Packaging
Disclosures on Labeling
Advertising
Pesticide and Fertilizer Use
Quality Assurance Testing
Sampling
Waste Disposal
Transport
Prohibited Foods
Concentration of THC 9
TERMINOLOGY
• Useable Marijuana: dried flower
• Infused Products: “products that contain marijuana or marijuana extracts and, are intended for human use, and have a THC concentration greater than 0.3 % and no greater than 10 %.”
• Concentrates: “products consisting wholly or in part of the resin extracted from any part of the plant Cannabis and having a THC concentration greater than 10%.”
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SERVINGS/UNITS
• Infused Products
– Single Serving: 10 mg of THC or Delta 9 per serving
– Single Unit (a single package): Edible/liquid: 100 mg of THC or Delta 9 per unit
• Concentrates
– 1 gram
PROCESSORS
LCB must approve all “marijuana-infused products.”
If LCB denies product, processor may request an administrative hearing.
Solid infused edibles: Each serving must be packaged individually in childproof packaging (ex. blister packs).
Label must display number of servings in package
Must be homogenized
“This product contains marijuana”
Liquid infused edibles: If more than one serving, a measuring device must be included in the package with the product.
Label must display number of servings in package
Must be homogenized
“This product contains marijuana”
Inspection by Dept. of Ag for food processing facilities12
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PROHIBITED FOOD
Infused edibles “that are especially appealing to children” are prohibited. Such products include gummy candies, lollipops, cotton candy, or brightly colored products.
Potentially hazardous foods, as defined in WAC 246-215-01115, may not be infused with marijuana (foods that require time-temperature control)
Other prohibited foods: (i) Any food that has to be acidified to make it shelf stable;
(ii) Food items made shelf stable by canning or retorting;
(iii) Fruit or vegetable juices (this does not include shelf stable concentrates);
(iv) Fruit or vegetable butters;
(v) Pumpkin pies, custard pies, or any pies that contain egg;
(vi) Dairy products of any kind such as butter, cheese, ice cream, or milk; and
(vii) Dried or cured meats.
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CONTINUE
Vinegars and oils derived from natural sources may be infused with dried marijuana if all plant material is subsequently removed from the final product. Vinegars and oils may not be infused with any other substance, including herbs and garlic.
Marijuana-infused jams and jellies made from scratch must utilize a standardized recipe in accordance with 21 C.F.R. Part 150, revised as of April 1, 2013.
A marijuana processor may infuse dairy butter or fats derived from natural sources and use that extraction to prepare allowable marijuana-infused solid or liquid products meant to be ingested orally, but the dairy butter or fats derived from natural sources may not be sold as stand-alone products.
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TRANSPORTATION
Marijuana must be in a locked, safe and secure storage compartment that is secured to the inside body/compartment of the vehicle transporting the marijuana or marijuana products;.
Live plants may be transported in a fully enclosed, windowless locked trailer, or in a secured area within the inside body/compartment of a van or box truck. A secured area is defined as an area where solid or locking metal petitions, cages, or high strength shatterproof acrylic can be used to create a secure compartment in the fully enclosed van or box truck. The secure compartment in the fully enclosed van or box truck must be free of windows. Live plants may not be transported in the bed of a pickup truck, a sports utility vehicle, or passenger car.
Vehicles assigned for transportation may be stopped and inspected by LCB at any time.
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TESTING OF FLOWER
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Products Tests Maximum Sample Size
Lots of flowers that will not be extracted
1. Moisture content2. Potency analysis3. Foreign matter inspection4. Microbiological screening
7 grams
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INTERMEDIATE PRODUCTS
Must be homogenized before testing. Batch of marijuana mix may not exceed five pounds and must be chopped or ground so no particles are greater than 3 mm
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Product Tests Maximum Sample Size
Marijuana mix 1. Moisture Content2. Potency Analysis3. Foreign Matter Inspection4. Microbiological Screening
2 grams
Butane, heptane, propane, or other solvent concentrate or extract
1. Potency Analysis2. Microbiological screening (only if using flowers and other plant material that has not passed QA testing)3. Residual solvency test
2 grams
CO2, ethanol, food grade solvent, keif, hashish, bubble hash, cooking oil, etc. concentrate or extract;
1. Potency Analysis2. Microbiological screening (only if using flowers and other plant material that has not passed QA testing)
2 grams
INFUSED PRODUCTS AND CONCENTRATES SOLD TO RETAILERS
End products consisting of only one intermediate product that has not been changed in any way is not subject to potency analysis.
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Product Tests Maximum Sample Size
Infused soled edible, infused liquid, infused topical
Potency Analysis 1 unit
Marijuana mix, infused marijuana mix
Potency Analysis 2 grams
Concentrate Potency Analysis 1 unit
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ADVERTISING - CONTENT
• No statement or illustration that:
– Is false or misleading;
– Promotes over consumption;
– Represents the use of marijuana has curative or therapeutic effects;
– Depicts a child or other person under legal age; includes objects, such as toys or cartoon characters suggesting the presence of a child; or is designed to be appealing to children or persons under 21.
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ADVERTISING - LOCATION
• 1,000’ Buffer– Licensee may not cause to be placed or maintained an advertisement in any form or medium within 1,000 feet of a school,
playground, recreation center or facility, child care center, public park, library, or game arcade
– print publications
• Public Transit– No advertisement on or in public transit or a public transit shelter
• Public Property– No advertisement on or in public owned/operated property
• Retail Sign– Two signs identifying the retail outlet by business/trade name, limited to 1600 sq. inches
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OTHER ADVERTISING REGULATIONS
• Promotional activity is severely restricted.
– No giveaways,
– No coupons,
– No distribution of branded merchandise
• Warnings
– “This product has intoxicating effects and may be habit forming.”
– “Marijuana can impair concentration, coordination, and judgment. Do not operate a vehicle or machinery under the influence of this drug.”
– “There may be health risks associated with consumption of this product.”
– “For use only by adults twenty-one and older. Keep out of the reach of children.”
RULES SPECIFIC TO RETAILERS
• Only Sell Marijuana & Paraphernalia
– No T-shirts, hats, or water bottles.
– The proposed rule defines paraphernalia to include products used for storage or use of marijuana, including lighters, roach clips, pipes, rolling papers, bongs and storage containers. Items for growing, cultivating and processing marijuana, like butane, grow lights and chemicals, are excluded from the definition.
• Local Presence
– Licensees limited to 1/3 of the allowed licenses in any county/city - REMOVED
• Open Containers/Consumption
– No open containers of marijuana or consumption at a retail outlet. Exception for sample jar with mesh screen
• Layout of Store
– Retail shop may not be located within another business.
– Counter: All products must be stored behind a counter or other barrier to ensure customers do not have direct access to product
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RETAILERS CONT.
Sales Price
Retailers may not sell marijuana products below their acquisition cost (so no fire sales).
Public View
May not display marijuana in a manner that is visible to the general public from a public right-of-way. REMOVED
Disclosures
Upon request, retailer must disclose third-party testing lab and results of product sold
MONEY ADVANCES, CONTRACTS, GIFTS
(1) No industry member or marijuana retailer shall enter into any agreement which causes undue influence over another retailer or industry member. This rule shall not be construed as prohibiting the placing and accepting of orders for the purchase and delivery of marijuana that are made in accordance with usual and common business practice and that are otherwise in compliance with the rules.
(2) No marijuana producer or processor shall advance and no marijuana retailer shall receive money or moneys' worth under an agreement written or unwritten or by means of any other business practice or arrangement such as: (a) Gifts; (b) Discounts; (c) Loans of money; (d) Premiums; (e) Rebates; (f) Free product of any kind except as allowed by WAC 314-55-083; or (g) Treats or services of any nature whatsoever except such services as are authorized in this rule.
(3) "Industry member" means a licensed marijuana producer, marijuana processor, marijuana retailer, their authorized representatives, and any affiliates, subsidiaries, officers, partners, financiers, agents, employees, and representatives of anyindustry member.
(4) No industry member or employee thereof shall sell to any retail licensee or solicit from any such licensee any order for any marijuana tied in with, or contingent upon, the retailer's purchase of some other marijuana, or any other merchandise, paraphernalia, property, or service.
(5) If the board finds in any instance that any licensee has violated this regulation, then all licensees involved shall be heldequally responsible for such violation.
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CONDITIONAL SALES (SEE ALSO WAC 314-55-017)
(1) Marijuana producers, processors, and retailers are prohibited from making sales of any marijuana or marijuana product, if the sale of the marijuana or marijuana product is conditioned upon the buyer's purchase of any service or nonmarijuana product. This subsection applies whether the buyer purchases such service or nonmarijuana product at the time of sale of the marijuana or marijuana product, or in a separate transaction.
(2) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.
(a) "Marijuana product" means "useable marijuana," "marijuana concentrates," and "marijuana-infused products," as those terms are defined in RCW 69.50.101.
(b) "Nonmarijuana product" includes paraphernalia, promotional items, lighters, bags, boxes, containers, and such other items as may be identified by the state liquor and cannabis board.
(c) "Selling price" has the same meaning as in RCW 69.50.535.
(d) "Service" includes memberships and any other services identified by the state liquor and cannabis board.
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RECENT CHANGES . . .
BUFFER
A city or county may reduce the buffer to 100 feet between licensed marijuana businesses and recreation centers, child care centers, public parks, public transit centers, libraries, and game arcades, but may not reduce the buffer for schools and playgrounds.
If a licensed research facility is within 1,000 feet of a school or playground, the facility must satisfy additional requirements regarding security and advertising.
CONSUMING IN PUBLIC
Consuming or opening marijuana is prohibited in a "public place" (versus in view of the general public). "Public place" is a defined term in the liquor control statutes, RCW 66.040.010.
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RECENT CHANGES . . .
NOTICE SIGNAGE
The bill requires additional signage for marijuana business applicants. Such applicants must place a sign outside the prospective business location notifying the public prior to the business becoming operational. The sign must be posted within 7 business days of submission of an application to the LCB.
VENDING MACHINES
Licensed marijuana retailers are prohibited from operating a vending machine or drive-through window.
SYNTEHTIC CANNABINOID
It is now a violation of the Consumer Protection Act to distribute, manufacture, or sell product that contains any synthetic cannabinoid, cathinone, or methcathinone. These substances are also added to the schedule of controlled substances.
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RECENT CHANGES . . .
NEW RETAIL APPLICATIONS
Adopt the priority language, provided in senate bill 5052, for accepting new license applications.
Remove the state-wide cap on the total number of retail licenses, the 30-day application window (leaving the application window open-ended), and the cap on the number of retail licenses per city and county.
Remove the requirement that a licensee could not exceed 33% of the allowed licenses in any county or city.
STATE-WIDE PLANT CANOPY
Emergency rules eliminate the state-wide plant canopy, currently set at 8.5 million. The WSLCB has stated that its lifting of this cap may only be temporary.
ADDITIONAL PROCESSOR LICENSES
Emergency rules allow currently licensed produces to submit an application to add a marijuana processor license at the location of their producer license providing they do not already hold three processor licenses.
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NEW LICENSE APPLICANTS - MERIT
New, competitive, merit-based application process. Includes the opportunity to demonstrate experience and qualifications in themarijuana industry. The LCB shall give preference to applicants that have the following experience and qualifications:
First priority:
Applied for a marijuana retailer license prior to July 1, 2014;
Operated or were employed by a collective garden before January 1, 2013;
Have maintained a state business license and a municipal business license, as applicable in the relevant jurisdiction; and
Have had a history of paying all applicable state taxes and fees;
Second priority:
Operated or were employed by a collective garden before January 1, 2013;
Have maintained a state business license and a municipal business license, as applicable in the relevant jurisdiction; and
Have had a history of paying all applicable state taxes and fees; and
Third priority
All other applicants who do not have the experience and qualifications identified above.
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FUTURE OF REGULATED MEDICAL MARIJUANAMEDICAL…RECREATIONAL…ALL OF THE ABOVE
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“ADIOS” UNREGULATED MEDICAL
RCW 69.51A.085 repealed effective July 1, 2016
In the meantime: New Seattle ordinance to shut-down
King County shutting down
Others?
State v. Reis
Immediate Changes 15-plants per housing unit
No hydrocarbon/butane extraction
No patients under 21 without designated provider
New authorization forms
http://www.doh.wa.gov/ForPublicHealthandHealthcareProviders/HealthcareProfessionsandFacilities/MedicalMarijuanaCannabis
FUTURE OF GROWING MEDICAL
Three Options
Home Grows
Licensed Producers
4-Patient Collectives
Sharing Marijuana
No sharing or sale of marijuana is permitted by individual patients/designated providers. Violation is a class C felony.
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MEDICAL ENDORSEMENT
RETAIL MEDICAL ENDORSEMENT
The emergency rules establish how retail stores may apply for, and maintain, a medical marijuana endorsement.
To maintain a medical endorsement, a retailer must:
Have at least one medical marijuana consultant certificate holder on staff.
Maintain at all times an assortment of medical marijuana products, and beginning with the second renewal cycle, at least 25% of the store's inventory (excluding paraphernalia) must consist of medical products.
Enter patients and providers into the state's authorization database and issue recognition cards.
Maintain copies of recognition cards to designate validity of tax exempt sales.
Train employees on validating authorizations and recognition of strains, varieties, and cannabinoid concentrations of products available for sale when assisting patients and providers.
Abstain from the unlicensed practice of medicine, which includes offering to treat or cure any condition and recommending or suggesting a modification to a course of treatment which does not involve marijuana.
HOME GROWS
15-Plant Limit in Single Housing Units, Effective July 24, 2015 No more than 15 plants may be grown in a single housing unit, even if a collective garden or multiple patients reside there.
A single housing unit is defined as, "a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied as separate living quarters, in which the occupants live and eat separately from any other persons in the building, and which have direct access from the outside of the building or through a common hall."
Growing/processing of plants cannot be readily seen or smelled from a public place or neighboring private property.
Extraction limited to noncombustible methods pursuant to regulations adopted by the LCB.
A copy of the patient's authorization (and recognition card if applicable) must be posted next to the plants.
"Plant" is defined as "a marijuana plant having at least three distinguishable and distinct leaves, each leaf being at least three centimeters in diameter, and a readily observable root formation consisting of at least two separate and distinct roots, each being at least two centimeters in length. Multiple stalks emanating from the same root ball or root system is considered part of the same single pant."
How will patients acquire plants???
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POSSESSION LIMITS
Authorization + Registered + Recognition Card:
3 x the recreational limit and a home grow:
3 ounces of useable marijuana;
48 ounces of infused solid;
216 ounces of infused liquid;
21 grams of concentrates;
Grow 6 plants and possess 8 ounces of useable marijuana (yield from the plants); and
Grow an additional 7-15 plants and possess 9-16 ounces of useable cannabis if such additional amounts are expressly authorized by a health care professional.
Authorization:
1 ounce of useable marijuana;
16 ounces of infused solid;
72 ounces of infused liquid;
7 grams of concentrates; and
Grow 4 plants and possess 6 ounces of useable marijuana (yield from the plants).
AUTHORIZATION VS. RECOGNITION CARD
Authorization Authorization + Recognition Card
Access • Home grow• Retail store
• Home grow• Retail store• 4-patient cooperative
Home Grow 4 plants (affirmative defense) 6-15 plants (arrest protection)
Possession Recreational limits 3x recreational limits
Sales Tax Pay Exempt
37% MET Pay Pay
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“MEDICAL MARIJUANA”
Medical DOH Logo
Anyone can purchase; sold at retail store with medical endorsement:
General use compliant product (additional testing, etc.)
High CBD
Concentrate: THC 2% + 25x more CBD by weight
Infused Edible: 2 milligrams of THC + 5x more CBD
Topicals: 5x more CBD concentration than THC concentration
Only patients can purchase; sold at retail store with medical endorsement
High THC
Capsules, Tinctures, Transdermal patches, and suppositories
10-50 milligrams of THC per serving or application (10 servings in a unit)
Recognition card required
GENERAL USE COMPLIANT PRODUCTS – DOH LOGO
ADDITIONAL TESTING
The new rules require significantly more quality assurance testing, including testing for pesticide screening, heavy metal screening, and mycotoxin screening.
LABELING Compliant products must not:
Use words or other imagery commonly used in or by medical or pharmaceutical professions including, but not limited to: caduceus, staff of Asclepius, bowl of Hygieia, or mortal and pestle, or use of the word "prescription" or "RX;" and
State or imply any specific medical or therapeutic benefit; and
Mimic a brand of over-the-counter or legend drug.
SAFE HANDLING
The rules contain a number of provisions regarding safe handling and clean/sanitary standards, which include, but not limited to, hand-washing facilities on all producer and processor premises and the cleaning and sanitizing of all contact surfaces, including utensils and equipment. In addition water supply must be capable of providing a safe, potable, and adequate supply of water for facilities needs.
EMPLOYEE TRAINING
Licensees shall adopt and enforce policies and procedures to ensure employees and volunteers receive training about the dditional testing
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LESS THAN .3% THC
Who may sell product with less than .3% THC:
All licensed retailers
Health care professionals
AUTHORIZATIONS
Valid for 1 year for patients 18 and older, and 6 months for patients under 18.
An in-person physical exam is required for renewal, along with the other requirements.
Effective July 24, 2015
All new authorizations must be written on a form developed by the Dept. of Health and printed on tamper-resistant paper.
Patient examinations and re-examinations must be performed in person at the healthcare practitioner's permanent business location.
Healthcare practitioners who write more than 30 authorizations per month must report the number to the department.
Healthcare practitioners cannot have a practice that consists primarily of authorizing the medical use of marijuana.
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TERMINAL OR DEBILITATING CONDITION
The bill defines a qualifying terminal or debilitating condition as "a condition severe enough to significantly interfere with the patient's activities of daily living and ability to function."
Traumatic brain injuries and PTSD added to the list of qualifying conditions.
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4 PATIENT COOPERATIVES
Cooperatives may not be located within 1 mile of a medical marijuana retailer.
Patients must register the location with the LCB and provide copies of recognition cards.
Patients no longer participating must notify the LCB within 15 days and a new patient may not join until 60 days later.
Cooperatives may grow up to the amount allowed for each patient (4 patients equals no more than 60 plants and 72 ounces of useable marijuana)
Patients/providers may only participate in one cooperative, and may not grow plants elsewhere.
Participants must provide nonmonetary resources (labor) in order to participate.
The location is limited to a domicile of one of the participants, and only one cooperative per tax parcel.
A copy of the patients/provider's recognition cards must be kept at the location.
LCB may adopt additional rules including security requirements, traceability, inspections, etc.
NEW SUBINDUSTRIES
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MEDICAL MARIJUANA CONSULTANT
Individuals must demonstrate knowledge of products, medical conditions, the medical use of marijuana, and the states' medical marijuana laws.
The Dept. of Health will approve training and education programs.
Such individuals may be employed by retailers with a medical marijuana endorsement (stores are not required to hire consultant).
Consultants will provide the following services at a retail store with a medical endorsement:
Assist patient's with the selection of products,
Describe the risks and benefits of such products,
Describe the risks and benefits of methods for administering such products,
Advise customers on safe handling and storage, and
Provide instruction and demonstration on proper use of such products.
Consultants may not:
Offer or undertake to diagnose or cure an ailment
Recommend or modify a course of treatment that does not involve marijuana
COMMON CARRIER LICENSE
Common carrier license may transport or deliver marijuana.
The LB will adopt rules regarding such licenses.
Drivers prohibited from carrying a firearm, unless:
(1) authorized by the LCB,
(2) they hold an armed private security guard license, and
(3) they comply with all LCB regulations.
Licensed common carriers may use the state ferry system.
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24
HEALTH AND BEAUTY AIDS
Cannabis health and beauty aids are exempt from all regulations in the Controlled Substances Act pertaining to marijuana; however, only for products that meet the specific definition.
Definition for "cannabis health and beauty aid" means product:
(1) containing cannabis;
(2) for topical application;
(3) intended to provide therapeutic benefit or enhanced appearance;
(4) containing.3% THC concentration or less;
(5) does not cross blood-brain barrier; and
(6) is not intended to be ingested.
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MARIJUANA CLUBS
It is a class C felony to operate an unlicensed marijuana club, defined as a club or association that conducts or maintains premises for individuals with the primary or incidental purpose of keeping or consuming marijuana on the premises.
LCB may adopt rules and establish fees regarding marijuana clubs and has the discretion whether to license such facilities
48
25
HOUSE BILL 1000INDIAN TRIBES
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TRIBAL-STATE AGREEMENTS
The Governor may enter into agreements with federally recognized Indian tribes regarding any marijuana-related issue that involves both state and tribal interests or otherwise has an impact on tribal-state relations.
Tribal-state marijuana agreement must include a requirement that the tribe impose a tribal marijuana tax in an amount that is at least 100 percent of all applicable state and local taxes on sales of marijuana, but with the following exception; tribal marijuana sales to tribal members and tribal entities are exempt from this taxation requirement to the extent such sales are exempted under state and federal law.
State license marijuana retailers may purchase and receive marijuana from a federally recognized Indian tribe as permitted by a tribal-state agreement
State licensed producers and processors may sell and distribute marijuana to a federally recognized Indian tribe as permitted by a state-tribal marijuana agreement.
50
26
MARIJUANA RESEARCHER LICENSESENATE BILL 5121
51
LICENSE
License permits the company to produce and possess marijuana to test chemical potency and composition levels; conduct clinical investigations of marijuana-derived drug products; conduct research on the efficacy and safety of administering marijuana as part of a medical treatment; and conduct genomic or agricultural research.
Must submit to the Life Sciences Discovery Fund Authority ("LSDF") a description of the research it intends to conduct.
The licensee may contract with UW or WSU to perform research in conjunction with the university.
The application fee for a marijuana research license is $250. The annual fee for issuance and renewal of the license is $1,000.
52
27
EXTRACTION BUILDING PERMITS
53
STATE BUILDING CODE COUNCIL EMERGENCY RULES
The new rules apply to extraction facilities and equipment used for solvent-based extraction of marijuana
Existing buildings facilities used for such activity must comply with these new rules by July 1, 2016.
54
28
PERMITS AND BUILDINGS
An operational permit is required to use a solvent-based extraction system. In addition, a construction permit is required to install a solvent-based extraction system.
All solvent-based extraction equipment and systems must comply Sections 5003.2, other applicable code provisions, the International Building Code, and the International Mechanical Code.
Extraction shall not be located in any building containing a Group A, E, I, or R occupancy.
55
SYSTEMS AND EQUIPMENT
Extraction systems and equipment for solvent-based extraction shall be listed for the specific use.
If not listed, the system must have a designer of record and technical report.
The designer of record shall be a Washington professional engineer, or if not, the system must be peer reviewed by a licensed Washington professional engineer.
The technical report shall be made available to the fire code official for review and approval prior to the equipment located or
For information on what needs to be included in the technical report, see 3802.3.3.4.2 in the rules
The engineer of record may also be required to perform a site inspection and building analysis.
Post-processing and winterization involving the heating or pressurizing of the extracted oil or fact and the extracting solvent to other than normal pressure or temperature shall be approved and performed in an appliance listed for such use. Domestic or commercial cooking appliances shall not be used. The use of industrial ovens shall comply with Chapter 30, but an automatic fire extinguishing shall not be required for batch-type Class A ovens having less than 3.0 cubic feet of workspace.
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29
EXTRACTION ROOMS
The room for solvent-based extraction must be located in a room dedicated only to extraction.
Rooms with solvent-based extraction equipment must contain one exit, swinging in the direction of travel provided with an automatic closer and panic hardware. The room shall not enter directly into an exit, exit passageway, horizontal exit, or along the sole egress path from another portion of the building.
The room shall include a dedicated, continuous, hazardous exhaust system, complying with Section 5004.3.
Each room shall be considered a single control area and comply with Section 5003.8.3.
All electrical components in the room must be interlocked with the hazardous exhaust system and when provided the gas detection system. When the hazardous exhaust system is not in operation, the electricity shall be disabled.
If power is required for operation of the extraction process, an automatic emergency power source must be provided. The emergency power system shall be provided for: lighting, ventilation, gas detection system, emergency alarm systems, and automatic fire extinguishing systems.
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HYDROCARBON
Ventilation rates for the room to maintain the concentration of flammable constituents in air below 25% of the lower flammability limit of the respective solvent.
A continuous gas detection system with a threshold no greater than 25% of the LEL/LFL of the materials.
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30
FLAMMABLE OR COMBUSTIBLE LIQUID
Flammable or combustible liquid must comply with NFPA 30.
The process must be located within a hazardous exhaust fume hood, rated for exhausting flammable vapors. Heating of flammable or combustible liquids over an open flame is prohibited.
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CO2
Carbon dioxide systems with more than 100 lbs of carbon dioxide :
Storage, use, and handling of liquid carbon dioxide must comply with Chapter 54 and applicable requirements of NFPA 55, Chapter 13. Insulated liquid carbon dioxide systems shall have pressure relief devices in accordance with NFPA 55.
Systems shall be installed so the storage tanks, cylinders, piping, and fittings are protected.
At the entrance of areas where carbon dioxide used or stored, signs must be posted, durable and permanent in nature, not less than 7"x10", bearing "skull and crossbones" emblem with the warning "DANGER! POTENIAL OXYGEN DEFICIENT ATMOSPHERE." NFPA 704 signage shall also be provided at the building main entry and rooms where carbon dioxide is stored and used.
Mechanical ventilation must include: a rate of not less than 1 cubic foot per minute per square foot; intake must be within 12 inches of the floor; and the system must be designed to operate at a negative pressure in relation to the surrounding area.
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1
3rd Annual Northwest Marijuana Law Conference November 13, 2015
Cannabis Taxation:Federal & State Issues
James G. Hunt Esq.
600 Stewart Street
Suite 1200
Seattle, WA 98101
206-826-9460
Overview• Federal Income Tax Update
Update on Sec 280E Expense Disallowance
CHAMP, Olive and developing case law
Computation of COGS
• Washington & Oregon State Tax Issues Washington Transition Rules
Excise Tax vs Trust-Fund Tax
Income Tax
Economic Nexus, Intangibles and Ancillary Businesses
2
Federal Income Tax Update
Just Say No to Deductions?
Federal Taxation of Illegal Activity
• Cannabis is a Schedule I controlled substance under the Federal Controlled Substances Act. Unlawful to possess, distribute, manufacture.
• Income From Illegal Activity Subject to Income Tax. Statutes: IRC Sec. 61
Regulations: Treas. Reg. 61-14(a)
Case Law: United States v. Sullivan, 47 S. Ct. 607 (1927)
3
Congress Punishes via the Tax Code
• Edmondson: Seller of amphetamine, cocaine and marijuana allowed deduction of all expenses including telephone and home office expenses. Jeffrey Edmondson, TC Memo 1981-623
• Congress Reacts: Enacts IRC Sec. 280E in 1982 “the adjustment to gross receipts with respect to cost of goods sold is
not affected by this provision”
IRC Sec. 280E
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or
business if such trade or business (or the activities that comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the
Controlled Substances Act) which is prohibited by Federal Law or the law of any State in which such trade or business is conducted”
4
Small Business Tax Equity Act of 2015(S.987;H.R.1855)
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities that comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal Law or the law of any State in which such trade or business is conducted unless such trade or business consists of marijuana sales conducted in compliance with State law.”
Trend One
Emerging Case Law:
What is your Trade or Business?
5
Separate Trade or Business
• A taxpayer can have more than one trade or business L.T. Alverson v. Comm.,35 BTA 482 (1937)
Facts and Circumstances - Treas. Reg. Sec. 1.183(d)(1)o Degree of economic and organization interrelationship.
o Business purpose served by discrete activity.
o Similarity of the activities.
Trade or Business Factors (Tobin,Trupp)Economic Integration
• Whether activities share close organizational relationship.
• Whether activities conducted at same location.
• Whether activities formed as a separate business.
• Whether one activity benefits from another.
• Whether one activity used to advertise another.
• Degree of shared management.
• Whether use same books and records, share accountant.
• Degree of joint management .
6
Californians Helping to Alleviate Medical Problems (“CHAMP”)
• Landmark Tax Court Case Addresses application of IRC Sec. 280E to a organization that provides
a wide variety of caregiving services which include providing medical marijuana to members.
Tax Court held that CHAMPS conducted dual trades or businesseso IRC Sec. 280E precludes deduction for expenses related to medical marijuana.
o Deduction for COGS allowed.
o All deductions allowed for trade or business of caregiving services.
CHAMP (Facts)
• Organized as a California Public Benefit Corporation.
• Operates at Break Even.
• 1,350 sq. foot main facility/office in community church.
• Almost 100% of members suffer from: AIDS, Cancer, MS.
• Executive Director with 10 years of health care experience.
• Primary purpose is care giving services.
• Secondary purpose is providing Cannabis under California Compassionate Use Act of 1996 - No unlimited supply.
7
CHAMP(Key factors)
• Regular, extensive and wide variety of care services Support Groups, Counseling, Lunch and Supplies for Low Income
Members
• Cost allocations allowed based on metrics Percentage of employees
Actual use of assets
Square Footage
• Did allow COGS of 80% of sales
Olive vs Commissioner : Part I 139 T.C. No.2 (2012)
• Olive operated the Vapor Room Herbal Center
• Provided medical marijuana under CCUA of 1996
• Provided a lounge area for smoking, socializing
• Required Doctor’s recommendation
• Sole revenue source is sale of Medical Marijuana
• Sold 93.5% to patrons; remainder to patrons and staff
• Offered yoga, movies, massage and informal discussion groups
8
Olive (Continued)
• Tax Court rejected arguments that Olive operated two trades of business All expenses related to medical marijuana disallowed
Integrated business model
COGS allowed was 75% of gross receipts based on testimony
• Tax Court focused on lack of substantiation Five ledgers
Existing records vague and incomplete
Testimony unpersuasive
Olive v. Commissioner (Part II)No.13-70510 (9th Cir. July 9, 2015)
• Olive’s Arguments The term “consists of” in Sec. 280E narrows statutes application to only apply to
situations where the sale of cannabis is the sole service the business provides. Sales of cannabis plus caregiving services not within application of Sec. 280E.
Congress intended Sec 280E to apply to street drug dealers; did not anticipate the medical cannabis dispensaries allowed under state law. Application is against legislative intent and public policy.
CRomnibus Act of 2015 prevents government from defending Olive’s appeal.
9
Olive v. Commissioner (Part II)No.13-70510 (9th Cir. July 9, 2015)
• Ninth Circuit “Bookstore A vs Bookstore B”
o Bookstore A offers free coffee, book advice, children story time. Trade or business consists of selling books.
o Bookstore B sells books and coffee. Has two trades or business’s: selling books and selling coffee.
Congress’ authoritative statement is the text; not relevant what Congress did not know or anticipate when enacting Sec. 280E.
Congressional action or inaction does not inform enforcement of valid statute.
Canna Care, Inc. v CommissionerT.C. Memo. 2015-206 (October 22, 2015)
• Stipulated facts – IRS disallowed “operating costs”.
• Taxpayer a California Mutual Benefit Corporation operating as a MMJ dispensary.
• Dispensary operator motivated by faith and personal financial interest.
• Operated at a loss.
• Officers and Director’s paid salaries and automobile expenses.
• Daily prayer service.
• Active community involvement including MMJ education and hosting MMJ activist groups.
10
Canna Care, Inc. v Commissioner(Continued)
Taxpayer Arguments
CHAMP incorrectly decided.o CHAMP had one trade or business.
o CHAMP not a qualified caregiver under California law.
Taxpayer was not trafficking for purposes of IRC Sec. 280E because activity legal under California law.
MMJ is not a Schedule I controlled substance.
Canna Care, Inc. v Commissioner(Continued)
• Tax Court Critical determination in CHAMP was whether taxpayer engaged in two separate
trades or businesses. Canna Care stipulated engaged in business of distributing cannabis. Other income from books and T-shirts not substantiated; therefore, all operating deductions disallowed.
The sale of cannabis is always considered trafficking for purposes of IRC 280E even when permitted by state law. Cites CHAMP and Olive.
MMJ is a Schedule I controlled substance – period.
11
Canna Care, Inc. v Commissioner(Continued)
• Takeaways CHAMP and Olive are the current roadmap in applying IRC Sec. 280E.
Direct challenges to IRC Sec. 280E are difficult.
Good works or community involvement not sufficient to support a tax deduction outside application of IRC 280E.
Only deduct costs if from activity considered a separate trade or business entered into with profit motive.
Fact stipulations set the tone of your case.
Trend Two
Restricted Definition of COGS
12
Summary
• Expenses Related to Sale of Cannabis Disallowed Unless considered a COGS
• Expenses Related to an Independent Trade or Business No limitation on deductibility
COGS – a timing issue
Must Develop your facts
Determination of COGS
• General Principles Intersection of two systems
The Inventory Method under IRC Sec. 471o Determined per regulation and administrative guidance
The Uniform Capitalization Rules (UNICAP) under IRC Sec. 263A
13
The Inventory Method
• Retailers include in COGS all direct costs and other indirect acquisition costs. Treas. Reg. Sec. 1.471-3(b)
• Producers include in COGS: raw material, direct labor, and indirect production costs incident to and necessary for production Treas. Reg. 1.471-3(c).
UNICAP
• Require allocation to COGS direct costs and indirect costs that “directly benefit or are incurred by reason of performance of production or resale activity” Treas. Regs. Sec. 1.263A (e)(3)(i)(A).
• Costs otherwise not deductible can not be included in COGS under UNICAP. IRC Sec. 263A(a)(2); Treas. Regs. Sec. 1.263A-1(c)(2).
14
Recent IRS Guidance
• January 23, 2015, Office of Chief Counsel Advice –
No precedential value but instructive.
How does taxpayer trafficking in controlled substance determine COGS for purposes of IRC 280E?
Does the IRS have authority on audit to change taxpayer from cash method to accrual method?
Office of Chief Counsel Advice (Conclusions)
• Cannabis producers and retailers are required to apply inventory methods outlined in IRC Sec 471.
• The 1986 enactment of UNICAP is a timing provision and does not create deductions. Accordingly, UNICAP may not be used to allocate a larger portion of costs to COGS.
• The IRS can change on audit a taxpayers method of accounting (Cash to Accrual)
15
Trend Three
Is it ok to think outside the box?
A Word About Farming …
• Is a producer or processor a farmer under the IRC?
• Is a grow a farm? The term farm “embraces the farm in the ordinary accepted sense” Treas. Reg. Sec. 1.61-4(d).
• Is taxpayer engaged in a farming businesses? The term includes “cultivating or raising…any agricultural or horticultural commodity”. Treas. Reg. Sec 263A-4.
• If a farmer, are required to use (or may elect) cash or accrual method of accounting? Treas. Reg. Sec. 1.61-4.
16
A Word About Tax Exemption…
• First Church of Cannabis May 21, 2015 Tax Exemption as 501(c)(3).
IRS is deferential to Religious Classifications.
First Amendment to US Constitution.
• Issue Under Debate – Public Policy Doctrine Sec. 501(c)(3).
Trend Four
• States Addressing “Destructive” Tax Systems. Is the excise tax included in COGS or non-deductible under IRC Sec.
280E?
Move toward “Trust-Fund” Tax System.
Eliminate tiered tax systems and push burden on consumer.
Eliminate bundling or conditional sales transactions.
Create (e.g., Oregon) or integrate (e.g., Washington) sales tax system.
Income Tax States allowed deduction of IRC Sec 280E expenses.
No special rules for ancillary businesses (e.g., economic nexus).
17
Washington Tax Update
• I-502 Producer, Processor, Retailer Subject to 25% Marijuana Excise Tax through July 1, 2015.
o MET deductible for federal income tax.
Starting July 1, 2015, MET is 37% of retail selling price imposed on retail purchaser.
• Medical Cannabis (Sales Tax) Compassionate Kitchen Case – potential sales tax refund.
July 1, 2015 to June 30, 2016 - Exemption for compliant Collective Gardens.
Starting July 1, 2015, exemption for patients in exemption database.
Marijuana Excise Tax (to June 30, 2015)
• Marijuana Excise Tax (“MET”)(Prior Law) Tax equal to 25% of selling price on each sale from producer to processor
or to another producer and is an obligation of the producer.o Sales between a producer that is also a processor are exempt if transfer within same legal
entity.
Tax equal to 25% of selling price on each sale from processor to retailer and is an obligation of the processor.o Processor to processor sales exempt regardless of entity.
Tax equal to 25% of selling price on each retail sale and is an obligation of the retailer.
18
Sales Price of Cannabis Reduced by MET Chief Counsel Advice 2015-31016
• IRS applies IRC Sec. 164 IRC Sec 164 enumerates allowable deductions for taxes.
“taxes paid or accrued in connection with … disposition of property … are a reduction in amount realized on the disposition”
MET is a tax … in connection with disposition of property by a trade or business. o MET not an inventory cost.
o MET not an “expense” under IRC Sec. 164.
o MET must be capitalized.
Application to other states?
Marijuana Excise Tax (as of July 1, 2015)
• Eliminates the Three-Tier Tax System (RCW Sec. 69.50.535) Removes Impact of IRC Sec 280E.
• Tax is 37% of retail selling price; imposed on retail purchaser.
• Trust Fund Tax Personal Liability of the Seller.
19
Marijuana Excise Tax (as of July 1, 2015)
• What is the Selling Price? Same as for Sales Tax. RCW 82.08.010.
Must equal market value. (“true value”).
Never less than indirect and direct costs.
MET not part of total retail price subject to sales/use tax.
MET must be separately itemized from sales tax on receipt.
MET must be reflected in price list, quoted shelf price or advertised price.
Marijuana Excise Tax (as of July 1, 2015)
• Prohibits Bundling Retail sale of marijuana product plus “distinct and identifiable product”
(e.g., paraphernalia)
Provide Marijuana product free of charge with required purchase of another product.
• Prohibits Conditional Sales “sale of …marijuana product… conditioned upon …purchase of service
or nonmarijuana product”
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Compassionate Kitchen v DOR
• Superior Court in Spokane County held that WA sales tax does not apply to sales of medical marijuana.
• Taxpayer paid tax and filed refund claim.
• Sales tax statute defines prescription as “ an order or formula issued … by a duly licensed practitioner authorized by the laws of this state to prescribe”.
• On appeal in Washington State Court of Appeals Division III.
Temporary MMJ Sales Tax Exemption(July 1,2015 to June 30, 2016)
• Special Notice (July 9, 2015) Sales by Collective Gardens to qualifying patients and designated
providers participating in collective garden exempt from sales tax.
CG must be in compliance with RCW 69.51A o (e.g. 15 plants per patient, up to 45 plants total).
• No B&O Tax Exemption.
21
Medical Marijuana Tax Preferences(From July 1, 2016)
• Purchases by qualifying patients or designated providers entered into the authorization database are exempt from sales/use tax.
• Department of Revenue must have access to database to verify tax exemptions.
• Cooperatives exempt from B&O tax.
Applicant Preferences (RCW 69.50.331)
• First and Second Priority to Applicants with “history of paying all applicable state taxes and fees”. See, WAC 314-55-020(3)(a),(b).
Obtain “Tax Status” Letter from DOR. o Snapshot of tax accounts as of a point in time
o Not a verification of correct reporting
Submit Copy of Payment Plan.
22
CONTACT INFORMATION
James G. Hunt
The Law Office of James G. Hunt PLLC
600 Stewart Street
Suite 1200
Seattle, WA 98101
206-826-9460
T.C. Memo. 2015-149
UNITED STATES TAX COURT
JASON R. BECK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25842-10. Filed August 10, 2015.
Jason R. Beck, pro se.
Carolyn A. Schenck and Vanessa M. Hoppe, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: Respondent determined a $1,047,743 deficiency in Jason
R. Beck’s Federal income tax for 2007 and a $209,549 accuracy-related penalty
under section 6662(a). The deficiency resulted from respondent’s disallowance1
Unless otherwise indicated, all section references are to the Internal1
Revenue Code in effect for the year at issue, and all Rule references are to the Tax(continued...)
Doc 2015-18540 (21 pgs)
-2-
[*2] of expense deductions claimed on petitioner’s Schedule C, Profit or Loss
From Business, for a “Health Care” business for the 2007 tax year. The expenses2
reported on petitioner’s Schedule C relate to the dispensing of medical marijuana.
Specifically, expense deductions claimed for Schedule C “other expenses”,
“rent/lease other business property”, “cost of goods sold”, and “advertising” were
disallowed. Therefore, the issues presented for our decision are:
(1) whether petitioner is entitled to deduct Schedule C expenses totaling
$194,094 for his medical marijuana dispensaries for the taxable year 2007. We
hold that he is not;
(2) whether petitioner is entitled to Schedule C cost of goods sold (COGS)
of $600,000 for items seized during the Drug Enforcement Administration’s
(...continued)1
Court Rules of Practice and Procedure.
Respondent filed three amendments to answer to apply sec. 280E to the2
Schedule C expense deductions disallowed on the notice of deficiency, disallowadditional Schedule C expense deductions, and increase Schedule C gross receipts. Significant adjustments that make up the deficiency (i.e., increased gross receiptsof $1,293,208 to reflect unreported gross receipts that respondent discovered afterhe issued the notice of deficiency) are no longer at issue as these were decided inrespondent’s favor with the granting of respondent’s motion for partial summaryjudgment on September 9, 2014.
Doc 2015-18540 (21 pgs)
-3-
[*3] (DEA) raid of petitioner’s medical marijuana dispensary in West Hollywood,
California, for the taxable year 2007. We hold that he is not;3
(3) whether petitioner is entitled to a section 165 loss deduction of $600,000
for items seized during the DEA’s raid of petitioner’s medical marijuana
dispensary in West Hollywood, California, for taxable year 2007. We hold that he
is not;
(4) whether petitioner is liable for self-employment tax of $68,949 for
taxable year 2007. We hold that he is; and4
(5) whether petitioner is liable for the accuracy-related penalty pursuant to
section 6662(a) for taxable year 2007. We hold that he is.
Respondent concedes that petitioner is entitled to $750,394 in COGS for3
taxable year 2007, computed as follows: the disallowed amount reflected on thenotice of deficiency of $1,350,394 minus $600,000 that petitioner claims was thevalue of the marijuana seized by the DEA. Respondent also concedes the issue ofwhether petitioner failed to report interest income of $10 for the taxable year 2007.
In the third amendment to answer, respondent asserted an increase in4
petitioner’s tax liability to properly account for self-employment tax in the correctamount of $89,046. After respondent’s concessions and the granting ofrespondent’s motion for partial summary judgment, the self-employment tax atissue is $68,949. This is a computational issue and is not discussed further herein.
Doc 2015-18540 (21 pgs)
-4-
[*4] Background
Certain facts in evidence have been stipulated and are so found. The
stipulation of facts and the exhibits attached thereto are incorporated herein by this
reference. When the petition was filed, petitioner resided in California.
I. Formation of Alternative Herbal Health Services
Petitioner started a medical marijuana business in 2001 which by 2007 had
expanded to two medical marijuana dispensaries. Petitioner operated these
dispensaries as a sole proprietor and conducted business under the name
Alternative Herbal Health Services (AHHS). Petitioner was not trained in any
healthcare-related services and has never worked in the healthcare industry.
The first dispensary was on Haight Street in San Francisco, California (San
Francisco dispensary). On May 14, 2001, petitioner purchased 50% of the San
Francisco dispensary. Six months later, he purchased the remaining 50%
ownership of the dispensary. The San Francisco dispensary opened in 2001 and
closed in the fall of 2008. The second dispensary was on Santa Monica Boulevard
in West Hollywood, California (West Hollywood dispensary). The West
Hollywood dispensary opened in 2004 and is currently in operation.
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[*5] II. Operation of AHHS
The dispensaries sold various strands of marijuana, marijuana seeds, pre-
rolled marijuana joints, and edible food items prepared with marijuana (edibles).
Petitioner did not grow marijuana at either dispensary to sell but rather purchased
marijuana from growers. The San Francisco dispensary had around 40 strands of5
marijuana. The West Hollywood dispensary had around 70 strands of marijuana.
Customers who purchased marijuana and edibles from petitioner’s dispensaries
were able to smoke and consume those products there. Petitioner did not sell
pipes, papers, or vaporizers. However, these types of items were made available
to customers who chose to medicate on site. Petitioner and his employees also
conducted the following activities with customers at no charge: education on the
effects of various strands of marijuana on the body; education on the use and
benefits of vaporizers; discussions on the various strands of marijuana that were
for sale; discussions on how to grow marijuana and the best grow shops to buy
supplies from; counseling as to how to load a bong, pipe, joint, or other smoking
device; and loading, grinding, and packing marijuana for customers’ use of bongs,
pipes, and vaporizers.
Petitioner grew some small marijuana clones in 2007 at the West5
Hollywood dispensary, but these plants were never harvested. These plants wereseized during the DEA raid.
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[*6] Recipients of the medical marijuana provided by the dispensaries could be
either medical marijuana patients or designated care-givers of medical marijuana
patients. In order to enter either dispensary, petitioner required that customers
provide written recommendations for the use of marijuana from doctors or have
medical ID cards. Petitioner did not charge customers for memberships to the
dispensaries, nor did he charge admittance fees. Petitioner maintained a checking
account in connection with the dispensaries. However, he did not accept checks or
credit cards from customers and operated primarily on a cash basis.
Petitioner stored marijuana in plastic tubs at both of the dispensaries. “Tub
sheets” or “tub slips” were taped to each tub for inventory tracking purposes. The
tub sheet identified the product name and included details concerning when the
tub was filled. Petitioner’s dispensary employees were supposed to record the
details each time marijuana was taken out of a tub and packaged. These tub
records, when totaled, reflect only a portion of the marijuana that was available for
purchase. Petitioner destroyed tub records for both of the dispensaries.6
Customers of the West Hollywood dispensary were given a “guest check” in
connection with a sale of marijuana. Guest checks were not given to customers of
It was petitioner’s ordinary practice to shred all sales and inventory records6
at the end of the day or by the next day. However, petitioner was able to recoverand produce some of these records.
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[*7] the San Francisco dispensary. In taking customer orders, dispensary
employees would write the amount, weight, price, and name of the desired strand
of marijuana on the guest check. If an edible was ordered, the quantity, name, and
price was written on the guest check. The total amount due was written at the
bottom of the guest check. Dispensary employees took the guest check back from
the customer upon receiving payment. Petitioner shredded most of the 2007 guest
checks of the West Hollywood dispensary. Petitioner provided respondent with
the only remaining documents, which included 28 days of guest checks primarily
from December 2007. The West Hollywood dispensary also had a vending
machine that dispensed marijuana and edibles. The vending machine accepted
only cash payments, which were collected when the machine was restocked every
couple of weeks. However, no documentation or receipts were separately
maintained for the vending machine transactions.
Employees at both dispensaries used a cash register to log sales of
marijuana and cash paid out. There was only one cash register at each dispensary.
At the end of each day, a “z-tape” was generated by the cash register, which
reflected the total sales and payouts of the day. Petitioner shredded most of the
2007 z-tape records from both dispensaries. Petitioner provided respondent with
the only remaining documents, which included 41 days of z-tapes from the West
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[*8] Hollywood dispensary reflecting the date, net sales, net tax, number of sales,
amounts paid in, and amounts paid out. Petitioner was unable to recover any z-
tapes from the San Francisco dispensary.
At the end of each day that the West Hollywood dispensary was open,
petitioner or his employees packed a plastic baggie with the following documents:
z-tape documents, receiving vouchers, sales receipts, and guest checks. Not all
baggies contained all types of sales documents. Petitioner was able to recover
some of these baggies and provide them to respondent.
III. DEA Raid of the West Hollywood Dispensary
On January 11, 2007, the DEA was authorized to conduct a search of
petitioner’s West Hollywood dispensary. In the affidavit attached to the Federal
search warrant application, the DEA special agent described the items to be seized
as evidence, fruits, and instrumentalities of violations of several Federal drug
statutes related to possession with the intent to distribute a controlled substance,
marijuana. The Central District of California authorized the DEA to seize
numerous items, including controlled substances such as marijuana and edibles.
On January 17, 2007, DEA special agents entered petitioner’s West Hollywood
dispensary and conducted a search of the premises. The DEA seized items
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[*9] including controlled substances, food items suspected to contain marijuana,
and marijuana plants. The DEA also seized $1,470.71 and $11,082.
After the DEA raid, petitioner’s West Hollywood dispensary was closed
from January 17 through 23, 2007. After execution of the Federal search warrant,
the DEA and the Los Angeles Police Department were authorized by the Los
Angeles Superior Court to execute a State search warrant at Bank of America for
accounts in the name of “Jason Robert Beck”. Pursuant to the State search
warrant, funds totaling $2,805 were seized. These funds were believed to be
proceeds of marijuana trafficking.
IV. Preparation of Petitioner’s 2007 Tax Return
Petitioner timely filed his 2007 tax return, reporting income from Form
W-2, Wage and Tax Statement, as well as attaching a Schedule C for a “Health
Care” business. Petitioner reported the income and expenses related to AHHS on
the Schedule C, reporting $1,700,000 in gross receipts with $1,429,614 in COGS
and $194,094 in expenses. Petitioner states that the gross receipts and COGS
entries on his 2007 tax return each include $600,000 attributable to the value of
the marijuana seized by the DEA. All gross receipts and expenses reported on
petitioner’s 2007 tax return were from the sale or expenses of marijuana or
edibles. All expenses reported on petitioner’s Schedule C pertained to the
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[*10] marijuana dispensaries, and those expenses were incurred at the San
Francisco and West Hollywood dispensaries.
In preparing his 2007 tax return, petitioner gave the numbers to his attorney,
Jim Hammer, who in turn gave them to his tax return preparer, James Moseley.
Once the 2007 tax return was prepared, Mr. Moseley gave the return to petitioner
for his review and approval. Upon petitioner’s approval, Mr. Moseley efiled the
2007 tax return with respondent. Mr. Moseley did no bookkeeping for petitioner,
the San Francisco dispensary, or the West Hollywood dispensary. Mr. Moseley
did not review any source documents relating to the numbers reported on
petitioner’s 2007 tax return. Mr. Moseley did no payroll work for petitioner, the
San Francisco dispensary, or the West Hollywood dispensary. Mr. Moseley did
not issue any Forms W-2 or Forms 1099-MISC, Miscellaneous Income, on behalf
of or in connection with petitioner, the San Francisco dispensary, or the West
Hollywood dispensary.
V. Petitioner’s AHHS Records
Petitioner provided copies of the leases for both of his medical marijuana
dispensaries to the Court. However, petitioner did not provide evidence of any
lease payments. He also provided a copy of the DEA search warrant dated January
11, 2007. Petitioner provided documents relating to payroll but did not provide an
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[*11] explanation as to where these expenses were reported on his tax return.
Petitioner has not provided any evidence to support the COGS claimed on his
Schedule C or the deductions claimed for outside services and advertising
expenses.
VI. California Compassionate Use Act (CCUA)
The State of California’s voters approved the California Compassionate Use
Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5 (West 2007), as a
ballot initiative in 1996. The CCUA is intended to ensure that “seriously ill
Californians” (recipients) can obtain and use marijuana if physicians recommend
marijuana as beneficial to recipients’ health. Numerous medical marijuana
dispensaries were formed in California to dispense medical marijuana to
recipients. Medical marijuana, however, is a controlled substance under Federal
law. Petitioner intended to dispense medical marijuana through the San Francisco
dispensary and West Hollywood dispensary pursuant to the CCUA and related
legislation and guidelines.
Discussion
California law allows petitioner to dispense medical marijuana to customers
through his AHHS dispensaries. However, Federal law prohibits taxpayers from
deducting any expense of a trade or business that consists of the trafficking of a
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[*12] controlled substance such as marijuana. See sec. 280E. Respondent
disallowed deductions claimed on petitioner’s Schedule C related to the operation
of his AHHS dispensaries for the 2007 tax year. Petitioner disputes the
disallowance and alleges: “[T]he disallowance by the IRS of certain cost of goods
for the wholesale expense of cannabis is improper” and the “IRS is not entitled to
any tax revenue per its own code, for Medical Marijuana during 2007.” Petitioner
also states that the “IRS cannot accept tax revenue on this type of business due to
its claim that product i[s] illegal.” We are asked to decide whether petitioner may
deduct certain Schedule C business expenses related to the operation of his AHHS
dispensaries. We are also asked to decide whether petitioner is entitled to
Schedule C COGS or a section 165 loss deduction for items seized during a DEA
raid of petitioner’s dispensary and whether petitioner is liable for an
accuracy-related penalty.
I. Burden of Proof
The taxpayer bears the burden of proving, by a preponderance of the
evidence, that the Commissioner’s determinations are incorrect. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a matter
of legislative grace, and the taxpayer bears the burden of proving entitlement to
any claimed deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503
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[*13] U.S. 79, 84 (1992). Section 7491(a) sometimes shifts the burden of proof to
the Commissioner, but that section does not apply where a taxpayer fails to satisfy
the recordkeeping and substantiation requirements. See sec. 7491(a)(2)(A) and
(B). Petitioner has failed to satisfy those requirements. Respondent bears the
burden of proof only with respect to the increased deficiency asserted in the
amendments to answer. See Rule 142(a)(1).7
II. Schedule C Expenses
In 2007 petitioner trafficked in the sale of marijuana at his AHHS
dispensaries. Petitioner reported $194,094 in Schedule C expenses related to the
AHHS dispensaries.
A. Business Expense Deductions
Deductions are a matter of legislative grace, and taxpayers must maintain
sufficient records to substantiate the amounts of their income and entitlement to
any deductions or credits claimed. Rule 142(a)(1); INDOPCO, Inc. v.
Commissioner, 503 U.S. at 84; New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934). A taxpayer may deduct ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business. Sec. 162.
We need not decide who bears the burden of proving the applicability of7
sec. 280E because resolution of that issue does not rest on which party bears theburden of proof.
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[*14] Whether an expense is ordinary is determined by time, place, and
circumstance, and whether it is necessary is determined by whether it is
appropriate and helpful. Welch v. Helvering, 290 U.S. at 113-114. The
determination of whether an expenditure satisfies the requirements for
deductibility under section 162 is a question of fact. Commissioner v. Heininger,
320 U.S. 467, 471 (1943). Where a taxpayer reports a business expense but
cannot fully substantiate it, the Court generally may approximate the allowable
amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However,
we may do so only when the taxpayer provides evidence sufficient to establish a
rational basis upon which an estimate can be made. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
Here, petitioner intentionally and routinely destroyed most documents
pertaining to the operation of both dispensaries. Petitioner was able to recover and
produce some records; however, those records do not reconcile with the categories
or amounts reported on petitioner’s tax return. Petitioner is not entitled to deduct
the Schedule C expenses because they are unsubstantiated.
B. Section 280E
A taxpayer may not deduct any amount paid or incurred in carrying on a
trade or business where the “trade or business (or the activities which comprise
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[*15] such trade or business) consists of trafficking in controlled substances * * *
which is prohibited by Federal law”. Sec. 280E. We have previously determined
that medical marijuana is a controlled substance under section 280E. See
Californians Helping To Alleviate Med. Problems, Inc. v. Commissioner
(CHAMP), 128 T.C. 173, 181 (2007); see also Gonzalez v. Raich, 545 U.S. 1
(2005). We have also held that a California medical marijuana dispensary’s
dispensing of medical marijuana pursuant to the CCUA was “trafficking” within
the meaning of section 280E. CHAMP, 128 T.C. at 182-183. Here, petitioner was
trafficking in a controlled substance. Petitioner admitted that all of his claimed
Schedule C expense deductions were attributable to the operation of his AHHS
dispensaries.
In CHAMP, 128 T.C. at 181-182, we held that section 280E precluded the
taxpayer from deducting expenses attributable to a medical marijuana business.
However, we allowed a portion of the taxpayer’s operating expenses, finding that
the taxpayer operated two separate businesses. Id. at 184-185. The taxpayer in
CHAMP dispensed medical marijuana pursuant to the CCUA and also provided
caregiving services. Id. at 174-175. Because two separate businesses were
operated in CHAMP, we allowed the taxpayer to deduct the portion of the
operating expenses unrelated to the medical marijuana business. Id. at 185-186.
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[*16] The present case is distinguishable from CHAMP. Petitioner operated two
medical marijuana dispensaries where he sold marijuana and edibles. Customers
were also permitted to medicate onsite. Petitioner and his employees also
instructed customers on the effects of marijuana and the proper use of smoking
devices free of charge. Petitioner has provided no evidence that the AHHS
dispensaries sold any non-marijuana-related items. The sole purpose of the AHHS
dispensaries was to provide customers with medical marijuana and instruct those
customers on how to use it. Unlike the taxpayer in CHAMP, petitioner has
provided no evidence that he had any business activity unrelated to the sale or
distribution of marijuana. Further, petitioner has not established which, if any,
expenses were for any alleged services offered and which expenses related to the
sale of marijuana.
Moreover, the Court of Appeals for the Ninth Circuit recently affirmed our
decision in Olive v. Commissioner, 139 T.C. 19 (2012), aff’d, __ F.3d __, __,
2015 WL 4113811, at *4 (9th Cir. July 9, 2015), holding that we “properly
concluded that I.R.C. § 280E precludes Petitioner from deducting, pursuant to
I.R.C. § 162(a), the ordinary and necessary business expenses associated with his
operation of * * * [his business].” Therefore, petitioner’s Schedule C expenses are
not deductible after application of section 280E.
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[*17] III. DEA-Seized Property
On January 17, 2007, the DEA seized marijuana, edibles, and money from
petitioner’s West Hollywood dispensary. These items were not returned to
petitioner. Petitioner valued the seized marijuana at $600,000. Petitioner sought
to include this amount as Schedule C COGS for taxable year 2007, in addition to
the amount respondent already allowed. Additionally, petitioner seeks to deduct a
section 165 loss for the marijuana seized by the DEA.
A. COGS
COGS is an offset to gross receipts in determining business income. Sec.
1.61-3(a), Income Tax Regs. A taxpayer must keep sufficient records to
substantiate any amount claimed as COGS. Wright v. Commissioner, T.C. Memo.
1993-27.
Petitioner seeks to characterize the cost of marijuana seized by the DEA as
COGS. Petitioner values the seized marijuana at $600,000 but has provided no
evidence as to how he computed this amount. Petitioner carried at least 70
different strands of marijuana in the West Hollywood dispensary. Petitioner failed
to identify which strands were among the marijuana confiscated by the DEA.
Petitioner did not provide any evidence regarding the amounts he paid for the
strands of marijuana or how he determined his selling prices for the various
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[*18] strands of marijuana. In addition to marijuana, the DEA also seized edibles
and marijuana plants. However, it is unclear whether petitioner is including costs
of these items in the $600,000. Because of his complete failure to substantiate the
value of the seized marijuana, petitioner is not entitled to claim $600,000 as part
of his Schedule C COGS. Additionally, if petitioner had provided substantiation,
the seized marijuana would still not be allowable as COGS because the marijuana
was confiscated and not sold. See Holt v. Commissioner, 69 T.C. 75, 78 (1977),
aff’d, 611 F.2d 1160 (5th Cir. 1980).
B. Section 165
Although it is not entirely clear from the pleadings, petitioner appears to
seek to deduct a section 165 loss for the marijuana seized by the DEA. In general,
section 165(a) allows a deduction for any loss sustained during the taxable year
and not compensated for by insurance or otherwise. Sec. 165(a). However,
section 280E provides that no deduction or credit (including a deduction pursuant
to section 165) shall be allowed for any amount paid or incurred in connection
with trafficking in a controlled substance. Holt v. Commissioner, 69 T.C. 75.
Therefore, petitioner is not entitled to a section 165 loss deduction for the
marijuana seized by the DEA.
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[*19] IV. Accuracy-Related Penalty
Respondent determined that petitioner is liable for an accuracy-related
penalty under section 6662(a). Section 6662(a) and (b)(1) imposes a 20% penalty
on an underpayment of tax required to be shown on a return if the underpayment is
attributable to a taxpayer’s negligence or disregard of rules or regulations.
Section 6662(c) defines negligence as including any failure to make a
reasonable attempt to comply with the provisions of the internal revenue laws.
Negligence has also been defined as the failure to exercise due care or the failure
to do what a reasonable and prudent person would do under the circumstances.
Neely v. Commissioner, 85 T.C. 934, 947 (1985). Negligence also includes any
failure by the taxpayer to keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. Section 6662(c) determines that
“disregard” includes any careless, reckless, or intentional disregard.
Section 6664(c)(1) provides an exception to the accuracy-related penalty if
it is shown that the taxpayer had reasonable cause and acted in good faith. Sec.
1.6664-4(b)(1), Income Tax Regs. The decision as to whether the taxpayer acted
with reasonable cause and in good faith depends upon all the pertinent facts and
circumstances. Higbee v. Commissioner, 116 T.C. 438, 448 (2001); see sec.
1.6664-4(b)(1), Income Tax Regs.
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[*20] The Commissioner bears the burden of production with respect to a
taxpayer’s liability for accuracy-related penalties and the burden of proof for
increased penalties asserted in the answer . See sec. 7491(c). To meet those
burdens, the Commissioner must produce sufficient evidence indicating that it is
appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. at 446-
447.
Petitioner intentionally destroyed most of the inventory and sales records
related to his AHHS dispensaries. The records petitioner ultimately provided to
respondent do not reconcile with the categories or amounts reported on
petitioner’s 2007 tax return. Petitioner has failed to keep and submit adequate
records to support his reported Schedule C expenses. Furthermore, petitioner has
failed to ascertain the proper treatment of his loss of any marijuana seized by the
DEA or substantiate his claim that the DEA seized $600,000 worth of marijuana
from the West Hollywood dispensary. Petitioner also undereported his income.
Therefore, we find petitioner’s underpayment negligent and petitioner lacking
reasonable cause or good faith. Accordingly, we sustain respondent’s imposition
of an accuracy-related penalty under section 6662(a) for the 2007 tax year.
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[*21] In reaching our holdings herein, we have considered all arguments the
parties made, and to the extent we did not mention them above, we conclude they
are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.
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T.C. Memo. 2015-206
UNITED STATES TAX COURT
CANNA CARE, INC., A CALIFORNIA NOT-FOR-PROFIT CORPORATION,Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5678-12. Filed October 22, 2015.
William R. McPike, for petitioner.
Randall G. Durfee and Sarah E. Sexton Martinez, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies in petitioner’s
Federal income tax of $229,473, $304,090, and $339,604 for 2006, 2007, and
2008, respectively. The issue for decision is whether respondent properly
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[*2] disallowed deductions for petitioner’s operating expenses pursuant to section
280E. 1
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. We incorporate
herein by this reference the stipulation of facts filed on March 16, 2015, with
attached exhibits.
When the petition was timely filed, petitioner’s principal place of business
was in Sacramento, California. 2
In 1996 California voters approved the Compassionate Use Act of 1996
(CUA) to ensure that seriously ill Californians had the right to obtain and use
marijuana for medical purposes. Cal. Health & Safety Code sec. 11362.5 (West
Unless otherwise indicated, all section references are to the Internal1
Revenue Code, as amended and in effect for the years at issue, and all Rulereferences are to the Tax Court Rules of Practice and Procedure.
This case was tried before Judge Diane L. Kroupa on February 24 and 25,2
2014. On June 16, 2014, Judge Kroupa retired from the Court. The Court issuedan order informing the parties of her retirement and proposing to reassign this caseto another judicial officer for purposes of preparing the opinion and entering thedecision based on the record of trial, or, alternatively, allowing the parties torequest a new trial. Pursuant to petitioner’s motion requesting a new trial, thiscase was submitted to Judge Robert P. Ruwe on August 18, 2014. On February 3,2015, the Court issued an order submitting the case to Judge Harry A. Haines fordisposition. On March 16 and 17, 2015, this case was tried again before JudgeHaines.
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[*3] 2007). In 2003 the Medical Marijuana Program Act was approved to promote
uniform and consistent application of the CUA, clarify the scope of its application,
and enhance patients’ and caregivers’ access to medical marijuana through
collective, cooperative cultivation projects. Id. secs. 11362.7-11362.9 (West
2007). The Federal Controlled Substances Act (CSA), however, classifies
marijuana as a schedule I controlled substance, and marijuana is a controlled
substance within the meaning of section 280E. Californians Helping to Alleviate
Med. Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173, 181 (2007); 21
C.F.R. sec. 1308.11(d)(22) (West 2007 & 2008).
Bryan and Lanette Davies are the parents of six children. Faced with
financial hardship compounded by his children’s mounting tuition expenses, Mr.
Davies turned to his faith for a solution. After much prayer, Mr. Davies was
convinced that God wanted him to open a medical marijuana dispensary to solve
his family’s financial woes.
Petitioner was incorporated under the laws of the State of California on July
5, 2005, and is in the business of distributing marijuana for medical purposes as
permitted by California law. Petitioner is a mutual benefit corporation, and,
pursuant to California law, is prohibited from distributing marijuana for profit.
See Cal. Health & Safety Code sec. 11362.765 (West 2007). At the time of its
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[*4] incorporation and for all years at issue, Mr. and Mrs. Davies and an
acquaintance, Jeff Cowen, were petitioner’s officers and directors.
In order to purchase medical marijuana from petitioner, an individual was
required to produce a written recommendation from a physician which was
verified by petitioner’s receptionist. Individuals were not charged a membership
fee and paid only for medical marijuana or other products (e.g., books, T-shirts,
and hats) that they purchased. Mr. Davies determined the price at which petitioner
would sell marijuana, but the method he used to determine the price is unclear
from the record.
During the years at issue petitioner occupied an approximately 2,250-
square-foot space in a business park. The lobby area was open to the general
public and had a table with medical marijuana pamphlets, legal information, and
free bibles. After petitioner’s receptionist verified their written physicians’
recommendations, individuals were allowed to walk down a hallway into the
locked sales area where marijuana was sold. The premises also had offices,
storage rooms, restrooms, and a break room with a kitchen.
Mrs. Davies and Ryan Landers used two of the offices during the years at
issue. Mr. Landers was a marijuana education activist. He and Mrs. Davies were
involved in educating the public on the different uses of cannabis, organized
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[*5] protests and rallies, and arranged for people to be present in court to show
support in marijuana-related cases. During the years at issue Mrs. Davies testified
at hearings before the California State Assembly and California State Senate on
pending medical marijuana legislation. She also testified at multiple city council
and board of county supervisor meetings, advocating opening access to medical
marijuana. Americans for Safe Access, an organization that supports the medical
use of marijuana, hosted meetings on petitioner’s premises every other week
during the years at issue. To accommodate larger meetings petitioner leased
additional adjacent space in 2008 which became known as “Crusaders Hall”.
Petitioner funded Mrs. Davies’ and Mr. Landers’ marijuana activist activities.
Mr. Davies held a daily prayer at 6 p.m. on petitioner’s premises. He, Mrs.
Davies, and other employees, including ordained minister Terry Lee Allen, Sr.,
were willing to listen to, comfort, and pray with individuals who sought their
counsel. During the years at issue no one associated with petitioner, including its
employees, officers, and directors, was a trained healthcare or caregiving
professional or had a substantial amount of experience in the healthcare industry.
At trial Mr. and Mrs. Davies emphasized petitioner’s community
involvement. Petitioner was involved with local cancer and diabetes walks, hosted
community barbecues, and held a holiday toy drive. Petitioner’s employees were
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[*6] not required to participate in these activities. Some employees would
occasionally volunteer to participate, and on other occasions employees would be
paid to participate during work hours. Mr. Davies also testified that petitioner was
a not-for-profit corporation, which to him meant that if there was money
remaining after petitioner paid wages and taxes, made necessary purchases, and
paid other expenses it would be given away. However, Mr. Davies said that
petitioner was usually “in the red” and that the owners usually had to contribute
additional money.
Petitioner had 10 employees in 2006 and 2007 and 6 employees in 2008.
Mr. Davies determined salaries. During the years at issue the shareholders’
salaries far exceeded the salaries paid to any other employees. Mr. Cowen was
paid $88,700, $152,900, and $144,000 during 2006, 2007, and 2008, respectively.
Mr. Davies was paid $79,200, $160,900, and $146,200 during 2006, 2007, and
2008, respectively. In addition to their salaries, petitioner made payments for its
shareholders’ automobiles in the amounts of $31,459, $24,609, and $23,942
during 2006, 2007, and 2008, respectively. Petitioner’s manager, its highest paid
nonshareholder employee, was paid $36,000, $55,600, and $52,000 in 2006, 2007,
and 2008, respectively. Mrs. Davies was paid $27,000, $66,480, and $74,000
during 2006, 2007, and 2008, respectively. Petitioner’s other employees made an
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[*7] average of $24,494.17, $12,173, and $12,314.29 during 2006, 2007, and
2008, respectively.
Petitioner filed timely tax returns for the years at issue, claiming deductions
for various expenses which respondent disallowed pursuant to section 280E in a
notice of deficiency mailed to petitioner on November 29, 2011.
OPINION
The sole issue in this case is whether respondent properly disallowed
petitioner’s deductions pursuant to section 280E. Petitioner bears the burden of
proving that respondent’s determination of the deficiencies set forth in the notice
of deficiency is incorrect. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933).
Section 162 generally allows a taxpayer to deduct ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business. Section 280E, however, is an exception to the general rule of section
162. It provides that
[n]o deduction * * * shall be allowed for any amount paid or incurredduring the taxable year in carrying on any trade or business if suchtrade or business (or the activities which comprise such trade orbusiness) consists of trafficking in controlled substances (within themeaning of schedule I and II of the Controlled Substances Act) whichis prohibited by Federal law or the law of any State in which suchtrade or business is conducted.
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[*8] The application of section 280E rests on the presence of three key elements:
(1) trade or business; (2) trafficking; and (3) a controlled substance. For ease of
discussion, we will address these elements in reverse order.
I. Controlled Substance
Drug Enforcement Administration regulations list marijuana as a schedule I
controlled substance for purposes of the CSA. 21 C.F.R. sec. 1308.11(d)(22).
Petitioner stipulated that it was in the business of distributing marijuana and that
marijuana was a controlled substance within the meaning of schedule I of the
CSA, prohibited by Federal law, during the years at issue.
Petitioner advances numerous arguments as to why marijuana should no
longer be considered a schedule I controlled substance. We reject these
arguments. Marijuana was a schedule I controlled substance during the years at
issue. As recently stated by the Court of Appeals for the Ninth Circuit, to which
an appeal in this case would lie: “[T]he only question Congress allows us to ask is
whether marijuana is a controlled substance ‘prohibited by Federal law.’ * * * If
Congress now thinks that the policy embodied in § 280E is unwise as applied to
medical marijuana sold in conformance with state law, it can change the statute.
We may not.” Olive v. Commissioner, 792 F.3d 1146, 1150 (9th Cir. 2015), aff’g
139 T.C. 19 (2012).
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[*9] II. Trafficking
Petitioner argues that its actions cannot be considered “trafficking” for
purposes of section 280E because its activities were not illegal under California
law. Petitioner claims that this conclusion is supported by memoranda issued by
the Department of Justice (DOJ) on October 19, 2009, and August 29, 2013, and
guidance issued by the Financial Crimes Enforcement Network (FinCEN) on
February 14, 2014.
We have previously held the sale of medical marijuana pursuant to
California law constitutes trafficking within the meaning of section 280E. Olive
v. Commissioner, 139 T.C. at 38 (“[A] California medical marijuana dispensary’s
dispensing of medical marijuana pursuant to the * * * [CUA] was ‘trafficking’
within the meaning of section 280E.”); CHAMP, 128 T.C. at 182. DOJ
memoranda and FinCEN guidance released after the years at issue that represent
exercises of prosecutorial discretion do not change the result in this case.
Petitioner regularly bought and sold marijuana. This activity constitutes
trafficking within the meaning of section 280E even when permitted by State law.
See CHAMP, 128 T.C. at 182.
- 10 -
[*10] III. Trade or Business
We find that petitioner engaged in the sale of marijuana. In CHAMP we
held that the taxpayer’s caregiving services and provision of medical marijuana
were separate trades or businesses for purposes of section 280E and that the
taxpayer could deduct the expenses attributable to its caregiving services. Id. at
173-174. Petitioner argues that the taxpayer in CHAMP was a single entity
involved in two distinct activities which have been misconstrued as two separate
businesses. Petitioner claims that the Tax Court erred in CHAMP in finding that
the taxpayer’s primary business was caregiving because an entity may not be a
caregiver under California law. Petitioner asserts that the taxpayer in CHAMP
was merely an entity doing charitable work.
Petitioner’s interpretation of CHAMP is incorrect. In CHAMP the taxpayer
operated a community center for members with debilitating diseases, including
AIDS and cancer. Id. at 174. The taxpayer’s “executive director had 13 years of
experience in health services as a coordinator of a statewide program that trained
outreach workers in AIDS prevention work.” Id. The services the taxpayer
provided included: five support groups that met weekly or biweekly; daily
lunches for low-income members; hygiene supplies; one-on-one consultations
with counselors to discuss benefits, health, housing, safety, and legal issues;
- 11 -
[*11] biweekly masseuse services; social events on Fridays and Saturdays;
monthly field trips; online access; encouraging members to participate in political
activities; and instructing members on various topics. Id. at 175-176. Members
paid the taxpayer a membership fee for the right to receive extensive services and
medical marijuana. Id. at 176. The membership fee was an amount the taxpayer’s
management estimated to be about equal to the cost of providing the foregoing
services and the cost of the fixed amount of medical marijuana the taxpayer
supplied to each of its members. Id.
CHAMP did not involve a determination as to whether the taxpayer
qualified as a “caregiver” for purposes of California law, but instead determined
that the taxpayer was involved in two distinct trades or businesses for purposes of
the application of section 280E. We determined that the taxpayer was involved in
two separate businesses--providing services and providing medical marijuana to
its members. The fact that we labeled the services the taxpayer provided as
“caregiving” is insignificant. We could have called them “social services” or
simply “services” and our conclusion would have remained the same.
The crucial determination in CHAMP was that the taxpayer was engaged in
two separate trades or businesses, and this is what allowed the taxpayer to deduct a
portion of its expenses. In order “to be engaged in a trade or business for purposes
- 12 -
[*12] of section 162, [a taxpayer] must be involved in the activity with continuity
and regularity and the taxpayer’s primary purpose for engaging in the activity must
be for income or profit.” Olive v. Commissioner, 139 T.C. at 41. The parties
stipulated that petitioner was in the business of distributing medical marijuana.
Aside from the sale of medical marijuana, petitioner’s only other source of income
was the sale of books, T-shirts, and other items. On the basis of the evidence
presented, we cannot determine what percentage of petitioner’s income was from
the sale of medical marijuana and what percentage was from the sale of other
items. Because of the parties’ stipulation, we find that the sale of medical
marijuana was petitioner’s primary source of income and that the sale of any other
item was an activity incident to its business of distributing medical marijuana. See
id. We find that petitioner was engaged in one business--the business of selling
medical marijuana.
California law prohibits the distribution of marijuana for profit, and it was
emphasized at trial and on brief that petitioner was not operated for profit. See
Cal. Health & Safety Code sec. 11362.765. Whether petitioner was operated in
accordance with California law’s restrictions on profiting from the distribution of
marijuana is not an issue before us, and it does not affect our finding that
petitioner was engaged in the business of distributing marijuana for purposes of
- 13 -
[*13] section 280E. There is no doubt that Mr. Davies incorporated petitioner to
produce income. In fact, it was clear from Mr. Davies’ testimony that he entered
into the medical marijuana business in order to cure his family’s financial
difficulties. Mr. Davies and the other shareholders received wages well in excess
of those paid to petitioner’s other employees, and the payment of such wages
would not have been possible if petitioner had not had income.
On the basis of the foregoing, we find that petitioner was involved in the
trade or business of trafficking in a controlled substance within the meaning of the
CSA that was prohibited by law during the years at issue. We hold that section
280E prohibits petitioner from deducting any amounts paid or incurred during the
years at issue in connection with its trade or business that respondent disallowed.
We have considered all remaining arguments the parties made, including
those in petitioner’s briefing, and, to the extent not addressed, we find them to be
irrelevant, moot or meritless.
To reflect the foregoing,
Decision will be entered for
respondent.
Office of Chief CounselInternal Revenue Service
memorandumNumber: 201531016Release Date: 7/31/2015
CC:ITA:B02PRENO-109562-15
UILC: 164.12-00, 280E.00-00
date: June 09, 2015
to: Gregory M. HahnAssociate Area Counsel -- Seattle (Group 1)Small Business/Self-Employed CC:SB:7:SEA:1
from: Thomas D. MoffittChief, Branch 2Office of Associate Chief Counsel(Income Tax and Accounting) CC:ITA:2
subject: Section 164, Section 280E, and the State of Washington Marijuana Excise Tax
This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.
ISSUE
How should a taxpayer who pays the State of Washington marijuana excise tax properly account for the expenditure for federal income tax purposes?
CONCLUSION
A taxpayer who paid the State of Washington marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property.
FACTS
On November 6, 2012, Initiative Measure No. 502 was approved in the State of Washington. This initiative authorized the state liquor control board to regulate and tax marijuana for persons 21 years of age and older. See generally Wash. Rev. Code Ann. chapter 69.50 (West 2015). Certain acts performed by validly licensed marijuana producers, validly licensed marijuana processors, and validly licensed marijuana
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retailers do not constitute criminal or civil offenses under Washington state law. Wash. Rev. Code Ann. §§ 69.50.366, 69.50.363, and 69.50.360 (West 2015).
After the passage of Initiative Measure No. 502, the State of Washington enacted excise taxes on marijuana producers, marijuana processors, and marijuana retailers. In relevant part, the law provides as follows:
Marijuana excise taxes—State liquor control board to review tax levels
(1) There is levied and collected a marijuana excise tax equal to twenty-five percent of the selling price on each wholesale sale in this state of marijuana by a licensed marijuana producer to a licensed marijuana processor or another licensed marijuana producer. This tax is the obligation of the licensed marijuana producer.
(2) There is levied and collected a marijuana excise tax equal to twenty-five percent of the selling price on each wholesale sale in this state of marijuana concentrates, useable marijuana, and marijuana-infused products by a licensed marijuana processor to a licensed marijuana retailer. This tax is the obligation of the licensed marijuana processor.
(3) There is levied and collected a marijuana excise tax equal to twenty-five percent of the selling price on each retail sale in this state of marijuana concentrates, useable marijuana, and marijuana-infused products. This tax is the obligation of the licensed marijuana retailer, is separate and in addition to general state and local sales and use taxes that apply to retail sales of tangible personal property, and is part of the total retail price to which general state and local sales and use taxes apply.
(4) All revenues collected from the marijuana excise taxes imposed under subsections (1) through (3) of this section shall be deposited each day in a depository approved by the state treasurer and transferred to the state treasurer to be credited to the dedicated marijuana fund.
(5) The state liquor control board shall regularly review the tax levels established under this section and make recommendations to the legislature as appropriate regarding adjustments that would further the goal of discouraging use while undercutting illegal market prices.
Wash. Rev. Code Ann. § 69.50.535 (West 2015).
LAW AND ANALYSIS
Section 280E of the Code provides:
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No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
For purposes of § 280E, marijuana is a Schedule I controlled substance under the Controlled Substances Act. Olive v. Commissioner, 139 T.C. 19, 38 (2012), appealdocketed, No. 13-70510 (9th Cir. Feb. 11, 2013).
Section 164(a) provides:
(a) General rule.--Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property taxes.(2) State and local personal property taxes.(3) State and local, and foreign, income, war profits, and excess profits taxes.(4) The GST tax imposed on income distributions.(5) The environmental tax imposed by section 59A.(6) Qualified motor vehicle taxes.
In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.
(Emphasis added.) The last sentence of section 164(a) was added by section 134(a)(2) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2116, to make it clear that State, local, or foreign taxes (other than the taxes enumerated in § 164(a)) that are incurred in a trade or business or in an income-producing activity and that are connected with the acquisition or disposition of property are to be capitalized. Sleiman v. Commissioner, T.C. Memo. 1997-530, aff’d, 187 F.3d 1352 (11th Cir. 1999); Sandy Lake Rd. Ltd. P’ship v. Commissioner, T.C. Memo. 1997-295.
We interpret the State of Washington marijuana excise tax to be a tax paid or accrued in connection with the disposition of property by a trade or business. Accordingly,
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pursuant to § 164(a), a taxpayer who paid the marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property rather than as either a part of the inventoriable cost of that property or a deduction from gross income.1 Though § 280E prohibits deductions and credits for these businesses, this excise tax is neither a deduction from gross income nor a tax credit. Consequently, § 280E does not preclude a taxpayer from accounting for this excise tax as a reduction in the amount realized on the sale of the property.
Please call Robert Basso at (202) 317-7011 if you have any questions.
1
We note that there could be an issue of whether economic performance has occurred if a taxpayer who uses an accrual method of accounting has not paid the marijuana excise tax. See Treas. Reg. § 1.461-4(g)(6).
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Special NoticeWASHINGTON STATE DEPARTMENT OF REVENUE
Temporary Sales and Use Tax Exemptions for Medical Marijuana from Collective Gardens
A new law provides a temporary sales and use tax exemption to collective gardens and some individuals participating in collective gardens (Second Engrossed Second Substitute House Bill (2E2SHB) 2136 (Chapter 4, Laws of 2015)).
Who qualifies
� Collective gardens
� Qualifying patients and designated providers participating in collective gardens (RCW 69.51A.010)
Marijuana sales by collective gardensFrom July 1, 2015 until June 30, 2016, sales of certain products by collective gardens to qualifying patients and designated providers are exempt from retail sales tax.
Exempt products include:
� Marijuana products: marijuana, marijuana concentrates, useable marijuana, and marijuana infused products (RCW 69.50.101)
� Low-THC products: products containing THC with a THC concentration of 0.3 percent or less that when used as intended are inhalable, ingestible, or absorbable
Collective gardens making sales under this exemption must report their gross sales, and then report a “Sales of Marijuana by Collective Gardens” deduction on their tax return.
Marijuana use by collective gardens, qualifying patients and designated providers
From July 1, 2015 until June 30, 2016, use of marijuana products and low-THC products by collective gardens, qualifying patients and designated providers participating in collective gardens are exempt from use tax.
This includes donations of marijuana products or low-THC products by collective gardens to qualifying patients and designated providers.
All use must be in compliance with Chapter 69.51A RCW to qualify for the exemption.
No B&O tax exemptionCollective gardens must still pay retailing B&O tax on all their retail sales of marijuana products, low-THC products, and all other goods. Collective gardens also owe manufacturing B&O tax on processing or manufacturing of these products.
A Multiple Activities Tax Credit may be claimed so that B&O tax is only paid under one classification for the same product (WAC 458-20-19301).
JULY 9, 2015
Requirements for collective gardensUntil July 1, 2016, qualifying patients and designated providers that create and participate in collective gardens must follow all of the conditions in RCW 69.51A.085:
� No more than 10 qualifying patients or designated providers may participate in a collective garden at any time
� No one under 21 may participate in a collective garden or receive marijuana that was produced, processed, transported, or delivered through a collective garden. A designated provider for someone under 21 may participate in a collective garden for that person
� A collective garden may contain up to 15 plants per patient, up to 45 plants total
� A collective garden may contain up to 24 ounces of useable marijuana per patient, up to 72 ounces total
� A copy of each qualifying patient’s authorization, including a copy of the patient’s proof of identity, must be available at all times on the premises
� No useable marijuana from the collective garden is delivered to anyone other than one of the qualifying patients participating in the collective garden
All sales of marijuana products and low-THC products must be in compliance with Chapter 69.51A RCW and meet the above requirements to qualify for the exemption. Each collective garden must maintain information establishing eligibility for the exemption.
When retail sales or use tax still is required Qualifying patients and designated providers must pay retail sales or use tax on marijuana products or low-THC products from an ineligible collective garden.
Sales by all collective gardens of items not covered by the exemption remain subject to retail sales and use tax. These items include paraphernalia, clothing, posters and memorabilia.
Collective gardens to be eliminated in 2016A new law eliminates collective gardens after June 30, 2016 (Engrossed Second Substitute Senate Bill (E2SSB) 5052 (Chapter 70, Laws of 2015).
For more information
� Collective gardens and medical marijuana, from the Department of Health: doh.wa.gov/YouandYourFamily/Marijuana/MedicalMarijuana
� The Liquor Control Board (now called Liquor and Cannabis Board) and its role under the new law: lcb.wa.gov/mj2015/cppa-impact
� Department of Revenue’s website on medical marijuana: dor.wa.gov/medicalmarijuana
PO BOX 47478 | OLYMPIA, WASHINGTON 98504-7478 | 1-800-647-7706 | DOR.WA.GOV
For tax assistance or to request this document in an alternate format, visit http://dor.wa.gov or call 1-800-647-7706. Teletype (TTY) users may use the Washington Relay Service by calling 711.
Office of Chief CounselInternal Revenue Service
MemorandumNumber: 201504011Release Date: 1/23/2015
CC:ITA:6 – LFNolanIIPOSTS-125750-13
UILC: 280E.00-00, 61.00-00, 263A.00-00, 446.00-00, 446.01-00, 471.00-00
date: December 10, 2014
to: Matthew A. HoutsmaAssociate Area Counsel (Small Business/Self-Employed)CC:SB:5:Den:2
from: W. Thomas McElroy, Jr.Senior Technician ReviewerOffice of Associate Chief Counsel (Income Tax & Accounting)CC:ITA:6
subject: Taxpayers Trafficking in a Schedule I or Schedule II Controlled Substance --Capitalization of Inventoriable Costs
This advice responds to your request for assistance. This advice may not be used or cited as precedent.
ISSUES
(1) How does a taxpayer trafficking in a Schedule I or Schedule II controlled substance determine cost of goods sold (“COGS”) for the purposes of §280E of the Internal Revenue Code (“Code”)?
(2) May Examination or Appeals require a taxpayer trafficking in a Schedule I or Schedule II controlled substance to change to an inventory method for that controlled substance when the taxpayer currently deducts otherwise inventoriable costs from gross income?
CONCLUSION
(1) A taxpayer trafficking in a Schedule I or Schedule II controlled substance determines COGS using the applicable inventory-costing regulations under §471 as they existed when §280E was enacted.
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(2) Yes, unless the taxpayer is properly using a non-inventory method to account for the Schedule I or Schedule II controlled substance pursuant to the Code, Regulations, or other published guidance.
BACKGROUND
In the Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. §801–971 (1970), (“Controlled Substances Act” or “CSA”), Congress created a regime to curtail the unlawful manufacture, distribution, and abuse of dangerous drugs (“controlled substances”). Congress assigned each controlled substance to one of five lists (Schedule I through Schedule V). See §812 of the CSA. Schedule I includes: (a) opiates; (b) opium derivatives (e.g., heroin; morphine); and (c) hallucinogenic substances (e.g., LSD; marihuana (a/k/a marijuana); mescaline; peyote).
Though a medical marijuana business is illegal under federal law, it remains obligated to pay federal income tax on its taxable income because §61(a) does not differentiate between income derived from legal sources and income derived from illegal sources. See, e.g., James v. United States, 366 U.S. 213, 218 (1961). Under the Sixteenth Amendment of the United States Constitution (“Sixteenth Amendment”), Congress is authorized to lay and collect taxes on income. In a series of cases, the United States Supreme Court has held that income in the context of a reseller or producer means gross income, not gross receipts. In other words, Congress may not tax the return of capital. See, e.g., Doyle v Mitchell Bros. Co., 247 U.S. 179, 185 (“As was said in Stratton’s Independence v. Howbert, [citation omitted], ‘Income may be defined as the gain derived from capital, from labor, or from both combined.’”); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) (“The power to tax income like that of the new corporation is plain and extends to the gross income. Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.”).
Section 61(a) defines “gross income” broadly using 15 examples of items that are includible in gross income. Consistent with the Sixteenth Amendment, §61(a)(3) provides that gross income includes net gains derived from dealings in property, which includes controlled substances produced or acquired for resale. “Gains derived from dealings in property” means gross receipts less COGS, which is the term given to the adjusted basis of merchandise sold during the taxable year. Section 1.61-3(a) of the Income Tax Regulations. See also §§1001(a); 1011(a); 1012(a). As the Tax Court explained in Reading v. Commissioner, 70 T.C. 730, 733 (1978), “[t]he ‘cost of goods sold’ concept embraces expenditures necessary to acquire, construct or extract a physical product which is to be sold; the seller can have no gain until he recovers the economic investment that he has made directly in the actual item sold.” A taxpayer derives COGS using the following formula: beginning inventories plus current-year production costs (in the case of a producer) or current-year purchases (in the case of a reseller) less ending inventories. In general, the taxpayer first determines gross income by subtracting COGS from gross receipts, and then determines taxable income by
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subtracting all ordinary and necessary business expenses (e.g., §162(a)) from gross income.
In 1981, the Tax Court allowed an illegal business to recover the cost of the controlled substances (i.e., amphetamines; cocaine; marijuana) obtained on consignment and also to claim certain business deductions (a portion of the rent he paid on his apartment which was his sole place of business, the cost of a small scale, packaging expenses, telephone expenses, and automobile expenses). See Jeffrey Edmondson v. Commissioner, T.C. Memo. 1981-623.
In 1982, Congress enacted §280E, which reverses the holding in Edmondson as it relates to deductions other than the cost of the controlled substances. Section 280E reads as follows:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Under Explanation of Provision, the Senate Report reads as follows:
All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.
S. REP. NO. 97-494 (Vol. I), at 309 (1982). The Senate bill was adopted in conference. CONF. REP. NO. 97-760, at 598 (1982), 1982-2 C.B. 661.
When enacting §280E, Congress exercised its authority to withhold the legislative grace mentioned in New Colonial Ice Co., supra. It is important to understand that §280E even disallows a deduction for expenses that are not illegal per se (e.g., salaries; rent; telephone). Thus, §280E has a greater reach than §162(c), which disallows a deduction for specified illegal payments (e.g., bribes; kickbacks).
When §280E was enacted, taxpayers using an inventory method were subject to the inventory-costing regulations under §471. Specifically, resellers were subject to §1.471-3(b), and producers were subject to §§1.471-3(c) and 1.471-11 (“full-absorption regulations”).
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Four years after enacting §280E, Congress enacted the Tax Reform Act of 1986, which added the uniform capitalization rules of §263A to the Code. Under §263A(a), resellers and producers of merchandise are required to treat as inventoriable costs the direct costs of property purchased or produced, respectively, and a proper share of those indirect costs that are allocable (in whole or in part) to that property. Flush language at the end of §263A(a)(2) provides, “Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.”
The flush language at the end of §263A(a)(2) was added by §1008(b)(1) of the Technical and Miscellaneous Revenue Act of 1988 (“TAMRA”)1 (P.L. 100-647), reprinted in 1988 U.S.C.C.A.N. 4621, as a retroactive, technical correction. Under Explanation of Provision, the Senate Report reads as follows:
The bill also clarifies that a cost is subject to capitalization under this provision only to the extent it would otherwise be taken into account in computing taxable income for any taxable year. Thus, for example, the portion of a taxpayer’s interest expense that is allocable to personal loans, and hence is disallowed under section 163(h), may not be included in a capital or inventory account and recovered through depreciation or amortization deductions, as a cost of sales, or in any other manner.
S. Rep. No. 100-445, at 104 (1988).
The Tax Court has tried a few cases involving taxpayers that sell medical marijuana. In the seminal case in this area, the Tax Court held that the taxpayer trafficked in medical marijuana, which is a Schedule I controlled substance, and that §280E disallows all deductions attributable to that trade or business. The Tax Court also held, however, that §280E does not disallow the deductions attributable to the taxpayer’s separate and lawful trade or business. Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner, 128 T.C. 173 (2007) (“CHAMP”). In CHAMP, the government conceded that §280E does not prohibit a taxpayer from claiming COGS. Id. at 178, n. 4. In other cases involving nonmedical marijuana or other Schedule I controlled substances, the Tax Court recognized that §280E does not disallow adjustments to gross receipts for COGS. See, e.g., Peyton v. Commissioner, T.C. Memo. 2003-146; Franklin v. Commissioner, T.C. Memo. 1993-184; McHan v. Commissioner, T.C. Memo. 2006-84.
Applied literally, §280E severely penalizes taxpayers that traffic in a Schedule I or Schedule II controlled substance but don’t use an inventory method for the controlled substance. When required to use an inventory method, a taxpayer also is required to use an accrual method for purchases and sales of merchandise. See §§1.471-1; 1.446-
1 TAMRA began as the Technical Corrections Act of 1988 (S. 2238) and the Miscellaneous Revenue Bill of 1988 (H.R. 4333).
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1(c)(2)(i). But see §1.61-4(b).2 Thus, the taxpayer will capitalize inventoriable costs when incurred and will remove these costs from inventory when units of merchandise are sold. Stated differently, the taxpayer will compute COGS as an adjustment to gross receipts. On the other hand, when not required to use an inventory method, a taxpayer might be permitted to use the cash method. See, e.g., §446(c)(1). See also Rev. Proc. 2001-10, 2001-1 C.B. 272; Rev. Proc. 2002-28, 2002-1 C.B. 815. Under the modified cash method as described in Rev. Proc. 2001-10 and Rev. Proc. 2002-28, a reseller may account for merchandise as “inventories” or as “materials and supplies that are not incidental.” See §1.162-3 (a)(1). When a unit of merchandise is sold, the reseller will account for that cost as a deduction from gross income in the taxable year that the unit is sold or the payment is received, whichever is later. Similarly, a cash-method producer or farmer will deduct production expenses from gross income in the taxable year paid and, thus, will have no basis in the merchandise that it eventually sells. In the case of a cash-method reseller, producer, or farmer, the obligation to pay an income tax on gains derived from the sale of a controlled substance creates a tension between the accepted interpretation of “income” under the Sixteenth Amendment and §280E, which disallows all deductions of a trade or business trafficking in a Schedule I or Schedule II controlled substance.
ANALYSIS
ISSUE 1: How does a taxpayer trafficking in a Schedule I or Schedule II controlledsubstance determine COGS for the purposes of §280E?
To resolve this issue, we will consider: (1) when and how an item becomes an inventoriable cost; (2) what Congress intended to include within the meaning of inventoriable costs when they enacted §280E; and (3) whether Congress changed their definition when they enacted §263A.
To be deductible by a business enterprise, a business expense (e.g., salaries; rent) must be “ordinary and necessary” within the meaning of §162 and must satisfy the timing requirements of §461. Once these requirements are satisfied, the amount of that expense is deducted in the current taxable year, unless another provision of the Code or regulations requires this deduction to be deferred to a subsequent taxable year, capitalized to an asset, or disallowed entirely. See, e.g., §§267(a)(2); 471(a); 263A(a); 280E. For example, in the case of a producer of property, inventory-costing rules typically require the capitalization of costs that are “incident to and necessary for production or manufacturing operations or processes” (e.g., §1.471-11(b)(1)) or costs that “can be identified or associated with particular units or groups of units of specific property produced” (e.g., §1.263A-1(e)(2)). Thus, when one of these inventory-costing regulations applies, a producer must capitalize, as an inventoriable cost, what otherwise
2 The rule that applies to farmers is different from the rule that applies to producers and resellers. A farmer using an overall accrual method also must use an inventory method because of its use of an accrual method.
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would have been a deduction under §162 and must keep that cost in inventories until the taxable year that the producer sells the merchandise. At that point, the producer includes those costs in COGS and accounts for COGS as an adjustment to gross receipts.
As noted above, the legislative history of section 280E states that “[t]o preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.” When §280E was enacted in 1982, “inventoriable cost” meant a cost that was capitalized to inventories under §471 (as those regulations existed before the enactment of §263A). The specific regulations are §1.471-3(b) in the case of a reseller of property and §§1.471-3(c) and 1.471-11 in the case of a producer of property. Thus, a marijuana reseller using an inventory method would have capitalized the invoice price of the marijuana purchased, less trade or other discounts, plus transportation or other necessary charges incurred in acquiring possession of the marijuana. Similarly, a marijuana producer using an inventory method would have capitalized direct materialcosts (marijuana seeds or plants), direct labor costs (e.g., planting; cultivating; harvesting; sorting), Category 1 indirect costs (§1.471-11(c)(2)(i)), and possibly Category 3 indirect costs (§1.471-11(c)(2)(iii)).
Section 263A increased the types of costs that are inventoriable compared to the rules under §471, but did not revolutionize inventory costing. A reseller still is required to treat the acquisition costs of property as inventoriable. Now, a reseller also is required to capitalize purchasing, handling, and storage expenses. In addition, both resellers and producers are required to capitalize a portion of their service costs, such as the costs associated with their payroll, legal, personnel functions. Thus, under §263A, resellers and producers of property are required to treat some deductions as inventoriable costs.
Section 263A is a timing provision. It does not change the character of any expense from “nondeductible” to “deductible,” or vice versa. For a taxpayer to be permitted to treat an expense as an inventoriable cost, that expense must not run afoul of the flush language at the end of §263A(a)(2) — “Any cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.” See §1.263A-1(c)(2)(i).
Read together, §280E and the flush language at the end of §263A(a)(2) prevent a taxpayer trafficking in a Schedule I or Schedule II controlled substance from obtaining a tax benefit by capitalizing disallowed deductions. Congress did not repeal or amend §280E when it enacted §263A. Furthermore, nothing in the legislative history of §263A suggests that Congress intended to permit a taxpayer to circumvent §280E by treating a disallowed deduction as an inventoriable cost or as any other type of capitalized cost. In fact, the legislative history of §263A(a)(2) states that “a cost is subject to capitalization . . . only to the extent it would otherwise be taken into account in computing taxable income for any taxable year.” If a taxpayer subject to §280E were allowed to capitalize “additional §263A costs,” as defined for new taxpayers in §1.263A-
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POSTS-125750-13 7
1(d)(3),3 §263A would cease being a provision that affects merely timing and would become a provision that transforms non-deductible expenses into capitalizable costs. Thus, we have concluded that a taxpayer trafficking in a Schedule I or Schedule II controlled substance is entitled to determine inventoriable costs using the applicable inventory-costing regulations under §471 as they existed when §280E was enacted.
ISSUE 2: May Examination or Appeals require a taxpayer trafficking in a Schedule I or Schedule II controlled substance to change to an inventory method for that controlled substance when the taxpayer deducts otherwise inventoriable costs from gross income?
A cash-method producer of a Schedule I or Schedule II controlled substance, such as marijuana, typically will deduct all production costs in the taxable year paid and, thus, will not have any adjusted basis in the product that it produces. When §280E is applied in the case of a producer trafficking in a Schedule I or Schedule II controlled substance, and all deductions from gross income are disallowed, the producer’s taxable income for each taxable year will be significantly higher than what it would have been if the producer had used a permissible inventory method and recouped its production costs through COGS. Furthermore, the producer will not be able to take those disallowed production costs into account in any future taxable year. Thus, in this scenario, the overall cash method does not clearly reflect income because of the operation of §280E.4 Stated differently, even a producer trafficking in a Schedule I or Schedule II controlled substance is subject to tax on “gains derived from dealings in property,” not on gross receipts. Section 61(a)(3). This rule regarding “gains derived from dealings in property” applies equally to a reseller trafficking in a Schedule I or Schedule II controlled substance.
In our view, Examination and Appeals have the authority under §446(b) to require a taxpayer to change from a method of accounting that does not clearly reflect income to a method that does clearly reflect income regardless of whether that change results in a positive or negative §481(a) adjustment.5 When a producer or reseller of a Schedule I
3 Section 1.263A-1(d)(3) provides, in part, “For new taxpayers, additional section 263A costs are defined as the costs, other than interest, that the taxpayer must capitalize under section 263A, but which the taxpayer would not have been required to capitalize if the taxpayer had been in existence prior to the effective date of section 263A.”4 In addition, the overall cash method might not clearly reflect income because of §1.61-4(b) or §1.471-1.5 Section 446(b) provides that if no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income. The Commissioner has broad discretion to determine whether a taxpayer's method of accounting clearly reflects income, and the Commissioner's determination must be upheld unless it is clearly unlawful. See Thor
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POSTS-125750-13 8
or Schedule II controlled substance uses a method of accounting that causes a tax result contrary to the Sixteenth Amendment, to §61(a)(3), and to the legislative history of §280E, the proper exercise of the above-mentioned authority is warranted. Section 446(b). See also Rev. Proc. 2002-18. See also IRM 4.11.6.7.1 (05-13-2005). Consequently, if a producer or reseller of a Schedule I or Schedule II controlled substance is deducting from gross income the types of costs that would be inventoriable if that taxpayer were properly using an inventory method under § 471, it is an appropriate exercise of authority for Examination or Appeals to require that taxpayer to use an inventory method, to use the applicable inventory-costing regime (as discussed under Issue (1) of this memo), and to change from the overall cash method to an overall accrual method.6 However, if that taxpayer is not required to use an inventory method (for example, small taxpayers properly using the modified cash method under Rev. Proc. 2001-10 or Rev. Proc. 2002-28 or farmers), it is not an appropriate exercise of authority for Examination or Appeals to require that taxpayer to use an inventory method. Instead, Examination or Appeals should permit that taxpayer to continue recovering, as a return of capital deductible from gross income, the same types of costs that are properly recoverable by a taxpayer both trafficking in a Schedule I or Schedule II controlled substance and using an inventory method under § 471. Thus, for example, a producer of a Schedule I or Schedule II controlled substance should be permitted to deduct wages, rents, and repair expenses attributable to its production activities, but should not be permitted to deduct wages, rents, or repair expenses attributable to its general business activities or its marketing activities.
Please call Leo F. Nolan II or Amy Wei at (202) 317-7007 (not a toll-free number) if you have any questions.
Power Tool Co. v. Commissioner, 439 U.S. 522 (1979); RCA Corp. v. United States, 664 F.2d 881 (2d Cir. 1981), cert. denied, 457 U.S. 1133 (1982).6 The §481(a) adjustment required to implement this method change does not include any amount attributable to non-inventoriable costs disallowed under §280E in any taxable year.
Doc 2015-1731 (8 pgs)
FOR PUBLICATION
UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT
MARTIN OLIVE,Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,Respondent-Appellee.
No. 13-70510
Tax Ct. No.14406-08
OPINION
Appeal from a Decision of theUnited States Tax Court
Diane Kroupa, Tax Court Judge, Presiding
Argued and SubmittedApril 16, 2015—San Francisco, California
Filed July 9, 2015
Before: Alex Kozinski and Susan P. Graber, CircuitJudges, and Dee V. Benson,* Senior District Judge.
Opinion by Judge Graber
* The Honorable Dee V. Benson, Senior United States District Judge forthe District of Utah, sitting by designation.
OLIVE V. CIR2
SUMMARY**
Tax
The panel affirmed the Tax Court’s decision assessingdeficiencies and penalties arising from taxpayer’s operationof a medical marijuana dispensary in San Francisco.
The panel affirmed the Tax Court’s conclusion that26 U.S.C. § 280E precluded taxpayer from deducting anyamount of ordinary or necessary business expenses associatedwith operation of the Vapor Room dispensary because it is a“trade or business . . . consist[ing] of trafficking in controlledsubstances . . . prohibited by Federal law.”
COUNSEL
Henry G. Wykowski (argued), Henry G. Wykowski &Associates, San Francisco, California, for Petitioner-Appellant.
Kathryn Keneally, Assistant Attorney General, and RichardFarber (argued) and Patrick Urda, Attorneys, Tax Division,United States Department of Justice, Washington, D.C., forRespondent-Appellee.
** This summary constitutes no part of the opinion of the court. It hasbeen prepared by court staff for the convenience of the reader.
OLIVE V. CIR 3
OPINION
GRABER, Circuit Judge:
Petitioner Martin Olive appeals the Tax Court’s decisionassessing deficiencies and penalties for tax years 2004 and2005, which arise from Petitioner’s operation of the VaporRoom Herbal Center (“Vapor Room”), a medical marijuanadispensary in San Francisco. The Tax Court held, amongother things, that 26 U.S.C. (I.R.C.) § 280E precludedPetitioner from deducting any amount of ordinary ornecessary business expenses associated with operation of theVapor Room because the Vapor Room is a “trade or business. . . consist[ing] of trafficking in controlled substances . . .prohibited by Federal law.” I.R.C. § 280E. Reviewing thatlegal conclusion de novo, DHL Corp. v. Comm’r, 285 F.3d1210, 1216 (9th Cir. 2002), we agree and, therefore, affirmthe Tax Court’s decision.
Established in 2004, the Vapor Room provides its patronsa place where they can socialize, purchase medical marijuana,and consume it using the Vapor Room’s vaporizers.1 TheVapor Room sells medical marijuana in three forms: driedmarijuana leaves, edibles, and a concentrated version of THC. Customers who purchase marijuana at the Vapor Room payvarying costs, depending on the quantity and quality of theproduct and on the individual customer’s ability to pay.
The Vapor Room is set up much like a community center,with couches, chairs, and tables located throughout the
1 A “vaporizer” is an apparatus that extracts from marijuana its principalactive component, tetrahydrocannabinol or “THC.” Using a vaporizerallows the user to inhale vapor instead of smoke.
OLIVE V. CIR4
establishment. Games, books, and art supplies are availablefor patrons’ general use. The Vapor Room also offersservices such as yoga, movies, and massage therapy. Customers can drink complimentary tea or water during theirvisits, or they can eat complimentary snacks, including pizzaand sandwiches. The Vapor Room offers these activities andamenities for free.
Each of the Vapor Room’s staff members is permittedunder California law to receive and consume medicalmarijuana. Petitioner purchases, for cash, the Vapor Room’sinventory from licensed medical marijuana suppliers. Patronswho visit the Vapor Room can buy marijuana and use thevaporizers at no charge, or they can use the vaporizers (again,at no charge) with marijuana that they bought elsewhere. Sometimes, staff members or patrons sample Vapor Roominventory for free. When staff members interact withcustomers, occasionally one-on-one, they discuss illnesses;provide counseling on various personal, legal, or politicalmatters related to medical marijuana; and educate patrons onhow to use the vaporizers and consume medical marijuanaresponsibly. All these services are provided to patrons at nocharge.
Petitioner filed business income tax returns for tax years2004 and 2005, which reported the Vapor Room’s net incomeduring those years as $64,670 and $33,778, respectively. Although Petitioner reported $236,502 and $417,569 inVapor Room business expenses for 2004 and 2005, the TaxCourt concluded that § 280E of the Internal Revenue Codeprecluded Petitioner from deducting any of those expenses. Petitioner timely appeals.
OLIVE V. CIR 5
The Internal Revenue Code provides that, for the purposeof computing taxable income, an individual’s or a business’s“gross income” includes “all income from whatever sourcederived,” including “income derived from business.” I.R.C.§ 61(a)(2). The Code further allows a business to deductfrom its gross income “all the ordinary and necessaryexpenses paid or incurred during the taxable year in carryingon [the] trade or business.” Id. § 162(a). But there areexceptions to § 162(a). See, e.g., id. §§ 261–280H (listing“Items Not Deductible”). One such exception applies whenthe “amount paid or incurred during the taxable year” is forthe purpose of “carrying on any trade or business . . .consist[ing] of trafficking in controlled substances.” Id.§ 280E. Although the use and sale of medical marijuana arelegal under California state law, see Cal. Health & SafetyCode § 11362.5, the use and sale of marijuana remainprohibited under federal law, see 21 U.S.C. § 812(c).
We turn first to the text of I.R.C. § 280E. See Blue LakeRancheria v. United States, 653 F.3d 1112, 1115 (9th Cir.2011) (holding that statutory interpretation begins with thestatute’s text). To determine whether Petitioner may deductthe expenses associated with the Vapor Room, then, we mustdecide whether the Vapor Room is a “trade or business [that]consists of trafficking in controlled substances . . . prohibitedby Federal law.” We start with the phrase “trade orbusiness.”
The test for determining whether an activity constitutes a“trade or business” is “whether the activity ‘was entered intowith the dominant hope and intent of realizing a profit.’” United States v. Am. Bar Endowment, 477 U.S. 105, 110 n.1(1986) (quoting Brannen v. Comm’r, 722 F.2d 695, 704 (11thCir. 1984)); see also Vorsheck v. Comm’r, 933 F.2d 757, 758
OLIVE V. CIR6
(9th Cir. 1991) (per curiam) (applying the same standard to§ 162(a) deductions). The parties agree, and the Tax Courtfound, that the only income-generating activity in which theVapor Room engaged was its sale of medical marijuana. Theother services that the Vapor Room offered—including,among other things, the provision of vaporizers, food anddrink, yoga, games, movies, and counseling—were offered toits patrons at no cost to them. The only activity, then, that theVapor Room “entered into with the dominant hope and intentof realizing a profit,” Am. Bar Endowment, 477 U.S. at 110n.1, was the sale of medical marijuana. Accordingly,Petitioner’s “trade or business,” for § 162(a) purposes, waslimited to medical marijuana sales.
Given the limited scope of Petitioner’s “trade orbusiness,” we conclude that the business “consist[ed] oftrafficking in controlled substances . . . prohibited by Federallaw.” The income-generating activities in which the VaporRoom engaged consisted solely of trafficking in medicalmarijuana which, as noted, is prohibited under federal law. Under § 280E, then, the expenses that Petitioner incurred inthe course of operating the Vapor Room cannot be deductedfor federal tax purposes.
Petitioner’s argument relies primarily on the phrase“consists of,” rather than on the phrase “trade or business.” According to Petitioner, the use of the words “consists of” ismost appropriate “when a listing is meant to be exhaustive”;the word “consisting,” he argues, is not synonymous with theword “including.” Relying on that proposition, Petitionercontends that, for § 280E purposes, a business “consists of”a service only when that service is the sole service that thebusiness provides. Because the Vapor Room providescaregiving services and sells medical marijuana, Petitioner
OLIVE V. CIR 7
concludes that his business does not “consist of” either onealone and therefore does not fall within the ambit of § 280E.
To support that line of reasoning, Petitioner cites the TaxCourt’s decision in Californians Helping to Alleviate MedicalProblems, Inc. v. Commissioner (CHAMP), 128 T.C. 173(2007). His reliance on CHAMP is misplaced. In CHAMP,the petitioner’s income-generating business included theprovision not only of medical marijuana, but also of“extensive” counseling and caregiving services. Id. at 175. The Tax Court noted that the business’s “primary purposewas to provide caregiving services to its members” and thatits “secondary purpose was to provide its members withmedical marijuana.” Id. at 174. The court found, afterconsidering the “degree of economic interrelationshipbetween the two undertakings,” that the petitioner wasinvolved in “more than one trade or business.” Id. at 183. That is not the case here. Petitioner does not providecounseling, caregiving, snacks, and so forth for a separate fee;the only “business” in which he engages is selling medicalmarijuana.
An analogy may help to illustrate the difference betweenthe Vapor Room and the business at issue in CHAMP. Bookstore A sells books. It also provides somecomplimentary amenities: Patrons can sit in comfortableseating areas while considering whether to buy a book; theycan drink coffee or tea and eat cookies, all of which thebookstore offers at no charge; they can obtain advice from thestaff about new authors, book clubs, community events, andthe like; they can bring their children to a weekend story timeor an after-school reading circle. The “trade or business” ofBookstore A “consists of” selling books. Its many amenitiesdo not alter that conclusion; presumably, the owner hopes to
OLIVE V. CIR8
attract buyers of books by creating an alluring atmosphere. By contrast, Bookstore B sells books but also sells coffee andpastries, which customers can consume in a cafe-like seatingarea. Bookstore B has two “trade[s] or business[es],” one ofwhich “consists of” selling books and the other of which“consists of” selling food and beverages.
Petitioner’s arguments related to congressional intent andpublic policy are similarly unavailing. He contends thatI.R.C. § 280E should not be construed to apply to medicalmarijuana dispensaries because those dispensaries did notexist when Congress enacted § 280E. Congress added thatprovision, he maintains, to prevent street dealers from takinga deduction. According to Petitioner, Congress could nothave intended for medical marijuana dispensaries, now legalin many states, to fall within the ambit of “items notdeductible” under the Internal Revenue Code. We are notpersuaded.
That Congress might not have imagined what some stateswould do in future years has no bearing on our analysis. It iscommon for statutes to apply to new situations. And here,application of the statute is clear. See Chamber of Commerceof U.S. v. Whiting, 131 S. Ct. 1968, 1980 (2011) (stating that“Congress’s authoritative statement is the statutory text”(internal quotation marks omitted)). Application of thestatute does not depend on the illegality of marijuana salesunder state law; the only question Congress allows us to askis whether marijuana is a controlled substance “prohibited byFederal law.” I.R.C. § 280E. If Congress now thinks that thepolicy embodied in § 280E is unwise as applied to medicalmarijuana sold in conformance with state law, it can changethe statute. We may not.
OLIVE V. CIR 9
Finally, for three reasons, we are not persuaded byPetitioner’s argument that section 538 of the Consolidatedand Further Continuing Appropriations Act, 2015, Pub. L.No. 113-235, 128 Stat. 2130, precludes the government fromcontinuing to defend Petitioner’s appeal. First, statements bya later Congress do not inform us about the intent of aprevious Congress. See Mackey v. Lanier Collection Agency& Serv., Inc., 486 U.S. 825, 840 (1988) (“The views of asubsequent Congress form a hazardous basis for inferring theintent of an earlier one.” (internal quotation marks andbrackets omitted)). Second, a decision not to expend funds toenforce a particular statute says nothing about the meaning ofthat statute. “What one house of Congress thinks, in the2010s, about enforcement priorities for the agency is entirelyuninformative about the intent of Congress when it enacteda statute in [an earlier year].” Navarro v. Encino Motorcars,LLC, 780 F.3d 1267, 1277 n.5 (9th Cir. 2015). Third, section538 does not apply. It provides that certain funds may not beused to prevent states, such as California, “fromimplementing their own State laws that authorize the use,distribution, possession, or cultivation of medical marijuana.” Pub. L. No. 113-235, § 538 (emphasis added). Here, thegovernment is enforcing only a tax, which does not preventpeople from using, distributing, possessing, or cultivatingmarijuana in California. Enforcing these laws might make itmore costly to run a dispensary, but it does not changewhether these activities are authorized in the state.
In summary, the Tax Court properly concluded that I.R.C.§ 280E precludes Petitioner from deducting, pursuant toI.R.C. § 162(a), the ordinary and necessary business expenses
OLIVE V. CIR10
associated with his operation of the Vapor Room. Wetherefore affirm the Tax Court’s decision.
AFFIRMED.
1
LENDING AND INSOLVENCY IN THE
MARIJUANA INDUSTRY
Dan Bugbee
LENDING TO MARIJUANA BUSINESSES
2
Barriers to Obtaining Financing
■ Federal regulation for banks
■ Low risk tolerance of lenders
■ Desire to stay off the license
Financing Options
■ Direct Loan to Marijuana Business– Lender (and spouse) must be Washington
resident and undergo a financial and criminal background check by LCB
3
Financing Options
■ Direct Loan to Marijuana Business– Lender must be Washington resident and undergo a
financial and criminal background check by LCB
■ Loan to Landlord– Landlord pays for improvements, tenant
repays with increased rent
Available Collateral
■ Real Property
■ Accounts Receivable
4
Available Collateral
■ Real Property
■ Accounts Receivable
– Both come with the risk of forfeiture; see 21 U.S.C. § 88
Available Collateral
■ Real Property■ Accounts Receivable
– Both come with the risk of forfeiture; see 21 U.S.C. § 88
■ Inventory– Risk of forfeiture– Liquidation would require license to sell marijuana
5
Available Collateral, cont.
■ The business itself– Stock or membership interests– License cannot be assigned
BANKRUPTCY AND MARIJUANA BUSINESSES
6
Purpose of Bankruptcy
■ Safety net for individuals and businesses
■ Orderly process that can also benefit creditors
Bankruptcy Unavailable■ Several jurisdictions have denied bankruptcy
protection marijuana businesses, their individual owners, and their creditors– In re Medpoint Management, LLC, 528 B.R. 178
(Bankr. D. Az. 2015)– In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014)
aff’d by Arenas, v. United States Trustee, BAP No. CO-14-046 (B.A.P. 10th Cir., Aug. 24, 2015)
– In re McGinnis, 453 B.R. 770 (D. Or. 2011)– In re Rent-Rite Super Kegs West, Ltd., 484 B.R. 799
(D. Colo. 2012)
7
Risk for Creditors
■ Creditors cannot seek involuntary bankruptcy for debtors
■ May not be able to seek bankruptcy even for themselves
RECEIVERSHIPS UNDER WASHINGTON LAW
8
A Creditor Remedy
■ Receiverships: a state-court creditor remedy analogous to bankruptcy– Petition by a creditor, OR– Voluntary assignment for the benefit of creditors
■ Governed by state law
■ Receiver appointed to liquidate assets
Receiverships for Marijuana Businesses■ WAC 314-55-140 contemplates the appointment of
a receiver over a marijuana licensee
9
314-55-140Death or incapacity of a marijuana licensee.(1) The appointed guardian, executor, administrator, receiver, trustee, or assignee must notify the board's licensing and regulation division in the event of the death, incapacity, receivership, bankruptcy, or assignment for benefit of creditors of any licensee.(2) The board may give the appointed guardian, executor, administrator, receiver, trustee, or assignee written approval to continue marijuana sales on the licensed business premises for the duration of the existing license and to renew the license when it expires.(a) The person must be a resident of the state of Washington.(b) A criminal background check may be required.(3) When the matter is resolved by the court, the true party(ies) of interest must apply for a marijuana license for the business.
Dan BugbeeDBS Law
PUBLISH
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
_________________________________
IN RE FRANK ANTHONY ARENAS, doing business as FA Husbandry LLC, doing business as FSA LLC, doing business as Twenty Eighth Larimer LLC, and SARAH EVE ARENAS, Debtors. __________________________________ FRANK ANTHONY ARENAS and SARAH EVE ARENAS, Appellants, v. UNITED STATES TRUSTEE, Appellee.
BAP No. CO-14-046
Bankr. No. 14-11406 Chapter 7
OPINION
_________________________________
Appeal from the United States Bankruptcy Court for the District of Colorado
_________________________________ Daniel J. Garfield of Foster Graham Milstein & Calisher LLP, Denver, Colorado, for Appellants. Noah M. Schottenstein, Trial Attorney, Executive Offices of the United States Trustee, Department of Justice (Ramona D. Elliott, Deputy Director/General Counsel and P. Matthew Sutko, Associate General Counsel, Executive Offices of the United States Trustee, Department of Justice, Washington, D.C.; Patrick S. Layng, United States Trustee for Region 19, Gregory Garvin, Assistant United States Trustee, and Alan K. Motes, Trial Attorney, United States Trustee, Department of Justice, Denver, Colorado with him on the brief), Washington, D.C., for Appellee.
2
_________________________________
Before CORNISH, NUGENT, and SOMERS, Bankruptcy Judges. _________________________________
NUGENT, Bankruptcy Judge.
Possessing, growing, and dispensing marijuana and assisting others to do that are
federal offenses. But like several other states, Colorado has legalized these acts and
heavily regulates them, triggering a flourishing marijuana industry there. Can a debtor in
the marijuana business obtain relief in the federal bankruptcy court? No.
In the Marrama case, the United States Supreme Court held that a debtor who is
involved in unlawful or deceitful conduct may not convert his Chapter 7 case to Chapter
13 because the conduct betrays a lack of good faith that would bar confirmation under
11 U.S.C. §1325(a)(3).1 Section 707(a)(1) allows a Chapter 7 case to be dismissed for
cause, including unreasonable prejudicial delay to creditors. A debtor’s conduct may
demonstrate a lack of good faith that amounts to such cause.
Frank Arenas is licensed in Colorado to grow and dispense medical marijuana. He
and Sarah Arenas leased a building to third parties who dispense medical marijuana from
it. After litigation with the renters resulted in a state court judgment against them, the
Arenases filed a Chapter 7 petition that they later attempted to convert to Chapter 13.
The United States Trustee (“UST”) objected to the conversion motion and instead asked
1 All future references to “Code,” “Section,” and “§” are to the Bankruptcy Code, Title 11 of the United States Code, unless otherwise indicated.
3
that the case be dismissed. The bankruptcy court found that even though the debtors’
conduct was legal under Colorado law, it violated the federal Controlled Substances Act,
21 U.S.C. § 801 et seq. (the “CSA”). For that reason, the bankruptcy court not only
denied the debtors’ motion to convert their Chapter 7 case to Chapter 13, but also
concluded that the debtors could not receive Chapter 7 relief because engaging in federal
criminal conduct demonstrated a lack of good faith that would bar confirmation of their
Chapter 13 plan and was cause to dismiss their Chapter 7 case, too. We affirm.
I. Factual Background
The debtors jointly own a commercial building in Denver that consists of two
units (the “Property”). Mr. Arenas grows and wholesales marijuana in one unit.2 He and
Sarah Arenas lease the other unit to Denver Patients Group, LLC (“DPG”), a marijuana
dispensary. While Mr. Arenas’ cultivation and sale of marijuana, and the debtors’ leasing
of space to a marijuana dispensary are lawful activities under Colorado state law, they
violate the CSA.3
2 There is no evidence that Mrs. Arenas participates in the growing business. Mr. Arenas possesses all of the required licenses and permits necessary to legally engage in his business under Colorado law. 3 21 U.S.C. § 856(a) makes it unlawful to–
(1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance;
(2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without
4
The debtors filed their Chapter 7 bankruptcy petition after they brought an eviction
action against DPG in state court that resulted in a $40,000 attorney’s fees award against
them even before the state court addressed DPG’s counterclaims against them for
$120,000 in damages. Lacking the resources to pay the $40,000 judgment or defend the
counterclaims, the debtors filed a Chapter 7 petition on February 12, 2014.4 According to
their schedules, Mrs. Arenas is disabled and receives monthly pension benefits and social
security totaling $2,977.5 The family’s remaining monthly income of $4,265 stems from
rental income and Mr. Arenas’ marijuana business.6 Their monthly expenses are
approximately $7,235, making their monthly net income $7.7 Their nonexempt assets are
25 marijuana plants (valued at $6,250)8 and the Property9 (collectively the “Assets”).
compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.
21 U.S.C. § 841(a)(1) makes it unlawful for any person knowingly or intentionally to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance. 4 Voluntary Petition, in Appellants’ Appendix (“App.”) at 17-20. 5 Schedule I at 2, in App. at 40; Statement of Financial Affairs, in App. at 46. 6 Schedule I at 2, in App. at 40. 7 Schedule J at 3, in App. at 43. 8 Arenas Dep. 20:9-13, June 19, 2014, in App. at 341. The plants were not listed in the debtors’ Schedule B. 9 The value of the Property is unclear. Although the debtors’ schedules indicate that the Property was heavily encumbered, some evidence indicated that the Property had value to the estate. See Schedule A, in App. at 25 (debtors listed the Property’s value at $262,725 with secured claims against it of $295,957.51); Schedule D, in App. at 30 (same); Statement of Financial Affairs, in App. at 46 (Property generated rental income of $52,920 in 2012 and $41,008 in 2013); United States Trustee’s Motion to Dismiss
5
After the meeting of creditors, the Chapter 7 trustee (the “Trustee”) filed a Notice
of No Distribution.10 The Trustee subsequently withdrew the notice when DPG
expressed an interest in purchasing the Property. The Trustee then sought guidance from
the UST about whether he could administer the Property and whether Mr. Arenas’
marijuana-related activities precluded the debtors from proceeding in Chapter 7.
The UST filed a motion to dismiss for cause under § 707(a). The UST alleged that
it would be impossible for a Chapter 7 trustee to administer the Assets without violating
federal law.11 In response, the Arenases moved to convert their case to Chapter 13 and
objected to the motion to dismiss. After an evidentiary hearing on both motions, the
bankruptcy court issued a written order denying the debtors’ motion to convert and
granting the UST’s motion to dismiss on August 28, 2014.12 This appeal followed.
Debtors’ Case Under 11 U.S.C. § 707(a) (the “Motion to Dismiss”) ¶ 7, at 2, in App. at 71 (“[T]he Trustee has received preliminary communications concerning a potential purchase of the building by [DPG] . . . ”). The bankruptcy court did not determine either the value of the Property or whether the debtors had any equity in the Property. 10 See Bankruptcy Dkt. Entry No. 16, in App. at 4. The Notice of No Distribution effectively abandons all nonadministered assets and closes the case. 11 Motion to Dismiss, in App. at 70-73. See In re Rent-Rite Super Kegs West Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012). 12 Order on the United States Trustee’s Motion to Dismiss and the Debtors’ Motion to Convert (the “Appealed Order”), in App. at 229-37.
6
II. Appellate Jurisdiction and Standard of Review
This Court has jurisdiction to hear timely filed appeals from “final judgments,
orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the
parties elects to have the district court hear the appeal.13 The Arenases timely filed their
notice of appeal from the Appealed Order, and the parties have consented to this Court’s
jurisdiction by not electing to have this appeal heard by the United States District Court
for the District of Colorado. We have jurisdiction of this appeal.
An order granting or denying a motion to convert under § 1307(c) is reviewed for
abuse of discretion as is an order dismissing a Chapter 7 petition for cause under
§ 707(a)(1).14 If in making those orders, the trial court makes conclusions of law, those
are reviewable de novo, requiring an independent determination of the legal issues, giving
no special weight to the bankruptcy court’s decision.15 We review findings of fact for
clear error and disturb them only when they lack factual support in the record or if we are
13 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8001(e) (now at Fed. R. Bankr. P. 8005, effective Dec. 1, 2014); 10th Cir. BAP L.R. 8001-3 (now at 10th Cir. BAP L.R. 8005-1, effective Dec. 1, 2014). 14 Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375 (2007) (bankruptcy court has authority to immediately deny a motion to convert a Chapter 7 case to a Chapter 13 in lieu of a conversion order that postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors); S. REP. NO. 95-989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880 (“The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.”); In re Isho, Nos. UT-12-090, 11-30284, 2013 WL 1386208, *3 (10th Cir. BAP April 5, 2013) (determination of cause for dismissal pursuant to § 707(a) is within the discretion of the bankruptcy court). 15 Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).
7
“left with the definite and firm conviction that a mistake has been made.”16 We focus on
whether the bankruptcy court acted within the bounds of permissible choice in reaching
its decision and whether that decision was properly grounded in the law. “Under the
abuse of discretion standard: ‘a trial court’s decision will not be disturbed unless the
appellate court has a definite and firm conviction that the lower court made a clear error
of judgment or exceeded the bounds of permissible choice in the circumstances.’”17 A
trial court abuses its discretion when it makes an “arbitrary, capricious or whimsical,” or
“manifestly unreasonable judgment.”18
III. Analysis
The pivotal issue here is whether engaging in the marijuana trade, which is legal
under Colorado law but a crime under federal law, amounts to “cause” including a “lack
of good faith” that effectively disqualifies these otherwise eligible debtors from
bankruptcy relief. We agree with the bankruptcy court that while the debtors have not
engaged in intrinsically evil conduct, the debtors cannot obtain bankruptcy relief because
their marijuana business activities are federal crimes.
16 Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893 F.2d 1182, 1185 (10th Cir. 1990) (quoting LeMaire ex rel. LeMaire v. United States, 826 F.2d 949, 953 (10th Cir. 1987)). 17 Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (quoting McEwen v. City of Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991)). 18 Id. at 1504-05 (internal quotation marks omitted).
8
A. No abuse of discretion to deny motion to convert to Chapter 13, §§ 706, 1307, and 1325.
While a Chapter 7 debtor may convert his case to Chapter 13 “at any time,” § 706
requires that the debtor not have previously converted the case to Chapter 7 and that the
debtor be eligible for Chapter 13 relief. Section 706 provides in part:
(a) The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not been converted under section 1112, 1208, or 1307 of this title. . . .
. . . . (d) Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.19 Because the Arenases originally filed their case in Chapter 7, only the subsection
(d) eligibility prong applies. Section 109(e) provides that only individuals with regular
income may be Chapter 13 debtors.20 Many courts consider a debtor’s good faith to be a
condition of Chapter 13 eligibility.21
19 11 U.S.C. §§ 706(a) and (d). 20 Section 101(30) defines “individual with regular income” as “[an] individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.” The regular income requirement anticipates that the income is sufficient to fund the debtor’s living expenses and the plan payments. The debt limitation is not an issue in this appeal. 21 Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 5.1 at & 5, Sec. Rev. Apr. 19, 2011, www.Ch13online.com. (“Although not mentioned in the Code as a condition for eligibility for Chapter 13, many reported decisions have considered a debtor’s ‘good faith’ at the threshold of a Chapter 13 case, typically in the context of a motion to dismiss.”).
9
In Marrama v. Citizens Bank of Mass., the United States Supreme Court held that
a Chapter 7 debtor who had made pre-petition false statements and concealed assets from
the trustee could not exercise his right to convert his case to Chapter 13 “at any time”
because his pre- and post-petition lack of good faith rendered him ineligible for Chapter
13 relief.22 Because of the debtor’s lack of good faith, the court could dismiss his
potential Chapter 13 case for cause under § 1307(c). In addition, the debtor’s bad
conduct prevented confirmation of any plan because good faith is an affirmative
confirmation requirement under § 1325(a)(3). The Supreme Court equated “a ruling that
an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of
prepetition bad faith” with a “ruling that the individual does not qualify as a Chapter 13
debtor.”23
The bankruptcy court may dismiss a Chapter 13 case for cause. Section 1307(c)
defines “cause” with a nonexclusive list of eleven examples.24 One nonenumerated cause
and one enumerated cause are important in this case. First, this Court has previously held
that a debtor’s lack of good faith—although not explicitly included in § 1307(c)—
amounts to cause for dismissal under § 1307.25 Second, “unreasonable delay by the
22 549 U.S. 365 (2007). 23 Marrama, 549 U.S. at 375. 24 11 U.S.C. § 1307(c)(1)-(11). 25 In re Armstrong, 303 B.R. 213, 218 (10th Cir. BAP 2004) (egregious prepetition conduct and other actions constituted bad faith, warranting dismissal of Chapter 13); In re Davis, 239 B.R. 573, 578-79 (10th Cir. BAP 1999) (cause for dismissal of Chapter 13 existed based on debtor’s lack of good faith in filing bankruptcy, inability to propose a
10
debtor that is prejudicial to creditors,”26 such as that brought about by inability to confirm
a plan, may be cause for dismissal.27 Had the debtors filed their original case as a
Chapter 13, it would have been susceptible to dismissal for either reason.
The bankruptcy court denied the Arenases’ motion to convert their Chapter 7 case
to Chapter 13 because it concluded that “their reorganization would be funded from
profits of an ongoing criminal activity under federal law and would necessarily involve
the Chapter 13 Trustee in administering and distributing funds derived from the Debtors’
violation of the CSA.”28 Because “[a]ny plan proposed by the Debtors would necessarily
be executed by unlawful means . . . [the court was] unable to find, under § 1325(a)(3),
that their plan [was] ‘proposed in good faith and not by any means forbidden by law.’”29
feasible amendment to unconfirmable plan, debtor’s lack of good faith in filing plan, and debtor’s ineligibility for Chapter 7 based on a prior discharge) (citing In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992)). 26 11 U.S.C. § 1307(c)(1). 27 In re Paulson, 477 B.R. 740, 745-46 (8th Cir. BAP 2012) (cause for dismissal under § 1307 due to unreasonable delay stemming from the debtor’s inability to get a plan confirmed); In re Merhi, 518 B.R. 705, 719-20 (Bankr. E.D.N.Y. 2014) (continuation of case when debtor cannot propose a confirmable debt adjustment plan constituted prejudicial delay to creditors under 11 U.S.C. § 1307(c)(1)); In re Yarborough, Case No. 12-30549, 2012 WL 4434053, *2 (Bankr. E.D. Tenn. Sept. 24, 2012) (“The right to convert [from chapter 7] to Chapter 13, however, is not absolute, and conversion may be denied where ‘cause’ would exist to convert or dismiss the debtor’s Chapter 13 case under 11 U.S.C. § 1307(c), including inability to propose a confirmable plan and bad faith.”) (footnote and citations omitted). See also In re Ames, 973 F.2d 849, 851-52 (10th Cir. 1992) (Chapter 12 bankruptcy may be dismissed due to failure to propose a confirmable plan). 28 Appealed Order at 5-6, in App. at 233-34. 29 Id. at 6-7, in App. at 234-35.
11
That was “cause for dismissal [under] § 1307(c) on account of the Debtors’ bad faith due
to their inability to propose a confirmable Chapter 13 plan.”30 On appeal, that conclusion
is entitled to the most deferential standard of review, whether denial of the conversion
motion was an abuse of discretion.31
We review the bankruptcy court’s finding that the debtors’ conduct showed a lack
of good faith for clear error.32 Courts evaluate a debtor’s good faith case by case,
examining the totality of circumstances.33 Courts in the Tenth Circuit look to the eleven
factors set forth in Flygare v. Boulden.34 Courts should also consider “whether the
debtor has stated his debts and expenses accurately; whether he has made any fraudulent
misrepresentation to mislead the bankruptcy court; or whether he has unfairly
manipulated the Bankruptcy Code.”35
30 Id. at 6, in App. at 234. 31 Marrama, 549 U.S. at 375 (bankruptcy court has authority to immediately deny a motion to convert a Chapter 7 case to a Chapter 13 in lieu of a conversion order that postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors); S. REP. NO. 95B989, at 94 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5880 (“The decision whether to convert is left in the sound discretion of the court, based on what will most inure to the benefit of all parties in interest.”). 32 In re Davis, 239 B.R. 573, 576 (10th Cir. BAP 1999) (“Whether a Chapter 13 plan has been proposed in good faith is a question of fact subject to the clearly erroneous standard of review.”). 33 Id. at 577. 34 709 F.2d 1344 (10th Cir. 1983). 35 In re Cranmer, 697 F.3d 1314, 1319 n.5 (10th Cir. 2012).
12
Only a few of the eleven Flygare factors are in play here. They include (1) the
debtor’s employment history, ability to earn and likelihood of future increases in income;
(2) the burden the plan’s administration would place on the trustee; and (3) the debtor’s
motivation and sincerity in seeking Chapter 13 relief.36
The debtors contend that when the bankruptcy court held that they could not
propose a Chapter 13 plan in good faith, it erred by adopting a per se rule that debtors
who are engaged in the marijuana business are not eligible for bankruptcy relief.37 This
oversimplifies the court’s reasoning. The bankruptcy court applied the Flygare factors
and concluded that the debtors couldn’t propose a feasible plan. First, the Arenases’
monthly income from sources other than marijuana was not enough to fund their plan.
Even the debtors agree that the only way they can fund a plan is with the rental income
from the marijuana dispensary. Without the rental income, their monthly expenses of
$7,000 exceed their non-marijuana income by $4,000 a month. Even with the rental
income, the plan is barely feasible because their Schedule I reflects a surplus of less than
$8 a month, yielding at best, a nominal dividend.38 Sarah Arenas is disabled and unable
to work. That, combined with Frank Arenas’ age and employment history, amply
supports a finding that the debtors’ income is unlikely to increase during the plan term.
The court considered the debtors’ “ability to earn and likelihood of future increases in
36 Id. at 1347-48. 37 Appellants’ Opening Brief at 9, 29-30. 38 We recognize that nominal repayments alone do not violate the good-faith standard of § 1325(a)(3). Other factors, however, weigh against a good-faith finding.
13
income” and concluded that their plan is not likely confirmable because it is not
feasible.39
Second, short of exposing him to physical harm, nothing could be more
burdensome to the Trustee’s administration than requiring him to take possession, sell
and distribute marijuana Assets in violation of federal criminal law. There is no way the
Trustee could administer the plan without committing one or more federal crimes.40
Finally, as for the debtors’ “motivation and sincerity,” the bankruptcy court found
the debtors to be sincere and credible and took pains to emphasize that their motives in
seeking bankruptcy relief were not improper.41 That said, the court also recognized that
lack of good faith carries an objective rather than a subjective meaning. If the debtors are
incapable of proposing a confirmable plan, it is objectively unreasonable for them to seek
Chapter 13 relief whether their intentions are kindly or not. We concur in this view.
Plenty of evidence supports the bankruptcy court’s finding of lack of good faith.
We affirm that finding and need not address whether the debtors’ plan was “proposed by
39 The debtors’ suggestion that the United States Government’s decision not to prosecute Colorado participants in the marijuana business somehow addresses the feasibility and good-faith question fails to account for the possibility that subsequent Administrations and Attorneys General could exercise their prosecutorial discretion to take a different approach. As long as marijuana remains a controlled substance, a matter left entirely to Congress, people who engage in the Colorado marijuana trade remain at risk of federal criminal prosecution, regardless of the Department of Justice’s current posture. 40 The CSA criminalizes virtually every aspect of selling, manufacturing, distributing and profiting from the use of controlled substances. See 21 U.S.C. §§ 841(a)(1) and 856(a). 41 Appealed Order at 6, n.8, in App. at 234.
14
any means forbidden by law.” Instead, we turn to the fate of the Arenases’ Chapter 7
petition.
B. No abuse of discretion to dismiss debtors’ Chapter 7 case, § 707(a)(1). After it concluded that the debtors could not convert their case to Chapter 13, the
bankruptcy court granted the UST’s motion to dismiss their Chapter 7 case for “cause”
under § 707(a). Section 707(a) provides “[t]he court may dismiss a case under this
chapter only after notice and a hearing and only for cause, including—(1) unreasonable
delay by the debtor that is prejudicial to creditors.” “Cause” is not defined in the Code.
Determining what amounts to cause for dismissal under § 707(a) is within the court’s
discretion.42 As we have previously held:
Dismissal factors that are often considered are: the best interests of both debtor and creditors; trustee’s consent or objection; potential to delay creditor payments; good or bad faith in seeking dismissal; and the possibility of payment priority becoming reordered outside of bankruptcy. Emphasis is typically given to any prejudice that dismissal might cause the estate’s creditors.43
The Supreme Court has held that “[t]here is no constitutional right to obtain a discharge
of one’s debts in bankruptcy.”44 Bankruptcy relief is merely a privilege.45
42 In re Isho, Nos. UT-12-090, 11-30284, 2013 WL 1386208, at *3 (10th Cir. BAP April 5, 2013). 43 Id. (citations omitted). 44 United States v. Kras, 409 U.S. 434, 446 (1973). 45 In re Michael, 285 B.R. 553, 556 (Bankr. S.D. Ga. 2002) (citing In re Sochia, 231 B.R. 158, 160 (Bank. W.D.N.Y. 1999); In re Khan, 35 B.R. 718, 719 (Bankr. W.D. Ky. 1984)).
15
The bankruptcy court concluded that it would be impossible for the Chapter 7
Trustee to administer the Arenases’ estate because selling and distributing the proceeds of
the marijuana assets would constitute federal offenses. Because of that, the creditors had
no expectation of receiving any dividend while the debtors would receive a discharge.
Meanwhile, the creditors are stayed from enforcing their state law rights. The
impossibility of lawfully administering the estate constituted cause for dismissal under
§ 707(a).46 The debtors argue here that the Trustee could have abandoned the marijuana
assets. They say that § 707(a) “cause” should be limited to circumstances where the
debtor’s actions have frustrated the administration of the estate or a bankruptcy purpose
and that they have not engaged in such conduct.47
In fact, the debtors have violated federal law and apparently intend to continue to
do so.48 Selling the plants and the building would require the Trustee to violate federal
law. If the Trustee abandoned the Assets, the debtors would retain their business after
exposing the Trustee to grave risk, provide the creditors with little or no recovery, and
receive a discharge, protected all the while from their creditors’ collection efforts by the
automatic stay and then the discharge injunction. That is the epitome of prejudicial delay.
46 Appealed Order at 5, in App. at 233. 47 Appellants’ Opening Brief at 23. 48 July 30, 2014 Hrg Tr. at 18, in App. at 198.
16
The bankruptcy court did not abuse its discretion by dismissing the debtor’s Chapter 7
case.49
As for the debtors’ claim that the bankruptcy court should have required the
Trustee to abandon the marijuana assets if he couldn’t administer them, they never raised
that in the bankruptcy court. 50 It is not clear that a bankruptcy court may order a trustee
to abandon assets sua sponte.51 And even if the court can do that, this bankruptcy estate,
shorn of its marijuana assets, would likely yield no dividend to the creditors. The debtors
would get a discharge and get to keep (via abandonment) their marijuana assets while
being protected from collection activities. This also strikes us as prejudicial delay that
amounts to cause for dismissal.
49 In re Medpoint Mgmt., LLC, 528 B.R. 178, 184-86 (Bankr. D. Ariz. 2015) (finding reasoning in Arenas and Rent Rite persuasive; dual risks of forfeiture of assets and a trustee’s inevitable violation of CSA constitute cause to dismiss involuntary petition under § 707(a)). 50 Walker v. Mather (In re Walker), 959 F.2d 894, 896 (10th Cir. 1992) (appellate court will not consider issues not raised below); Pritner v. COFCO Credit Co., LLC (In re Pritner), Nos. WO-040-080, 99-16898-BH, 03-1371-BH, 2005 WL 705363, at *5 (10th Cir. BAP 2005) (refusing to consider argument not raised below). 51 Section 554(b) states: “(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.” 11 U.S.C. § 554(b) (emphasis added).
17
IV. Conclusion
In this case, the debtors are unfortunately caught between pursuing a business that
the people of Colorado have declared to be legal and beneficial, but which the laws of the
United States—laws that every United States Judge swears to uphold—proscribe and
subject to criminal sanction. Because of that, neither a Chapter 7 nor 13 trustee can
administer the most valuable assets in this estate. Without those assets or the marijuana
based income stream, the debtors cannot fund a plan without breaking the law, and are
therefore ineligible for relief under Chapter 13. In reaching that conclusion, the
bankruptcy court stayed well within the bounds of permissible choice and in no way
abused its discretion in denying the debtors’ motion to convert.
Administering the debtors’ Chapter 7 estate would require the Trustee to either
violate federal law by possessing and selling the marijuana assets or abandon them. If he
did the former, the Trustee would be at risk of prosecution; if he did the latter, the
creditors would receive nothing while the debtors would retain all of their assets and
receive a discharge as well. Either amounts to prejudicial delay that is sufficient to
demonstrate cause to dismiss their Chapter 7 case under § 707(a). The bankruptcy court
did not abuse its discretion in granting the UST’s motion to dismiss. Accordingly, we
AFFIRM the bankruptcy court’s order.
1
D A V I D A . G A L A Z I N , A S S I S T A N T C I T Y A T T O R N E Y, C I T Y O F K E N T
MARIJUANA BASICS:THE ROLE OF LOCAL GOVERNMENT
HEY, WHAT GIVES YOU THE RIGHT???
• Article XI, Section 11, Washington State Constitution:
• “Any county, city, town or township may make and enforce within its limits
all such local police, sanitary and other regulations as are not in conflict
with general laws.” (Emphasis added.)
• Local ordinances entitled to presumption of constitutionality
• All comes down to preemption:
• Field preemption – express or implicit legislative intent to deprive local
jurisdictions of their inherent authority
• Conflict preemption – ordinance cannot be “harmonized” with statute
2
STATE PREEMPTION
• Field preemptionRCW 69.50.608 State preemption. The state of Washington fully occupies and preempts the entire field of setting penalties for violations of the controlled substances act. Cities, towns, and counties or other municipalities may enact only those laws and ordinances relating to controlled substances that are consistent with this chapter. Such local ordinances shall have the same penalties as provided for by state law. Local laws and ordinances that are inconsistent with the requirements of state law shall not be enacted and are preempted and repealed, regardless of the nature of the code, charter, or home rule status of the city, town, county, or municipality.
• Tacoma v. Luvene, 118 Wn.2d 826 (1992)• No state preemption – intent to grant concurrent jurisdiction
STATE PREEMPTION
• Medical marijuana – ESSSB 5073
• Governor’s veto
• Retained Section 403: collective gardens• RCW 69.51A.085
• Retained Section 1102: local authority to regulate• RCW 69.51A.140
• “Qualifying patient” still only an affirmative defense• RCW 69.51A.043
3
STATE PREEMPTION
• Medical marijuana – ESSSB 5073• “As the plain language of the statute and the governor’s veto message
indicate, collective gardens are not legal activity. The Ordinance, by prohibiting collective gardens, prohibits an activity that constitutes an offense under state law. As it prohibits an activity that is also prohibited under state law, the Ordinance does not conflict with the MUCA.”
• Cannabis Action Coalition, et al., v. City of Kent, 180 Wn. App. 455, at 482-483 (Division I, 2014)
• “…an operation to produce marijuana, potentially on a large scale, is a land use activity. Accordingly, Kent has properly exercised its authority under RCW 69.51A.140(1) to zone the land use activity involving collective gardens. This Ordinance is consistent with state law and is not preempted.”
• Cannabis Action Coalition, et al., v. City of Kent, 183 Wn.2d 219 at 231-232 (Wash. Supreme Court, May 21, 2015)
INITIATIVE 502! STATE PREEMPTION AT LAST?
4
I-502
• ATTORNEY GENERAL OPINION, JANUARY 16, 2014
• AGO 2014 No. 2 – request from the Washington State Liquor Control Board: can local governments ban I-502 businesses?
• Short answer? YES.
• No field preemption
• No conflict preemption
• “…the relevant question is not whether the initiative provided local jurisdictions with such authority, but whether it removed local jurisdictions’ preexisting authority.” (Emphasis added.)
• Board’s own rule supported this conclusion: “The issuance or approval of a license shall not be construed as a license for, or an approval of, any violations of local rules or ordinances including, but not limited to: … zoning ordinances…” WAC 314-55-020(11)
I-502
• ATTORNEY GENERAL OPINION, JANUARY 16, 2014
• Not controlling, but given deference by the courts.
• Nonetheless, this question is also being litigated.
• See, e.g., MMH, LLC, et al., v. City of Fife (transferred to Division II of the Court of Appeals by order of the State Supreme Court, June 3, 2015.)
5
FEDERAL PREEMPTION
• Marijuana Schedule I controlled substance under CSA
• 4 types of preemption:
1. Express
2. Field
3. Obstacle
4. Conflict
FEDERAL PREEMPTION
• CSA preclusion of express, field preemption
• Conflict preemption:• Impossible to comply with both laws simultaneously
• Obstacle preemption:• Acts as obstacle to accomplishment of Congressional intent
• Pack v. City of Long Beach, 199 Cal.App.4th 1070 (2011)
• Emerald Steel Fabricators v. Bureau of Labor and Industries, 348 Ore. 159 (2010)
6
WHAT ABOUT THOSE WACS?
• Liquor and Cannabis Board cannot issue a license within 1000 feet of certain protected uses• New legislation allows cities flexibility to reduce some “buffers”
• (20) "Playground" means a public outdoor recreation area for children, usually equipped with swings, slides, and other playground equipment, owned and/or managed by a city, county, state, or federal government.
• (21) "Public park" means an area of land for the enjoyment of the public, having facilities for rest and/or recreation, such as a baseball diamond or basketball court, owned and/or managed by a city, county, state, federal government, or metropolitan park district. Public park does not include trails.
• (23) "Recreation center or facility" means a supervised center that provides a broad range of activities and events intended primarily for use by persons under twenty-one years of age, owned and/or managed by a charitable nonprofit organization, city, county, state, or federal government.
WHAT ABOUT THOSE WACS?
• Is this a playground?
7
WHAT ABOUT THOSE WACS?
• Is this a public park?
WHAT ABOUT THOSE WACS?
• Is this a recreation center or facility?
8
COLLECTIVE GARDENS OUT/PATIENT “COOPERATIVES” IN
• Second Substitute Senate Bill No. 5052
• “The location of the cooperative must be the domicile of one of the participants. Only one cooperative may be located per property tax parcel.” (Emphasis added.)
• Now do we have a preemption issue?
“THE PEOPLE HAVE SPOKEN!”(SO WHY ARE CITIES AND TOWNS HOLDING OUT?)
• “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”• New State Ice Co. v. Liebman, 285 U.S. 262 (1932) (J. Brandeis,
dissenting)
9
“THE PEOPLE HAVE SPOKEN!”(SO WHY ARE CITIES AND TOWNS HOLDING OUT?)
“The presumption against preemption is additionally supported by the existence of significant local interests that may vary from jurisdiction to jurisdiction. Amici curiae League of California Cities et al. point out that ‘California's 482 cities and 58 counties are diverse in size, population, and use.’ As these amici curiae observe, while several California cities and counties allow medical marijuana facilities, it may not be reasonable to expect every community to do so.
For example, these amici curiae point out, ‘[s]ome communities are predominantly residential and do not have sufficient commercial or industrial space to accommodate’ facilities that distribute medical marijuana. Moreover, these facilities deal in a substance which, except for legitimate medical use by a qualified patient under a physician's authorization, is illegal under both federal and state law to possess, use, furnish, or cultivate, yet is widely desired, bought, sold, cultivated, and employed as a recreational drug. Thus, facilities that dispense medical marijuana may pose a danger of increased crime, congestion, blight, and drug abuse, and the extent of this danger may vary widely from community to community.”
City of Riverside v. Inland Empire, 56 Cal. 4th 729, at 755-756 (2013).
WE’RE NOT IN KANSAS ANYMORE, TOTO(AND THERE’S NO YELLOW BRICK ROAD, EITHER)
• Possibilities?
1. Local ordinance in conflict with I-502
2. Local regulations in conflict with federal CSA
3. I-502 in conflict with CSA
• Courts looking to favor coexistence where possible
• Preemption when choices are forced?
1
City of SeattleCannabis Legislation
DAVID B. MENDOZA, POLICY ADVISOR
MAYOR’S OFFICE OF POLICY AND INNOVATION
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 1
State of the Seattle Market• 502
• 19 retail locations now open
• 4 retail locations pending
• 32 fully licensed producer/processors
• 73 pending producer/processors
• Non‐502 – (Approximate)• 118 storefronts (August 2015)
• 49 storefronts with business licenses issued before January 1, 2013 or affiliated with a business opened before January 1, 2013.
• 69 storefronts without business licenses or issued on or after January 1, 2013.
• 4 delivery services with business licenses.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 2
2
1. Enforcement ResolutionTier 1:
• Distributing or delivering marijuana or marijuana infused products directly to anyone under 21 years old or people other than qualifying patients.
• Under law enforcement investigation for criminal violations or public safety concerns.
• Manufacture or distribute products that mimic trademark protected products or are otherwise appealing to children.
• Operating without a business license or with a business license obtained after January 1, 2013.
Tier 2:
• Violation of City building, fire, or other codes.
• Engaged in delivery services of marijuana for medical purposes.
• Allow consumption of marijuana or marijuana infused products on their premises.
Tier 3:
• Distributing marijuana that has not undergone microbial and potency testing.
• Located within 500 feet of another licensed or unlicensed marijuana establishment or are within 1000 feet of a school or playground.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 3
ENFORCEMENT PREFERENCE• City agencies will favor civil remedies to address compliance.• Criminal sanctions may be imposed if civil remedies fail to gain
compliance.
2. Title 5 – Business License• Change name from “Business License” to “Business License Tax Certificate”• Purpose to emphasize Title 5 as a tax registration and not authorization to engage in business.
• Amendment would allow the Director of FAS to reject or revoke the business license of any business that is:• Operating in violation of the law or
• A type of business that requires a Title 6 regulatory business license and does not have or does not qualify for one.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 4
3
3. Title 6 Regulatory Business License• Limited to only those businesses that have received a license to produce, process or distribute marijuana by the WA State Liquor and Cannabis Board (LCB). • LCB rules for marijuana businesses would be incorporated in a way to allow the City of Seattle to enforce.
• Non‐state‐licensed marijuana establishments in compliance with MUCA and enforcement guidelines allowed continue to operate without a regulatory license until July 2016. • Exemption only extended to those that opened before 1/1/13.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 5
Implementation and Enforcement• Upon passage of legislation FAS, wrote and/or visited 69 storefront dispensaries requesting them to close by September 16, 2015.
• Prior to September 16th, FAS Inspectors visited 8 dispensaries and were able to purchase medical marijuana without a medical authorization at 3 locations.• After September 16th, FAS obtained search warrants and seized marijuana products from 3 locations.
• FAS led seizures with support of two uniformed SPD officers. No arrests were made. Owners may face misdemeanor charges for operating a marijuana business without a state license.
• As of October 29th:• 49 locations opened before January 2013 have a path to licensure by LCB.• 59 locations have closed voluntarily with no further action needed.
• 10 post‐January 2013 locations remain open. These locations have received at least one $1000 citation, are facing another $1500 citation and may face criminal charges and seizure of marijuana products if they remain open after those citations are issued.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 6
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Pending Legislation Major Marijuana Activity, Buffer Zone and
Dispersion• Major Marijuana Activity
• Align definition to reflect changes brought by SB 5052.
• Individual and cooperative grows will only be allowed in residences.
• Any other marijuana‐related activity without a state‐license or exemption until July 2016 will be considered MMA.
• Buffer Zone Reduction and Retail Store Dispersion• Buffer zone for all entities, not a school or public playground, proposed to be reduced to 500 feet.
• No marijuana retail store can be any closer than 500 from any other store.
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 7
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5
Thank [email protected]
206-386-1256
10/30/2015 CITY OF SEATTLE – THE OFFICE OF MAYOR EDWARD B. MURRAY 9
1
November 13, 2015
KB Law Group PLLC206.728.0200www.keblaw.com
1
TWO systems:
Medical – collective gardens (criminal)
Recreational – retail stores (legal)
July 2016 ONE system
2
2
• Qualifying patients may create and participate in collective gardens for the purpose of producing, processing, transporting, and delivering cannabis for medical use
• Requirements:• 45 plants• 72 ounces of useable cannabis• A copy of each patient’s documentation must be available on the premises at
all times
• Sale/Donation:• “The creation of a ‘collective garden’ means qualifying patients sharing
responsibility for acquiring and supplying the resources required to produce and process cannabis for medical use such as, for example, a location for a collective garden; equipment, supplies, and labor necessary to plant, grow, and harvest cannabis; cannabis plants, seeds, and cuttings; and equipment, supplies, and labor necessary for proper construction, plumbing, wiring, and ventilation of a garden of cannabis plants.”
State v. Reis,183 Wn.2d 197 (2015)
Issue: Whether the 2011 amendments to Chapter 69.51A RCW legalized possession of medical marijuana in certain circumstances.
RCW 69.51A.040: “The medical use of cannabis in accordance with the terms and conditions of this chapter does not constitute a crime”
3
The Court held that the amendments did not legalize possession, and instead, only allow for an affirmative defense. The Governor vetoed portions of the 2011 amendments, including the state‐wide patient registry, but kept intact other amended statutes referencing such registry.
RCW 69.51A.043(1) (“A qualifying patient or designated provider who is not registered with the registry established in *section 901 of this act may raise the affirmative defense”).
Senate Bill 50502
6
Collective Gardens will be repealed effective July 1, 2016
4
How can a patient acquire marijuana in the future? Home grow
Registered 4‐patient cooperative
Licensed marijuana retail store with, or without, medical endorsement
Sharing Marijuana ‐New No sharing or sale of marijuana is permitted by individual patients/designated providers; violation is a class C felony.
Authorization + Registered + Recognition Card: 3 x the recreational limit and a home grow:
▪ 3 ounces of useable marijuana;▪ 48 ounces of infused solid; ▪ 216 ounces of infused liquid; and▪ 21 grams of concentrates;
Grow 6 plants + 8 ounces of useable marijuana (yield from the plants); and Grow an additional 7‐15 plants + 9‐16 ounces of useable marijuana (yield from
plants) if such additional amounts are expressly authorized by a health care professional.
Authorization: Limited to recreational limits
▪ 1 ounce of useable marijuana;▪ 16 ounces of infused solid;▪ 72 ounces of infused liquid;▪ 7 grams of concentrates; and
Grow 4 plants and possess 6 ounces of useable marijuana (yield from the plants), but only afforded affirmative defense.
5
15‐Plant Limit in Single Housing Units, Effective July 24, 2015 No more than 15 plants may be grown in a single housing unit, even if a collective garden or multiple patients reside there.
A single housing unit is defined as: "a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied as separate living quarters, in which the occupants live and eat separately from any other persons in the building, and which have direct access from the outside of the building or through a common hall."
No one under 21 may participate in a collective garden, unless through a designated provider
Illegal to use butane to extract marijuana resin, unless licensed marijuana processor
6
Collective gardens prohibited
Licensed retail stores with medical endorsement may sell “medical” marijuana to patients (more THC, larger servings, more testing)
State database operational
Patients under 18 must have permission from parent or guardian, who must also participate in treatment
Possession amounts for patients issued recognition card increase to 3x recreational limit
Health care practitioner may sell or donate topicals with less than .3% THC
DUI 5 nanograms of THC concentration per milliliter of whole blood, regardless of impairement. RCW 46.61.506.
Requires blood draw
“‘THC concentration’ means nanograms of delta‐9 tetrahydrocannabinol per milliliter of a person’s whole blood. THC concentration does not include measurement of the metabolite THC‐COOH, also know as carboxy‐THC.” RCW 46.04.586.
7
Class C felony to operate an unlicensed marijuana club, defined as a club or association that conducts or maintains premises for individuals with the primary or incidental purpose of keeping or consuming marijuana on the premises
LCB may adopt rules and establish fees regarding marijuana clubs and has the discretion whether to license such facilities
Varied responses to marijuana
Civil vs. Criminal
Strict enforcement against medical (Lewis County) vs. local licensing (Issaquah, Shoreline, and Seattle)
8
15
In light of WA’s and CO’s new laws, DOJ identifies 8 federal enforcement priorities preventing the distribution to minors; preventing revenue from going to criminal enterprises,
gains, and cartels; preventing the diversion to other states; preventing state‐authorized activity from being used as a
cover for the trafficking of other drugs or illegal activity; preventing violence and the use of firearms; preventing drugged driving and the exacerbation of other
adverse public health consequences; preventing the growing of marijuana on public lands; and Preventing possession or use on federal property.
DOJ’s guidance relies upon expectation that state governments “implement strong and effective regulatory and enforcement systems,” with “robust controls and procedures on paper,” and “effective in practice.”
“If state enforcement efforts are not sufficiently robust to protect against [8 enforcement priorities] the federal government may seek to challenge the regulatory structure.”
Guidance only, individual prosecutors have discretion to deviate from federal enforcement priorities.
1
INDUSTRIAL HEMP & ITS FUTURE
IN WASHINGTON AND IN THE U.S.
Joy Beckerman President, Hemp Ace International
Industrial Hemp Advisor, Northwest Farmers Union
3rd Annual NW Marijuana Law Conference: Strategies for a Local and National IndustryNovember 13, 2015 · Seattle University School of Law
WHAT IS CANNABIS, REALLY?
(genus) (species*)
Oilseed & Fiber Type“INDUSTRIAL HEMP”
Low-Resin Non-Psychoactive
VARIETIES/CULTIVARSGen. Planted 4 Inches Apart
for Stalk & Seed*
Drug Type“MARIJUANA”
High-Resin Psychoactive*
STRAINSGen. Planted 4 Feet Apart
for Flowers & Leaves
Cannabis indica & afghanicaCannabis sativa (genus) (species*) (species*)
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
2
CANNABIS COMPARISONS
Industrial Hemp: Grown 4" apart, very tall, grown for stalk & seed.Low-Resin, Non-Psychoactive
Marijuana: Grown 4' apart, short & bushy, grown for flowers & buds.
High-Resin, Psychoactive*
Industrial Hemp Marijuana
Low-THC/High CBD Varieties:Developing crop grown for flowers &
buds. Resin Range, Non-Psychoactive
Cannabis sativa Cannabis indica Cannabis sativa
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
THE JAW-DROPPING U.S. HISTORY
OF INDUSTRIAL HEMP
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
3
LET’S PONDER THIS…
• Hempstead, Long Island;
• Hempstead County, AR;
• Hempstead, TX;
• Hemphill, NC;
• Hempfield, PA
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
1619 – OUR FIRST CANNABIS LAW
At Jamestown Colony, VA, “ordering” all farmers to “make tryal
of [grow] Indian hempseed.”
Clark, V.S., HISTORY OF MANUFACTURE IN THE UNITED STATES, McGraw Hill, NY 1929, Pg. 34; Herndon, G.M., HEMP IN COLONIAL VIRGINIA, 1963; THE CHESAPEAKE COLONIES, 1954.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
4
AMERICA’S RICH HEMP HISTORY
• 1631 to Early-1800’s: Hemp was legal tender in most of the U.S. and we paid our taxes with it.
• 1763 to 1767: In parts of Virginia, farmers could even be jailed in America for not producing hemp during several periods of shortage.
• 1850: U.S. Census indicates 8,327 hemp plantations.
Clark, V.S., HISTORY OF MANUFACTURE IN THE UNITED STATES, McGraw Hill, NY 1929, Pg. 34; Herndon, G.M., HEMP IN COLONIAL VIRGINIA, 1963; THE CHESAPEAKE COLONIES, 1954.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
USDA: Hemp produces four (4) times more paper than trees over a 20-year period
1916 LYSTER DEWEY & USDA BULLETIN 404
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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1930 MELLON APPOINTS ANSLINGER
TO THE FEDERAL BUREAU OF NARCOTICS
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
MARIJUANA TAX ACT OF 1937
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
Pub. 238, 75th Congress, 50 Stat. 551 (Aug. 2, 1937).
6
1. Cultivation of Industrial Hemp
2. Viable Industrial Hemp Seeds (i.e. seeds capable of germination); and
3. Resins (i.e. derivatives or extracts from any part of the plant other than the seed)
HEMP’S ONLY THREE SCHEDULE 1 ITEMS
Keys to the kingdom, though they be!
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
In 1938, Popular Mechanics reported on the industrial hemp
“Billion Dollar Crop”
Today, America is the largest importer of industrial hemp.
https://m.youtube.com/watch?v=oPEF9eFqBwY
6/4/15: Sen. Ron Wyden addressing Pres. Obama
1938 POPULAR MECHANICS
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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1941 POPULAR MECHANICS
In 1941, Popular Mechanics reported on the car that Ford “grew from the soil” and had “impact strength 10 times greater than steel” …“made
from flax, wheat, hemp, [and] spruce pulp.”https://www.youtube.com/watch?v=ryO2JLzFPTY
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
USDA & HEMP FOR VICTORY
In 1942, after the Japanese invasion of the Philippines cut off the supply of Manila hemp, the U.S. government distributed 400,000 pounds of
hemp seeds to American farmers from WI to KY, who produced 42,000 tons of hemp fiber annually until 1946 when the war ended.
The U.S.D.A. created the instructional film “Hemp for Victory” to promote the war effort need for American industrial hemp and to explain
the licensing process.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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CURRENT INDUSTRIAL HEMPMARKETS
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
NUTRACEUTICAL – HUMAN CONSUMPTION
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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COSMECEUTICAL – BODY CARE
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
PAPER
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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TEXTILES & APPAREL
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
CAR PARTS & BIOCOMPOSITES
Faurecia, one of the largest car parts suppliers in the world, has developed a hemp-based plastic made entirely from
renewable materials, which it hopes to mass produce by 2016.
Hemp door liner for the BMW 3 & 5 Series
manufactured in Germany.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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BUILDING MATERIALS
Hemp resin transfer molded sink basin
Hemp building materials(hempcrete, hemp board, hemp wool insulation)
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
TRADE IT ALL IN FOR HEMP & LIME
• Fiberglass Insulation
• Sheetrock
• Vapor Barrier
• Siding
• Excessive Lumber
• Off-Gassing
• Mold & Mildew
• High Energy Bills& Consumption
• Heating & Cooling Systems in Many Regions
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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INDUSTRIAL OIL
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
ENERGY & BIOFUEL
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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Nanotechnology is the creation of USEFUL/FUNCTIONAL materials, devices and systems through control of matter on thenanometer length scale and exploitation of novel phenomena andproperties (physical, chemical, biological) at that length scale
“If I were asked for an area of scienceand engineering that will most likelyproduce the breakthroughs of tomorrow, Iwould point to nanoscale science andengineering.”
- Neal Lane, Former Assistant to thePresident for Science and Technology
NANOTECHNOLOGY
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
NANOTECHNOLOGY
> 500 “NANO” PRODUCTS ON THE MARKET NOW!
http://www.nanotechproject.org/index.php?id=44&action=view&product_id=1340
Nano-cosmetics
http://www.nanotechproject.org/index.php?id=44&action=view& product_id=0238
http://www.nanotechproject.org/index.php?id=44&action=view&product_id=1034
OLEDShttp://www.nanotechproject.org/index.php?id=44&action=view&product_id=0339
http://www.yamaha-motor.com/waverunner/products/modelfeatures/615/0/features.aspx
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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CELLULOSE NANOCRYSTALS HAVE
A HIGH SURFACE AREAm2/g
*http://www.jm.com/engineered_products/filtration/products/microfiber.pdf** Winter, W. presentation at ACS meeting, San Diego, March 2005
***http://www.ipme.ru/e-journals/RAMS/no_5503/staszczuk/staszczuk.pdf.
E-glass fibers* ~1
Paper fibers 4
Graphite 25-300
Fumed silica 100-400
Fully exfoliated clay ~ 500
Cellulose nanocrystals** 250
Carbon nanotubes*** ~ 100 - ?
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
1. Marks, Cell wall mechanics of tracheids 19672. Sturcova, et al. (2005) Biomacromol. 6, 10553. http://www.ezlok.com/TechnicalInfo/MPCarbonSteel.html
4. Yu, et al Science (2000) 287, 637
STRONGER THAN STEEL – STIFFER THAN ALUMINUM
Material Tensile strength GPa
Modulus GPa
Cellulose Crystal 7.51 1452
Glass fiber 4.8 86
Aluminum wire 0.62 73
Steel3 0.54 200
Graphite whisker 21 410
Carbonnanotubes4
11-63 270-970
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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HEMP AS A SUPERCAPACITOR! HEMP SUPERIOR TO GRAPHENE!
July 2013: Am. Society of Mechanical Engineers, “Hemp carbon makes supercapacitors superfast.”
8/12/14: Am. Chemical Society, “Could hemp nanosheets topple graphene for making the ideal supercapacitor?”
8/13/14: BBC, “Hemp fibres ‘better than graphene’”
8/14/14: Tech Times: “Hemp beats out graphene for high-performance energy storage”Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
THE CURRENT REGULATORY
LANDSCAPE OF INDUSTRIAL HEMP
State Federal
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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CONTROLLED SUBSTANCES ACT OF 1970
U.S.C. §802(16)*
*Marijuana Tax Act of 1937, Pub. 238, 75th Congress, 50 Stat. 551 (Aug. 2, 1937).
(16) The term “marihuana” means all parts of the plant Cannabis sativa L.[sic], whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
(t) The term “marihuana” means all parts of the plant Cannabis [sic], whether growing or not, with a THC concentration greater than 0.3 percent on a dry weight basis; the seeds thereof; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin. The term does not include the mature stalks of the plant, fiber produced from the stalks, oil or cake made from the seeds of the plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of the plant which is incapable of germination.
WA STATE UNIFORM CONTROLLED SUBSTANCES ACT
RCW 69.50.101(t)
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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§7606 OF THE FEDERAL FARM BILLLegitimacy of Industrial Hemp Research
Agricultural Act of 2014Signed into Law on Feb. 7, 2014
(2) INDUSTRIAL HEMP.—The term ‘‘industrial hemp’’ means the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
INDUSTRIAL HEMP IS ALSO A CONTROLLED SUBSTANCE
IN CERTAIN OTHER HEMP PRODUCING COUNTRIES
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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OMNIBUS APPROPRIATIONS BILL
AMENDMENT 754
H.R. 8.3Signed into Law by President Obama on 12/16/14
“Sec. 539. None of the funds made available by this Act may be used in contravention of section 7606 (“Legitimacy of Industrial Hemp Research”) of the Agricultural Act of 2014 (Public Law 113-79) by the Department of Justice or the Drug Enforcement Administration.”
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
FARMERS & USDA BENEFITS ELIGIBILITY
UNDER §7606 OF THE FARM BILL
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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THE INDUSTRIAL HEMP FARMING ACT OF 2015
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
(2) INDUSTRIAL HEMP.—The term ‘‘industrial hemp’’ means the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.
*Duplicitous of §7606
THE INDUSTRIAL HEMP FARMING ACT OF 2015S.134 Supplemental Language in Yellow
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
To amend the Controlled Substances Act to exclude industrial hemp from the definition of marihuana, and for other purposes.
1 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Industrial Hemp Farming Act of 2015’’.
SEC. 2. EXCLUSION OF INDUSTRIAL HEMP FROM DEFINITION OF MARIHUANA.
Section 102 of the Controlled Substances Act (21 U.S.C. 802) is amended—
(1) in paragraph (16)—
(A) by striking ‘‘(16) The’’ and inserting ‘‘(16)(A) The’’; and
(B) by adding at the end the following:‘‘(B) The term ‘marihuana’ does not include industrial hemp.’’; and
(2) by adding at the end the following:
‘‘(57) The term ‘industrial hemp’ means the plant Cannabis sativa L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.’’.
SEC. 3. INDUSTRIAL HEMP DETERMINATION BY STATES.
Section 201 of the Controlled Substances Act (21 U.S.C. 811) is amended by adding at the end the following:
‘‘(i) INDUSTRIAL HEMP DETERMINATION.—If a person grows or processes Cannabis sativa L. for purposes of making industrial hemp in accordance with State law, the Cannabis sativa L. shall be deemed to meet the concentration limitation under section 102(57), unless the Attorney General determines that the State law is not reasonably calculated to comply with section 102(57).”.
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THE CURIOUS LEGAL STATUS OF CBD& ALL NON-PSYCHOACTIVE CANNABINOIDS
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
U.S. Patent Reg. No. 6,630,507Assigned to the U.S.A. as represented
by the Dept. of Health & Human Services
Issued 10/7/03;Filed 2/2/01
“Cannabinoids as antioxidants and neuroprotectants”
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
21
CONTROLLED SUBSTANCES ACT OF 1970
U.S.C. §802(16)*
*Marijuana Tax Act of 1937, Pub. 238, 75th Congress, 50 Stat. 551 (Aug. 2, 1937).
(16) The term “marihuana” means all parts of the plant Cannabis sativa L.[sic], whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
THE FDA & THE HEMP INDUSTRIES ASSOCIATION’SJULY 10, 2014 POSITION STATEMENT
The Position Statement can be found at http://www.thehia.org/PR/PDF/2014-07-10_cbd_hemp_oil_statement.pdf.
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
22
HAIRS WERE SPLIT BY THE
HEMP INDUSTRIES ASSOCIATION IN THE NINTH CIRCUIT
Hemp Industries Ass’n., et al. v. Drug Enforcement Administration, et al., 357 F.3d 1012 (9th Cir. 2004).
“…Congress was aware of the presence of trace amounts of psychoactive agents (later identified as THC) in the resin of non-psychoactive hemp when it passed the 1937 ‘Marihuana Tax Act,’ and when it adopted the Tax Act marijuana definition in the CSA. As a result, when Congress excluded from the definition of marijuana ‘mature stalks of such plant, fiber . . . , [and] oil or cake made from the seeds,’ it also made an exception to the exception, and included ‘resin extracted from’ the excepted parts of the plant in the definition of marijuana, despite the stalks and seeds exception.”
For extensive information and documents concerning the HIA, et al. v. DEA, et al. hemp seed product Ninth Circuit Emergency Motions, go to http://www.votehemp.com/legal_cases_DEA.html#Overview.
When the DEA Issued Preposterous “New” & “Proposed” Rules
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
S. 683 Compassionate Access, Research Expansion & Respect States (CARERS) Act
Introduced by Sen. Cory Booker
(D-NJ) on 3/10/15
• Would amend the CSA to exempt state-compliant individuals from federal prosecution
• Would reschedule marijuana from Schedule I to Schedule II
• Would exclude CBD from the definition of marijuana under the CSA
• Would allow banks to provide financial services to state-legal medical marijuana dispensaries
• Would eliminate barriers to and end NIDA’s monopoly on production of marijuana for research purposes
• Would allow VA physicians operating in medical marijuana states to recommend MMJ
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
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H.R. 1635 Charlotte’s Web Medical Access Act of 2015
Introduced by Rep. Scott Perry
(R-PA) on 3/25/15
• Would amend the CSA definition of “marihuana” by adding language that excludes and exempts “cannabidiol” and “cannabidiol-rich plants” from the CSA
• Would amend the CSA by defining “cannabidiol” and “cannabidiol-rich plants”
• Cannabidiol-Rich Plants: “(57) [T]he term ‘cannabidiol-rich plant’ means the plant Cannabis sativa (sic) L. and any part of such plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” *Duplicitous of §7606
• Cannabidiol: “(58) The term ‘cannabidiol’ means the substance cannabidiol, as derived from a cannabidiol-rich plant.”.
• Would exempt both from the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301, et. seq.)
• Includes a three-year sunset provision
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
S. 1333Therapeutic Hemp Medical Access Act of 2015
Introduced by Sen. Cory Gardner
(R-OR) on 5/13/15
• Would amend the CSA definition of “marihuana” by adding language that excludes and exempts “cannabidiol” and “cannabidiol-rich plants” from the CSA. Also defines:
• Cannabidiol-Rich Plants: “(57) [T]he term ‘cannabidiol-rich plant’ means the plant Cannabis sativa (sic) L. and any part of such plant, whether growing or not, with a tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” *Duplicitous of §7606 , but without the “delta-9” prefix.
• Cannabidiol: “(58) The term ‘cannabidiol’ means the substance cannabidiol, as derived from a cannabidiol-rich plant.”.
• Would define “tetrahydrocannabinol concentration” in a manner that is not based in science and would not result in accuracy for determining psychoactive potential.
• Would NOT exempt either from the Federal Food, Drug, and Cosmetic Act
Joy Beckerman · Hemp Ace International LLC 11/13/15 · Seattle University School of Law
24
THANK YOU FOR YOUR PARTICIPATION TODAY!
President: Hemp Ace International
Advisor: Northwest Farmers UnionIndustrial Hemp Program
Tel: (206) 383-6000
Email: [email protected]
Skype: hempintheusa
Joy Beckerman
1
Update: Challenges to Recreational Marijuana and the Legal Horizon
Jared Van KirkGarvey Schubert Barer
November 13, 2015
Agenda
• Federal & State Law
• Challenges
• Legal Horizon
2
Federal v. State Law
Controlled Substances Act
The possession, distribution, and manufacturing of
marijuana, and aiding and abetting such offense, is a violation of the federal
Controlled Substances Act.
21 U.S.C. § 841(a)
The CSA was intended “to combat the international and
interstate traffic in illicit drugs.”
Its “main objectives . . . were to conquer drug abuse and to control the legitimate and illegitimate traffic in controlled substances.”
Gonzales v. Raich, 545 U.S. 1 (2005)
3
DOJ Guidance
• Limited acceptance of well regulated markets
• Federal priorities: minors, criminal organizations, interstate trafficking, …
Legal Challenges
4
Federal Preemption
“[T]he historic police powers of the States [are] not to be
superseded by the Federal Act unless that was the clear and
manifest purpose of Congress.”
Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947)
“No provision in this title shall be construed as indicating an
intent on the part of the Congress to occupy the field in which that provision operates … unless there is a positive conflict between that provision [and]
State law so that the two cannot consistently stand together.”
21 U.S.C. § 903
Federal Preemption
• Unresolved
• Express Congressional intent
• Historic state regulation
• Impossibility v. obstacle preemption
• Supremacy v. anti‐commandeering
5
Local Bans
• Upheld by lower courts – pending before WA Court of Appeals
• Bans – 72 cities and 5 counties
• Moratoria – 22 cities and 4 counties
• May support criminal market, undermine goal of I‐502
Legal Horizon
6
Legislation
• Federal: low prospects for successful legislation
• Targeting prohibition
• Taxes and banking
• States rights
Citizen Initiatives
