Cannabis Business Blog

Justice Department has options to crack down, but may galvanize the push for even wider legalization

In statements that were perhaps inevitable but nonetheless surprising to the cannabis industry, White House Press Secretary Sean Spicer on February 23, 2017, provided the first official comments on how the Trump administration may address recreational marijuana.

Responding to a question from an Arkansas reporter regarding medical marijuana, Spicer indicated that the Trump administration sees “a big difference” between medical and recreational marijuana, stating that federal law needs to be followed “when it comes to recreational marijuana and other drugs of that nature.”

Spicer also indicated that enforcement decisions will primarily be a Department of Justice (“DOJ”) matter, stating that enforcement is “a question for the Department of Justice,” but that he believed there would be “greater enforcement of [federal law], because again, there’s a big difference between medical use, which Congress has, through an appropriations rider in 2014, made very clear what their intent was on how the Department of Justice would handle that issue,” which, Spicer stated, is “very different from the recreational use, which is something the Department of Justice will be further looking into.”

Although Spicer’s statements should probably not be considered as the Trump administration’s definitive policy statement on recreational marijuana use, they do raise a variety of concerns for cannabis businesses.

In a long-awaited decision released this morning, the United States Drug Enforcement Administration announced that it has denied two petitions to reschedule marijuana under the Controlled Substances Act (the “CSA”). The DEA concluded that marijuana should remain a Schedule I controlled substance because it does not meet the criteria for currently accepted medical use in treatment in the United States; there is a lack of accepted safety for use of marijuana under medical supervision and it has a high potential for abuse.  The DEA’s decision relies on a scientific and medical evaluation and scheduling recommendation from the United States Department of Health and Human Services (“HHS”), based on studies conducted by the United States Food and Drug Administration and National Institute on Drug Abuse (“NIDA”).

The Metropolitan King County Council voted on July 25th to end the moratorium on accepting or issuing permits for marijuana growers, processors, and retailers in unincorporated areas of the county. Additionally, per the council’s news release, legislation was approved which:

• • Limits growing, production, and processing facilities in the rural areas to zones with lots of 10 acres or larger.

• • Because Vashon has its own land-use restrictions, it is exempt from the rural limits.

• • Approves studies on potential retail and processing in specific locations.

• • Requires the County Executive to identify 10 new retail stores in neighborhood business zones.

• • Requires separation between retailers (1,000 feet) in areas where multiple shops already exist.

Washington law regulates the buffer zone requirements for licensed marijuana premises and their proximity to locations of sensitive use, namely, elementary or secondary schools; playgrounds; recreational centers or facilities; child care centers; public parks; public transit centers; libraries; or game arcades admitting minors. RCW 69.50.331(8). Washington state law though does not regulate the distance of licensed marijuana premises from one another. Therefore, the now-required 1,000 foot between retail stores is more restrictive than mandated at the state level. For an interesting read regarding the discretion of cities, counties, and towns to control such distance requirements, please see our previous blog post.

Interestingly, in The Seattle Times' coverage story, it was reported that “the state has allocated 22 additional retail stores to the unincorporated areas. The state has issued 23 producer, or farming, licenses in unincorporated King County. In contrast, 22 have been licensed in Seattle and eight in other King County cities.”

Ada Danelo is a Summer Associate at GSB's Seattle office. 

The University of Washington School of Law’s Cannabis Law and Policy Project hosted its first annual conference on Washington state marijuana policy on June 14, 2016.

Rick Garza, Director of the Washington State Liquor and Cannabis Board (LCB), and Seattle City Attorney Pete Holmes kicked off the Conference by discussing the following current policies and industry trends:

• • Use of pesticides on cannabis products. Garza described the regulatory issues that the LCB faces, and noted that one of the LCB’s new challenges is to ensure that cannabis products are safe and properly tested for pesticides. To address this, the LCB plans to work with the EPA and the Department of Agriculture.

• • Increasing market limits. By the LCB’s estimate, the market is sufficiently served by the 48 cannabis stores currently in Seattle, but Garza noted that the LCB plans to increase the market ban if they see demand. Holmes, on the other hand, commented that of the 48 stores allocated, only 31 are open, and that “we need substantially more,” adding that legal delivery services may be another way to meet that demand. The City Attorney also wants to ensure that applicants who are “sitting on” a license either use or lose it, which Holmes wants to work with the LCB to enforce.

• • Increase in tourism benefits hospitality and tourism industry. Holmes noted the significant increase in tourism to Seattle since legalization and how much it benefits hotels, restaurants, and the tourism industry generally. According to the City Attorney, the increase in tourism has created a need for marijuana lounges, since state law prohibits public consumption of cannabis.

The afternoon sessions featured cannabis producers, processors and retailers explaining the intricacies of their compliance with both state and federal law. Ian Eisenberg, owner of Uncle Ike’s Pot Shop, made a pitch for legalization, which he and the other retailers on the panel agreed limits underage access to cannabis – since legal stores turn away customers under 21.

Attorneys from various law firms also spoke about issues ranging from pesticide regulation and tax compliance to diversity in the marijuana industry. Andy Aley, Owner at GSB and Co-Chair of its Cannabis Industry Group, discussed the impediments to sales and marketing for marijuana producers and processors, noting that “it takes about six weeks to get a bud tender to even sample product,” and that “we need smart policy changes that allow the industry to mature and become more akin to the craft beer industry.”

With reports of significant non-approved pesticide use by some in the industry, the LCB has increased its focus upon pesticides.

In addition to emergency regulations addressing product recalls and pesticide action levels, the LCB (via the Washington State Department of Agriculture) recently amended the list of approved pesticides.  Specifically, the WSDA added 29 pesticides to the list of allowable products and removed 27 products.

Bottom line:  Make sure that your house is in order.  Confirm that your current stock of pesticides only includes those on the WSDA’s approved list.  Note that you may “use up” any existing inventory of the 27 pesticides removed from the list, but cannot purchase additional amounts of these products.  Also, we are seeing increasing volumes of pesticide-related disputes and lawsuits, and will address how to best protect your business from pesticide litigation in a future post.

In a surprise move, the Metropolitan King County Council imposed a four-month moratorium on accepting or issuing permits for marijuana growers, processors, and retailers. The moratorium took effect Monday, April 25th, and will be subject to a public hearing within 60 days. No statement clearly outlining the primary concern regarding legal marijuana businesses has been issued by the council. Although Council member Reagan Dunn, who represents rural areas, “likened the lack of restrictions on growers and processors in the county’s rural residential areas to the “wild West.””

As way of reminder, while marijuana is legal in Washington, cities, towns, and counties can still ban marijuana sales and production. Also as way of reminder, unincorporated areas of King County are those areas outside of any city within King County. Such areas, cover 82 percent of King County’s land area.

The Seattle Times article is available here: http://www.seattletimes.com/seattle-news/marijuana/with-no-notice-king-county-slaps-ban-on-pot-businesses/

Washington State Bar Association is hosting its CLE program, “Marijuana Law: Changes in Regulation and Best Practices” seminar taking place next Tuesday, April 12, 2016 in Seattle, Washington.

The marijuana industry is a rapidly evolving landscape. The seminar will address changes and updates in the law, what constitutes medical marijuana, commercial best practices relating to contracts, and ethical considerations in running a cannabis law practice.

The seminar will kick off with introductions by program Co-Chairs, Andy I. Aley, Owner at Garvey Schubert Barer and Co-Chair of the Cannabis  practice group and Jared Van Kirk, Owner at GSB and Co-Chair of its Labor and Employment practice group. Emily Harris Gant, also Co-Chair of Garvey Schubert Barer’s Cannabis practice group, will lead off the seminar with reviews of Washington’s legislative and regulatory updates.

This blog post will be in two parts. The first part will provide the reader with an understanding of the laws and concepts associated with the taxation of the marijuana business. The second part will take these ideas and concepts and attempt to provide some practical operational guidance.

The First Part

The income taxation of a marijuana business, whether it be a producer, processor, wholesaler or retail establishment, is very different from a non-marijuana business. Everyone entering into the business will want to talk with a tax expert experienced in the taxation of a marijuana business in order to maximize the return on their investment.

There are several sections of the Internal Revenue Code (“IRC”) that impact the taxation of the marijuana business. Businesses, in general, in which the sale of merchandise is an income producing factor, calculate their taxable income in accordance with three primary sections of the IRC. Those are code sections IRC § 162(a), IRC § 471 and IRC § 263A.

Hal Snow shares his views with Puget Sound Business Journal’s Emily Parkhurst on the surprises, growth of the burgeoning marijuana industry, and issues faced by the industry such as putting together financing structures, non-Washington residents not being allowed to invest in companies, and the struggle in dealing with banking issues. Hal also discusses how GSB’s Cannabis practice group came to fruition with their team of experienced and dedicated attorneys with backgrounds ranging from business law, M&A, land use, real estate and regulatory, and also their experience in helping companies navigate the complexities of highly regulated industries.

Read the article here (subscription required): http://www.bizjournals.com/seattle/print-edition/2016/02/12/su

A little over a year ago, the Department of Justice released the infamous “Wilkinson Memo” containing DOJ policy guidance to U.S. District Attorneys on Marijuana in Indian Country.

Chaos ensued.

Media and industry began shouting “Marijuana is legal in Indian Country!” from the rooftops. Tribal leaders were swarmed by tribal members demanding that marijuana be immediately legalized. State and local jurisdictions were worried about the impact of legalization on their jurisdictions. Some tribes immediately announced their intent to open large marijuana operations; other tribes issued strong statements against legalization, and lawyers all started scratching our heads.

As the debris settles, we look back at a year with several tribes attempting to enter into the industry. The federal government either closed down their operations or the tribes shut down their operations themselves. Two tribes successfully opened two retail shops.

The truth is that there is just too much uncertainty in the law for most tribes to confidently enter into the industry. But there does seem to be economic opportunity available and some tribes will be able to take advantage of that.

Here are some highlights from 2015:

• • Development of the National Indian Cannabis Coalition. In February 2015, Jeff Doctor (Seneca) announced the establishment of NICC. NICC’s mission is to educate tribal leaders and elected officials on the emerging regulated cannabis industry while advocating for parity on behalf of Indian Country. NICC has been on the forefront of cannabis policy development in Indian Country, speaking at conferences around the country and weighing in on policy development at the Congressional and Administrative level.

• • Development of a draft tribal marijuana bill. Congress has been paying attention to the concern in Indian Country that dabbling in the cannabis industry could lead to the termination of federal grants or other funding. House representatives drafted a bill that would clarify that tribes would not lose federal funding if they were engaged in economic development in the cannabis industry.

• • HHS Secretary Burwell promised that tribes engaged in the cannabis industry will not lose their federal funding so long as they do not use HHS funds in those endeavors. (Now we need more such statement from other Agencies).

• • Suquamish and Squaxin Island open and operate (successfully) two retail marijuana stores on their reservations. While other tribes were being raided, these tribes in Washington were quietly negotiating with the State and preparing to open their retail stores. Now I hear that several other tribes are in negotiations with Washington State to do the same.

What should we look for in 2016?

• • Ruling in Menominee v. DEA and DOJ determining whether a tribal college is an “institute of higher learning” for the purposes of growing hemp under the Farm Bill.

• • Congressional legislation protecting federal funding for tribes engaged in the cannabis industry.

• • Development of a single federal policy regarding legalization of cannabis in Indian Country.

• • Development of tribal cannabis businesses in states with some form of legalization.

There have been a couple tribes who have tried unsuccessfully to open marijuana operations within states that have no form of legalized marijuana. The logistics of ‘legalization on an island’ are at this point, in my opinion, too difficult to overcome. Instead, the focus should be on developments within states with some form of marijuana legalization. I understand that this means that tribes in restrictive states without other forms of economic development will lag behind others – but cannabis remains a schedule 1 Controlled Substance carrying severe penalties for those convicted of possession, intent to manufacture or distribute. It is just not worth the risk unless you KNOW your intergovernmental agreements are strong and protect tribal people and tribal investments.

We are still in the infancy of this industry, both in Indian Country and the “outside” world. Growing pains are inevitable. What is both encouraging and frightening is that for the first time since gaming, non-Native businesses are coming to Indian Country. A word of caution - be careful who you work with – the sharks are circling and while they can leave and change their name, we are tribal people and members of our tribal nations from the beginning of time to the end of time and these businesses will remain part of our tribal history forever. Make sure that history tells a good story of developing cutting edge industries in a good way.