Cannabis Business Blog

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.

Garvey Schubert Barer will be sponsoring and attending the Cannabis Collaborative Conference at the Portland Expo Center on February 3 and 4. The conference will kick off with a keynote address from former NBA All-Star and Portland Trail Blazer Cliff Robinson, a cannabis advocate, and will feature 80 cannabis industry speakers and more than 90 exhibitors.

The numerous sessions are devoted to informing both existing businesses and new ventures about recent industry developments, including interactive workshops and hands-on demonstrations hosted by the Oregon Liquor Control Commission. This year’s conference is shaping up to be a can’t-miss event for members of the cannabis community.

You can find us at the following events on Wednesday, February 3:

• 2:15-3:00 PM - “Ask the Experts” Roundtable

Emily Harris Gant, Scott G. Warner and William K. Kabeiseman will participate in this informal round table session and will be available to answer attendees’ questions about corporate, intellectual property and real estate & land use issues, respectively, as they relate to the cannabis industry.

• 3:15-4:00 PM - The Status of Investing in the Cannabis Industry

Harold E. Snow, Jr. will review the law and regulations concerning who can invest in the cannabis industry and how, both directly and indirectly, and he will offer suggestions on maximizing investor participation in the emerging cannabis industry.

• 7:00-10:00 PM - Evening Reception

GSB is hosting the conference’s Wednesday evening party.

We hope to see you there!

Looking for a location for a licensed marijuana premises? Changes to the buffer zone requirements may be headed to your fair city.

Previously, the Washington State Liquor and Cannabis Board (“LCB”) would not issue a license for any premises within one thousand (1,000) feet of various sensitive uses, 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) (2013).

This requirement caused headaches for many applicants, as they scrambled to find compliant locations. This was particularly true for retailers in larger cities, where much of the prime real estate was near a public transit center, by a public park, or otherwise within the 1,000 foot buffer zone.

Thinking about opening a recreational store or medical cooperative in Tacoma? Better sit tight, at least for the time being.

On Tuesday, January 13, 2016, the Tacoma City Council passed a “temporary moratorium on new marijuana retail uses and a prohibition on the establishment of marijuana cooperatives.” Substitute Ordinance No. 28343.

From a practical perspective, this means that Tacoma will not accept or process applications for city licenses, or for land use, building, or other development permits.

The moratorium does not impact existing State- and city-licensed recreational marijuana retailers, which can continue to operate.

The Tacoma Planning Commission is currently revising the Land Use Regulatory and Nuisance Codes. The Commission is expected to forward recommendations to the City Council in March 2016.

The moratorium is set to expire within six months. Although the City Council could technically renew the moratorium, it apparently expects to lift the moratorium after voting on the amended Land Use and Nuisance Codes in April or May 2016.

Come tax time, taxpayers in the marijuana industry in Oregon may want to proceed with caution.  Since Oregon is tied to the Internal Revenue Code—specifically IRC § 280E—for purposes of income taxation, deductions relating to the trade or business of selling medical or recreational marijuana will be disallowed, and therefore taxpayers in this industry seeking to capitalize expenses and add them to the cost of goods should keep in mind that the taxing authorities will likely be monitoring this area closely.  For more information on this issue, please read the latest post on our firm's sister blog Larry's Tax Law.

Radio talk show host Ross Reynolds, from KUOW's The Record interviews Hal Snow, member of Garvey Schubert Barer's Cannabis practice group, on the tricky landscape of the marijuana industry. Hal gives his thoughts on topical issues related to current states compliance with federal laws under the Obama administration, banking issues, rise of medicinal and recreational marijuana, and the outlook on marijuana legalization and regulation under a new president and Congress in January 2017.

Listen here: http://kuow.org/post/current-legal-landscape-marijuana-still-tricky

In the July 9, 2015 Olive¹ decision, the Federal 9^th Circuit Court of Appeals upheld a Tax Court decision that a medical marijuana dispensary was precluded from deducting any amount of ordinary and necessary business expenses associated with the operation of the business because the Vapor Room (the “business”) is a “trade or business…consist[ing] of trafficking in controlled substances…prohibited by Federal law.” I.R.C. § 280E. Deductions were limited to the “costs of goods sold.”

The Vapor Room sold only medical marijuana. It provided many other services but didn’t charge for them. The appellate court distinguished Olive¹ from the 2007 CHAMP² decision where the Tax Court determined that the taxpayer was engaged in two income generating businesses including the sale of medical marijuana and extensive counseling and caregiving services. In CHAMP², the ordinary and necessary business expenses related to the counseling and caregiving services were deductible. See I.R.C. § 162(a).

Participants in the marijuana industry should review the facts of the Olive¹ and CHAMP² decisions carefully, and consult with their tax attorneys and accountants on the most tax efficient way to structure their marijuana businesses.

If the marijuana business owner also obtains revenue from the sale of non-marijuana goods and services then the ordinary and necessary business expenses related to the non-marijuana activity should be deductible.

Finally, on Aug. 10, 2015, the U.S. Tax Court published the Beck³ decision which, in line with the Olive¹ decision, held that a marijuana business that only sold marijuana products, could not deduct any of the ordinary and necessary business expenses related to the marijuana business. Deductions were limited to “cost of goods sold” I.R.C. § 280E. The Beck³ decision discussed the CHAMP² decision and upheld its holding that a business may have two or more businesses and that the ordinary and necessary business expenses relating to the non-marijuana businesses were deductible.

¹ Martin Olive v. C.I.R. 139 T.C. 19

²Californians Helping to Alleviate Medical Problems, Inc. – CIR (CHAMP), 128 T.C. 173 (2007)

³Beck-v-C.I.R., T.C. Memo 2015-149 (08/10/2015)

Under Section 162(a) of the Internal Revenue Code, a business can deduct from its gross income “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” According to the United States Court of Appeals for the Ninth Circuit, however, this deduction is not extended to marijuana related businesses. Olive v. Commissioner of Internal Revenue, No. 13-70510 (9^th Cir. July 9, 2015).

In 2012, the United States Tax Court assessed penalties and interest against Vapor Room Herbal Center, a California medical marijuana dispensary owned by Martin Olive, for its deduction of $654,071 as business expenses on its 2004 and 2005 income tax returns. Although IRC Section 162(a) allows businesses to deduct “ordinary and necessary expenses,” IRC Section 280E prohibits a business from deducting for any “trade or business [that] consists of trafficking in controlled substances … prohibited by Federal law.” Citing Section 280E, the Tax Court held that operating a medical marijuana dispensary constituted trafficking in controlled substances in violation of federal law, even though it was legal under California law.

Olive appealed the Tax Court’s decision to the Ninth Circuit Court of Appeals. His first claim was that for a “trade or business” to “consist of trafficking in controlled substances,” the business must consist solely of trafficking in controlled substances. Olive argued that in addition to dispensing medical marijuana, the Vapor Room also offered free caregiving services such as yoga, massage therapy, discussion of illnesses, counselling on various personal, legal or political matters related to medical marijuana and education on how to consume medical marijuana responsibly. The Ninth Circuit agreed with the Tax Court that the Vapor Room’s only “trade or business” was the sale of marijuana. It noted that the test for determining if an activity is “trade or business” is whether the activity was entered into with the intent of making a profit. As the Vapor Room’s other services were offered for free, the only activity that could raise a profit was the sale of marijuana.

Olive’s second claim was that IRC Section 280E should not apply to him because it was enacted before medical marijuana dispensaries existed, therefore Congress could not have intended for medical marijuana dispensaries to fall within the category of “items not deductible.” The Ninth Circuit stated that this argument had no bearing on its analysis.

Olive’s last claim was that Section 538 of the Consolidated and Further Continuing Appropriations Act 2015, PL 113-235 prohibits the IRS from defending his appeal as it provides that federal funds may not be used to prevent states that at the time of the Act had legalized medical marijuana, from implementing their state laws authorizing the use, distribution, possession or cultivation of medical marijuana. The Ninth Circuit held that Section 538 does not apply because the IRS is not preventing California from implementing its laws that authorize the use, distribution, possession or cultivation of marijuana. Instead, the IRS is simply enforcing a tax, which does not prevent people from using, distributing, possessing or cultivating marijuana in California.

This ruling is an obvious and a troubling set-back for the marijuana business community. It is just another example of how the inconsistencies between federal and state laws can be challenging for marijuana users, growers, processors and regulators. This problem could be resolved by revising the Internal Revenue Code to provide a further exception under 280E to allow state-sanctioned marijuana enterprises. Until then, marijuana business owners should caution taking business deductions or – alternately, consider whether other business activities are entered into with the intent of making a profit for the business.

This article was first posted on GSB's Northwest Land Law Forum blog, May, 29, 2015. 

Cities and counties don’t always have the power to regulate on anything they please.  Sometimes local action is pre-empted by state or federal law, but determining when local government action is pre-empted is often tricky business.

The general rule in Washington (and Oregon) is that local governments are authorized to make and enforce all laws necessary to further its police power, including zoning laws, so long as they do not directly conflict with state or federal laws.  The Medical Use of Cannabis Act (MUCA), enacted in 2010, codified at RCW 69.51A.085(2), authorized patients to establish collective gardens for growing medical marijuana.  “Collective gardens” are defined by state law to include group efforts to pool resources and grow medical marijuana for patients’ own use.  The MUCA further clarified that local governments retain authority to regulate the production, processing or dispensing of medical marijuana through zoning, business, licensing, health and safety requirements, and business taxes.  RCW 69.51A.140.  Relying on this zoning authority, the City of Kent, Washington enacted an ordinance that prohibited “collective gardens” in every zoning district within the city.

In the recent case, Cannabis Action Coalition (CAC) v. City of Kent, the Washington Supreme Court was asked whether the MUCA authorization for “collective gardens” preempts the Kent ordinance banning them. A statute preempts the field and invalidates a local ordinance “if there is express legislative intent to preempt the field or if such intent is necessarily implied…from the purpose of the statute and facts and circumstances under which it was intended to operate.”  The Court found no express preemption clause, leaving the question of whether preemption is implied.  CAC argued that the express authorization allows cities to zone only commercial production and processing of marijuana and not non-commercial collective gardens.  The court rejected that argument, finding nothing in the express language that distinguished between a profit or the shared use collective garden activities.  The Court went on to find that, although state law prohibits local governments from opting out of medical marijuana altogether, the local ordinance concerned a particular land use, collective gardens, and did not address the personal use of medical marijuana.  Accordingly, the Court found that the City’s ordinance was not pre-empted.

Justice Gonzalez provided an interesting dissent explaining that, although a city may regulate consistent with the MUCA, it may not completely ban what the state permits.  The majority failed to acknowledge that participation in collective gardens is legal under state law and, as a result, Gonzalez asserts, the city may not enact regulations, zoning or not, that prohibit this lawful activity.

It is also important to note that while this appeal was pending, the legislature enacted comprehensive reform concerning the regulation of medical marijuana in Washington including repeal of the statutory provisions authorizing collective gardens.  Laws of 2015, ch. 70.  That said, this case provides an interesting commentary as the Washington Supreme Court prepares to decide whether to hear a case challenging cities’ and counties’ authority to ban licensed recreational marijuana retailers and the legislatures of both Oregon and Washington work to fashion regulations surrounding the production, processing and distribution of both medical and recreational marijuana that focus on standards controlling activities and revenue rather than land use.