special to Drug War Chronicle by investigative reporter Clarence Walker, firstname.lastname@example.org
Dispensaries providing marijuana to doctor-approved patients operate in a number of states, but they are under assault by the federal government. SWAT-style raids by the DEA and finger-wagging press conferences by grim-faced federal prosecutors may garner greater attention, but the assault on medical marijuana providers extends to other branches of the government as well, and moves by the Internal Revenue Service (IRS) to eliminate dispensaries' ability to take standard business deduction are another very painful arrow in the federal quiver.
[image:1 align:left]The IRS employs Section 280E, a 1982 addition to the tax code that was a response to a drug dealer's successful effort to claim his yacht, weapons purchases, and even illicit bribes as business expenses. Under 280E, individuals involved in the illicit sale of controlled substances -- including marijuana, even medical marijuana in states where it is legal -- cannot claim standard business expenses on their federal taxes.
"The 280E provision which requires certain businesses to pay taxes on their gross income, as opposed to their net income, is aimed at shutting down illicit drug operations, not state-legal medical marijuana dispensaries," said Kris Hermes, spokesman for the medical marijuana defense group Americans for Safe Access." Nonetheless, the Obama Administration is using Section 280E to push these local and state licensed facilities out of business."
The provision can be used to great effect. Oakland's Harborside Health Center was hit with a $2 million IRS assessment in 2011 after the tax agency employed Section 280E against. Harborside is fighting that assessment, even as it continues to try to fend off federal prosecutors' attempts to shut it down by seizing the properties it leases. Similarly, when the feds raided Richard Lee's Oaksterdam University that same year, it wasn't just DEA, but also IRS agents who stormed the premises. Lee said it was because of a 280E-related audit.
The attacks on Harborside and Oaksterdam were part of an IRS campaign of aggressive audits using 280E to deny legitimate business expenses, such as rent, payroll, and all other necessary business expenses. These denials result in astronomical back tax bills for the affected dispensaries, threatening their viability -- and patients' access to their medicine.
"Should the IRS campaign be successful; it will throw millions of patients back in to the hands of street dealers; eliminate tens of thousands of well paying jobs, destroy hundreds of millions of dollars of tax revenue; enrich the criminal underground; and endanger the safety of communities in the 17 medical cannabis states," said Harborside's Steve DeAngelo as he announced the 280E Reform Project to begin to fight back.
It's going to be an uphill battle. In the last Congress, Rep. Pete Stark (D-CA) introduced House Bill 1985, the Small Business Tax Equity Act, designed to end the 280E problem for medical marijuana businesses, but it went to the Republican-controlled House Ways and Means Committee, where it was never heard from again.
Still, something needs to happen, said Betty Aldworth, deputy director of the National Cannabis Industry Association, which this year is working with members of Congress to try to find a fix for the 280E problem.
"When Section 280E was created in the 1980s, no one imagined state-legal marijuana providers," Aldworth told the Chronicle. "Whether or not it is part of a larger effort to curtail the development of regulated models for providing marijuana, which is a model that is clearly preferable to leaving this popular and relatively safe medicine (or adult product) in the underground market, these onerous tax rates have severely hampered the development of the regulated market."
It's a brake on the overall economy, Aldworth said.
"Not only has it resulted in stymieing job development, but it also curtails other economic activity such as reinvestment in business and the rippling positive effects of that spending," she argued. "And in many cases, it has created a tax burden that is simply unbearable: many providers have had to close their doors and lay off their staffs because the tax burden was simply too great."
Because of this unintended application of 280E, medical marijuana providers are paying overall taxes at a rate two to three times those of other small businesses, Aldworth said.
"It's important to note that just as they want to apply for licenses, follow regulations, and otherwise participate in the legal business community, state-legal marijuana providers also want to pay their fair share of taxes," she pointed out. "Most small businesses pay an effective tax rate of between 13% and 27% on net income, according to the Small Business Administration. State-legal marijuana providers pay an average effective tax rate of 65-80%. An industry that can provide thousands of jobs is being held back by these crazy tax rates."
While the lobbyists look to Congress for a fix, one academic tax law expert thinks he has hit upon a novel solution, but not everyone agrees.
Benjamin Leff, a professor at American University's Washington College of Law, raised eyebrows at a Harvard University seminar this spring when he presented his report,Tax Planning For Marijuana Dealers, where he suggested that dispensaries get around 280E by registering with the IRS as tax-exempt social welfare organizations, known as 501(c)(3)s or 501(c)(4)s.
The IRS has already ruled that medical marijuana providers can be exempt under 501(c)(3) because its "public policy doctrine" does not allow charitable organizations to have purposes contrary to law, but in the paper, Leff argued that "a state-sanctioned marijuana seller could qualify as tax-exempt under 501(c)(4), since the public policy doctrine only applies to charities, and 501(c)(4) organizations are not charities."
The organization would have to be operated to improve the social and economic conditions of a neighborhood blighted by crime or poverty, by providing job training, employment opportunities, and improved business conditions for commercial development in the neighborhood, just like many existing community economic development corporations that run businesses.
"When taxes get too high, you can drive compliant dispensaries out of business," Leff told the Chronicle.
Americans for Safe Access' Hermes would agree with that, but he's not so sure about Leff's idea.
"The concept of medical marijuana dispensaries registering with the federal government as a 501(c)(4) in order to sidestep section 280E is novel and may be hypothetically valid," he said. "However, the IRS will refuse to grant tax-exempt status to a business that the agency believes is violating federal law. Perhaps, it would be possible for a dispensary to obtain 501(c)(4) status under false pretenses, but such status would not very likely withstand an IRS audit."
There are better ways, he said.
"A much more realistic and sensible approach -- pending a change to the federal classification of marijuana for medical use -- is to amend the tax code to exclude state-lawful medical marijuana businesses from Section 280E," Hermes recommended. "This is the kind of legislation that Congress should pass in order to allow states to implement their own medical marijuana laws, without undue interference by the federal government."
"I agree with everything he said," Leff replied. "But it's not just the Obama administration that is using 280E this way. The Supreme Court has held that there is no exception to the Controlled Substances Act for state-level legal marijuana sales, and since 280E makes references to Schedule I controlled substances, it applies to legal marijuana unless Congress changes the law. I totally agree that Congress should amend 280E to exempt marijuana selling that is legal under state law. Congress could also amend the Controlled Substances Act to remove marijuana from it, which would probably also make sense," he added.
Whether it is by act of Congress, internal policy shifts, or creative thinking by law school professors, some way has to be found to exempt state-permitted medical marijuana providers from the clutches of 280E and its punitive tax burden aimed at dope dealers, or there may not be any medical marijuana providers.
The feds stay on the attack in California, and fallout mounts from last week's state Supreme Court decision allowing local dispensary bans. There's news from other states as well. Let's get to it:
Last Monday, US Attorney Melinda Haag moved to seize a building housing a San Francisco dispensary. Targeted is the Shambala Healing Center, a city-approved dispensary. Under federal pressure, Shambala's landlords earlier sought to evict it, but failed because it complies with state laws. While Haag has moved to seize buildings in Oakland, Berkeley and Marin County because they housed cannabis dispensaries, this is the Justice Department's first forfeiture action against a San Francisco landlord. Shambala was one of eight San Francisco dispensaries whose landlords received asset forfeiture threat letters starting in the fall of 2011.
Last Tuesday, the city of Garden Grove told dispensaries in the city they must shut down. The city sent out a cease-and-desist notice to dispensary operators, warning they must close this week or face $1,000 a day fines. The city had banned dispensaries in 2008, but turned to a registration process in 2011, then stopping registering dispensaries last year as it awaited the state Supreme Court's ruling on whether locales can ban them. After the high court upheld local bans, Police Chief Kevin Raney sent out a letter calling on all of the more than 60 dispensaries within Garden Grove to close no later than Tuesday. Dispensary owners who do not comply could face criminal charges, the letter said, as well as fines or civil lawsuits.
Last Wednesday, US Attorney Melinda Haag defended her use of lawsuits against dispensaries. Lawsuits against landlords of medical marijuana dispensaries and letters threatening the landlords have been reasonable and are supported by educators, addiction specialists, police officers, clergy, parents and others who are "negatively affected by marijuana," Haag said in a statement. "The marijuana industry has caused significant public health and safety problems in rural communities, urban centers and schools in the Northern District of California. Because some believe marijuana has medicinal value, however, we continue to take a measured approach and have only pursued asset forfeiture actions with respect to marijuana retail sales operations very near schools, parks or playgrounds, at the request of local law enforcement, or in one case, because of the sheer size of its distribution operations."
Also last Wednesday, the Berkeley Patients Group vowed to fight Haag's efforts to shut it down. "We intend to vigorously defend the rights of our patients and the citizens of Berkeley to be able to obtain medical cannabis from a responsible, licensed dispensary," said Sean Luse, the chief operating officer of the Berkeley Patients Group. The previous week, Haag filed suit against the dispensary's landlord seeking to seize the San Pablo Avenue retail space. Haag had previously forced the Berkeley Patients Group to move by threatening to seize its old locale because it was too close to a school. The Berkeley Patients Group, founded in 1999, is the oldest continuously operating medical marijuana dispensary in the Bay Area and serves more than 10,000 patients.
Also last Wednesday, a Thousand Palms dispensary shut down after last Monday's state Supreme Court ruling. The ruling upheld the right of localities to ban dispensaries, and the owner of the Hazy Colitas dispensary said he was closing his doors on his attorney's advice -- before Riverside County sheriff’s deputies did it for him. In nearby Palm Springs, the owner of the CCOC dispensary said he feared he would have to close his doors as well. Palm Springs is the only city in Riverside County that allows dispensaries, but it limits the number of city-approved permits to three. Plans to allow a fourth are on hold. The city has already shut down 12 non-permitted operations and will continue to work on closing five dispensaries still operating without proper permits, said Palm Springs City Attorney Doug Holland. CCOC doesn't have a permit.
Last Thursday, San Bernardino police raided and closed one dispensary and raided a second only to find it had already shut down. City officials reported that 18 of the 33 dispensaries in the city had already shut down in the wake of last week's California Supreme Court ruling. The city had ordered them to close last Tuesday. City officials vow to shut down the rest, too.
Also last Thursday, the Stockton city council took its first step toward banning dispensaries just three years after it moved to allow them. The council moved after city staff warned that by allowing dispensaries the city could leave itself open to federal enforcement measures. At the Thursday meeting, the Planning Commission voted 5-2 in favor of the ban. One already permitted dispensary may be allowed to stay open.
Last Friday, San Bernardino police raided a dispensary that had previously been ordered to close but had quietly reopened, staying closed during the day, but doing business in the evening. City officials said they weren't interested in making arrests, but in closing down dispensaries.
On Monday, the Riverside County Democratic Central Committee passed a resolution calling on state legislators to "enact statewide regulations and licensing requirements that will provide for the safety and concerns of local communities as well as fulfill the mandate of Proposition 215... 'for the safe and affordable distribution of marijuana to all patients in medical need of marijuana.'" The committee said strong community support is needed to boost statewide regulation efforts at the capitol in Sacramento.
Also on Monday, San Diego's draft law on dispensaries was given to the mayor and city council. The proposal builds on an ordinance passed two years ago. Medical marijuana advocates considered the zoning law component too restrictive, however, and collected enough petition signatures to get it rescinded, but ended up with dispensaries being made illegal in the city. Mayor Bob Filner has made getting regulated dispensaries back in the city a priority. The newly drafted ordinance would allow dispensaries to operate legally for five years under a conditional use permit. A 100-foot buffer would be required between dispensaries and residential zones. It also forbid dispensaries within 1,000 of public parks, playgrounds, child care centers, schools, churches, municipal libraries, residential care facilities and other pot shops.
On Sunday, Lt. Gov. Sheila Simon came out in favor of a pending medical marijuana bill, saying that testimony from seriously ill veterans and other patients helped change her mind. The bill has passed the Illinois House and awaits a Senate vote. The bill would allow patients with more than 30 medical conditions to seek recommendations for medical marijuana, but also requires background checks of both caregivers and patients, limits patients to purchasing 2.5 ounces at a time, and bars them from growing their own. They would have to go to state-regulated dispensaries.
On Monday, a dispensary workers union filed a complaint against Wellness Connection of Maine, the state's largest dispensary operator. The complaint filed by the United Food and Commercial Workers with the National Labor Relations Board accuses the company of subjecting employees to unfair labor practices, including retaliation for participating in union activity. The NLRB’s regional director in Boston will investigate the claims and determine whether they should lead to formal action.
Last Wednesday, the Public Health Council finalized medical marijuana regulations. They are set to go into effect May 24. The regulations leave the determination of appropriate medical marijuana use to doctors and patients, rather than restricting it based on an arbitrary list of conditions, restricts patients to 10 ounces every two months (but allows doctors to recommend more), allow patients to visit doctors other than their primary care physician for recommendations, allow patients to use multiple dispensaries, and sets a financial hardship threshold at 300% of the federal poverty line. Dispensaries are set to open next year.
Last Friday, Attorney General Bill Schuette ruled that parents who use medical marijuana aren't disqualified from child custody or visitation. That immunity isn't absolute, however, Schuette clarified. Judges can determine if use presents unreasonable dangers to children, but they can't independently decide if a parent is qualified to use medical marijuana. Schuette's opinion came in response to a question from a state legislator.
On Monday, it was revealed that the state Medical Marijuana Review Panel was dissolved after the state admitted it erred in setting it up. "After a careful review of the Medical Marihuana Act… the make-up of the current Medical Marihuana Review Panel does not meet the administrative rule requirements… As a result, the Department of Licensing and Regulatory Affairs will be appointing a new panel that complies with the law. No further meeting of the review panel will be held until the new panel is appointed," the state said.
Thanks to aggressive policing strategies, New York City has for more than a decade been the world's leader in marijuana possession arrests, but now those numbers are starting to go down.
[image:1 align:right]According to the State Division of Criminal Justice Services, some 10,078 people had been arrested on pot possession charges through April 23, about a 20% decrease over the same period last year. And last year saw a 22% overall decline in possession arrests over 2011.
That means that if the current trend continues, New York City will still see more than 30,000 small-time marijuana busts this year. But that's better than the 50,000 of a couple of years ago or the 40,000 last year.
This is in a state that decriminalized marijuana possession in 1977. The arrests occur because possession in public view is not decriminalized, and for years, the NYPD followed a practice of police directing people to produce what they were carrying, then charging them with misdemeanor possession instead of citing them for the civil offense of possession.
NYPD Commissioner Ray Kelly issued a memo in fall 2011 directing the force to stop arresting people for that, which undoubtedly accounts for some of the decline. Increased public scrutiny of the NYPD's stop-and-frisk policy, which saw some 600,000 people a year searched -- the vast majority of them young people of color -- has probably also played a role in forcing the numbers down.
Earlier this year, Mayor Michael Bloomberg announced that people arrested for small-time possession would no longer be sent to Central Booking, where they typically spend 24 hours before being released, but would instead be given a desk appearance ticket. That move reduced the pain somewhat, but not the arrest numbers.
Gov. Andrew Cuomo (D) has proposed decriminalizing possession in public view. If that law had been in effect last year, 39,257 of the 40,661 pot possession arrests in 2012 would have gone up in smoke.
A bill to decriminalize the possession of small amounts of marijuana has made it through the Vermont legislature, winning final approval Monday. Gov. Peter Shumlin (D) has said he supports it. If he indeed signs it, Vermont will become the 17th state to either decriminalize or legalize marijuana.
[image:1 align:right]Senate Bill 48, sponsored by Sen. Joe Benning, and House Bill 200, sponsored by Rep. Chris Pearson, would impose a civil fine on possession of up to an ounce of marijuana. Under H. 200, a person under 21 who is found in possession of up to an ounce of marijuana would have to undergo substance abuse screening and possible treatment. That language was carried over in the final votes.
Under current state law, possession of up to two ounces of marijuana is a misdemeanor punishable by up to six months in jail for a first offense and up to two years in jail for a subsequent offense.
"We applaud the Vermont Legislature for adopting this much-needed legislation and setting an example for other states in the region and around the country," said Matt Simon, a legislative analyst for the Marijuana Policy Project. "The exceptionally broad support demonstrated for this measure reflects the progress our nation is making toward adopting a new and more sensible approach to marijuana policy."
The Marijuana Policy Project has spent years lobbying for marijuana reform in Vermont.
"The days of criminalizing people simply for using a substance less harmful than alcohol are coming to an end,” Simon said.
That's already the cost in most of the states in the region. Connecticut, Maine, Massachusetts, New York, and Rhode Island have all decriminalized pot possession. In New England, New Hampshire is now the lone hold-out.