"The California marijuana industry is not about providing medicine to the sick. It's a pervasive, for-profit industry that violates federal law," said Laura Duffy, U.S. Attorney for the Southern District of California.

 

Shortly following the Richmond City Council’s latest love fest with marijuana vendors in which the Council increased the number of proposed dispensaries by 33% from three to four, fast moving developments in the state Appeals Court and IRS rulings have put the marijuana industry and Richmond’s ordinance in a smoky purple haze.

In Pack v. Superior Court (Long Beach), the court found that a City of Long Beach ordinance regulating medical marijuana collectives was preempted by the Federal Controlled Substances Act (CSA). 

In Pack, the Court explained that the CSA classifies marijuana as a “schedule I” drug, meaning that Congress has determined that marijuana has no currently accepted medical use.  The Act makes it illegal to manufacture, distribute, or possess marijuana, or to maintain any place for the purpose of manufacturing, distributing, or using any controlled substance.  (See 21 U.S.C. §§ 841, 844, 856.) 

The Pack Court concluded that the Long Beach ordinance conflicted with these prohibitions.  Although courts have concluded that the Compassionate Use Act and the Medical Marijuana Program Act do not conflict with – and are thus not preempted by—the CSA  because they merely decriminalize certain behavior,
The City’s ordinance [] goes beyond decriminalization into authorization. Upon payment of a fee, and successful participation in a lottery, it provides permits to operate medical marijuana collectives. It then imposes an annual fee for their continued operation in the City. In other words, the City determines which collectives are permissible and which collectives are not, and collects fees as a condition of continued operation by the permitted collectives. A law which “authorizes [individuals] to engage in conduct that the federal Act forbids . . . ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ ” and is therefore preempted. (Michigan Canners and Freezers Association, Inc. v. Agricultural Marketing and Bargaining Board (1984) 467 U.S. 461, 478.)
The Court concluded that because the permit process conflicts with the CSA, those portions of the ordinance must be stricken.  The Court further directed the trial court to consider whether any of the provisions of the ordinance could survive a “conflict preemption analysis.”

Richmond’s Medical Marijuana Collectives ordinance (RMC Chapter 7.102) is similar to the Long Beach ordinance in several respects, including the permitting of collectives. Both ordinances limit the number of allowable collectives, prescribe an application and permitting process, and regulate collectives’ operations.  Because these are precisely the elements the Pack Court found preempted, the decision may invalidate Richmond’s Ordinance. 

In other actions, the IRS ruled in a potentially crushing blow to the burgeoning medical marijuana industry, that dispensaries cannot deduct standard business expenses such as payroll, security or rent. Harborside Health Center, a $22 million business that claims 95,000 customers (nearly half the adult population of Oakland), is one of the nation's largest medical marijuana dispensaries and considered a model for the industry, is on the hook for $2.5 million in taxes from 2007 and 2008.  That is $2 million more than the Oakland, Calif.-based company paid for those tax years. “I see only two outcomes here,” said Steve DeAngelo, director and chief executive of Harborside. “Either this IRS assessment has to change or we go out of business. There really isn’t a middle ground for us.”

Meanwhile, Federal prosecutors are targeting medical marijuana dispensaries across California, warning them to shut down within 45 days or face federal criminal and civil penalties regardless of whether they are operating within state and local laws. Prosecutors have sent letters to at least 16 dispensaries -- or their landlords -- warning them they are violating federal drug laws. There have been no reports yet of East Bay or South Bay dispensaries receiving the letters, although 12 in San Diego and a few in San Francisco and Marin counties have received them. The action marks a resurgence of the ever-present tension between federal law's blanket ban on marijuana and California's 1996 law permitting the drug's medicinal use.

See the following articles for details.

Amended ordinance expands permits for medical marijuana collectives to four

Both Councilmembers Jeff Ritterman and Nat Bates said an increase in the number of allowable collectives would benefit the city.
By: Derek Lartaud | October 5, 2011 – 1:07 pm
The City Council voted 4-3 Tuesday to allow an increase in the number of medical marijuana collectives operating in Richmond from three to four.
Councilmember Jeff Ritterman summed up the majority council opinion, saying he didn’t “see that much of a downside” going from three to four collectives.
Ritterman, along with Councilmembers Nat Bates, Corky Booze and Jim Rogers, rejected the notion that the increase posed additional risks.
Rogers added that allowing four collectives to operate did not mean that four collectives would necessarily be approved for permits. He said the council would “still have the right to revoke the permits if we need to.”
Echoing concerns of the dissenting councilmembers, Jovanka Beckles said the increase set a “bad precedent” and was not a “fair way of conducting business.”
The idea to amend the ordinance that limits the number of collectives was born from a Sept. 13 meeting, when the council allowed a medical marijuana permit application to be submitted after the submission deadline had expired. The decision renewed discussion regarding the three collective limit, with the council deciding to revisit the ordinance at a future council meeting.
Councilmember Tom Butt and Mayor Gayle McLaughlin both said that it made little sense to change an ordinance that had been previously debated and agreed upon. Butt argued that the increase was unwarranted given Richmond’s size.
“I’ve never heard anyone complain that there aren’t enough pharmacies in Richmond,” Butt said. “If we find that we need to expand the program later on, then we can do so.”
On Sept. 21, the Public Safety Committee agreed to move the ordinance amendment to the full council with a unanimous recommendation of approval.
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October 7, 2011
State Court of Appeal Deems Local Medical Marijuana Permit Ordinance Pre-Empted by Federal Law
The Second District of the California Court of Appeal filed a published decision (Pack v. Superior Court/City of Long Beach) this week, holding that the city of Long Beach ordinance that regulates medical marijuana collectives through a permit process is pre-empted by the federal law that prohibits the possession and distribution of marijuana (the Controlled Substances Act).

The court found that the permit provisions in the Long Beach medical marijuana ordinance — including the application fees, renewal fees, and lottery system for the permits — were all pre-empted by federal law. 

The appellate court returned the case to Superior Court to further consider and determine whether the non-permit aspects of the city’s ordinance are enforceable in the absence of the permit system. The opinion did not discuss or consider the legality of city ordinances that ban or prohibit medical marijuana collectives and dispensaries.

The League’s City Attorneys’ Department Committee on Medical Marijuana will be discussing the effect of the Pack decision in the coming days. The Committee on Medical Marijuana was recently formed to review the many legal issues related to medical marijuana use and distribution in California. The Committee is comprised of nine legal experts who represent and advise cities across the state on medical marijuana issues.

UPDATED: Court rules Long Beach medical marijuana law illegal

Regulation forces collectives to engage in acts barred by feds, judge writes.
Eric Bradley Staff Writer
Posted: 10/05/2011 12:19:49 PM PDT
Updated: 10/05/2011 04:35:07 PM PDT

The 2nd District Court of Appeal says Long Beach's medical marijuana ordinance violates federal law. (Brittany Murray / Press Telegram)
LOS ANGELES — Long Beach's ordinance regulating medical marijuana violates federal law, the 2nd District Court of Appeal ruled Tuesday.
The decision could have statewide ramifications, affecting the ability of other California cities to control medical marijuana dispensaries. It also highlights the conflict between state law, which recognizes medicinal benefits for marijuana, and the federal government's position that the drug doesn't have such effects and is illicit.
In the court's opinion, Judge Walter Croskey wrote that Long Beach's permitting process is illegal because it compels medical marijuana collectives to engage in acts that are barred by the federal government.
The three-judge panel remanded the case, brought by medical marijuana patients Ryan Pack and Anthony Gayle, to Los Angeles Superior Court to determine the validity of other aspects of the law.
Long Beach was also ordered to pay court costs for the plaintiffs, which their attorney Matt Pappas estimated Wednesday at $200,000.
Pappas said the law is discriminatory against sick people whose symptoms and pain can be alleviated by smoking marijuana.
He drew a distinction between patients who can obtain potentially more dangerous prescribed opiates from common pharmacies and those who have to rely on collectives for marijuana for their illnesses.
"The purpose of the ordinance was to not provide for patients," said Pappas.
The Long Beach City Council passed the medical marijuana ordinance last year.
Qualified collectives were required to participate in a lottery for a limited number of permits and pay a non-refundable application fee of $14,742.
An annual permit fee of at least $10,000 was also imposed. The fee was more depending on the size of the medical marijuana-growing collective.
The ruling could make the city liable for more than $700,000 in fees collected last year.
In its opinion, the court said, "The conclusion is inescapable: the City's permits are more than simply an easy way to identify those collectives against whom the city has chosen not to enforce its prohibition against collectives; the permits instead authorize the operation of collectives by those which hold them.
"As such, the permit provisions, including substantial application fees and renewal fees, and the lottery system, are federally preempted."
Long Beach City Attorney Robert Shannon acknowledged the discordance between the city ordinance and established federal law.
"The council was made to understand from the get-go that this was problematic," said Shannon.
Shannon called the ruling a "relief."
"We've finally gotten the issue square out in the open," he said.
During the ordinance's creation, then-City Prosecutor Thomas Reeves told the council that he wouldn't enforce the regulations because he believed they violated federal law.
The council is expected to discuss its course of action during closed session on Tuesday.
Options include applying for a rehearing to clarify portions of the ruling, petitioning the State Supreme Court to uphold the ordinance or defending other parts of the law in the trial court, Shannon said.
Council members could also repeal the ordinance or ban medical marijuana collectives in the city.
The case is Pack v. Long Beach.
eric.bradley@presstelegram.com, 562-499-1254
Follow Eric Bradley on Twitter at http://twitter.com/EricBradleyPT

Feds crack down on California pot dispensaries

By Josh Richman and John Woolfolk
Staff Writers
Posted: 10/06/2011 02:14:01 PM PDT
Updated: 10/06/2011 06:42:10 PM PDT

Federal prosecutors are targeting medical marijuana dispensaries across California, warning them to shut down within 45 days or face federal criminal and civil penalties regardless of whether they are operating within state and local laws.
Prosecutors have sent letters to at least 16 dispensaries -- or their landlords -- warning them they are violating federal drug laws. There have been no reports yet of East Bay or South Bay dispensaries receiving the letters, although 12 in San Diego and a few in San Francisco and Marin counties have received them. The action marks a resurgence of the ever-present tension between federal law's blanket ban on marijuana and California's 1996 law permitting the drug's medicinal use.
The U.S. Attorneys for all four of California's federal districts have scheduled a news conference for 11 a.m. Friday in Sacramento to "outline actions targeting the sale, distribution and cultivation of marijuana in California." A spokesman for the U.S. Attorney in San Francisco didn't return messages Thursday, but a cannabis industry lawyer said he expects they'll announce a multipronged approach to squelch California's permissive stance on marijuana by any means necessary.
"What they're getting at is basically the Obama Administration war on medical cannabis is exactly the same as the Bush Administration war on cannabis," attorney Bill Panzer of Oakland said.
Panzer said these letters go hand-in-hand with Tuesday's
news that the Internal Revenue Service wants Oakland's Harborside Health Center dispensary to pay $2.4 million in back taxes because it can't claim the same deductions as other businesses. "You've got a lot of things happening all at the same time all trying to stem the tide of medical cannabis," he said.
Oaksterdam University founder Richard Lee, who bankrolled 2010's unsuccessful Proposition 19 for recreational marijuana legalization, says the federal action could be the result of cities and counties limiting medical cannabis to a few large, permitted dispensaries rather than a network of smaller, private-membership clubs that could stay under the federal radar.
Oakland has allowed only four dispensaries; Lee owns one, the Coffeeshop Blue Sky on 17th Street, but declined to say whether he or his landlord have recently received a federal prosecutor's letter.
The Drug Enforcement Administration some years ago made similar threats to some landlords renting space to medical marijuana outlets, yet rarely followed through, Lee noted. But Panzer said the new letters strike a different tone, both because they come from the U.S. Attorneys, who have authority to pursue asset forfeiture in federal court, and because they set a 45-day deadline for compliance.
"That's a little different from what we saw before," he said.
Panzer said he has one of the most recent letters, but attorney-client privilege prevents him from sharing it or identifying its recipient.
Activists said they weren't aware of any notices received yet in the San Jose area. The San Jose City Council last month approved regulations allowing up to 10 marijuana collectives in a city now believed to have as many as 140, and requiring them to grow all their product on site rather than buying it wholesale from growers -- a requirement that some complained would invite federal drug raids.
Marijuana collectives complain the city's rules would effectively force all of them to close, and so they have launched a drive to collect the required 30,000 signatures of city voters needed to qualify a referendum to repeal the city laws.
Rich Robinson, a San Jose political consultant advising the city referendum drive, said the effort would continue unabated. He called the federal prosecutors' letters a "scare tactic to get as many clubs to close down as possible" and predicted it would fail because "there's too many to enforce."
San Jose City Councilman Pierluigi Oliverio, who led the city effort to regulate and tax medical marijuana shops, suspected the move stemmed from President Obama's concerns his administration's previous tolerance for medical marijuana in states that allow it may hurt his re-election chances. His predecessor, George W. Bush, and other presidents have strongly opposed state efforts to legalize marijuana use even for the sick.
"This is Obama freaking out about his re-election," Oliverio said. "It sounds like they reverted back to the Bush policy of zero tolerance."
The Justice Department issued an October 2009 memo saying that prosecution of significant drug traffickers remained a priority but U.S. Attorneys shouldn't focus resources on those acting in compliance with state laws allowing for medical use of marijuana.
Another Justice Department memo from June seemed to portend a crackdown, saying that dispensaries and licensed growers in states with medical marijuana laws could face prosecution for violating federal drug and money-laundering laws.
Keith Stephenson, director of the Purple Heart Patient Center -- another of Oakland's permitted dispensaries -- said he hasn't received a federal letter and didn't expect to.
"We are optimistic," he said. "We're really low-key, we're a small mom-and-pop (operation)."
Wire services contributed to this report. Contact Josh Richman at jrichman@bayareanewsgroup.com; contact John Woolfolk at jwoolfolk@mercurynews.com.

IRS ruling strikes fear in medical marijuana industry

John Brecher / msnbc.com
Steve DeAngelo of Harborside Health Center
By Al Olson
In a potentially crushing blow to the burgeoning medical marijuana industry, the IRS has ruled that dispensaries cannot deduct standard business expenses such as payroll, security or rent.
Harborside Health Center, one of the nation's largest medical marijuana dispensaries and considered a model for the industry, is on the hook for $2.5 million in taxes from 2007 and 2008.  That is $2 million more than the Oakland, Calif.-based company paid for those tax years.
“I see only two outcomes here,” said Steve DeAngelo, director and chief executive of Harborside. “Either this IRS assessment has to change or we go out of business. There really isn’t a middle ground for us.”
DeAngelo says the ruling will likely be appealed. He has 90 days to respond to the ruling.
The IRS ruling is based on an obscure portion of the tax code -- section 280E -- passed into law by Congress in 1982, at the height of Reagan administration’s “war on drugs.” The law, originally targeted at drug kingpins and cartels, bans any tax deductions related to "trafficking in controlled substances."
Although 16 states and the District of Columbia have passed laws allowing medical use of marijuana, the federal government still considers it a Schedule I drug, the most restrictive category with the harshest penalties.
The Internal Revenue Service refused to comment on the specific case, but letters sent from Andrew Keyso, IRS deputy associate chief counsel, to some members of Congress spell out the official position:
“Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term “controlled substances” has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act.”
The news has spread rapidly through the cannabis community and is likely to have a chilling effect on businesses.
“We are all a bit nervous and frustrated,” said Ken Estes, owner of Patient To Patient Group Collective in San Jose, Calif. “We have tried to comply with every city, state and federal law. We ask for input from all the agencies. But we are still being punished for operating a legitimate business.”
Harborside, which celebrated its fifth anniversary Monday, serves 94,000 patients with 84 full-time employees and brings in about $22 million in annual revenue. According to DeAngelo, the center, set up as a not-for-profit business, pays about $1.1 million in taxes to the city of Oakland, $2 million to the state of California and $500,000 to the federal government.
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“We have no complaint about the taxes we pay," DeAngelo said. "We are doing our part. All we ask is that we be treated like any other business enterprise. To treat us like criminals is simply wrong. Drug kingpins and cartels don’t file taxes. We do. But no business, including ours, can survive if it is taxed on its gross revenue. The IRS is trying to tax us out of existence.”
Keith Stroup, legal counsel and founder of NORML, the nation’s largest marijuana advocacy group, says the IRS ruling is likely to  stifle the quasi-legal industry and force people back onto the black market.
“You know, Al Capone was taken down by the IRS, not by the FBI or the police. And I can assure you that Steve DeAngelo is no Al Capone,” Stroup said.
Stroup believes the move also could make it more difficult for the medical marijuana industry to capture significant capital investment. Medical marijuana is now a $1.7 billion market, according to a report released this year by See Change Strategy, an independent financial analysis firm that specializes in new and unique markets. The figure represents estimated sales of marijuana through dispensaries in states with medical marijuana laws.
Although the IRS declined comment, Stoup says NORML has received e-mails from other dispensaries that are currently being audited and will likely receive similar rulings. “Harborside is one of the biggest, so that is why the IRS targeted them first,” Stroup said. “But there are other dispensaries that will suffer the same fate unless Congress acts.”
Some members of Congress have taken up the cause.
Reps. Pete Stark, D-Calif., Barney Frank, D-Mass., and Jared Polis, D-Colo., have introduced legislation to ensure the medical marijuana industry is treated like any other business.
Two Republican presidential candidates — Ron Paul and Gary Johnson — also support the legislation.
Stark’s bill, the Small Business Tax Equity Act, authorizes medical marijuana dispensaries to take the full range of business expense deductions.
“You’d think that a time of record budget deficits that the IRS would be happy that a legal business is doing the right thing and paying its taxes," Polis said. "Instead, the IRS seems intent on destroying a successful and legal business that creates jobs and strengthens our economy."
The confused legal situation is “an un-American  loop of nonsense,” says Jerome Handley, a tax attorney in Oakland who has more than 100 clients in the medical marijuana industry. “My advice to my clients is simple: Document everything … and stay out of the spotlight.”
William Panzer, an Oakland  tax attorney who helped author California’s medical marijuana law, Proposition 215, also successfully fought the IRS in a similar case in 2007.
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In that case, U.S. Tax Court Judge David Laro declared that Californians Helping to Alleviate Medical Problems (CHAMP), a medical marijuana provider, could deduct the majority of employee costs as caregiving expenses. The IRS sought $426,000 in back taxes and penalties, but CHAMP ended up paying a tax assessment of less than $5,000.
“This law is not about protecting citizens from criminals. It is a concerted effort by the federal government to crack down on a legitimate business,” Panzer said.
DeAngelo points out the apparent craziness of the law. “The IRS allows me to deduct my cost of purchasing cannabis, which is the controlled substance they say is illegal. But I can’t deduct my payroll or my rent? That, clearly, defies logic and common sense.
"Besides," DeAngelo added, "have you ever heard of a drug trafficker that actually files a tax return? Me neither."

Prosecutors target California's marijuana trade

By Mary Slosson
LOS ANGELES | Fri Oct 7, 2011 8:07pm EDT
(Reuters) - Federal prosecutors announced a crackdown on Friday on what they call California's massive commercial marijuana trade, including medical pot dispensaries they say are often fronts for illegal for-profit drug distribution.
They outlined a range of actions including civil forfeiture lawsuits against property owners involved in drug trafficking, written warnings to landlords of storefronts illegally selling pot and criminal prosecution of other cannabis offenses.
The move, unveiled by the U.S. attorneys for each of the state's four federal districts, marks an escalation in friction between the federal government and California, which in 1996 became the first state to decriminalize medical marijuana.
Fifteen other states and the District of Columbia have since enacted similar statutes, though cannabis remains classified as an illegal narcotic under U.S. law.
The prosecutors said California's medical marijuana law had given cover for large-scale commercial operations to engage in drug trafficking across state lines, with thousands of pounds of marijuana worth tens of millions of dollars flowing across the country from California.
"That is not what the California voters intended or authorized, and it is illegal under California law," said Andre Birotte, U.S. attorney for the Central District of California.
"There are a number of medical marijuana stores that are operating in contravention to both federal and state law," Birotte later told Reuters. "The vast majority of ones we come across operate at extreme profit" and were "basically drug traffickers."
Supporters of medical marijuana said federal enforcement was unfairly targeting patients and suppliers operating legally under state law.
"The Obama administration's latest moves strongly suggest that their medical marijuana policies are now being driven by over-zealous prosecutors and the anti-marijuana ideologues who dominated policymaking in past administrations," said Ethan Nadelmann, executive director of the Drug Policy Alliance.
"Instead of encouraging state and local authorities to regulate medical marijuana distribution in the interests of public safety and health, his administration seems determined to re-criminalize as much as possible," he said in a statement. "It all adds up to bad policy, bad politics and bad faith."
MISREAD TEA LEAVES
Reversing the position taken by the Justice Department under President George W. Bush, the Obama administration said in 2009 that federal attorneys would no longer prosecute patients who use pot, or dispensaries that distribute it, for medical reasons in states where it has been legalized.
But that memo was "never intended to shield commercial operations or industrial-size growth," said Melinda Haag, U.S. attorney for the Northern District of California.
"The California marijuana industry is not about providing medicine to the sick. It's a pervasive, for-profit industry that violates federal law," said Laura Duffy, U.S. Attorney for the Southern District of California.
Kevin Sabet, former senior adviser at the White House Office of National Drug Control Policy, said that marijuana legalization advocates had "misread the tea leaves" when they predicted that Obama would be friendly to their policies.
The latest actions are consistent with the 2009 federal directive, Sabet said, noting that neither state nor federal law allows the selling of marijuana for profit.
"People are using medical marijuana to make tons of money, and sometimes engage in drug trafficking," Haag said.
The number of pot growers and storefront clinics in some states, including California, has surged since the 2009 policy pronouncement.
In recent months, however, the Justice Department has taken a hard line against what it deems as drug trafficking conducted under the guise of activities allowed by state medical marijuana laws.
In March, federal agents raided marijuana greenhouses and dispensaries in 13 cities across Montana in a crackdown that prosecutors said was aimed at supposed medical cannabis suppliers who were engaged in large-scale narcotics trade.
In California, the number of dispensaries has peaked at roughly a few thousand statewide, said Stephen Gutwillig, state director of the Drug Policy Alliance.
But those numbers have fluctuated, he said, as most local governments that are regulating medical pot access have capped dispensary numbers in their jurisdictions, or banned them.
(Additional reporting by Dan Whitcomb; Editing by Steve Gorman and Cynthia Johnston)