Sean Hocking, Author at Green Market Report

Sean HockingSean HockingSeptember 16, 2019
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11min450

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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

Un Pesce Marcisce Dalla sua Testa is an old Sicilian proverb that translates “a fish rots from its head”. The statement appears to be an accurate summary of the present condition of both the private and governmental sides of California’s cannabis industry.

A Los Angeles Times article September 11th that was headlined “Nearly” stated,

‘The audit[1], conducted by the United Cannabis Business Association.[2], found approximately 2,835 unlicensed dispensaries and delivery services operating in California. By comparison, only 873 cannabis sellers in the state are licensed, according to the Bureau of Cannabis Control [“BCC”]

 We were a bit surprised to discover that UCBA is afflicted by the same type of intentional disregard for the statutes and regulations governing not-for-profit corporations, business leagues and mutual benefit corporations as other California cannabis businesses. Most of the organizations that purport to speak for the businesses and individuals that comprise California’s legal cannabis industry are under suspension, never completed registrations, filed erroneous organizational documentation, or have failed to file correct tax returns and reports with the California Department of Tax and Fee Administration (“CDTFA”) or the California Attorney General Charities Division [See Who is Inept? ].

The September 11th article continues,

This year, an industry-backed financial audit projected that roughly $8.7 billion will be spent on unregulated cannabis products in California in 2019, compared with just $3.1 billion spent on cannabis sold by legal businesses.”

If we accept those figures, then the average “black market” cannabis business has annual sales of $3.1MM, and the average “legal dispensary” has sales of $3.6MM. We have created numerous models of the financial revenues, costs and returns for the legal cannabis industry in California [See Allocation – Costs – Gross Profit – Taxes and It’s the Math]. The taxes that California should be collecting are approximately 31% of the gross receipts of cannabis businesses, or $960K for each “black market” cannabis entity, and $1.1MM per legal cannabis entity. The annual total for cannabis taxes for “black market” and legal business should be $3.66B [2,835 *$960K + 857*$1,100K] for the current year.

It is our recollection CDTFA recently announced the cannabis taxes collected for the second quarter of 2019 were $144.2MM[3] vs. $915MM California should be collecting. While we understand there are several contributing factors, we will start by laying blame on CDTFA. CDTFA has proved to be inept, inefficient and lethargic in its administration of cannabis taxes. It also was incredibly poor in its design of its systems and controls for the collection, reporting and remittance of cannabis taxes [See Missing or Uncollected and Taxes – Cannabis – Myth  and Cannabis Taxation – Reality Check].

 

We have commented extensively on the underlying problems. We have described proposed corrective actions CDTFA and the regulatory agencies could take. With rampant abuse of the law by industry associations and experts combining with a perpetuation of “black market” businesses, and death and maiming from toxic vaping cartridges[4], it seems unlikely the California Attorney General, the United States Attorneys for the Districts in California, the Drug Enforcement Administration [“DEA”] will continue for long to treat the stand down from the “War on Drugs”[5] as meaning to become catatonic.

 

There is a place for aggressive law enforcement efforts in California’s cannabis industry [e.g. flagrant tax evasion, circumvention of laws that places the health and safety of the public at risk, and repeat offenders engaging in significant illegal cannabis activity] are warranted. At some point, such individuals need to have the “entire bookcase” thrown at them.

While we understand the urgency of preventing further loss of life with toxic vaping cartridges, we view the abuses by the organizations we identified in “Who is Inept?” to be equally toxic to the legal cannabis industry. Those who knowingly violate the laws and regulations relating to nonprofit and tax exempt status should also aggressively prosecuted.

On the public side, it is also galling to us when we see local governmental agencies selling licenses to cannabis businesses that will never succeed in order to generate license application revenue and encouraging cannabis businesses based on “social equity” without providing the support and training required for such businesses to succeed. A number of local jurisdictions are as culpable as the abusers of the tax and nonprofit laws with their encouragement of cannabis business investment in the local community for the supposed tax revenue that will be generated.

Greed drives the public side at a local level as hard as it drives the private side.

[1] We note that the term “audit” is being used as a journalist rather than as it would be by the only professionals licensed to perform “audits” or examinations of financial statements – certified public accountants [“CPA’s]. The definition of an audit or examination of financial statements is described California Business and Professions Code, Division 3, Chapter 1, Article 3, Section 5051(c).

[2] United Cannabis Business Association [“UCBA”] is a DBA of a California Nonprofit Mutual Benefit Corporation organized under the name UCBA Trade Association.   The California Secretary of State Corporate No. is: C3857701; the California Attorney General Registry No. is: CT0229633. The Articles of Incorporation state is an IRC Sec. 501(c)(6) organization.

IRC Sec. 501(c)(6) of the Internal Revenue Code provides for an exemption from income tax for business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. An organization that otherwise qualifies for exemption under IRC Sec. 501(c)(6) will not be disqualified from the exempt status merely because it engages in some political activity. In addition, the organization may engage in lobbying that is germane to accomplishing its exempt purpose without jeopardizing its exempt status.

A business league is an association of persons having some common business interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. In order to be exempt from income tax, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing services for individual persons.

 

No part of a business league’s net earnings may inure to the benefit of any private shareholder or individual and it may not be organized for profit to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only enough income to be self-sustaining).  The term line of business generally refers either to an entire industry or to all components of an industry within a geographic area.  It does not include a group composed of businesses that market a brand within an industry.

 

[3] See California Department of Tax and Fee Administration Reports Cannabis Tax Revenues for the Second Quarter of 2019

[4] Deaths, illnesses related to vaping cannabis on the rise, health authorities say

[5] Bringing Back The War


Sean HockingSean HockingSeptember 14, 2019
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7min2470
Guest post by Christopher McHugh and Drew Goodwin of Seigfried Bingham.

Kansas City, Missouri, September 13, 2019

Recently, in connection with the rejection of many medical marijuana facility license applications as “incomplete,” the Missouri Department of Health and Senior Services (DHSS) issued a Sample Ownership Visual Representation, which is a fancy name for a sample organizational chart, “[f]or assistance with the Ownership Structure Form” included in DHSS’ standard marijuana facility application packet. The Sample is below:

Source: https://health.mo.gov/safety/medical-marijuana/pdf/sample-ownership-written-visual.pdf

The big problem with this Sample is it shows – as a state example of how a Missouri marijuana licensee should be organized – a corporation (GrowMo, Inc.) existing as the majority owner of the licensee, which is an organizational structure unequivocally barred by the plain language of Article 14 of the Missouri Constitution.

The Constitution is crystal clear on this point. All medical marijuana facility licenses “shall be held by entities that are majority owned by natural persons who have been citizens of the state of Missouri for at least one year prior to the application for such license.” There is no room for interpretation. In fact, there may be no term in the law less subject to interpretation than the term “natural person.” Black’s Law Dictionary, the universally recognized authority on legal terminology, defines natural person as, “A human being as distinguished from an artificial person [such as a corporation] created by law.”

You might wonder, what’s the big deal since the Sample chart also shows that the intermediary corporation is in turn owned by three natural persons who are all Missouri residents? In the end and from a certain perspective, all the GrowMo corporation in the Sample does is add one more layer between the licensee and three humans who own 100 percent of that middle layer. Is that really so bad?

The answer is a resounding YES, because whether you agree with the reasoning behind the natural person requirement, or you think it is silly, the requirement exists and is not optional. The authors would argue the natural person requirement in the Constitution helps protect against out-of-state companies seizing control of Missouri’s fledgling medical marijuana industry without forcing the state to dig through copious corporate records to confirm identities. But even if the requirement was universally recognized as bad policy, it was still part of Amendment 2, which Missouri voters overwhelmingly approved, and is now enshrined in Missouri’s Constitution, the highest law of the land. So ignoring it results in a legal nightmare of sorts.

This is not a problem on the periphery or something that might be fixed later down the road. Majority ownership of medical marijuana licensees by natural persons is a core requirement under the Constitution. Even the emergency regulations enacted by DHSS acknowledge that majority ownership by natural persons is one of the “minimum standards for licenses.” The regulation on “Facility Evaluation Criteria” states, “[t]he minimum standards for licenses and certifications can be met by providing all materials required by 19 CSR 30-95.040(2) in order to show, as applicable … [t]hat the entity is majority-owned by natural persons who have been residents of Missouri for at least one (1) year.”

In other words, the natural person requirement is a must-have. Either an applicant meets the requirement or not. And if not, the applicant cannot have a license under Missouri law under any circumstances. Or to put it in strictly practical terms, any applicant following the Sample chart promulgated by DHSS will be SOL (sorry, out of luck) no matter how good the rest of its application might be.

Right now, litigation looks inevitable. Those unsuccessful applicants that follow DHSS’ Sample chart will claim (and rightfully so) they were misled. And those that do not will claim license spots were taken by other applicants who did and should be disqualified under the Constitution.

Ultimately, the fallout could include a substantial number of additional licenses issued by DHSS in the settlement, and/or a serious delay in the rollout of licenses in general.

If DHSS were to react quickly, retract its Sample Ownership Visual Representation and corresponding Sample Ownership Structure Form, and take steps to contain and fix the damage already done, including issuing clear guidance that direct majority ownership by natural persons is a minimum requirement for all medical marijuana licensees, that might help.

Drew Goodwin

Christopher McHugh

Drew Goodwin and Chris McHugh lead Seigfreid Bingham PC’s Cannabis Practice Group, which is dedicated to helping plant-touching and plant adjacent businesses meet all the different legal challenges in the marijuana and hemp industries.


Sean HockingSean HockingSeptember 12, 2019
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12min1480
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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

DEAD – ALIVE – COMATOSE – Are medical cannabis collectives dead or alive?  What about medical cannabis cooperatives?  What about adult-use cannabis collectives and cooperatives?  Depending on who you ask the answers will be, Yes, No or Maybe.  All three of these answers may be correct answers to all of these questions.  The questions are not as simple as they appear to be.

Does it make a difference if you ask a cannabis industry expert?  Not at all!  We have concluded the phrase “cannabis industry expert” may be an oxymoron.  It appears to us that when it comes to the cannabis industry, there may be an inverse relationship between the amount you pay for advice and the value of the advice.  The more you pay the less valuable the advice relative to the cost.  We are writing this article to give free advice to California’s cannabis industry.

 

 

Free advice can be readily ignored by those who would rather pay than think.

First, we want to make a brief comment about the value of free advice.  The statement “Free advice is worth what you pay for it” is B.S.  The statement is false and misleading.  All advice is worth what you make of it not what you pay for it.  As a consequence, free advice is the best advice.  It costs you only a little time to listen or read the advice.  If you can apply the advice to improve your business or your life, you get a benefit that cost you solely a little time.

The amount you pay for advice does not establish the value of the advice.  The more you pay for advice, the greater the benefit you must secure in order to justify the cost of the advice.  If you take into account the indirect costs associated with advice that you pay for, your investment of time, effort and money based on the advice, free advice that is useful becomes relatively even more valuable.

DEAD – ALIVE – COMATOSE

Medical collectives and cooperatives were spawned by the passage of Proposition 215 in 1996.  Over a period of 20 years, the parameters for the operation of medical collectives and cooperatives in California acquired a semblance of definition through policies and practices, as well as legal and political pressures.  Many questions relating to medical collectives and cooperatives remained unanswered when Proposition 64 added an additional layer of confusion.

Proposition 64 preserved Proposition 215.  Proposition 64 added legal adult-use cannabis to legal medical cannabis, but with conditions and limitations.  There is, of course, a logical conflict between Proposition 215 and Proposition 64.  You cannot both preserve a right already granted by the California Constitution through Proposition 215, and at the same time add conditions and limitations through Proposition 64.  Proposition 215 collectives were preserved in Proposition 64 but subject to conditions and limitations that take away rights that were granted over 20 years ago.

A quick example will illustrate one of the conflicts between Proposition 215 and Proposition 64.  Proposition 64 imposes a Cannabis Cultivation Tax (“CCT”) and a Cannabis Excise Tax (“CET”).  Proposition 215 grants every resident of California the right to “safe and affordable” medical cannabis.  As we noted above, Proposition 64 preserved the rights granted California residents under Proposition 215.  CCT may be justified with respect to both medical and adult-use cannabis because growing either place the same burden on the land.  It is our opinion the imposition of CET on medical cannabis conflicts with the “safe and affordable” language of Proposition 215.

Our free advice regarding Proposition 215 medical collectives is that they are alive and well.  Proposition 215 medical collectives are entitled to distribute medical cannabis to patients on a nonprofit basis without being subject to licensing because Proposition 64 preserved all of the rights of California residents under Proposition 215.  Precisely how they must operate and what they can do is going to require at least ten years to sort out.  California has more than its fair share of lawyers.  The conflicts between Proposition 64 and Proposition 215 will eventually get sorted out, and California lawyers will make a lot of money in the meantime.

DEAD – ALIVE – COMATOSE

While theoretically, you could apply for a license for a Proposition 215 medical collective, there is absolutely no reason to do so.  A licensed medical cooperative is far easier to manage.  Of greater significance, a cooperative can do much more than a collective and it provides substantial tax advantages.  A licensed medical cannabis cooperative has substantial tax advantages over any other structure for the movement of cannabis from cultivator to consumer.  Anything a licensed medical cannabis collective can do a licensed medical cannabis cooperative can do better.

Anyone who plans to be involved in California’ cannabis industry in any capacity other than as an employee must have a working knowledge of cooperatives in order to succeed in the long-run.  Those organizations involved in the legal movement of cannabis from cultivator to consumer in California in the form of cooperatives must be divided into three different classifications.  The three classifications become six if you distinguish between medical and adult-use cannabis cooperatives which you must do to realize the tax advantage of medical over adult-use.

The three classifications are:

A Cannabis Cooperative Association (“CCA”) organized and operated in accordance with Title 10, Chapter 22, of the California Business and Professions Code (“B&P”).  (B&P §§26220-26231.2.)

A CCA organized pursuant to Title 10, Chapter 22, but not operated in accordance with the limitations imposed on a CCA by B&P §§26220-26231.2.

Corporations organized under other provisions of California corporate law, including Nonprofit Mutual Benefit Corporations, Nonprofit Public Benefit Corporations, General Stock Corporations, Close Corporations, Limited Liability Companies and Agricultural Cooperatives, that claim to be or believe they are cooperatives.

Solely those organizations that fall into the first category – CCAs – can secure the financial benefits of filing tax returns as cannabis cooperatives.  Why?  Solely CCAs can file federal income tax returns pursuant to Subchapter T of the Internal Revenue Code.  Most of the individuals involved in California cannabis industry are not even aware of Subchapter T.  In order to secure the financial benefits of a cooperative, an entity must file federal and California income tax returns as a cooperative.

DEAD – ALIVE – COMATOSE

All is not lost for those organizations that have were not organized or operated in accordance with B&P §§26220-26231.2.  In most instances, those organizations that are not organized and operated as CCAs will be able to make changes in their organizational and operational structures in order to secure the benefit of filing tax returns as cooperatives.  It may prove costly and difficult, but it can be done.

Readers will undoubtedly ask why do I have to change my organizational and operational structure.  I am doing fine at the moment.  Continuing to do things as you have to date rather than change to a structure that is more financially efficient is a risk management calculation.  It is a calculation that should be regularly made with a full understanding of the risks involved or in a miscalculation of the risks.  Various governmental agencies expect to receive almost ½ of the money that consumers pay for cannabis.  A miscalculation of an entity’s tax liabilities over a period of a year or more will very likely turn a profitable year into a substantial loss for the entity that miscalculates.  Many of our readers will recall the size of the hit that Harborside took for its income tax miscalculation.

There is one other aspect of CCAs that we must mention that may tip the scale for some in favor of a reevaluation of the significance of converting an existing entity into a CCA.  Business and Professions (“B&P”) §26222.2 provides:

“A person, firm, corporation, or association, that is hereafter organized or doing business in this state, may not use the word ‘cannabis cooperative’ as part of its corporate name or other business name or title for producers’ cooperative marketing activities, unless it has complied with this chapter.”

As a consequence of the express language of B&P §26222.2, an entity organized under some other provision of California corporate law could operate as a cannabis cooperative but it could not tell anyone it was a “cannabis cooperative” unless it was organized and operated pursuant to B&P §§26220-26231.2.  It defeats the purpose of being a cannabis cooperative if you cannot tell anyone you are a cannabis cooperative.

 

 


Sean HockingSean HockingSeptember 11, 2019
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12min1340
If you wish to re-publish this story please do so with following accreditation
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This is the last of the four articles we decided to publish to illustrate the savings for consumers, and additional profits for cultivators, that can be produced through the use of a properly organized Cannabis Cooperative Association (“CCA”). This article describes the savings for consumers, and the additional profits for cultivators, that can be produced through the movement of extracted oil as medical cannabis through a fully integrated CCA.

 

As we have said on multiple occasions, a CCA is the most financially efficient structure for engaging in business in California’s cannabis industry. The use of a CCA to move extracted oil as medical cannabis produces even greater price reductions for consumers than are produced in the movement of flower as medical cannabis. More costs are incurred between the cultivator and the consumer in the movement of extracted oil than in the movement of flower. The financial benefits from the use of a fully integrated CCA increase as a consequence.

 

The spreadsheet immediately below was the starting point for our August 8th article. The spreadsheet immediately below assumes that consumers pay a total of $10,000, including all taxes collected directly and indirectly from consumers, for 250 cartridges of refined cannabis oil ($40 per 0.5 gram cartridge). The spreadsheet immediately below assumes the dispensary, distributor, manufacturer and cultivator are conventionally organized.

 

The spreadsheet immediately below illustrates the distribution of the $10,000 paid by consumers among the governmental agencies, and the dispensary, distributor, manufacturer and cultivator. We have assumed each of the manufacturer, distributor and cultivator have a profit before taxes that is one-third of the profit before taxes of the dispensary. We have also assumed a 40% income tax rate is applicable to the profits of each of the businesses.

 

The basis for the spreadsheet immediately below is a sale of five kilograms of trim by a cultivator at a price $304.60 per kilogram including Cannabis Cultivation Tax (“CCT”). The manufacturer assumes the CCT. The net to the cultivator is $1,051 which is approximately $95 per pound. We further assumed the cultivator has a production cost of $394 for the five kilograms of trim which produces a $657 before tax profit for the five kilograms.

 

For the manufacturer we assumed additional costs of $1,094 and a profit of $657 on the extraction of the five kilograms of trim. We further assumed the manufacturer passed on the CCT to the distributor. We assumed the distributor had additional costs of $657 in packaging and handling of the oil, and had a profit of $657. We assumed a yield of a total 125 grams of refined oil (250 packages of 0.5 gram). For the dispensary we assumed additional costs of $789 and a profit of $1,971 on the 250 cartridges based on a 60% mark-up of the wholesale cost of the cartridges from the distributor.

 

 

A total of $10,000, including all taxes directly or indirectly collected from consumers, is paid by consumers for the refined oil in the preceding spreadsheet. The $10,000 is distributed as follows: (1) governmental agencies for taxes other than income tax, 31.4%; (2) dispensary revenue, 27.5%; (3) distributor revenue, 13.1%; (4) manufacturer revenue, 17.5%; and (5) cultivator revenue, 10.5%. We have included the spreadsheet above as a baseline for illustrating the advantages of a CCA as a business structure.

 

The dispensary in the spreadsheet above has gross revenue of $7,356, COGS of $4,598 and income of $2,758. The dispensary has an after tax profit of $1,182 on its income of $2,758; the distributor has an after tax profit of $394 on its income of $1,314; the manufacturer has an after tax profit of $394 on its income of $1,751; and the cultivator has an after tax profit of $394 on its income of $1,051.

 

In the spreadsheet immediately below, we assume the same 250 cartridges of refined oil are sold as medical cannabis to consumers at a price per cartridge that produces the same gross revenue for the dispensary, excluding the taxes directly and indirectly collected from consumers, as the sales reflected in the first spreadsheet. We have further assumed that the Local Taxes on sales of medical cannabis are 5.0% instead of 10.0%. Since medical cannabis is not subject to Sales Tax, the sale of the 250 cartridges for $8,827 will produce a gross revenue of $7,356 for the dispensary. The $7,356 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 cartridges of refined oil for $10,000 as adult-use cannabis.

 

 

We have included the spreadsheet immediately above to illustrate the changes in the distribution of money that are caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis. The sale of the 250 cartridges of refined oil as medical cannabis provides the consumers with a 11+% discount even though the gross revenue, costs and profits of the dispensary, distributor, manufacturer and cultivator remain the same.

 

In the preceding spreadsheet the total of $8,857 paid by consumers for the cartridges of refined oil is distributed as follows: (1) governmental agencies for taxes other than income tax, 22.2%; (2) dispensary revenue, 31.2%; (3) distributor revenue, 14.9%; (4) manufacturer revenue, 19.8%; and (5) cultivator revenue, 11.9%. The change in the distribution of the money collected from consumers in the spreadsheet above is solely caused by the change in the taxes collected from consumers.

 

In the spreadsheet below we have assumed the cannabis moves from cultivator to consumer, and is refined, through a fully integrated CCA. We have also assumed the profit to the cultivator through the use of the CCA is doubled by the shifting of the profit of the manufacturer in the two illustrations above to the cultivator. We have further assumed the profits of the dispensary and the distributor, and the reductions in costs of conducting business that are achieved through the use of a fully integrated CCA, are passed on to the consumers.

 

 

The costs for the cultivator, manufacturer, distributor and dispensary in the spreadsheet immediately above are the same as in the first two spreadsheets. The tax rates also remain the same. We have assumed any income tax at the dispensary level is included in the $787 of costs. The shifting of the amounts to which the tax rates are applied produces dramatic savings for the purchasers of the cartridges of refined oil notwithstanding the doubling of the cultivator’s profits.

 

The preceding spreadsheet reflects the sale of the same 250 cartridges of refined oil as medical cannabis through a fully integrated CCA for a total of $5,673, including all of the taxes collected directly and indirectly from consumers. The $5,673 total amount paid by consumers for the cartridges of refined oil is distributed as follows: (1) governmental agencies for taxes other than income tax, 25.1%; (2) dispensary revenue, 13.9%; (3) distributor revenue, 11.6%; (4) manufacturer revenue, 19.3%; and (5) cultivator revenue, 30.1%.

 

Through the use of a CCA the cultivator has an after tax profit of $788 on income of $1,708. The consumers purchase the same refined oil, including all taxes, as medical cannabis for over 43% less than the cost for the same cannabis when conventionally structured businesses are used to move the cannabis from cultivator to consumer even though the cultivator’s profits are doubled.

 

The preceding illustrates how the total cost, including taxes, to consumers of refined oil that is sold as medical cannabis can be reduced by over 43%, and the profit to the cultivator doubled, through the use of a fully integrated CCA.

 

Can anyone doubt a CCA is a “Better Mousetrap”? Consumers pay substantially less for the same cannabis product. California collects all of the taxes it is owed. Local governments collect all of the taxes they are owed. Cultivators make twice as much money.


Sean HockingSean HockingSeptember 7, 2019
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11min2000
If you wish to re-publish this story please do so with following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

On August 6th we published an article that described the financial benefits of the use of a properly organized Cannabis Cooperative Association (“CCA”) to move cannabis as adult-use flower from cultivator to consumer. [See CCA’s Beat Underground ] On August 8th we published an article that described the financial benefits of moving cannabis as adult-use oil through a CCA. [See CCAs Create Profits ]This article describes the additional financial benefits of moving flower from cultivator to consumer through a CCA as medical cannabis rather than as adult-use cannabis.

The spreadsheet immediately below was the starting point for our August 6th article. This spreadsheet illustrates the division of the proceeds, including all taxes collected from consumers, of the retail sale of flower as adult-use cannabis through conventionally structured businesses. In this illustration we have assumed a sale of 250 packages of flower for $40 per 8-gram package. The $40 sale price includes the taxes collected from consumers. We have assumed a Local Cannabis Tax rate of 10.0% and a Sales Tax rate of 8.75%. The operating costs and profits of the dispensary, distributor and cultivator we have assumed are as stated in the spreadsheet below.

The $10,000 paid by the consumers for the packages of flower as adult-use cannabis through conventionally structured businesses will be divided among governmental agencies, and the dispensary, distributor and cultivator, as is reflected in the spreadsheet below.

The $10,000 paid by consumers for the flower as adult-use cannabis is divided as follows: (1) governmental agencies for taxes collected, both directly and indirectly, from consumers, 30.2%; (2) dispensary revenue, 27.6%; (3) distributor revenue, 20.4%; and (4) cultivator revenue, 21.8%.

In the spreadsheet immediately below, we have assumed the same 250 8-gram packages of flower are sold as medical cannabis to consumers at a price per package that produces the same gross revenue for the dispensary, excluding the taxes directly collected from consumers, as the sales reflected in the first spreadsheet. We have further assumed that the Local Taxes on sales of medical cannabis are 5.0% instead of 10.0%. Since medical cannabis is not subject to Sales Tax, the sale of the 250 8-gram packages for $8,827 will produce a gross revenue of $7,355 for the dispensary. The $7,355 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 packages of flower for $10,000 as adult-use cannabis.

We have included the spreadsheet immediately above to illustrate the changes in the flow of funds caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis. The sale of the 250 packages of cannabis flower as medical cannabis provides the consumers with a 11+% discount even though the gross revenue of the dispensary, distributor and cultivator remain the same.

 

The basis for both of the preceding illustrations is an assumed sale by a cultivator to a distributor of one kilogram of flower at a price slightly over $1,100 per pound including Cannabis Cultivation Tax (“CCT”). The distributor assumes the CCT. The net to the cultivator is a little over $950 per pound. We assumed the cultivator has production costs of $1,410 per kilogram for the flower. These assumptions produce a before tax profit for the cultivator of $766 per kilogram. We have assumed the distributor has additional costs of $1,278 per kilogram, and a profit of $766 per kilogram. For the dispensary we assumed additional costs of $1,226, and a profit of $1,531, per kilogram. The additional costs and profit for the dispensary are based on 60% mark-up of the wholesale cost from the distributor.

 

The division of the sale proceeds between governmental agencies and the three cannabis businesses changes when the flower is sold as medical cannabis. The sale of the flower as medical cannabis significantly reduces the taxes collected from consumers. The allocation of the sales proceeds of $8,827 is: (1) governmental agencies, 16.7%; (2) dispensary revenue, 31.2%; (3) distributor revenue, 23.1%; and (4) cultivator revenue, 29.0%.

 

The costs, profits and income taxes of the dispensary, distributor and cultivator in the two preceding spreadsheets are the same. The sole difference in the preceding spreadsheets is the reduction in the taxes collected from the consumer when the flower is sold as medical cannabis. In both of the preceding illustrations we have assumed the cultivator and distributor each have a profit before taxes that is one-half of the profit before taxes of the dispensary. We have also assumed a 40% income tax rate is applicable to each of the businesses.

In the spreadsheet below we have assumed the same 250 8-gram packages of flower move from cultivator to consumer as medical cannabis through a fully integrated CCA. We have also assumed the operating costs for the dispensary, distributor and cultivator remain the same with the additional assumption any income tax liability of the dispensary is included in its costs. We have further assumed the profit to the cultivator is doubled through the use of a CCA. We have further assumed the reductions in costs and profits at the distributor and dispensary levels from the use of a CCA are passed on to the consumers.

The shifting of the amounts to which the tax rates are applied through the use of a CCA produces dramatic savings for the consumers. We saw this result with adult-use cannabis. The savings are more dramatic when medical cannabis is sold through a fully integrated CCA. In the preceding spreadsheet a total of $6.989, including Sales Tax and Local Cannabis Tax, is paid by the consumers for the same 250 8-gram packages of flower. The sale of this flower as medical cannabis drops the price per package to the consumers from $40 to $27.95. The total of $6,989 paid by the consumers for the flower as medical cannabis through a fully integrated CCA will be divided: (1) governmental agencies for taxes collected from consumers, 22.1%; (2) dispensary revenue, 17.5%; (3) distributor revenue, 18.3%; and (4) cultivator revenue, 42.1%.

The preceding illustrates why we have been touting CCAs since before this legislation became effective. The same packages of flower that cost consumers $10,000 as adult-use cannabis can be sold to the consumers as medical cannabis through a CCA for less than $7,000. California collects all of its CCT and Cannabis Excise Tax (“CET”), and local governmental agencies collect all local cannabis taxes. Best of all, the cultivators who grow the cannabis make twice as much money. This is the reason the Legislature created CCAs.

The use of a CCA to move extracted oil from cultivator to consumer as medical cannabis produces even more dramatic results than the movement of flower as medical cannabis.   We will shortly publish an article describing the financial benefits of moving oil from cultivator to consumer through a CCA as medical cannabis.


Sean HockingSean HockingSeptember 5, 2019
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27min2120
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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

We have spent the past couple of articles reviewing the differences between “bookkeepers”, “generic accountants”, and “professional accountants”, the final phrase being limited to certified public accountants [‘CPAs” in the United States[1]. We add mention of Enrolled Agents [“EAs”][2] noting that they are “Circular 230 Practitioners” many of whom, are or have been employed by the Internal Revenue Service, and may be skilled at “Tax Resolution[3]”.

 

We have summarized the resources available to licensed firms of CPAs that are members of the American Institute of CPAs, the Private Companies Practice Section [“PCPS”], the Tax Section, and various state societies[4]. We apologize for the way we build rigorous background in our articles, however, we believe that is part of their value as references for our readers[5].

 

We have defined the roles and skills of the participants in the financial and tax space for the legal commercial cannabis industry. Let’s see if we can provide an example of how we approach a group of promoters that have decided that they want to form, capitalize, license and operate a cultivation operation and a companion cannabis extraction operation in California. While there are certain items that are unique to California, the basic pattern is the same in many other state[6].

 

As we dive into the formation and operation of a cannabis business, we need to make a shameless plug for an article that is about how we think our clients can make the best use off our services. [See Effective Use Professional Services]

 

The core team of advisors should be selected, the composition of which will vary according to the size, nature and operations of the business. [We are going to assume that our entity does not have any intention of entering the public capital markets at this time. However, it may decide to seek money from accredited investors under the California Dept. of Business Oversight.[“CDBO”] Small Securities Exemptions provided in Sec. 25102(f)[7].

 

The core team must include law firm with cannabis industry experience[8] , a firm of certified public accountants, a firm or individual freelance “generic accountants” and “bookkeepers” that are under the direction and supervision of senior company executives and the outside CPA firm. If the size of the business warrants it, an outside fractional CFO may also be appropriate [who should be under the same supervision], a business banker for day to day banking, cash management and credit card processing, an insurance broker to manage multiple needs, a payroll processor[9] and other consultants as necessary [Once again, please note that the focus in this article is on accounting, tax, regulatory compliance and indirectly licensing.

 

Once the structure of the entity or entities has been decided, they need to be:

Formed in the appropriate jurisdictions and qualified in any necessary related jurisdictions with the Secretary of State [ California SOSDelaware Division of Corporations].

The entity needs an Employer Identification Number from the Internal Revenue Service [“IRS”][10]. Then registration for indirect cannabis taxes[11] [CCT and CET] and a Seller’s Permit is done with CDTFA, and employment taxes are done with EDD.

 

There are situations where somewhat more specialized documents may be required.

A primer on Non-Disclosure Agreements can be found here.

 

Article on the How To Fund A Start Up [includes “Venture Funding”] and a Fundraising Survival Guide.

 

Y Combinator – Simple Agreement Future Equity – they can be used to make “bridge notes” is needed.

 

The items above should permit the business to form a legal structure, and get to the point where they can set up accounting software[12]. We recommend Sal Cucinella and Lilypad for Fishbowl as the “bridge” to METRC.

 

Where necessary, bank accounts should be opened, detailed procedures for internal accounting controls over cash developed and documented, and coordinated with both business operations and security.

 

If the business is going to have a customer facing front end, they need to select a Point-of-Sale system and insure that it can interface with the back-end general ledger.

 

We don’t place much value in pre-constructed charts of accounts for cannabis businesses in California. There are just too many distinct sets of rules for numerous purposes. We tend to develop the Chart of Accounts from checklists we have developed which originate from an article – Which Set off Books?

 

Just as we can be certain that we will set up an entity structure, someone is going to want a change, and there are traps and issues associated with that[13].

 

We remind everyone that we have all of this in a climate of provisional licenses and annual licenses that are renewable after a year.

 

While we are at it, we might as well mention some good news…we will say with certainty that fifty percent or more of the cannabis industry licensees in California won’t be around in a year. Once of the big reasons is going to be enforcement action by CDTFA with respect to Cannabis Tax Audits. We have yet to see a business that is maintaining records that meet recordkeeping requirements.

 

We note that we have note even scratched the surface on the next level of issues which include

Application of IRC Sec. 280E and YES the provisions apply differently for the various types of licensees.

 

We haven’t touched on expense allocations, state withholding.

Consequences of alternative choices in a capital structure and investor returns.

 

While important, for the moment, we are not going to dwell on the fine details associated with what we call the “local portion” of the “dual control” features contained in the California cannabis statute[14]. A resource is provided at California Cannabis Portal.

 

Appendix – Outline for Accounting Best Practices

  • “Use your primary accounting system as the general ledger only for sales, cost of sales and inventory.
  • Use your primary accounting system’s department classification functionality within a single accounting file and use separate files for each legal entity. DO NOT commingle a management company or other entities with your dispensary.
  • Use the same chart of accounts in each company’s accounting file. This will make it easier to prepare and confirm financial information.
  • Keep the details of sales, cost of sales and inventory in the tracking and point-of-sale systems and archived monthly.
  • Document the services and transactions between all your dispensary-related entities.
  • Follow all intercompany contracts and pay/record the intercompany bills monthly.
  • Ensure all inventory is on your balance sheet at the end of each reporting period.
  • Create a separate cash general ledger account for each safe.
  •  Develop and document a process to determine the total cost of goods sold and follow it strictly.”

 

[1] See Rules Apply to Everyone and Cannabis Work – Division

[2] We have mentioned our respect for the skills of some of the EA’s we have encountered in practice. We have also expressed our disgust with the outrageous claims contained in much of the advertising and marketing material which has been produced by the National Association of Enrolled Agents [“NAEA”], notably their “America’s Tax Experts” campaign. They should realize that the “Experts” claim is probably a violation of Circ. 230 Sec. 10.30(a)(1). We created “America’s Tax Experts – A Cruel Hoax” as part of our effort to provide correct information, and wrote proposed legislative amendment to the statue that underlies Circular 230 you can read here.

[3] We have always been impressed by the quality of both the material and presenters at NAEA’s National Tax Practice Institute [“NTPI”]. We have had significant issues with Tax Marketing HQ, and we highlight a significant collection of inappropriate, crude and otherwise inappropriate comments at Smelly Stinky EA

[4] Our firm and I are members of the state CPA societies in every state where we are licensed – California, Florida, Illinois, New York, Oregon [Applied] and Texas. The state society committee network is invaluable. Since it will come up, feel free to verify my licenses here.

[5] We have compiled a number of collections of Whitepapers, Tools and Guides for the commercial cannabis industry, particularly California. We note that unlike some of our peers, we didn’t package them up and seek to sell a $5K course under the “Cannabis Genius” moniker, nor have we implied that there is any secret to this process. We share for the benefit of the cannabis industry, specifically the CPA profession that services it. The following are some of the next “generation” of professional accountants working in the cannabis industry – Diana Halenz, CPA, John Cornwell, CPA, Shane Eloe, CPA, Mel Sams, CPA , Jeff Calloway, CPA and Zephrina Cazaubon CPA, EA.

 

See Cannabis Business Start Up – a series of Whitepapers for new California cannabis industry businesses, aBIZinaBOX CPG – Resources For CPA Firms serving the cannabis industry, aBIZinaBOX CPG – Doing Cannabis Business in Cash, and our Manufacturing SOP’s [by invitation]

 

[6] A brief history of legal cannabis in California can be traced through Background – California Cannabis Regulation, California Cannabis Cultivation – Qualification as Farming, Keeping the Promise of Proposition 215, Implementing Proposition 64 – Marijuana Policy in California

,

[7] Corporations Code Title 4, Division 1, Part 2, Chapter 1, Sections 25100-25105

 

[8] The skills required of cannabis industry attorneys has increased substantially. At a minimum for a small business, the firm needs to have skills as business transactional, corporate. land-use and zoning, environmental, taxation [though the tax and regulatory compliance responsibilities can and in many cases should be divided between counsel, and an CPA firm with a senior contact that has an MS in Taxation, possibility business litigation and criminal procedure,

 

[9] Gusto.com is our recommended payroll processor.

 

[10] The entity may need to make a “Check the Box Election – Form 8832, S Corporation Election – Form 2553, or QSSS Election Form 8869, or Form W-9 for vendors. We may also need S Corporation Stock & Debt Tracking

 

[11] See Guide for Cannabis Businesses

[12] In the interest of simplicity, we are going to select QuickBooks Online – Essentials Edition for the businesses’ general ledger, boxstorm.com by Fishbowl Inventory for Distribution, and Fishbowl Manufacturing for Extraction and Manufacturing [which we will “containerize” in a Virtual Machine either on AWS or MS azure.com].

 

Our individual desktop productivity and ECM will be a combination of Office 365 E3, Google Cloud G Suite Business or Dropbox Business. If HIPAA or similar “hardening is required, we lay sookasa.com on top.

 

[13] See Transactions Involving Changes in Ownership, Financial Interests and Entities, BCC – Commercial Activities

 

[14] The California statutes provide that the cannabis industry is to be regulated by three entities, the lead agency is the Bureau of Cannabis Control [“BCC”]which is responsible for licensing Dispensaries [On-Premise], Dispensaries [Off-Site], Distributors, and Distributors [Transportation Only]. Cultivation licenses are overseen by the CalCannabis division of the California Dept. of Food and Agriculture [“CDFA”], and Extraction, Manufacturing, and Testing Laboratory license are managed by the Manufactured Cannabis Safety Branch [“MCSB”] division of the California Dept. of Public Health [“CDPH”]. Finally, Cannabis Cultivation Tax [“CCT”], Cannabis Excise Tax [“CET”] and Sales Tax are the responsibility of the California Dept. of Tax and Fee Administration [“CDTFA”] See “Blowing Smoke


Sean HockingSean HockingSeptember 5, 2019
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7min2570
05.09.2019

Two years of trials in the Riverland and South East of nine different varieties has demonstrated the industrial hemp industry’s potential in South Australia, according to a State Government report released today.

The South Australian Research and Development Institute (SARDI) report outlines the success of industrial hemp as an irrigated summer crop under the state’s often challenging weather conditions.

Minister for Primary Industries and Regional Development Tim Whetstone said the trials have demonstrated a number of factors for licenced growers to consider when planting industrial hemp.

“The results of two years of trialling nine varieties are positive and will support ongoing investment in the burgeoning industrial hemp industry,” said Minister Whetstone.

“These trials have shown under the right conditions, including planting in free-draining soil and using good quality irrigation water, there was good germination and growth at the trial sites. There were challenges at the Kybybolite trial site in the 2017/18 trials primarily due to the salinity of the groundwater, so the trial was moved to Maauope for the 2018/19 trials.

“With free draining soil and high-density plantings, the results showed industrial hemp varieties performed successfully during the October to January period, particularly in the hot summer heat of the Riverland where the plants reached more than three metres high.

“The first commercial industrial hemp harvest in South Australia occurred during the 2018-19 growing season and the growing industry is anticipated to have a farmgate value of $3 million annually within five years.

“Current and potential growers are looking to order seed for the 2019-20 season and this information will also assist them with planning their growing schedule.”

Initial trials, conducted at Loxton and Kybybolite, compared five different industrial hemp varieties, while the 2018-19 trials looked at six varieties.

“Some of the varieties were dropped during this latest round of trials based on the initial results, in favour of other varieties that were believed to be more suited to South Australian conditions,” said Minister Whetstone.

“The results not only look at growing rates but also assess the grain and fibre yield as to its suitability for a range of uses. To date the State Government have approved 13 cultivation licences and two processing licences for industrial hemp in South Australia.”

The research trials are a collaboration between SARDI, the University of Adelaide and the CSIRO. A third round of trials for six varieties is set to commence at Loxton and Maaoupe.

Industrial hemp is produced from cannabis plants with low tetrahydrocannabinol (THC) content – less than one per cent – in the leaves, flowers and stems.

INDUSTRIAL HEMP PRODUCTION IN SOUTH AUSTRALIA RESOURCE PAGE

 

To view the latest report, visit www.pir.sa.gov.au/industrialhemp

Or read here..

SA_Industrial_Hemp_Trials_19_Update_Report


Sean HockingSean HockingAugust 30, 2019
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19min5130

By Teri Buhl

A wholesale CBD oil company, called Folium Biosciences, is being accused of siphoning off cash to its founder Kashif Shan and another top executive in a lawsuit filed this week in Colorado state court.

Kashif Shan

The accusation comes while Shan is courting potential outside buyers for the company.

The Colorado Springs-based company, whose legal corporate name is Whole Hemp Company LLC,  is being sued by its former Vice President of business development and marketing, Dale Takio, after Shan allegedly tried to cut him out of his promised equity in the privately held company. The lawsuit accuses the company, Kashif Shan and Quan Nguyen of breach of contract, breach of fiduciary duty, and demands an accounting of the company books and records.

Quan Nguyen

Folium made news this January when it received a $3 million investment from U.S. based Australis Capital, which is a financing spin-off of Canadian cannabis powerhouse Aurora. Australis is traded publicly on the OTC pink sheets under ($AUSAF) and is run by Scott Dowty.

Shan said in a podcast with Green Rush that the investment was a secondary offering and the funds were used to pay off some of its early investors but looks forward to a long partnership with Australis. Shan also bragged that the company funds its expansion through its own revenues and doesn’t need outside capital, which according to people familiar with the company are in the single digit millions.

Folium Biosciences says it is the largest vertically-integrated producer, manufacturer, and global distributor of hemp-derived phytocannabinoids. It is a business-to-business, bulk and wholesale supplier of hemp-derived CBD 0.0% THC oil, CBD water-soluble technology, CBD 0.0% THC edibles, cosmeceuticals and CBD for animal health. The company ships to over 20 countries internationally, according to Shan.

Henry Baskerville: Fortis Law Partners

The state court lawsuit, filed by corporate litigator Henry Baskerville of Colorado-based Fortis Law Partners, says Takio was originally offered a .5% equity as part of his compensation package and it was negotiated down to .25%. Emails of the equity negotiation between Takio and Shan were included in the lawsuit but there is no official signed contract attached to the legal filings. Folium has countered the suit by filing an action in Colorado federal court asking for a judge to make a declaratory judgement that there is no equity contract with Takio. Because of diversity of residence issues the federal court motion has a chance of being thrown out giving way to the State court case leading the court battle. The federal court action was filed after Takio’s lawyer had sent a demand letter notifying the company of the coming lawsuit.

Takio accuses the company of secretly recording employees who are located in a one-party state, which means each party has to agree to be recorded otherwise the recordings are illegal. But the juiciest part of the lawsuit takes a look Shan’s self-dealing and negligence, according to first hand knowledge by Takio.

The lawsuit states :

“For example, on January 8, 2019, Shan and Nguyen caused $585,070.55 to be transferred from Folium’s bank account to Nguyen. That same day, Shan and Nguyen caused $1,999,921.84 to be transferred to Shan’s wife. On January 18, 2019, Shan and Nguyen caused $464,745.69 to be transferred to Nguyen. Also on January 18, 2019, Shan and Nguyen caused $1,664,672.54 to be transferred to Shan’s wife.

In other words, in January 2019 alone, Shan and Nguyen caused $3,664,594.38 to be transferred to Shan’s wife and $1,049,816.24 to be transferred to Nguyen. Other Folium members, such as Takio did not receive similar distributions.”

Shan has made statements to the press that the company does pay dividends to its seed investors. The company refused to answer questions from Cannabis Law Report regarding if Shan’s wife has any official job at Folium that would justify the payments or if she is an investor in the company. According to a person who has worked with the company Shan has allegedly made comments to staff that ‘his wife is good for hiding money’. His Linkedin bio doesn’t list  any work experience before starting Folium but he said on a podcast he previously worked in the tech business in San Francisco. Shan is a Colorado resident.

A minority percentage of equity ownership, which according to an email from Shan, is given out to senior staff to lure talent to the company. While Shan publicly tells the press he is not interested in taking the company through a public stock offering he privately tells staff that he is seeking a buyer. That courted buyer is Aurora Cannabis ($ACB), according to people who are familiar with the company. Shan has said he received an initial $800 million offer but thinks he can get $2 billion for the company. A number that could be an industry record and outweighs a comparable value of another CBD seller Charlotte’s Web.   Charlotte’s Web is currently trading around ten times its sales in revenue. The hemp/cannabis industry is currently using revenue to value companies. Assuming Folium is making similar revenue numbers a $2 billion offer would be 20 times sales revenue valuation. Given how fast the market is seeing sales of CBD jump and a hype of the product because the Farm Bill made CBD without THC legal who knows where valuations will go. Or if Shan’s 2 billion buyout is a pipe dream.

Takio’s lawsuit last line of allegations says….

“On information and belief, Shan and Nguyen have engaged in numerous other acts of misconduct that have caused significant harm to Folium and its members, including Takio”.

Basically making a broad warning that other dubious allegations could come out in an amended complaint.

Folium has definitely been through some recent employee turnover with their general counsel also recently leaving the company.

Justin Baily: Sanders Law Firm

Folium is represented by Justin Baily of Colordao Springs-based Sanders Law Firm. Attorney Baily did not respond to a request for comment. Takio would not comment on the lawsuit only referring us to his attorney who when reached for comment said he thinks the lawsuit speaks for itself.

 

Resources

Law 360 Whole Hemp Company, LLC v. Takio

 

DOCUMENT 1

Plaintiff: Dale Takio; an Individual, in his own capacity and derivatively as a member on behalf of Whole Hemp Company LLC d/b/a Folium Biosciences

v.

Defendants: Whole Hemp Company LLC d/b/a Folium Biosciences, a Colorado limited liability company; Kashif Shan, an Individual; and Quan Nguyen, an Individual.

Folium state court employment lawsuit Aug 28 2019

 

DOCUMENT 2

WHOLE HEMP COMPANY, LLC d/b/a FOLIUM BIOSCIENCES, Plaintiff,

v. Civil Action No. DALE TAKIO,

Defendant.

Folium federal court lawsuit 8.20.19

 

I’m a professional financial investigative journalist who has written for the Greenwich Time, Hearst CT Newspapers, Forbes Magazine, Fortune.com, The Atlantic.com, New York Magazine, New York Post, Trader Monthly, Housingwire, ML-Implode, The Business Insider, Long Island Business News, Dealbreaker, New York Observer, Bitcoin Magazine, DealFlow Media, SIRF.org and more. For the last five years I have been a contributing reporter for Market Nexus Media who publishes a financial trade publication called Growth Capital Investor.

I earned my breaking/investigative news chops reporting during the financial crisis in 2008 for the Sunday edition of the New York Post. I was one of the first to report on the missteps at IndyMac that lead to government investigations and lawsuits against the banks founders. Caught hedge funds like Carrington Capital abusing investors without disclosing conflicts of interest with senior RMBS bond holders; they were sued by Wilbur Ross for Civil RICO. I exposed Bear Stearns misleading their own investors and monoline insurers on the quality of the loans in their mortgage-backed securities, which led to a fraud lawsuit against JP Morgan/Bear Stearns and the $13 billion settlement with the DOJ in 2013. Since 2010 multiple Wall Street firms, that my reporting warned about first, have been [JP Morgan, SpongeTech, Security Savings Bank, SAC Capital, Palm Beach Capital Management, New Stream Capital, NIR Group/Cory Ribotsky, Bear Stearns RMBS Traders, Mike Perry IndyMac CEO, Steven Muehler and the Nanocap MarketPlace, Barry Honig and The Frost Group] investigated or charged for financial violations by the FBI/SEC/State AG or shut down by bank regulators.

The Huffington Post named me the number three most dangerous financial journalist for being willing to challenge the establishment and inform readers best. I’m working on trade-marking “Smashmouth Journalism”

Read More About Teri’s Work At: https://www.teribuhl.com/about/


Sean HockingSean HockingAugust 29, 2019
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5min2900

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PUBLISHER:  CANNABIS LAW REPORT

It has been just over a month since the public comment period closed in the wake of the public hearing held by the FDA, “Scientific Data and Information about Products Containing Cannabis or Cannabis-Derived Compounds”. Over 4,000 comments were docketed, ranging from controlled scientific data submissions to tales of miracle cures to horror stories. It will be interesting to see what the agency gleans from the docket.

Nevertheless, the FDA currently stands as a pillar of uncertainty in the cannabis industry, at least when it comes to products derived from “hemp”, now defined essentially as Cannabis sativa L. and its derivatives containing no more than 0.3% THC by dry weight following the enactment of the 2018 Farm Bill. While the USDA has issued a confirmation that hemp is no longer a controlled substance, uncertainty remains about what FDA-regulated products may and may not be shipped across state lines.

The FDA approved a purified CBD product for the treatment of certain types of seizures in 2018 under its new drug application process. This would lead one to believe that CDB is now considered a “drug” as a matter of law and has to be approved by the FDA to be sold or marketed interstate. The FDA has also issued several warning letters to makers of CBD-containing products labeled with certain health or therapeutic claims, suggesting that that is, in fact, the current view of the agency. But what about CBD that is derived from hemp in view of its removal from the controlled substance list? Not only that but what about foods and dietary supplements containing CBD derived from hemp?

Under the Food, Drug & Cosmetic Act, once a product is approved as a drug, it cannot be a constituent of a food or dietary supplement product legally sold or marketed in interstate commerce, unless it was present in these products prior to FDA approval of the ingredient in question as a drug, or prior to the publication of clinical trial data associated with drug approval (I’m paraphrasing, but that’s the general idea). The FDA has already stated that this exception does not apply for CBD.

The uncertainty is even greater for the host of CBD-containing products that are likely cosmetics under the Food, Drug & Cosmetic Act. The FDA guidance on these products is basically that while there is not a literal prohibition on the books, a substance in a cosmetic that affects the structure or function of the body or has some therapeutic effect may be a drug, and the FDA is likely to issue warning letters in cases where CBD-containing products such as oils and lotions bear labels touting therapeutic claims.

Hemp may be a safer bet where CBD is present in trace amounts. The FDA has responded to at least three hemp-related GRAS notifications (submissions asserting substances are Generally Regarded As Safe and should be allowed in certain FDA-regulated products) positively, but with the caveat that there is no guarantee that, for example, the products can be legally introduced into the food.

It will be interesting to see where the FDA falls once the agency digests the public comments in the wake of the public hearing on cannabis products.

Scott Lloyd                                           
Counsel
Offit│Kurman®
Attorneys At Law

the perfect legal partner®
301.575.0357     Washington
301.575.0335      Facsimile      

 


Sean HockingSean HockingAugust 29, 2019
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16min2010
If you wish to re-publish this story please do so with the following accreditation
AUTHOR:   aBIZinaBOX Inc. and Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

Bringing Back The War – A bit of background on illegal storefront dispensaries tells us And the enforcement in California will come from both state and local authorities. The City of Los Angeles recently launched a massive crackdown on unlicensed, illegal cannabis businesses, filing misdemeanor charges against more than 500 people and shutting down 105 illegal cannabis businesses, including cultivation operations, extraction labs, and delivery companies across the city. In Los Angeles, a charge of unlicensed commercial cannabis activity within the city carries a potential sentence of six months in jail and $1,000 in fines.

Los Angeles’ City Attorney Mike Feuer, who has a track record of going after illegal cannabis businesses within the city, summed up the city’s reasoning behind its recent enforcement actions succinctly:

 

“If they’re going to go through this process, it just cannot be the case that others that flout the rules are allowed to function. It’s bad for those who buy from them, it’s bad for the communities in which they’re located and, again, it threatens to undermine the viability of a system that’s predicated on lawful licensing.”

 

Although there are currently around 165 approved cannabis storefronts and delivery businesses in Los Angeles, there are many more operating without the necessary approvals, a problem that has plagued the city for years and will likely be an ongoing issue.

“Commercial Cannabis Activity” includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products.

A current listing of the penalties of cannabis offenses in California can be found here. The relevant provisions of California law are found in Health & Safety Code [”HSC”] Sec. 11357[1] and Penal Code [“PEN”] Sec. 1170(h)[2]We happened to locate a fascinating document – Drug Offenses: Maximum Fines and Terms of Imprisonment for Violation of the Federal Controlled Substances Act and Related Laws. A quick check of the Federal rules found the following:

 

“Marihuana CSA Penalties

  • 1000 kilograms or more or 1000 or more plants  $10/50 million 10 years to life
  • 100 to 999 kilograms or 100 to 999 plants $5/25 million 5 to 40 years 
  • 50 to 99 kilograms or 50 to 99 plants $1/5 million Up to 20 years
  • Under 50 kilograms, 10 kilograms of hashish, 1 kilogram of hashish oil, or 1 to 49 plants $250,000/$1 million Up to 5 years”

 

We truly have no desire to revive the “War on Drugs” however, we can imagine a scenario where Penal Code Sec. 1170(h) is amended to adopt the Federal penalties for second and subsequent offense convictions for Illegal Commercial Cannabis Activity. We would be willing to be that while “padlock” procedure might have a small impact, the possibility of up to forty years of incarceration just might be sufficient to get a substantial number of the recalcitrant black market to come out from underground into the light.

 

It would certainly provide law enforcement with the tools they need to either stamp out a large portion of the black market or scare some of them straight. The authorities have telegraphed a willingness to charge felonies for environmental damage. It is truly unfortunate, but it might be just what is needed to destroy the black market.

 

It a reincarnation of the carrot and stick approach – you shove the carrot up their ass and beat them with the stick. As we think this through, it might be possible to implement something like this without requiring legislation. The state and local authorities could selectively turn offenders over to federal law enforcement for prosecution. A very similar approach was deployed in Virginia a number of years ago to deal with illegal firearms and it was incredibly successful [3]

 

[1] ARTICLE 2. Cannabis [11357 – 11362.9]

  ( Heading of Article 2 amended by Stats. 2017, Ch. 27, Sec. 121. )

“11359.  

Every person who possesses for sale any cannabis, except as otherwise provided by law, shall be punished as follows:

(a) Every person under the age of 18 who possesses cannabis for sale shall be punished in the same manner provided in paragraph (1) of subdivision (b) of Section 11357.

(b) Every person 18 years of age or over who possesses cannabis for sale shall be punished by imprisonment in a county jail for a period of not more than six months or by a fine of not more than five hundred dollars ($500), or by both such fine and imprisonment.

(c) Notwithstanding subdivision (b), a person 18 years of age or over who possesses cannabis for sale may be punished by imprisonment pursuant to subdivision (h) of Section 1170 of the Penal Code if:

(1) The person has one or more prior convictions for an offense specified in clause (iv) of subparagraph (C) of paragraph (2) of subdivision (e) of Section 667 of the Penal Code or for an offense requiring registration pursuant to subdivision (c) of Section 290 of the Penal Code;

(2) The person has two or more prior convictions under subdivision (b); or

(3) The offense occurred in connection with the knowing sale or attempted sale of cannabis to a person under the age of 18 years.

(d) Notwithstanding subdivision (b), a person 21 years of age or over who possesses cannabis for sale may be punished by imprisonment pursuant to subdivision (h) of Section 1170 of the Penal Code if the offense involves knowingly hiring, employing, or using a person 20 years of age or younger in unlawfully cultivating, transporting, carrying, selling, offering to sell, giving away, preparing for sale, or peddling any cannabis.

(Amended by Stats. 2017, Ch. 27, Sec. 124. (SB 94) Effective June 27, 2017. Note: This section was amended on Nov. 8, 2016, by initiative Prop. 64.)”

[2] (h) (1) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years.

(2) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision shall be punishable by imprisonment in a county jail for the term described in the underlying offense.

(3) Notwithstanding paragraphs (1) and (2), where the defendant (A) has a prior or current felony conviction for a serious felony described in subdivision (c) of Section 1192.7 or a prior or current conviction for a violent felony described in subdivision (c) of Section 667.5, (B) has a prior felony conviction in another jurisdiction for an offense that has all the elements of a serious felony described in subdivision (c) of Section 1192.7 or a violent felony described in subdivision (c) of Section 667.5, (C) is required to register as a sex offender pursuant to Chapter 5.5 (commencing with Section 290) of Title 9 of Part 1, or (D) is convicted of a crime and as part of the sentence an enhancement pursuant to Section 186.11 is imposed, an executed sentence for a felony punishable pursuant to this subdivision shall be served in the state prison.

(4) Nothing in this subdivision shall be construed to prevent other dispositions authorized by law, including pretrial diversion, deferred entry of judgment, or an order granting probation pursuant to Section 1203.1.

(5) (A) Unless the court finds that, in the interests of justice, it is not appropriate in a particular case, the court, when imposing a sentence pursuant to paragraph (1) or (2), shall suspend execution of a concluding portion of the term for a period selected at the court’s discretion.

(B) The portion of a defendant’s sentenced term that is suspended pursuant to this paragraph shall be known as mandatory supervision, and, unless otherwise ordered by the court, shall commence upon release from physical custody or an alternative custody program, whichever is later. During the period of mandatory supervision, the defendant shall be supervised by the county probation officer in accordance with the terms, conditions, and procedures generally applicable to persons placed on probation, for the remaining unserved portion of the sentence imposed by the court. The period of supervision shall be mandatory, and may not be earlier terminated except by court order. Any proceeding to revoke or modify mandatory supervision under this subparagraph shall be conducted pursuant to either subdivisions (a) and (b) of Section 1203.2 or Section 1203.3. During the period when the defendant is under that supervision, unless in actual custody related to the sentence imposed by the court, the defendant shall be entitled to only actual time credit against the term of imprisonment imposed by the court. Any time period which is suspended because a person has absconded shall not be credited toward the period of supervision.

(6) When the court is imposing a judgment pursuant to this subdivision concurrent or consecutive to a judgment or judgments previously imposed pursuant to this subdivision in another county or counties, the court rendering the second or other subsequent judgment shall determine the county or counties of incarceration and supervision of the defendant.

(7) The sentencing changes made by the act that added this subdivision shall be applied prospectively to any person sentenced on or after October 1, 2011.

(8) The sentencing changes made to paragraph (5) by the act that added this paragraph shall become effective and operative on January 1, 2015, and shall be applied prospectively to any person sentenced on or after January 1, 2015

[3] A crime reduction strategy in Richmond, Virginia implemented to deter former and would-be offenders from carrying and using firearms, with an overall goal of reducing firearm-related homicides.

 

Program Goals
Project Exile was a crime reduction strategy launched in 1997 in Virginia, by the U.S. Attorney’s Office, as a result of the spike in violent crime rates in the late 1980s and early 1990s. During these years, Richmond, Virginia consistently ranked among the top 10 U.S. cities in homicides per capita. Specifically, in 1994, Richmond was ranked 2nd for homicides per capita, with a homicide rate of 80 per 100,000 residents. Overall, the goal of the project was to deter felons from carrying firearms and decrease firearm-related homicides through both sentence enhancements for firearm-related offenses and incapacitating violent felons (Rosenfeld, Fornango, and Baumer 2005).
Program Activities
Essentially functioning as a sentence enhancement program, Project Exile targeted felons who were caught carrying firearms (i.e., felon-in-possession-of-a-firearm [FIP]) and prosecuted them in federal courts where they received harsher sentences, no option of bail, and no potential for early release. Prior to Project Exile, FIP cases could be processed in state courts. Through increasing the expected penalty for firearm-related offenses, Project Exile sought to deter both firearm carrying and criminal use. Additionally, through sentencing more violent offenders to longer prison sentences, the program sought to reduce crime through incapacitating violent felons (Rosenfeld, Fornango, and Baumer 2005; Arends 2013).

In addition to incapacitating offenders, the program sought to deter would-be offenders. To make the public aware of the sentence enhancements surrounding firearms, a broad “outreach” campaign was implemented using media outlets. The public campaign was implemented to increase community involvement and to send a message of zero-tolerance for firearm offenses. The goal of the message was to indicate a “swift and certain” federal penalty for firearm offenses. Advertised in both electronic and print media outlets, the campaign was featured on city buses and business cards displaying a specific message: “an illegal gun will get you five years in federal prison” (Rosenfeld, Fornango, and Baumer 2005).

The program consisted of a number of distinct elements:

  • A felon in possession [“FIP”]  of a firearm would be remanded and denied bail until trial.
  • A conviction would result in a MINIMUM sentence of five years in federal prison.
  • The convicted felon would be denied commissary, library and mail privileges for the duration of their sentence
  • The incarceration would be in a facility AT least a thousand miles from the felon’s home

We think that a similar program would put some black market operators in a “world of hurt”



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