Sean Hocking, Author at Green Market Report

Sean HockingSean HockingNovember 8, 2019
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48min5120

Folium Biosciences, based in Colorado, is one of the US’s largest privately owned CBD processing companies. As the demand for CBD has risen from many sectors of the US & international economy over the last 36 months, so, it seems, has the desire to process business without the normal checks and balances.

After a CLR story published last month about owner , Kashif Shan, further irregularities and questions about Folium’s products and operational management have come to light.

CannTrust was a wake up for the regulated Canadian market will Folium be the same  for the USA as 2019 draws to a close. Colorado has long been regarded one of the the US’s better state markets for efficient compliance and good regulatory management by state and local authorities.

We ask, after the following revelations detailed below, if in the first 2020 sitting, CO legislators have to go back to the drawing board and effect a stricter regulatory and compliance regime than the state currently has in play.

Teri Buhl reports

 

PART I

Formulating Folium Finance: Australis Stock Hiked after Misleading Folium Announcement  

Colorado based Folium Biosciences, run by Kashif Shan, teamed up with Scott Dowty of publicly traded Australis ($AUSAF), to announce the launch of Folium Finance, April 2019.

 

 

Kashif Shan Folium Biosciences

 

Australis is a U.S. based spin off of Canadian marijuana grower, Aurora, with a strategy focused on investing in and acquiring cannabis related companies in the U.S.

 

Scott Dowty Australis (You Tube)

 

A press release issued by Folium April 3, 2019 said Dowty had served as a strategic advisor to create Folium Finance, a collection of financial products and services designed as a new means for cannabis start-ups to get banking services from non-traditional banks.  Except, according to two senior Folium employees involved in the transaction Australis at no time had anything at all to do with the creation of Folium Finance.

 

The press release was issued by Folium, not Australis, but contained within it, this quote from Australis.

 

“Our growing relationship with Folium Biosciences provides Australis and our brands access to the true global leader in the CBD space,” said Scott Dowty, CEO of Australis. “We firmly believe Folium Finance’s impressive and complete suite of financial service solutions is the industry game-changer.”

 

Australis stock price which had been trading around $.70 jumped to $1 $USD over two weeks after the press announcement. The sole purpose of the April press release was to announce the launch of Folium Finance.

 

Australis is listed on the Canadian Stock Exchange and was up-listed to the OTCQB earlier this year to trade on a U.S. based trading system called OTC Markets . The stock currently trades around 40 cents $USD.

 

Folium Finance was the brain child of Florida lawyer, Craig Brand, who had moved to Colorado to become the General Counsel of Folium Bioscience.

 

Craig Brand, Lawyer

 

Attorney Brand had an equity interest in a Loveland, Colorado hemp farm, called Space Cowboys before he became Folium’s general counsel. Brand also runs his own law practice that covers criminal and civil litigation under the business name, The Brand Law Firm with the Cannabis practice called Ganja Law.  According to people who have worked at Folium it was Brand, with the help of a former business development executive Dale Takio that ushered through the approval of Folium Finance by teaming up with a company called CannaSecure Alliance Partner. When John Schilhab, the head of CannaSecure, was contacted by Cannabis Law Report he said he has never met Scott Dowty and “didn’t know the man.” 

 

John Schilhab, CannaSecure

Dowty has refused to respond to multiple emails about the alleged misleading press release or what his exact role was at Folium Finance. When Folium was asked about the press release a local Colorado Springs lawyer  responded on behalf of the company threatening legal action if CLR wrote anything about Australis and Mr. Dowty’s relationship with Folium it could be considered putting the company in false light . The law firm also wouldn’t answer any detailed questions about Dowty or his CFO Michael Carlotti‘s exact role at Folium Finance. The attorney,  Justin Bailey of Sanders Law ,  did respond by email saying the transaction was private and as a result “the details CLR were seeking were protected by company confidentiality rules”.

 

Justin Bailey, Sanders Law Firm CO

 

According to two former Folium employees internal rumblings at the company this past spring were that Kashif Shan had stock or discounted warrants in Australis and the press release Folium wrote was used in the hopes of moving the stock price up. Cannabis Law Report has not been able to verify if Shan holds any stock or equity in Australis and Shan has refused to respond to any emails or calls for comment with regard to inquiries about Australis.

 

CLR has previously reported on Shan being accused in a lawsuit of financial misconduct involving moving money out of Folium into family bank accounts and not paying investors promised dividends or employees their equity.  Since then Folium and Shan have been sued by two more former staffers at Folium  in Colorado state court over alleged lies about equity ownership to induce top employees to work at Folium. The individuals suing Folium and Kashif Shan are: Dale Takio, Juanita Ramos, & Brandon Young. 

 

Folium indicates it employs around 200 people and is a vertically integrated cannabis company meaning they own, both, the farms that supply hemp and the processing facility to create what they label as THC-free wholesale CBD. This means the company sells CDB oil and other related products to retailers who then label and brand as their own products.

 

OWNERSHIP CONFUSION:

A local press story (* the story is  factually wrong because they report Diamond A owns Folium) has reported that a farm growing crops and hemp called Diamond A Farms out of La Junta and Rocky Ford, Co is the owner of Folium Biosciences. Folium sales people interviewed by CLR believed Diamond A is owned by Folium and were even asked to tell potential wholesale customers the Diamond A farm locations were Folium farms when clients came to visit the facilities. Folium’s website has a section talking about “our farms” but doesn’t list what the name of the farms are or provide links to their locations.

 

A records search in the Colorado government database  shows the required industrial hemp grower certificate is registered to Diamond A Farms. Colorado corporate registration records do not list an owner of Diamond A Farms only an agent named , Deborah L Bayles, who is a partner of local law firm out of Greenwood Village, Co called Stinson Leonard Street LLP.

 

Deborah L. Bayles, Partner Stinson

 

A subsequent search in the U.S. government federal vendors database that list companies approved to bid for government contracts shows Diamond A Farms is actually registered as a minority owned business with a Dianne Chavez as the owner. A minority owned business has to have a minority person (a women in this case) own at least 51% of the company to qualify for this status.  Dianne Chavez is the wife of Phillip Chavez who was listed as the original owner of Diamond A Farms before Folium showed up to grow hemp.

 

 

Bill von Gremp, a California M&A deal broker, who worked on the sale of a specialized hemp with a unique CBD to THC ratio from a Canadian company to Folium for their proposed Canada processing plant in Medicine Hat told CLR,

 

“Folium told us they wanted out of the grower business.

We tried to sell them the farm but Folium only wanted to buy the grown product.”

Source: https://medicinehatnews.com/news/local-news/2019/09/07/folium-seeks-temporary-local-facility/

 

Von Gremp agreed to negotiate with Folium on behalf of the Canadian company, including dealing with Kashif Shan, after he was introduced to the company by NBA hall of famer Rick Barry von Gremp said the deal isn’t expected to go through now and he had concerns about Folium’s promise to share a percentage of profits which was part of the deal negotiations.

 

Rick Barry, NBA Hall of Famer

  

Part of Folium’s ongoing pitch and advertising to wholesale clients is that the company has a propriety processing method that removes all the THC from the hemp.

 

 

PART II

Cutting Corners, Sidestepping Regulatory Requirements

 

According to over half a dozen former Folium employees, interviewed by CLR, mis-truths are simply party of the company’s  corporate culture.

 

This includes buying hot hemp, meaning cannabis with THC above the Federal mandated minimum % , from a California grower in August 2018 when Colorado hemp supply was unavailable to Folium because of strained relationships with local growers who had experienced slow or non-payment for goods by Folium, according to two former Folium employees.

 

According to two former Folium sales people involved in the California transaction Kashif Shan (aka Kash) asked a Folium sales employee to locate and negotiate purchase of some out of state (CO) hemp. Folium would be unable to meet sales commitments if they could not get access to  hemp stock .

 

The Folium salesperson who has asked to not be named for fear of retribution said he / she helped broker the deal via a women named Kristyne Croce who was a hemp broker he / she met at a  hemp/cbd Las Vegas conference called Super Zoo earlier that year.  When reached by phone Kristyne Croce admitted to CLR that she brokered hemp for Folium but said she did not believe she brokered hot product. Croce said the transaction was private and would not explain further details about the deal.

 

Super Zoo, Las Vegas 2019

 

This salesperson was told by Croce at the conference  the product  to be purchased had already been tested at the Oregon farm and had the legal limit (.3%) of THC to be considered hemp. When the product arrived at the processing plant in CO, and Folium subsequently tested it, the flower came up as “way above” the legal THC limit; meaning the company had just purchased adult use cannabis and transported it across state borders . Folium subsequently cancelled the check that secured the deposit for the payment telling the Oregon farm they would be unable to use the product.   

 

But then, according to two former  Folium sales employees familiar with the deal, the cannabis was used anyway to process CBD oil and subsequently sold.

 

Folium Biosciences is a Colorado headquartered company specializing in the cultivation, extraction, and manufacturing of hemp-derived bulk CBD ingredients and finished products. We are the largest known fully vertical cannabinoid extractor and producer in North America, shipping wholesale CBD products including: Broad Spectrum hemp oil (with 0.0% THC), water-soluble CBD powder, water-soluble CBD liquid, nano CBD, and finished goods throughout the United States and much of the world. Our emphasis on research, product development and clinical science is reflected in our state-of-the-art extraction processes and advanced formulations, resulting in multiple pending patents.
SOURCE https://foliumbiosciences.com/#

 

Folium’s General Counsel, Craig Brand, told Cannabis Law Report this story just wasn’t true.  But according to the former sales person who helped broker the deal and another sales person who heard the conversation, a member of the legal team was very aware of the processing and acceptance of the “hot product” and told the sales person he’d take care of the non-payment issue and to stop communication with the farm that grew the hot product.

 

After Cannabis Law Report published our first story on the alleged problems at Folium  , a former graphic designer at the company, based out of the Colorado Springs office came forward to inform CLR that they, as a designer employed at the company, had been asked to doctor Certificate of Analysis reports by  Folium management.

 

These reports / forms known as COA’s are used by Colorado CBD processors to prove to retail clients that the CBD is the percentage level the company says it is and that the THC level is the required zero %.

 

The former employee, said he / she  was unaware of how the doctored reports were used after they were passed onto his / her superiors.

 

According to multiple Folium staff who spoke with CLR the person who requested the changed CAO reports was Jenna Lubenicki V.P. of operations. Lubencicki, when reached on her cell phone denied the accusation and demanded to know the name of the whistleblowers.

 

A current wholesale client, Holistic Hounds, in Berkley California, was contacted by Cannabis Law Report and said they had  never had any THC level problems with Folium because they did their own third party testing once the wholesale product was received.

 

Additionally a former NBA hall of famer who also  acts as a brand ambassador for Folium, Rick Barry, told Cannabis Law report when reached on the phone that he has “never had any problems with Folium’s products”. Barry did not confirm if he had done any third party testing on the product, on his own.

 

But, a former Folium sales person, Jean Paule Fekete , said he knew of at least one client that did third party testing and the CBD level on product received from Folium was much lower than the level she had been promised. As a result Folium eventually returned the client’s money after multiple complaints.

 

Former Folium employees have also informed CLR that fudged CBD or THC levels were the least of their worries when it came to the company’s day to day operations.

 

Instead, their real concern was Folium’s management’s lack of willingness to follow the necessary regulatory requirements to create safe process and disposal of chemicals used to create CBD products.

 

CLR has learnt Folium  has already suffered two explosions at their processing plant  which included a 911 being called on the night of July 23, 2017, according to an internal company email chain obtained by CLR that included Kashif Shan. One explosion involved an oven, the other a refrigerator, according to counsel Craig Brand.

 

According to an email obtained by Cannabis Law Report from the July 2017 event, Folium staff were informed that the incident would create a delay in the availability of their product because 20 kilos had been contaminated but the email didn’t inform staff of the severity of the explosion. The email did promise Folium would work on safety conditions for staff.

 

In July 2017 an email from a member of  the Fire Protection Engineer team of the Colorado Springs Fire department, Steven Smith, sent to Folium showed serious concern was expressed by the CO Fire Dept because they had been informed Folium was housing 3000-5000 gallons of ethanol  without the required permits.

 

Two former Folium employees involved in operational matters at the company told CLR they were asked on more than one occasion  to rent trucks and move the ethanol to a friend’s house when the fire inspectors or OHSA came through the Colorado Springs plant.

 

This, we have learned, happened regularly throughout  2017 and 2018. Additionally a former driver for the company said he / she was asked to move dangerous chemicals, without relevant paperwork, by  Folium executive, Brad Jones, but had eventually refused to comply with requests because the company was not licensed to transport chemicals.

 

 

 

The driver also added that Folium’s Rocky Ford location  was used to house the chemicals the company wanted to hide from inspectors.

 

 

20094 Hwy 60 Rocky Ford, Co 81067, Google Maps

 

 

In an exit letter obtained by CLR one employee wrote to Folium executives in 2018 highlighting the company’s modus operandi for transporting regulated chemicals

 

“I’ve been instructed on many occasions to move thousands of gallons of ethanol in rented trucks, off site, in preparation for Colorado Springs Hazmat/Fire and OSHA inspections.”

 

A review of the Colorado OSHA website that tracks inspections, complaints and violations within the state’s regulated cannabis sector show that Folium has been fined a number of times over the last three years.

 

In 2018 the fines were listed as ‘serious’ and involved problems with chemicals among other safety issues in the processing facility. This summer (2019) the Colorado division of OSHA had to go to federal court and get a warrant to enter the facility after attorney Craig Brand denied their entrance on a surprise inspection, according to the warrant application.  The warrant listed over a dozen serious concerns that related to employee safety. David Nelson, a manager at OSHA, wrote in the warrant,

 

“Employees are exposed to chemical and fire hazards due to inadequate storage, handling, use, and clean-up of flammable liquids, such as hexane.”

 

Attorney Brand told Cannabis Law Report he didn’t allow the OSHA inspection because he wasn’t on the premises at the time and was surprised they wanted to review an area that held what he called “our propriety equipment”.

 

OSHA subsequently obtained warrant approval and entered the facility over a week later. As recently as September 30, 2019 Folium has settled fines that OSHA listed as serious concerning the control of hazardous energy and other safety issues.

 

Folium CEO, Kashif Shan would not answer any questions about the OSHA inspection or the fines when approached by CLR.

 

Attorney Brand is no longer with the company and said he was not aware of the September 2019 fines.

 

PART III

Strong Arm Tactics to Silence Whistleblowers and Competitors

“Intimidation” is the word used by former employees when talking about how Kashif Shan operates the company.

 

Over a half a dozen former Folium staff interviewed by Cannabis Law Report  said false internal charges, from being accused of taking a range of  illegal drugs at work, threatening other employees during arguments, and sharing trade craft with competitors, were made up about them when Folium management wished to move them out of the company’s employ  after they made specific complaints about operational matters.

 

This approach to HR management was seen as an avenue  for Folium, as a company, to avoid unemployment tax payments.  It is also alleged that Folium attempted to make some staff, leaving the company at their own will, sign NDA’s with a promise of only a few weeks extra payout.  As a result Cannabis Law Report is not currently in a position to name former Folium employees interviewed for this profile.

 

Additionally, we have learnt, when the Folium’s former head of sales, Ryan Lewis, left the company to launch his own bulk business sales CBD company called Global Canabanoids in January 2018. There was, we learn, an aggressive pursuit by Folium management to gather “dirt” or information about Lewis to build a lawsuit, according to an email written by attorney Craig Brand and obtained by CLR. Lewis did subsequently  file an arbitration claim against the Folium but it was settled out of court and the settlement was not made public. Internal documents obtained by CLR show Lewis had been given 7 percent equity in Folium when he came on as a new employee. 

Ryan Lewis, Chief Business Developer of Global Cannabinoids, talks about the emerging markets for CBD and hemp-derived products.Global Cannabinoids is a high volume producer and distributor of bulk and wholesale phytocannabinoid-rich (PCR) industrial hemp—naturally high in CBD, CBG, CBC, CBN, CBDA, and terpenes.

 

But Kashif Shan’s negative reaction about Lewis leaving and taking Folium clients with him went much further, much much further. The following allegations investigated by Colorado Springs Police read more like a Scorsese movie plot line than the machinations of a CBD processing plant and white labelling outfit.

 

According to three individuals who either worked at the company or were employed on a consulting basis, they all confirm that they heard first hand from a Folium executive of an attempt in the summer of 2018 to hire a person and pay a six figure sum to kill Mr Lewis.

 

Cannabis Law Report has spoken with a lawyer who had verified that the Colorado Springs Police department investigated the case but no charges were brought.

 

It’s unclear if anyone at Folium was ever able to actually hire a person to undertake the murder for hire or if the offer was made in the heat of the moment anger and not intended to be carried out.  Kashif Shan would not respond for comment about the alleged murder for hire offer. Former Folium counsel, Craig Brand, told CLR that  the claim was “ridiculous”. Henry Baskerville  Ryan Lewis’ lawyer   called the  Colorado Springs Police Department when he heard about the murder for hire plot and asked if the CO Springs Police Department were investigating. The officer said yes but would not comment to Baskerville on who they were investigating.

 

Henry Baskerville, Fortis Law Partners. Henry Baskerville, recognized by Super Lawyers, Best Lawyers in America, and National Trial Lawyers, is an experienced trial lawyer who focuses on complex commercial litigation, cannabis law, white-collar criminal defense, government contracts, and construction law.

  

Cannabis Law Report also learns that Shan told a cannabis podcast in a rare interview in January 2019  that prior to Folium he was a tech entrepreneur in San Francesco.

 

But CLR has not yet discovered after months of relevant research the name of this technology company. Also  we have been unable  to locate where this “tech”company  was based and what work he and they undertook.

 

A separate USA court records search shows that Shan was president of a real estate services company prior to the 2008 financial crisis in San Jose, California. The company, Aidan West Financial Group, and Shan filed for personal bankruptcy as a result of the financial crisis. Court records show the trustee for the company had to file a claim of fraudulently transference against the company saying Shan allegedly moved assets out of the company prior to the bankruptcy. The claim was eventually settled.

 

Editor’s note: In the reporting and research for this story Teri Buhl was repeatedly threatened over the last two months when trying to reach current Folium employees to get their response for comment about accusation or their misconduct saying they would report her to the local police for asking questions. Buhl ignored their threats.
This week Buhl was served with a lawsuit (prior to story publication) claiming defamation for calling Folium staff for comment and conducting journalistic research. Law360 – a US trade publication for Lawyers wrote about the attempt to silence Buhl before the publication of this story
Please see / download document at
https://www.scribd.com/document/433949012/Colo-CBD-Co-Accuses-Reporter-of-Defamation-Law360

 

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 HockingNovember 5, 2019
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15min1110
If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

A few days ago, we published a short note that described how a Cannabis Cooperative Association (“CCA”) could be utilized to circumvent the confiscatory nature of Internal Revenue Code (“IRC”) §280E[i]. Several our readers, including some purported experts, advised us that our suggestion would not work for them because the business organization with which they were involved pre-dated the enabling legislation for CCAs.

Read the law! The California Legislature anticipated this problem. The Legislature was aware many collectives and cooperatives were organized based on Proposition 215 long before a glimmer of hope for legalization even existed in fantasies regarding the future. Beginning even before Proposition 215 was passed, collectives and cooperatives were organized under various provisions of California law for the cultivation and underground distribution of marijuana. Many such groups formed a Nonprofit Mutual Benefit Corporation. Most did little else in the way of the creation of formalizing an organizational structure. There were, of course, some significant exceptions in which a group of individuals established formalized organizations.

Regardless of the extent to which an existing cannabis collective or cooperative has an established legal structure and formal documentation, the California Legislature created an avenue for such organizations to become CCAs. The enabling legislation for CCAs is found in Chapter 22, Title 10, of the Business and Professions Code (“B&P”). Articles 1-10 of Chapter 22 provide the substantive legislation for CCAs. The Legislature included Article 11 to specifically address the issue of existing cannabis collectives and cooperatives that would benefit from a conversion into a CCA[ii].

 

Article 11 provides in relevant part:

“26231. A corporation that is organized or existing pursuant to any law . . . may be brought under the provisions of this chapter by amending its articles of incorporation, in the manner that is prescribed by the general corporation laws, to conform to this chapter. If a corporation amends its articles of incorporation to conform to this chapter, it shall be deemed to be organized and existing pursuant to, and entitled to the benefit of, and subject to this chapter for all purposes and as fully as though it had been originally organized pursuant to this chapter.

“26231.1. Articles of incorporation shall be deemed to conform to this chapter within the meaning of Section 26231 if it clearly appears from the articles of incorporation that the corporation desires to be subject to, and to be organized, exist, and function pursuant to this chapter. [Emphasis added.]

“26231.2. If the amended articles conform, as provided in Section 26231.1, provisions in the articles of incorporation that appeared in the original articles or some previous amended articles, are ineffective if, and to the extent that, they are inapplicable to, or inconsistent with, this chapter.”

It takes far more, of course than an amendment to Articles of Incorporation to convert a collective or cooperative into a duly organized and operating CCA. A CCA that engages in commercial cannabis activity pursuant to the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) is a special form of corporation expressly created to engage in commercial cannabis activity in California’s cannabis industry through the equivalent of an agricultural cooperative. A CCA is a sophisticated form of an incorporated entity. A CCA is subject to California’s general corporate laws as well as the special provisions of B&P §§26220-26231.2. The combination of these two bodies of law creates operational business advantages for CCAs. The special provisions of law set forth in B&P §§26220-26231.2 trump the general corporate law in the event of a conflict.

A CCA is also subject to special rules for California and federal income tax purposes. A CCA files a return for federal income tax purposes as a cooperative pursuant to Subchapter T[iii]. A CCA files similarly for California income tax purposes. These special filing rules provide income tax advantages for CCAs.

All existing collectives and cooperatives should not be converted into CCAs. Proposition 64 preserved all the rights granted to Californians under Proposition 215. There will be a place in California for unlicensed, unregulated medical collectives for the foreseeable future. The cottage industry of unlicensed, closed-loop collectives is entitled to continue to operate as not-for-profit collectives. Such organizations cannot engage in commercial cannabis activity.

There will also be a place in California for licensed medical collectives and cooperatives for the foreseeable future. Those Proposition 215 collectives and cooperatives that intend to engage in commercial cannabis activity must be licensed. The foundation for a Proposition 215 medical collective is not consistent with commercial cannabis activity. Any such an organization should consider conversion into a CCA. There is no prohibition against a CCA operating as a not-for-profit organization that is engaged in commercial cannabis activity for the benefit of both its cultivator members as well as its consumer members. Any such a collective or cooperative, however it is presently organized, will have a financial advantage over any conventional business structure if the organization properly converts into a CCA.

The special treatment of CCAs for income tax purposes makes these special corporations financially more efficient than conventional business structures for the conduct of cannabis business in California. A CCA also has operational advantages over conventional business structures in connection with the conduct of commercial cannabis activity. The conduct of commercial cannabis activity through a CCA requires experienced legal counsel. Of even greater importance, accounting and tax-reporting advice from a CPA firm are essential to the successful conduct of commercial cannabis activity through a CCA.

A CCA that does nothing more than act as a cooperative marketing representative provides a valuable service for its member growers. In this regard, an organization that acts as a broker must be licensed as a distributor. Marketing representation and sales representation are not the same things, although they are frequently conflated. Licensing is required for representation in connection with sales. The use of a CCA solely for marketing merely scratches the surface of the benefits such an organization can provide with respect to commercial cannabis activity. As we pointed out in the article referenced above, even for a modest cannabis business operation the tax savings that can be secured using a CCA can exceed $1.0M per year.

A CCA that engages in cannabis business activities beyond acting as a cooperative marketing representative, for example operating a wholly-owned cannabis distributor, requires a capable business organization. Such a business operation necessarily requires sophisticated operational and financial record-keeping systems and procedures in order to comply with the regulatory requirements of the California Dept. of Tax and Fee Administration [“CDTFA”] Bureau of Cannabis Control [“BCC”] and other cannabis regulatory agencies as well as the multiple tax filing requirements for California cannabis businesses.

A CCA that operates a wholly-owned cannabis distributor should establish an accrual method of accounting for federal income tax purposes. A number of additional record-keeping benefits, as well as significant tax-saving benefits, will flow from the use of an accrual method of accounting for a CCA engaged in commercial cannabis activity. The establishment of an accrual basis system of accounting for a distributor engaged in business in California’s cannabis industry requires the services of an experienced CPA.

For the gamblers among our readers, the use of a CCA for the conduct of business in California’s cannabis industry is the equivalent of playing with “house” money. For the investors among our readers, the use of a CCA for the conduct of business in California’s cannabis industry is the equivalent of an “all up-side, no down-side” financial arrangement.

Sources & Footnotes

[i] See IRC Sec 280E – Escrows

[ii] See CCA’s Good or Better, California Cannabis Collective the Sky Is Falling and Dead – Alive – Comatose

[iii] IRC Secs. 1381-1383


Sean HockingSean HockingNovember 5, 2019
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17min1960
If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

Corporate Transparency Update. The focus of this website has been on the legal cannabis industry in California. However, many of our clients and regular readers are aware that our practice also focuses on:

  • Taxation and Transactional Consulting for pass-thru entities, [limited liability companies [“LLC’s], partnerships and S Corporations
  • Alternative Asset and Debt Hedge Funds and Private Equity
  • US Title 31 – anti-money laundering [“AML”] provisions and virtual currency
  • US Title 26 [“IRC”] – IRS practices and procedures relating to civil and criminal tax controversies

We have written about FinCEN’s Cannabis Industry Policy[1], AML anti-structuring policy[2], and the FDIC’s initial efforts at beneficial ownership, transparency for LLC’s acquiring residential property in major markets[3] and the application to the California cannabis industry[4].

HR 2513 – Corporate Transparency Act

On October 23, 2019, the House passed H.R. 2513. H.R. 2513 is a two-part Bill. Division A is the Corporate Transparency Act, or CTA[5]. If enacted, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties.

The CTA:

  • Requires certain, defined corporations and limited liability companies (see below) to disclose their Beneficial Owners [“BOs”] to FinCEN at the time the company is formed.
  • Establishes minimum BO disclosure requirements, including the BOs’ name, date of birth, current address, and driver’s license or non-expired passport number.
  • Requires covered companies to file annually with FinCEN a list of its current BOs, and a list of any changes in BOs that occurred during the previous year.
  • Imposes civil and criminal penalties for persons who willfully submit false or fraudulent BO information, or who knowingly fail to provide complete or updated BO information.
  • The key provision of the CTA is its definition of a “BO.” With certain exceptions, noted below, the CTA broadly defines a “beneficial owner” as a “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise –”
  • exercises substantial control over a corporation or limited liability company;
  • owns 25 percent or more of the equity interests of a corporation or limited liability company; or
  • receives substantial economic benefits[6] from the assets of a corporation or limited liability company.

At this point, our regular readers should ask why we are writing about federal legislation that is perhaps indirectly related to individuals and entities involved in California’s cannabis industry. The CTA provides for a number of exemptions from the BO disclosure requirements which will be discussed in a separate article.

The CTA will have little direct impact on the owners of “plant touching” cannabis businesses. However, it will have significant application to the owners and purchasers of residential and commercial real estate that may be acquired as an investment of the earning of cannabis industry businesses, which will certainly be exacerbated if the proceeds of cannabis activity originate in the “black market”.

It is also quite possible that the “cash-out” of certain cannabis investments could wind up being invested in real estate or operating businesses that are subject to the CTA.

H.R. 2513 contains another section – “Division B” – entitled the “Counter Act of 2019.” The acronym “COUNTER” stands for “Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform.” Division B stretches for 63 pages. It is almost twice as long as the CTA. The COUNTER Act of 2019 represents a grab-bag of detailed provisions relating to BSA/AML reforms which previously had been set forth in a proposed and inelegantly-named bill, “To make reforms to the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (on which we previously blogged, here). The COUNTER Act of 2019 has 35 different sections, including a whistleblower provision; a provision including “dealers in antiquities” in the definition of a “financial institution” covered by the BSA; and many other provisions pertaining to information sharing, resource sharing, and technological innovation.

 

FATF – Best Practices for Beneficial Ownership

The Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, has issued a document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) on November 5, 2019[7] which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities. This document also describes some thoughtful recommendations.

 

The FAFT Best Practices Guidance represents an evaluation of the approaches of the member countries to the collection and maintenance of beneficial ownership information, including specific recommendations. The FATF Guidance identifies six challenges to tracking beneficial ownership[8]

 

Sources Footnotes

[1]See FIN-2014-G001

[2]See Structuring Transactions to Evade and 31 USC 5324,

[3] Much of the initiative in this area was inspired by a series of articles in the New York Times – Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market. The issue was discussed extensively in an article in the June 20, 2019 edition of Ballard Spahr LLP’s Money Laundering Watch newsletter – Lawmakers Renew Effort to Overhaul AML Laws, Including Greater Beneficial Ownership Transparency and in Congressional discussion draft of The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings [“Illicit Cash”] Act.

[4] Transactions Involving Changes in Ownership, Financial Interests and Entities

[5] The purpose of the CTA is described as,“To ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies, in order to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes”.

[6] The “substantial economic benefits” prong under the CTA’s definition of a “beneficial owner” represents an expansion of the definition of “beneficial owner” imposed by FinCEN’s existing BO regulation, which contains only the two “control” and “ownership” provisions. How these competing definitions of the same key term can be reconciled is not clear.  It is also not clear is how financial institutions will address checking the beneficial ownership information that they have collected from their customers under the BO regulation against a database that presumably will include different and more expansive information.

[7] FATF previously released its Guidance on Transparency and Beneficial Ownership in October 2014. The earlier FATF Guidance described steps countries should take to prevent the misuse of legal persons for ML/TF. The FATF did not specify the mechanisms that countries should utilize for the collection of beneficial ownership information. Rather FATF described three options for facilitating the cooperation of companies with the competent authorities and ensuring the availability of beneficial ownership information on companies. The three options are:

“Registry Approach – this approach requires company registries to obtain and hold up-to-date information on the companies’ beneficial ownership. This information is made publicly available and would facilitate access by financial institutions, designated non-financial businesses and professions (DNFBPs) and other competent authorities.

Company Approach – under this approach, companies are required to obtain and hold up-to-date information on the companies’ beneficial ownership or companies to take reasonable measures to obtain and hold up-to-date information on the companies’ beneficial ownership.

Existing Information Approach – under this approach, existing BO information is gathered from existing sources, including: (i) information obtained by FIs and/or DNFBPs; (ii) information held by other competent authorities on the legal and BO of companies; (iii) information held by the company as required; and (iv) available information on companies listed on a stock exchange, where disclosure requirements ensure adequate transparency of beneficial ownership.”

[8] The challenges identified were

“Lack of adequate risk assessment concerning the possible misuse of legal persons. Specifically, the mutual evaluation revealed that not all types of legal persons were covered in the risk assessment, relevant risk assessment was not consistent with the results of national risk assessments, and only domestic threats and vulnerabilities associated with legal persons were considered. Finally, FATF concluded that registries, companies, FIs and DNFBPs and competent authorities did not demonstrate a good understanding of the risks involved in using legal persons.

Adequacy, accuracy and timelines of information on beneficial ownership. The evaluation revealed that beneficial ownership information collected was not accurate and there were no systems in place to actively verify, test or monitor the information. Nor were there requirements of legal persons to update their beneficial ownership information or inform the registry that there were changes to beneficial ownership. Countries did not coordinate among different sources of information to cross-check information for accuracy. Moreover, the parties responsible for updating the information lacked rigorous customer due diligence (“CDD”) measures and were unable to identify beneficial ownership information when complex structures or foreign ownership was involved. Finally, there were no record retention requirements.

Access by competent authorities. The evaluation found that there was inadequate mechanism to ensure that competent authorities had timely access to beneficial ownership information. This was so because of the obstacles to information sharing caused by data protection and privacy laws. Moreover, FATF found that competent authorities did not share information and had no procedures to seek information from parties obligated to provide information. The lack of registration and licenses mechanisms caused competent authorities’ difficulty in identifying the source of information. Finally, competent authorities lacked sufficient resources to carry out investigations

Bearer share and nominee shareholder arrangements.  The evaluation determined that countries did not place risk mitigating measures in place to address money laundering concerns, particularly because ownership of the bearer shares and share warrants were not sufficiently accessible or transparent. FATF found that the use of nominee shareholders obscured the ultimate control and ownership of the companies.

Fine and sanctions. The evaluation found that there was generally a lack of effective, proportionate, and dissuasive sanctions directed at companies that failed to provide accurate and up-to-date information on beneficial ownership and reporting entities which failed to apply specific CDD measures required for legal persons. As we previously blogged, many countries in the EU have failed to prosecute people for money laundering offenses and has in general lagged behind the US on enforcement actions against money launderers.

International Cooperation. The evaluation found that there were inadequate mechanisms for monitoring the quality of assistance received from other countries. Specifically requests for information often took a long time to fulfill when they involved multiple international agents and complex legal issues. This concern was amplified by the fact that not all countries keep beneficial ownership information.”

 


Sean HockingSean HockingNovember 4, 2019
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3min1020
Guest post by: Patrick McKnight
“We need regulation, we need to make sure we’re protecting public health, public safety. But that’s regulation, not prohibition,” Governor Wolf said. “It’s also really important that we work together as a region to make sure that we’re on the same page.”

Governors in the Northeast appear to be ramping up their support for cannabis reform. On October 17th, Governor Wolf (PA), Governor Cuomo (NY), Governor Murphy (NJ), and Governor Lamont (CT) met to discuss coordinating public policy across the region. Governor Wolf recently changed his position, announcing he now supports legalization.

“We need regulation, we need to make sure we’re protecting public health, public safety. But that’s regulation, not prohibition,” Governor Wolf said. “It’s also really important that we work together as a region to make sure that we’re on the same page.”

“Cooperating as a coalition of states on these issues is the best path forward—as we not only share borders, but we share economic interests, public health priorities, and a joint understanding that the more states that work together on these kinds of issues, the better the policy results will be for our residents,” Governor Lamont said.

“This is a very important topic,” Governor Cuomo explained. “It is probably one of the most challenging issues that I know I’ve had to address in the state of New York. It is complicated, it is controversial and it is consequential. That is a very difficult and challenging combination.”

The governors discussed coordinating tax, licensing, and public safety measures. They also considered best practices garnered from states like Colorado.

Follow Legislation For Free

Currently, New York, New Jersey, and Connecticut have legalized medical marijuana. You can follow the latest legislative actions by clicking on the Legislation tab at the top menu of the home page for the Green Market Report. You can browse by state, set up alerts to be notified when new bills are introduced.


Sean HockingSean HockingNovember 4, 2019
Pennsylvania.jpg

7min24180
Guest post by Patrick McKnight

Pennsylvania Considers New Recreational Cannabis Legislation

A new effort to legalize recreational cannabis is coming to the Keystone State. Pennsylvania lawmakers Daylin Leach and Sharif Street are hoping to build support for their latest proposal, Senate Bill 350 which they introduced on October 15th. The bill would allow for both home delivery and the automatic expungement of many previous criminal convictions related to marijuana. The bill’s supporters estimate it will generate $500 million in tax revenue within twelve months.

In contrast to the approach of many other states, Senate Bill 350 contains a provision allowing home grower permits for personal use. The bill also envisions “use lounges” where individuals can legally consume marijuana brought from outside the establishment.

“An end to the prohibition of cannabis is overdue,” Senator Street said in a release. “It is time for us to join the emerging cannabis economy with the legalization of the Adult Use of Cannabis in PA., which should not be a crime when responsibly used by adults nor mandate medical oversight.”

“Pennsylvania’s cannabis policy is cruel, irrational and expensive,” Senator Leach said. “Prohibition has destroyed countless lives and has cost taxpayers millions.”

“We need to stop arresting our kids and funding violent drug cartels,” Leach continued. “This is going to be a tough battle, but so was passing medical marijuana. We did that, and we’ll do this too. The stakes are too high for us to fail.”

Senator Leach released a press release identifying several key points in the proposal:

  • A system of permits for industry participants with low barriers to entry in order to allow people with limited resources to enter the cannabis industry.
  • Automatic expungement of previous criminal convictions, dismissal of pending charges, and commutation of sentences.
  • Tax revenue collected pursuant to the bill—an estimated $500 million in the first full fiscal year of operation—will be appropriated to school districts using the 2016 fair funding formula (Act 35). School districts have total discretion over the funding; they may choose to invest in their schools, hire more teachers, or even provide local tax relief to homeowners in their districts.
  • Use of cannabis will be permitted by adults over 21 years of age.
  • Home delivery of cannabis will be permitted. The bill’s language allows deliverers, who may start their own company or work for dispensaries, to use any form of transportation—from cars to bicycles to public transportation—to deliver cannabis.
  • People will be permitted to grow up to ten plants for personal use in their own homes.

While public support for legalization appears to be increasing, Senate Bill 350 likely faces an uphill battle. On the other side of the Delaware River, New Jersey’s much-anticipated legalization bill never even made it to the floor for a vote. Despite widespread optimism and strong support from Governor Phil Murphy, New Jersey cannabis reform advocates now appear resigned to wait for a ballot initiative.

The political landscape is even less favorable for reform in Pennsylvania. Across the nation, many more states have legalized cannabis through ballot initiatives than legislative action. In Pennsylvania, previous attempts to legalize recreational cannabis have failed due to a lack of bipartisan support.

Also…

Pennsylvania Expands Medical Marijuana Program

In July, Pennsylvania significantly expanded its medical marijuana program. The state now includes anxiety and Tourette’s on the list of qualifying conditions for enrollment. The move by the Pennsylvania Health Department now allows medical marijuana for conditions beyond cancer, epilepsy, seizures, post-traumatic stress disorder, and terminal illness. Similar decisions in other states have led to rapid increases in enrollment.

Pennsylvania has nearly 116,000 patients certified for participation in its medical marijuana program. The program is relatively new, coming online in February 2018.

“The first year that the state’s medical-marijuana program has been operational tells us that this program is working to help Pennsylvanians in need of this medication,” Governor Wolf said. “Patients are realizing the benefits and there has been steady, positive progress that I am pleased to report.”

In its first full year, Pennsylvania collected $2 million in tax revenue from growers and processors. Dispensaries reported $132 million in sales. The program has also expanded to allow patients to purchase marijuana is dried leaf form. Initially only pills, liquids, or topical ointments were permitted.

“Our goal for the next year and beyond is to increase the number of grower/processors and dispensaries operating, to register even more physicians and to continue the growth of our scientific, medically based program,” said Department of Health Secretary Dr. Rachel Levine said.

Pennsylvania’s medical marijuana program is noteworthy for its promotion of scientific testing. As part of the program, the state certifies eight academic clinical research centers. The mission of the clinical program is to conduct, “Research on the therapeutic or palliative efficacy of medical marijuana limited to the serious medical conditions defined by the act and the temporary regulations.” The state also has four approved laboratories for quality testing and sampling.


Sean HockingSean HockingNovember 4, 2019
tax.jpg

16min1360
If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

The recent Tax Court decision in Northern California Small Business Assistants Inc. v. Commissioner [“Nor Cal”][1] made what is perhaps the most damning statement [2] yet regarding the application of IRC Sec. 280E to cannabis dispensaries. The Court stated:

“Our precedent is unambiguous. Congress, rather than this Court, is the proper body to redress the petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in IRC Sec.280E for businesses that operate lawfully under State law.

Until then, the petitioner is not entitled to deduct expenses incurred in the operation of its drug-related business.”

In reaching our holding, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.”

The Court in Nor Cal followed the Tax Court precedential analysis by Judge Mark V. Holmes in his opinion in the first Harborside case[3].

The first Harborside case rejected the manner in which the two dispensaries determined Cost of Goods Sold (“COGS”).  Judge Holmes agreed with the Chief Counsel Memorandum[4] that IRC Sec. 471 should be used by a cannabis dispensary to determine COGS.  The opinion in Harborside rejected the use of IRC Sec. 263A and approved the use of IRC Sec. 471 in the determination of COGS[5].

The situation becomes particularly grim for California dispensaries beginning after 2017.  California’s Bureau of Cannabis Control adopted regulations beginning in 2018 that require Retailers to purchase cannabis that has been tested, packaged, and labeled by a Distributor[6].  The adoption of these regulations renders virtually all adjustments to COGS by a dispensary improper[7].

A California cannabis dispensary can mitigate against a significant portion of the adverse impact of the Harborside and Nor Cal opinions. These opinions create an opportunity for a cannabis dispensary to exclude from gross revenue a substantial portion of the money collected from cannabis consumers. Through the adoption of proper record-keeping systems and procedures, a dispensary can treat all of the money it collects for taxes that are not included in COGS as taxes imposed on consumers, or as reimbursements for taxes paid or payable by the dispensary, that must be remitted to various governmental agencies.

A dispensary will collect state-level Cannabis Excise Tax [“CET”], California Sales Tax, and it may collect any of a variety of municipal and county sales taxes, excise taxes, and gross receipts taxes[8]. These funds are money that a dispensary is obligated to remit to various governmental agencies.

As a consequence of the Harborside and Nor Cal opinions, it is critical for a dispensary to not allow these funds [“Reimbursable Taxes”] to be included in gross revenue. If Reimbursable Taxes are properly identified and consistently segregated using an escrow account[9] [“Reimbursable Tax Escrow”], all taxing agencies should recognize these taxes are properly excluded from gross revenue.

The taxes included in the money a dispensary will collect from retail customers can be classified into five categories as follows:

(1) income taxes which will be paid by the dispensary out of income;

(2) CCT which will be paid to a distributor by the dispensary as part of COGS;

(3) local taxes on cannabis that may be comparable to the preceding classification (2) or comparable to either of the two classifications (4) and (5) that follow;

(4) CET which is an excise tax that a dispensary is required to collect from a cannabis consumer that has some aspects of being money held in trust by virtue of the requirement that collections of CET in excess of the amounts actually paid by a dispensary to distributors are owed to California under the language of the statute; and

(5) Sales Tax collections which are more specifically money that constitute a trust fund in the hands of the retail seller that is collected as an agent for California and for which there is personal liability for a failure to remit.

We believe that the taxes identified in (1) and (2) above cannot be excluded from gross revenue. However, the taxes identified in (3), (4), and (5) may be excluded from gross revenue by a dispensary if:

  • Each of the taxes is separately stated and identified on sales receipts that the dispensary provides to its retail customers; and
  • The dispensary creates and maintains separate Reimbursable Tax Escrow trust account as well as complete and accurate records of each type of tax collected, deposited into the account, and remitted from the account, and performs a reconciliation for the trust account and the various Reimbursable Taxes each time the dispensary prepares a tax return and remits tax to a governmental agency.

While this issue is not entirely free from doubt, a dispensary that carefully maintains and utilizes a separate trust account, and minimizes transfers into and out of such an account, has a high probability the segregation of these funds as well as the exclusion of these funds from gross revenue will be respected.

Sources / Footnotes

[1] 153 TC 4 (2019)

[2] The taxpayer also argued in this case that IRC Sec. 280E solely applies to IRC. Sec. 162 deductions.  The taxpayer argued that the text of IRC Sec. 280E “tracks” the language of IRC Sec. 162 which allows a deduction for all ordinary and necessary business expenses.  The taxpayer argued the use of the same language indicated the prohibition of IRC Sec.  280E should solely apply to IRC Sec. 162 deductions. Judge Goeke points out the taxpayer’s argument ignored the first line of IRC Sec.  280E which states, “No deduction or credit shall be allowed . . . .” (Emphasis added.)  The Court states the language of this section is clear and unequivocal.

Judge Goeke also points to a broader statutory scheme as support for the conclusion IRC Sec. 280E means what it says – no deductions under any section shall be allowed for businesses that traffic in a controlled substance.  As the Court points out, IRC Sec. 261 which is found in part IX of subchapter B of Chapter 1 of the Code, provides that “no deduction shall, in any case, be allowed in respect of the items specified in this part.”  IRC Sec. 280E is found in part IX[9]

[3] 151 TC 11(2018)

[4] CCM 201504011

[5] The tax year 2015 is significant for two reasons. The Tax Court’s decision in Olive v. Commissioner, 139 TC 19, 36-42 (2012) aff’d 792 f.3d 1146 [CA-9, 2015] was the first reviewed decision that discussed the phrase “consists of” in IRC Sec. 280E.  Olive was not affirmed by the 9th Circuit until 2015.  Chief Counsel Memorandum 201504011 was issued in 2015. This Memorandum provided the first guidance from the IRS relating to IRC Sec. 280E.  The IRS has never promulgated regulations relating to IRC Sec. 280E. A taxpayer that fails to utilize IRC Sec. 471 post-2015 is almost certainly subject to the “substantial understatement” penalty contained in IRC Secs. 6662, and potentially the civil fraud penalty in IRC Sec. 6663.

[6] See § 5412. Prohibition on Packaging and Labeling by a Retailer.

  • A licensed retailer shall not accept, possess, or sell cannabis goods that are not packaged as they will be sold at final sale, in compliance with this division.
  • A licensed retailer shall not package or label cannabis goods.
  • Notwithstanding subsection (b) of this section, a licensed retailer may place a barcode or similar sticker on the packaging of cannabis goods to be used in inventory tracking. A barcode or similar sticker placed on the packaging of a cannabis goods shall not obscure any labels required by the Act or this division.

Authority: Section 26013, Business and Professions Code. Reference: Section 26120, Business and Professions Code. and

  • 5303. Packaging, Labeling, and Rolling.
  • A licensed distributor may package, re-package, label, and re-label cannabis, including pre- rolls, for retail sale. All packages of cannabis, including pre-rolls, shall comply with the following:
  • Until January 1, 2020, all packages shall meet the following requirements:
  • The package shall protect the cannabis, including pre-rolls, from contamination and shall not expose the cannabis or pre-rolls to any harmful substance.
  • The package shall be tamper-evident.
  • If the package of cannabis or pre-rolls contains more than one serving, then the packaging shall be resealable.
  • The package shall not imitate any package used for goods that are typically marketed to children.
  • Beginning January 1, 2020, all packages shall meet the requirements of subsection (a)(1) of this section and shall also meet the following requirements:
  • The package shall be child-resistant until the package is first opened. For purposes of this division, the following packages are considered child-resistant:
  • Any package that has been certified as child-resistant under the requirements of the Poison Prevention Packaging Act of 1970 Regulations (16 C.F.R. §1700.15(b)(1)) (Rev. July 1995), which is hereby incorporated by reference.
  • Plastic packaging that is at least 4 mils thick and heat-sealed without an easy-open tab, dimple, corner, or flap.
  • The package shall be labeled with the statement “This package is not child-resistant after opening.”
  • Notwithstanding subsections (a)(1)-(a)(2) of this section, immature plants and seeds shall not be required to be packaged in child-resistant, tamper-evident, and resealable packaging.
  • A licensed distributor shall not process cannabis but may roll pre-rolls that consist exclusively of any combination of flower, shake, leaf, or kief. Pre-rolls shall be rolled prior to regulatory compliance testing.
  • Licensed distributors may label and re-label a package containing manufactured cannabis goods with the amount of cannabinoids and terpenoids based on regulatory compliance testing results.

Authority: Section 26013, Business and Professions Code. Reference: Sections 26013 and 26120, Business and Professions Code.

[7] The common practice for California dispensaries prior to the Harborside decision was to purchase flower in bulk, and then process and package, label, and possibly test the flower in-house.  With proper substantiation, the opinion in Harborside permits a dispensary to utilize IRC Sec. 471 to increase COGS for both the direct and indirect costs properly allocable to the handling, processing, packaging, and security for the conversion of bulk purchases of cannabis inventory into a retail product.

The Harborside opinion approves the use of IRC Sec. 471.  California’s regulation of its cannabis industry, however, now prohibits a dispensary from processing products for retail sale.  A California dispensary must acquire cannabis products from a distributor in a consumer-ready form.  Commercial cannabis products must be acquired by a California dispensary fully packaged and labeled.  As a consequence of regulatory requirements, effective January 1, 2019, a California dispensary is effectively subject to income tax on Gross Income (Gross Revenue less Cost of Goods Sold [“COGS”] )  for federal income tax purposes.

[8] A similar set of principles applies to the portion of employment taxes which are withheld from employee paychecks and treated as “trust funds”. A discussion of employment taxes is beyond the scope of this article.

[9] An escrow account is an account where funds are held in trust for a particular purpose, for example a segregation of funds that were collected for a taxing agency. In formalized escrow arrangements third-party acting as a fiduciary will hold funds in a segregated trust account. Funds are subject to disbursement in accordance with the contractual arrangements for the escrow.

 


Sean HockingSean HockingNovember 4, 2019
Screen-Shot-2019-11-04-at-3.58.45-pm-150x150-2-1.png

12min3600

 It is estimated that close to a million patients are now seeking access to medicinal cannabis in Australia alone. 

Government figures show around 20,000 patients now have approvals for access to legal medicinal cannabis products. 

Many patients are, the MCUA reports,  still having to turn to the “black” market or are self supplying because access to and cost of the majority of legal medicinal cannabis products is way beyond their financial reach.

This is happening in Queensland, for example, partly because public hospital policy does not permit its doctors to prescribe cannabis-based products.

 

The MCUA states that the rate of approvals

Has increased substantially since the inception and there has been a mushrooming of corporate clinics set up to move products which were languishing on warehouse shelves because GPs were refusing to prescribe medical cannabis. These clinics have the sole purpose of prescribing corporate cannabis-based products and have become the gateway to moving them off the shelves.

 

It appears these clinics are given “special treatment” in this highly regulated environment as the MCUA noted when CEO of Medical Cannabis Company THC, David Radford said on sky news …we are working with individual State govts to get their approvals (for clinics)…  the clinic is not the same as health clinic that you go through so we are not expecting the same regulatory hurdles…”    

Source: https://www.skynews.com.au/details/_5713222826001

 

The current modus operandi of the clinics when communicating with “patients” is an offering of both teleconferencing and face to face consultations with doctors who it is being alleged have no prior experience using or prescribing cannabis-based medicine in a clinical situation and who also have had limited training via educational videos and medical cannabis company company backup.

Some patients have reported to the MCUA  that consultation processes have been amateur in approach.  In some cases, no medical history of the patient is recorded and prospective patients weren’t even asked about current medications or allergies that they might have.

As to consultation fees the MCUA report that these can vary enormously between clinics.

The majority of medical cannabis patients do not receive a Medicare rebate and the organization currently understands that on average that patients are charged fees by third parties of around $200 to apply to the TGA online)a process for which there is no fee attached if one registers direct). Costs,  it is reported, varies from under $100 to over $1000 for an initial consultation and application (for medical cannabis) fees. 

 Due to the  increasing number of complaints about these clinics the MCUA is currently conducting a patient satisfaction survey asking about patient experiences overall with the delivery model set up by the Australian Government

 Responses to their survey have been consistent throughout with around  45% of patients saying they are paying up to $500 to $1000 a month for products.  

Most survey respondents are on Centrelink payments because of their illness and some have got themselves into debt with family or friends, to enable them to purchase the medicine. Almost half of the prescriptions written have not been filled.

 Peter Crock, CEO of the Cann Group and Chairman of Medicinal Cannabis Industry Australia reinforces this scenario.  He said on ABC radio  recently that:

“All medicinal cannabis is being imported .. that is what is keeping prices high …. and people are taking the opportunity to make super profits on the way thru.”

Peter Crock, CEO of the Cann Group and Chairman of Medicinal Cannabis Industry Australia

Source: https://cannabislaw.report/podcast-australian-medical-association-tells-abc-radio-they-still-cant-back-medical-cannabis/?fbclid=IwAR0p6uG6zYomCLxkRpcNOm5Ml2GBQtOCmlFRvuIUs_zmKkTeEOn-j6ZiZlM

  Many survey respondents say they have had more than one approval with 20% or respondents saying they have had more than 5 approvals.  The dissatisfaction rate with the delivery system is sitting consistently at 86% . 

 Patient experiences from gathered via the survey include the following, amongst many.

  • One MCUS member reported being charged $700 in consultation fees and for the product for her father to use as palliative medicine for his final days as he was showing intolerance for conventional end of life drugs. The medicine was delivered late,  a 6 weeks supply of cannabis oil with an expiry date of October 2019; and then the supplier charged $50 to tell the member how to administer & dosage amount. Then after that charge to be told the family GP  would need to sign it off before the prescription could be administered.   
  • Another writes “I’m worried my cannabis clinic is taking me for a ride. My appointments initially cost $100. Then my first batch of tilray was 25mg THC:25mg CBD. I have to buy it in 2 bottles of 25ml otherwise I have to pay an excess of $50 for shipping. My first script cost was $633.30 for the 50ml I received. The next time I needed an order it cost $330.30 for 50ml of the same script.” 
  • Another patient said she recently applied for the legal version, knowing full well it was above and beyond what she can afford. The initial appointment cost $200 with $59 for any subsequent scripts, $80 for a follow-up appointment and  $59 whenever the patient has had to adjust dose or product.

 

MCUA President, Deb Lynch, is currently waiting for a trial date after being arrested and charged for self-supply following many attempts to acquire a prescription through Qld Health, whose doctors have been advised not to prescribe cannabis under public hospital policy. Being on a disability pension, there is no way she says she can afford the costs involved in getting a script from one of these corporate cannabis clinics.  

The MCUA is still seeking patients who have been through the legal process to fill in their customer satisfaction survey (https://surveyhero.com/c/55e2c285) which will be going to the Federal Senate, via ALP Senator Anne Urquhart along with their current petition to them asking for a full review of the delivery system put in place by the LNP.

To contact the MCUA please go to https://www.mcuainc.org.au/


Sean HockingSean HockingNovember 1, 2019
tax.jpg

6min2180
If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

An Elegant Solution – we are writing this article for the cannabis cultivators of the Emerald Triangle as well as all of the cannabis growers in smaller and less well-recognized enclaves of cannabis cultivation throughout California.

This Article Is For You!

As our followers are aware, we have written a number of articles regarding the financial advantages of the use of a Cannabis Cooperative Association (“CCA”) for California’s cannabis industry[1].   This article describes use of a CCA that appears to have been wholly overlooked by many of the advisors to California’s cannabis industry.

Everyone who follows the cannabis industry is aware the United States Tax Court hammered the industry with its opinion in Northern California Small Business Assistants Inc. v. Commissioner[2], This case affirmed the earlier decision of Judge Mark V. Holmes in the first Harborside case[3] ,, that IRC §280E disallows any deduction to a cannabis dispensary of ordinary and necessary business expenses for federal income tax purposes.

A CCA provides an elegant solution to this problem for well-advised California cannabis cultivators. A CCA is a special form of California corporation created by the California legislature to allow small California cannabis cultivators to organize the equivalent of an agricultural cooperative. The Long Valley Cannabis Cooperative Association is the legal equivalent to the Sacramento Valley Pear Growers Association under California law. Both of these organizations are marketing and processing agricultural cooperatives.

The critical aspect under California law for the Long Valley Cannabis Cooperative Association and the Sacramento Valley Pear Growers Association is that both of these organizations are legally recognized cooperative organizations. Both of these organizations can own and operate an incorporated distributorship. A wholly-owned corporation that operates a distributorship for a cooperative will be deemed to be conducting a portion of the business activities of the cooperative for federal and California income tax purposes.

At this point, a reader should ask, What does this have to do with IRC §280E? Cooperatives can have buyer members as well as grower members. Pear connoisseurs can join the Sacramento Valley Pear Growers Association as members in order to be confident they will receive the best pears at the lowest possible price. Cannabis connoisseurs can join the Long Valley Cannabis Cooperative Association as members in order to be certain they will receive the highest quality Emerald Triangle cannabis at the lowest possible price.

The financial relationship between the purchaser members of a cooperative and the cooperative is determined by the membership agreement as a matter of contract law. As long as the contractual relationship does not improperly circumvent tax laws, the contractual relationship will be respected for federal and California income tax purposes. If a consumer member of Long Valley Cannabis Cooperative Association contractually agrees to reimburse the cooperative for the taxes and non-deductible business expenses the organization incurs in connection with the member’s purchase as a contribution to the capital of the cooperative, the agreement will be respected for federal and California income tax purposes. The cooperative will receive the money required for the organization to tax the taxes imposed on the sale of cannabis as well as the non-deductible business expenses without being required to include this money in revenue.

Of course, great care must be taken in the organization and operation of a cannabis cooperative as a CCA in order to secure these tax benefits. Is it worth the effort? Of course, it is. The income tax deficiency asserted by the IRS in the Northern California Small Business Assistants Inc. case for the one year before the Tax Court exceeds $1.0M.

[1] See Licensing a Cannabis Cooperative Association, CCA’s Create Profits and Towards A Better Mousetrap

[2] 153 T.C. No. 4 (2019).

[3] 151 TC 3 [2018]


Sean HockingSean HockingOctober 27, 2019
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17min2700
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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

IRC Sec. 280E Insanity – We just completed writing what is perhaps our tenth article about IRC Sec. 280E and Harborside[1]. Harborside is a sophisticated taxpayer with well-designed financial and operational systems and expensive professional advisors. The two Harborside cases created an opportunity for analysis and a solid foundation for tax planning going forward for the cannabis industry.

Such planning is what tax professionals should be engaged with on a daily basis.

Northern California Small Business Assistants Inc. v. Commissioner[2], is an example of positions that should not be pursued in the Tax Court. The Tax Court is a prepayment forum in which taxpayers are permitted to contest tax liabilities without first paying the tax and claiming a refund. The Tax Court enforces federal tax laws. The Tax Court enforces federal tax laws. The Tax Court will only reluctantly consider policy. It will do so solely when it finds the statutory language ambiguous. Judge Mark V. Holmes had already addressed the language of IRC Sec. 280E. For the cannabis industry, the pursuit of the motion for partial summary judgment gave a number of Tax Court judges an opportunity to express in dicta opinions which were largely unfavorable to the cannabis industry. This case created an opportunity for judge to express opinions we anticipated that in several instances we would prefer not to have seen expressed. The dicta generated by this case will haunt taxpayers involved in t cannabis industry for the next ten years.

 

The summary of the case by the Tax Court is

“P is a California corporation that operates a medical marijuana dispensary legally under California law. R argues that P is subject to the limitations of I.R.C. sec. 280E, which disallows all deductions for a business that consists of trafficking in a controlled substance within the meaning of Schedule I or II of the Controlled Substances Act. P argues that I.R.C. sec. 280E imposes a gross receipts tax as a penalty in violation of U.S. Const. amend. VIII. Further, P argues, even if I.R.C. sec. 280E is constitutional, it only bars ordinary and necessary business deductions under I.R.C. sec. 162 and does not apply to other distinct sections of the I.R.C. Finally, P argues that it is not subject to I.R.C. sec. 280E because its business, legally operated under California law, does not consist of “trafficking” in a controlled substance.

 

Held: I.R.C. sec. 280E is not a penalty provision and therefore does not violate the prohibition on excessive fines in U.S. Const. amend. VIII.

Held, further, I.R.C. sec. 280E is not limited to deductions claimed under I.R.C. sec. 162 but applies to bar all deductions claimed by P.

Held, further, P has provided no compelling argument to overrule our precedent holding that I.R.C. sec. 280E applies to businesses operating legally under State law, notwithstanding its use of the word “trafficking.

 

The Tax Court was NOT pleased with the position taken by the taxpayer stating,

“On July 12, 2018, petitioner filed its motion for partial summary judgment pending before the Court in which it alleges that section 280E: 

(1) imposes a gross receipts tax as a penalty in violation of the Eighth Amendment to the Constitution;

(2) eliminates only ordinary and necessary business deductions under section 162 and does not apply to other distinct sections of the Code; and

(3) does not apply to marijuana businesses legally operated under State law.

 

We reject each of petitioner’s arguments and will deny its motion for partial summary judgment.”

 

It is our opinion the questions of whether IRC Sec. 280E is a penalty, whether the VIII Amendment applies, and whether IRC Sec. 280E is unconstitutional are well settled law. Judge Joseph Goeke affirmed these opinions. If taxpayers want to change or repeal IRC Sec. 280E[3], they should follow the lead of “the adults in the room” such as the Cannabis Trade Federation [“CTF”] and Marijuana Policy Project[4].

 

The Supreme Court has held that any deductions from gross income are a matter of legislative grace. Deductions can be reduced or expanded in accordance with Congress’ policy objectives[5]. Under the Sixteenth Amendment, “[t]he power of Congress to tax gross income is unquestionable[6].

 

Section 280E is directly tied to Congress’ policy objective to limit and deter trafficking in illegal controlled substances[7]. Section 280E is not an effort by Congress to punish violators of State law that has no legitimate Federal objective[8].

 

The argument that IRC Sec. 280E is a penalty cannot be reconciled with the authority of Congress to tax gross income. For that reason the Tax Court concluded IRC Sec. 280E is not a penalty provision. Consequently, the Eighth Amendment’s Excessive Fines Clause does not apply.

 

The taxpayer also argued that IRC Sec. 280E solely applies to IRC. Sec. 162 deductions. The taxpayer argued that the text of IRC Sec. 280E “tracks” the language of IRC Sec. 162 which allows a deduction for all ordinary and necessary business expenses. The taxpayer argued this indicated IRC Sec. 280E should apply solely to prohibit IRC Sec. 162 deductions. Judge Goeke pointed out the taxpayer’s argument ignored the first line of IRC Sec. 280E which states, “No deduction or credit shall be allowed . . . .” (Emphasis added.) The language of this section of the Code is clear and unequivocal.

 

Judge Goeke also points to broader statutory scheme as supports for the conclusion IRC Sec. 280E means what it says – that no deductions under any section shall be allowed for businesses that traffic in a controlled substance. As the Court points out, IRC Sec. 261 which is found in part IX of subchapter B of Chapter 1 of the Code, provides that “no deduction shall in any case be allowed in respect of the items specified in this part.” IRC Sec. 280E is found in part IX[9].

 

The taxpayer argued as its final argument that section 280E applies only to businesses that engage in illegal or disreputable sales of controlled substances. As support for the position the taxpayer pointed to the word “trafficking” in section 280E. The taxpayer argued the word suggested some unsavory or illicit purpose was required for IRC Sec. 280E to apply. The Court made short shrift of this argument[10] stating “[T]he sale of medical marijuana pursuant to California law constitutes trafficking within the meaning of section 280E.”

 

“Medical Marijuana” is a Schedule I controlled substance, and dispensing it pursuant to * * * [California law] is ‘trafficking’ within the meaning of IRC Sec. 280E.”). Thus, we hold that the use of the word “trafficking” in IRC Sec.280E encompasses petitioner’s medical marijuana dispensary legally operated under California State law.

 

The nasty bonus gift in the Tax Court’s opinion in this case includes an express denial of the taxpayer’s and an express statement by a majority of the Tax Court judges that IRC Sec. 280E denies as “trafficking expenses” all of the expenses associated with the operation of a dispensary. Solely items that are excluded from gross revenue such as reimbursed expenses before the deduction of Cost of Goods Sold [“COGS”] would be subject to IRC Sec. 280E[11]. Of course, the opinion in this case is a disaster for California dispensaries. The only saving grace is that the case is a denial of a motion for partial summary judgment. Most of the statements of the judges are dicta.

 

Upon reflection, this case might be viewed as a close cousin to “play stupid games, win stupid prizes”.

 

We must mention a couple of additional items. It is our impression many representatives of cannabis dispensaries failed to consider the opportunity to reconsider and amend returns based on CCM 201504011. We noted some time ago an argument could be made the failure to do so constituted malpractice. In light of Judge Mark V. Holmes opinion in Harborside[12] taxpayers and representatives of dispensaries should carefully evaluate the risks associated with IRC Secs. 6662-6664 as well as consider the inclusion of a Form 8275 – Disclosure Statement with returns. Practitioners should also consider the possible application of penalties on preparers pursuant to IRC Sec. 6694, including the consequences of an enhanced penalty for intentional disregard pursuant to IRC Sec. 6694(b)(2). An enhanced penalty constitutes grounds for a referral to the Office of Professional Responsibility.

 

FOOTNOTES

[1] 151 TC No. 3 (2018).

[2] 153 TC No. 4 (2019).

[3] Consistent with this designation, we have held that the limitations imposed by section 280E are applicable to the ever-increasing number of marijuana businesses operating legally under State law. Olive v. Commissioner, 139 T.C. 19, 38 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); CHAMP, 128 T.C. at 182-183.

[4] See Killing Three Birds with One Bill: The STATES Act Simultaneously Harmonizes Federal Law with State Cannabis Laws and Addresses the Cannabis Industry’s Banking and Tax Issues and Marijuana Legalization

[5] INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see Keeler v. Commissioner, 70 T.C. 279, 284-285 (1978)

[6] .” Bagnall v. Commissioner, 96 F.2d 956, 957 (9th Cir. 1938), aff’g 35 B.T.A. 1 (1936).

[7] See CHAMP, 128 T.C. at 182 (“Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances.”); see also S. Rept. No. 97-494 (Vol. 1), at 309 (1982), 1982 U.S.C.C.A.N. 781, 1050 (“To allow drug dealers the benefit of business expense deductions * * * is not compelled by the fact that such deductions are allowed to other, legal, enterprises.”).

[8] Cf. Constantine, 296 U.S. at 295-296.

[9] See CHAMP, 128 T.C. at 180-181 (disallowing section 162 deductions under IRC Sec. 280E); Beck v. Commissioner, T.C. Memo. 2015-149, at *18 (disallowing a IRC Sec. 165 loss deduction under IRC Sec. 280E).

[10] See, e.g., Olive v. Commissioner, 139 T.C. at 38; CHAMP, 128 T.C. at 182-183;

Canna Care, Inc. v. Commissioner, T.C. Memo. 2015-206, at *9

[11] The Tax Court concludes,

“Our precedent is unambiguous. Congress, rather than this Court, is the proper body to redress petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in IRC Sec.280E for businesses that operate lawfully under State law. Until then, petitioner is not entitled to deduct expenses incurred in the operation of its drug-related business.”

In reaching our holding, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.

[12] 151 TC 11


Sean HockingSean HockingOctober 25, 2019
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11min2300
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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT
October 17th is remembered by many Californians as the anniversary of the Loma Prieta earthquake. Both the San Francisco Bay Bridge and the Cypress Freeway collapsed. Millions around the world witnessed the fires in the Marina District. The Loma Prieta earthquake is now a memory for most Californians. More recent disasters have supplanted these memories. Many present day Californians were not here.

For those involved in California’s cannabis industry two events occurred on the East Coast on the most recent October 17th that will prove to be a tremor equivalent to the Loma Prieta earthquake.   Most Californians, even those actively involved in the cannabis industry, will not recognize the significance of these two events. These two events, however, evidence California’s fall from the apex of leadership in the cannabis industry in the United States.

One event occurred in Washington, D.C. The other occurred in New York. The event that occurred in Washington, D.C. was the entry of the DECISIONS in United States Tax Court cases involving Harborside’s federal income tax liabilities for the years 2007-2012. Harborside has put a brave face on its loss Tax Court loss. Harborside has, however, neglected to allow for interest on the tax deficiencies in establishing a tax reserve for projected adjustments to income. Of greater significance, Harborside has failed to properly reflect the consequences of Judge Mark V. Holmes’ opinions in its establishment of reserves for income tax adjustments for the years 2013-2018.

The event that occurred in New York on October 17th is of greater significance for California’s cannabis industry. On October 17th the Governors of New York, Connecticut, New Jersey and Pennsylvania, Governors Cuomo, Lamont, Murphy and Wolf, hosted a summit to establish uniform principles for each state to utilize in order to implement standardized regulations across the Northeast region. Representatives from Rhode Island, Massachusetts and Colorado also attended the summit.

One notable aspect of the reports relating to this summit is the absence of any mention of representatives from California. Who knows the reason? Very likely there were representatives from California. We have no doubt there were attendees who have substantial financial interests in California’s cannabis industry. Rational and intelligent individuals recognize and acknowledge California’s cannabis industry is in a state of chaos. For those interested in the cannabis industry in other jurisdictions, California is instructive for its multiple examples of actions that should not be taken.

Those who follow voting patterns in the United States will immediately recognize that the population of the Northeast, as well as the financial and political clout of the area, exceed the population and clout of California. The financial and political strength of the Northeast alone makes the area a worthy competitor for California. California’s cannabis industry, however, has been rushing headlong toward disaster for several years. Thousands have been lured into the investment of money and effort in California’s cannabis industry like sailors following the song of the Sirens of Greek mythology.

We have described on multiple occasions our opinions regarding the principal reasons California’s cannabis industry continues to become more chaotic. See, [[.

We have suggested from time to time solutions to some of the issues that have surfaced over the past several years in California’s cannabis industry. See, [[.

We realize there are many issues relating to California’s cannabis industry that we do not recognize let alone have any idea how to solve. We know little about cultivation, testing, packaging, etc. We realize California’s cannabis industry faces challenges with respect to a myriad of items. We do not understand many of the granular the issues that face California’s cannabis industry let alone have suggestions for solutions .

We are, however, acutely aware California’s cannabis industry continues to become more chaotic. While we can suggest solutions to only a few of the granular issues facing California’s cannabis industry, we know where solutions to all of the issues facing the industry will be found.

Solutions to big picture issues are found by looking at big picture causes. The causes of all of the problems that confront California’s cannabis industry ultimately flow from a lack of thoughtful and adept leadership. All of the problems relating to California’s cannabis industry flow from the failure of those with the power to influence the course of the industry to competently provide proper leadership and guidance.

Those who were involved in California’s underground cannabis industry were ill-prepared to readily adjust to the new reality of a regulated commercial cannabis industry. Some will survive, but many will not. California’s professional communities, California’s lawyers and accountants, failed to provide proper leadership. Those professionals who leaped into the fray in most instances did so to make money rather than to assist in the transition. The consultants who came forward to provide services to assist with regulatory requirements did so for the same reason. Local political leaders acted for political reasons looking for immediate benefits for their communities through tax revenues and improved economies. Few devoted significant thought to the welfare of California’s cannabis industry as a whole.

The policies that produced Proposition 215 – the War on Drugs and the political misuse of marijuana prohibition – started the ball rolling in California toward adult-use legalization. . Proposition 64 was the product of astute financial and political leadership, but the focus of this leadership was on financial rewards for the backers of the proposition. For the financial backers of Proposition 64, Californians are merely consumers.

The Legislature cobbled together the Medical and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”) based on Proposition 64. The primary guiding force for the decisions of every legislator was political – act to please as many as possible while offending as few as possible. Elected officials temper all evaluations of what is best for California with their views to the impacts of their actions on the next election. The Legislature ignored several key aspects of the report of the Blue Ribbon Commission on cannabis because it was politically expedient to do so.

What about the money and effort expended to administer MAUCRSA? The administrative structure California established for the regulation of the cannabis industry illustrates many of the inherent problems of governmental agencies. Governmental agencies are process-driven as distinguished from product-driven. The administrative agencies tasked with the regulation of California’s cannabis industry promptly set out to establish effective administrative organizations to regulate every aspect of the movement of cannabis from cultivator to consumer in a two-tier regulatory system.

California’s effort to create administrative agencies was a great success. Systems and processes were established for the comprehensive and detailed regulation of every aspect of California’s cannabis industry. At least two new administrative departments of significant size were established. Two others were significantly expanded. More than a dozen other California agencies were seriously expanded. California’s effort to establish administrative agencies to regulate the cannabis industry was so successful that a majority of those already involved in the industry gave up or decided to remain in the underground industry. California’s cannabis regulatory agencies have successfully caused the expansion of both the legal and the underground cannabis industries.

California’s leadership failed to understand that the goal was the transition an underground commercial industry into a regulated commercial industry. This failure was wholly a failure of leadership – political leadership; leadership from within California’s cannabis industry; leadership from the professions; leadership from local government; and leadership from law enforcement. It is our opinion that the single most significant failure of leadership is found in the leadership of the administrative agencies tasked with implementing the transition of an underground commercial industry into a regulated commercial industry.

The leaders of California’s administrative agencies tasked with the regulation of its cannabis industry concentrated on building administrative empires instead of making it as easy as possible for those involved in California’s cannabis industry to transition into a regulated commercial industry.



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