Criminal Justice

In a Friday decision, a three-judge panel of the US 6th Circuit Court of Appeals in Cincinnati held that the provisions of the 2010 Fair Sentencing Act that reduced the sentencing disparity between crack and powder cocaine offenses should apply to people convicted even before the law was passed. If upheld, the ruling could reduce the sentences of thousands of inmates, mostly black, who were sentenced under the draconian old laws.

Even though the Fair Sentencing Act had reduced the 100:1 ratio between crack and powder cocaine for sentencing purposes to 18:1, "thousands of inmates, most black, languish in prison under the old, discredited ratio because the Fair Sentencing Act was not made explicitly retroactive by Congress," the court noted.

"In this case, we hold that the federal judicial perpetuation of the racially discriminatory mandatory minimum crack sentences for those defendants sentenced under the old crack sentencing law, as the government advocates, would violate the Equal Protection Clause, as incorporated into the Fifth Amendment," the court wrote, noting that the Fifth Amendment forbids federal racial discrimination in the same way as the Fourteenth Amendment forbids state racial discrimination.

The US Supreme Court had already approved sentencing retroactivity for crack offenders who were charged before the Fair Sentencing Act went into effect but sentenced after it in Dorsey v. US, but this decision from the 6th Circuit dramatically expands the impact of the Fair Sentencing Act's sentencing reductions by applying it to all federal crack cocaine offenders.

Whether the ruling will survive the scrutiny of the 6th Circuit en banc or the US Supreme Court, if it gets that far, remains to be seen.

special to Drug War Chronicle by investigative reporter Clarence Walker, cwalkerinvestigate@gmail.com

Dispensaries providing marijuana to doctor-approved patients operate in a number of states, but they are under assault by the federal government. SWAT-style raids by the DEA and finger-wagging press conferences by grim-faced federal prosecutors may garner greater attention, but the assault on medical marijuana providers extends to other branches of the government as well, and moves by the Internal Revenue Service (IRS) to eliminate dispensaries' ability to take standard business deduction are another very painful arrow in the federal quiver.

"The 280E provision which requires certain businesses to pay taxes on their gross income, as opposed to their net income, is aimed at shutting down illicit drug operations, not state-legal medical marijuana dispensaries," said Kris Hermes, spokesman for the medical marijuana defense group Americans for Safe Access." Nonetheless, the Obama Administration is using Section 280E to push these local and state licensed facilities out of business."

The provision can be used to great effect. Oakland's Harborside Health Center was hit with a $2 million IRS assessment in 2011 after the tax agency employed Section 280E against. Harborside is fighting that assessment, even as it continues to try to fend off federal prosecutors' attempts to shut it down by seizing the properties it leases. Similarly, when the feds raided Richard Lee's Oaksterdam University that same year, it wasn't just DEA, but also IRS agents who stormed the premises. Lee said it was because of a 280E-related audit.

The attacks on Harborside and Oaksterdam were part of an IRS campaign of aggressive audits using 280E to deny legitimate business expenses, such as rent, payroll, and all other necessary business expenses. These denials result in astronomical back tax bills for the affected dispensaries, threatening their viability -- and patients' access to their medicine.

"Should the IRS campaign be successful; it will throw millions of patients back in to the hands of street dealers; eliminate tens of thousands of well paying jobs, destroy hundreds of millions of dollars of tax revenue; enrich the criminal underground; and endanger the safety of communities in the 17 medical cannabis states," said Harborside's Steve DeAngelo as he announced the 280E Reform Project to begin to fight back.

It's going to be an uphill battle. In the last Congress, Rep. Pete Stark (D-CA) introduced House Bill 1985, the Small Business Tax Equity Act, designed to end the 280E problem for medical marijuana businesses, but it went to the Republican-controlled House Ways and Means Committee, where it was never heard from again.

Still, something needs to happen, said Betty Aldworth, deputy director of the National Cannabis Industry Association, which this year is working with members of Congress to try to find a fix for the 280E problem.

"When Section 280E was created in the 1980s, no one imagined state-legal marijuana providers," Aldworth told the Chronicle. "Whether or not it is part of a larger effort to curtail the development of regulated models for providing marijuana, which is a model that is clearly preferable to leaving this popular and relatively safe medicine (or adult product) in the underground market, these onerous tax rates have severely hampered the development of the regulated market."

It's a brake on the overall economy, Aldworth said.

"Not only has it resulted in stymieing job development, but it also curtails other economic activity such as reinvestment in business and the rippling positive effects of that spending," she argued. "And in many cases, it has created a tax burden that is simply unbearable: many providers have had to close their doors and lay off their staffs because the tax burden was simply too great."

Because of this unintended application of 280E, medical marijuana providers are paying overall taxes at a rate two to three times those of other small businesses, Aldworth said.

"It's important to note that just as they want to apply for licenses, follow regulations, and otherwise participate in the legal business community, state-legal marijuana providers also want to pay their fair share of taxes," she pointed out. "Most small businesses pay an effective tax rate of between 13% and 27% on net income, according to the Small Business Administration. State-legal marijuana providers pay an average effective tax rate of 65-80%. An industry that can provide thousands of jobs is being held back by these crazy tax rates."

While the lobbyists look to Congress for a fix, one academic tax law expert thinks he has hit upon a novel solution, but not everyone agrees.

Benjamin Leff, a professor at American University's Washington College of Law, raised eyebrows at a Harvard University seminar this spring when he presented his report,Tax Planning For Marijuana Dealers, where he suggested that dispensaries get around 280E by registering with the IRS as tax-exempt social welfare organizations, known as 501(c)(3)s or 501(c)(4)s.

The IRS has already ruled that medical marijuana providers can be exempt under 501(c)(3) because its "public policy doctrine" does not allow charitable organizations to have purposes contrary to law, but in the paper, Leff argued that "a state-sanctioned marijuana seller could qualify as tax-exempt under 501(c)(4), since the public policy doctrine only applies to charities, and 501(c)(4) organizations are not charities."

The organization would have to be operated to improve the social and economic conditions of a neighborhood blighted by crime or poverty, by providing job training, employment opportunities, and improved business conditions for commercial development in the neighborhood, just like many existing community economic development corporations that run businesses.

"When taxes get too high, you can drive compliant dispensaries out of business," Leff told the Chronicle.

Americans for Safe Access' Hermes would agree with that, but he's not so sure about Leff's idea.

"The concept of medical marijuana dispensaries registering with the federal government as a 501(c)(4) in order to sidestep section 280E is novel and may be hypothetically valid," he said. "However, the IRS will refuse to grant tax-exempt status to a business that the agency believes is violating federal law. Perhaps, it would be possible for a dispensary to obtain 501(c)(4) status under false pretenses, but such status would not very likely withstand an IRS audit."

There are better ways, he said.

"A much more realistic and sensible approach -- pending a change to the federal classification of marijuana for medical use -- is to amend the tax code to exclude state-lawful medical marijuana businesses from Section 280E," Hermes recommended. "This is the kind of legislation that Congress should pass in order to allow states to implement their own medical marijuana laws, without undue interference by the federal government."

"I agree with everything he said," Leff replied. "But it's not just the Obama administration that is using 280E this way. The Supreme Court has held that there is no exception to the Controlled Substances Act for state-level legal marijuana sales, and since 280E makes references to Schedule I controlled substances, it applies to legal marijuana unless Congress changes the law. I totally agree that Congress should amend 280E to exempt marijuana selling that is legal under state law. Congress could also amend the Controlled Substances Act to remove marijuana from it, which would probably also make sense," he added.

Whether it is by act of Congress, internal policy shifts, or creative thinking by law school professors, some way has to be found to exempt state-permitted medical marijuana providers from the clutches of 280E and its punitive tax burden aimed at dope dealers, or there may not be any medical marijuana providers.

Thanks to aggressive policing strategies, New York City has for more than a decade been the world's leader in marijuana possession arrests, but now those numbers are starting to go down.

That means that if the current trend continues, New York City will still see more than 30,000 small-time marijuana busts this year. But that's better than the 50,000 of a couple of years ago or the 40,000 last year.

This is in a state that decriminalized marijuana possession in 1977. The arrests occur because possession in public view is not decriminalized, and for years, the NYPD followed a practice of police directing people to produce what they were carrying, then charging them with misdemeanor possession instead of citing them for the civil offense of possession.

NYPD Commissioner Ray Kelly issued a memo in fall 2011 directing the force to stop arresting people for that, which undoubtedly accounts for some of the decline. Increased public scrutiny of the NYPD's stop-and-frisk policy, which saw some 600,000 people a year searched -- the vast majority of them young people of color -- has probably also played a role in forcing the numbers down.

Earlier this year, Mayor Michael Bloomberg announced that people arrested for small-time possession would no longer be sent to Central Booking, where they typically spend 24 hours before being released, but would instead be given a desk appearance ticket. That move reduced the pain somewhat, but not the arrest numbers.

Gov. Andrew Cuomo (D) has proposed decriminalizing possession in public view. If that law had been in effect last year, 39,257 of the 40,661 pot possession arrests in 2012 would have gone up in smoke.

The bill creates a separate sentencing system for drug offenders and allows people convicted of some felony drug charges to be sentenced to probation and community-based sentencing and see that felony charge changed to a misdemeanor conviction upon completion of probation.

It also creates an "exhaustion of remedies" requirement for some drug offenders. That means they must have already participated in several other forms of treatment and sentencing before being sentenced to prison.

Those and other reform provisions in the bill will save the state of Colorado $5 million a year, according to the Colorado Commission on Criminal and Juvenile Justice. Some 550 offenders a year will be able to avoid prison sentences for their drug offenses under the new law, according to a legislative analysis.

"It's been a long time coming," said Sen. Steve King (R), sponsor of the bill. "It starts to deal with addiction issues and getting them off drugs."

The governor is expected to sign the bill shortly.