Intersecting Issues

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 IRS employs Section 280E, a 1982 addition to the tax code that was a response to a drug dealer's successful effort to claim his yacht, weapons purchases, and even illicit bribes as business expenses. Under 280E, individuals involved in the illicit sale of controlled substances -- including marijuana, even medical marijuana in states where it is legal -- cannot claim standard business expenses on their federal taxes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are better ways, he said.

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

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

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

Idaho is officially not a marijuana-friendly state. Although it is bordered on most sides by medical marijuana states (Washington, Oregon, Nevada, and Montana), it so far refuses to accept the medicinal use of the herb. And even though one of those states (Washington) has legalized marijuana and two others (Nevada and Oregon) have decriminalized it, Idaho remains firmly grounded in 20th Century attitudes toward the plant. The state legislature this year took the time to approve a non-binding resolution noting its opposition to marijuana legalization.

But that doesn't mean there aren't reformers in the Gem State. There have been sporadic local marijuana legalization efforts in past years, and this year, medical marijuana supporters are in the midst of signature-gathering campaign to put an initiative on the ballot.

That campaign is led by Compassionate Idaho, some of whose most stalwart and publicly visible members are Lindsey and Josh Rinehart and Sarah Caldwell. But with an incident that began while Caldwell and the Rineharts were away on a retreat, the trio are learning a harsh lesson in hardball pot politics. When they got back home, their kids were gone, and the police and child social services had them.

According to Boise Police, who released a statement on the matter as controversy grew, on April 23, they were contacted by a local school official about a child who had apparently eaten marijuana and fallen ill. Police "learned from witnesses" that the supposed marijuana supposedly came from the Rinehart residence, and, "concerned for the safety of children at the residence," they went there and found a baby sitter caring for the Rinehart and Caldwell children.

Police persuaded the baby sitter to let them search the residence and "found drug paraphernalia, items commonly used to smoke marijuana, and a quantity of a substance that appeared to be marijuana in locations inside the house accessible to the children." Police at the scene then contacted both narcotics investigators and the department's Special Victims Unit.

(Rinehart, a Multiple Sclerosis sufferer, said she indeed had medical marijuana at home, but that she had a small amount and a pipe on a dresser in her bedroom, a larger amount of trim locked away in a freezer, and some marijuana tincture in a bottle in a kitchen cabinet atop her refrigerator.)

"Based on the fact that illegal drugs and drug paraphernalia were located in an area that appeared to be commonly used by the children in the residence and the fact that one child had already become ill from ingesting what he assumed was marijuana, and the inability to contact the children's parents, detectives made the decision to contact Idaho Health and Welfare officials and place the children in imminent danger, meaning they were placed in the protective custody of the state until it can be determined they are in a safe environment," the statement said.

At this point, it is unclear whether whatever made the school child sick was marijuana. It is equally unclear that any marijuana came from the Rinehart residence. What is clear is that both the Rineharts and Sarah Campbell are up-front, in-your-face medical marijuana patients and activists, and that their children were being subjected to the tender mercies of the state.

Sarah Caldwell has had her kids returned to her -- it was not her child who is suspected of providing the suspected marijuana -- but the Rineharts are still fighting to get their kids returned.

"My sons were not involved," Caldwell said. "They were at the house the police searched, the police decided my kids were in 'imminent danger,' and it took three days to get them back."

While the two boys and the Rinehart kids were held at the same foster home, providing them with the small comfort of being with friends, Caldwell said her younger son was traumatized.

"My six-year-old is autistic," she explained. "I noticed when he came home, he started packing his favorite toys. I asked him why and he said, 'In case the police make me go away again.' He doesn't understand why," Caldwell said, her voice breaking.

While Caldwell has her children at home again, both she and the Rineharts are going to have to comply with the requirements of the child welfare system to ensure that their children can return to their old lives. But, Lindsey Rinehart said, Child Protective Services is moving more quickly than usual in her case.

Normally, Child Protective Services requires parents to meet with them at the department three times, then allows them to have three visits with their children in the community, then inspects the home to ensure a safe environment is being provided, and only then considers returning the kids, most likely with the added provision that the parents must undergo parenting and drug education classes.  But when the Chronicle last spoke to Rinehart Saturday, she was in the middle of a home visit with her kids -- one that ends Sunday morning.

"They seem to be expediting the process because they realize they messed up," she said. The state taking her kids wasn't doing them any favors, she added.

"My oldest son now will only talk if you ask him really specific questions, and my younger one is acting out," she said. "He is upset and argumentative; he has a hard time vocalizing things," she said of her six-year-old. "I told him I had to go to the store, and he freaked out; he didn't want me to leave him. He's reacting like I've never seen before. He was a happy kid; now he's mad and confused. He doesn't understand what's going on."

The older Rinehart son is having issues, too, she said.

"He's mad. Both of the kids have been educated about my medicine, so they know this is wrong," the multiple sclerosis sufferer explained. "They're mad that they were taken away because mommy had her medicine. I'm trying to comfort them as best as I can. They just know that somebody took them away, and now I have to explain that they have to go back to foster care tomorrow," Rinehart said, her voice trembling.

Both the Rineharts and Sarah Caldwell suspect they were set up.

"I'm the director of Compassionate Idaho.  Everybody knows who I am. I'm on the news at least once a month," said Rinehart. "We had just done the Hemp Fest in Moscow and signature-gathering in five towns. The police knew what they were looking for, and they knew where to look without anyone telling them. Those kids on the playground didn't know where to look. There were kids from several other families involved in that playground incident, but we think the police got who they wanted."

"I do think they were targeting us," Caldwell agreed. "That incident at the school was just an excuse for them to try to get us."

"This has got me fired up," Caldwell said. "They took my children to try to keep me focused on getting my kids back so I wouldn't do my activism, but I'm not going to stop."

The use of children as pawns in the marijuana culture wars is shocking and distressing, but nothing new, said Keith Stroup, founder and currently counsel for the National Organization for the Reform of Marijuana Laws (NORML).

"We get calls three or four times a week from people who have lost custody of their children because they tested positive at birth or in a situation where parents are feuding over custody," Stroup said. "One will say 'My spouse smokes marijuana and is thus not a fit parent,' and once that child welfare issue is raised, it's a totally separate matter from the criminal justice system. Even if no one is proposing to arrest the parent, this is far more damaging and destructive to the family."

That's at least in part because once child welfare has its clutches on you, it doesn't want to let go, and it typically has an attitude toward marijuana use that is reminiscent of Reefer Madness, Stroup said.

"They can require that you take parenting and drug education courses right out of the 1950s," he said. "It's a worthless routine, but you have to do it, you have to pay hundreds of dollars to do it, and you can't get your kids back until you do it. It doesn't matter how nice or good a parent you are or how well-intentioned you are, once you get caught up in this, you are in for a bad time."

NORML is doing what it can to assist the Idaho activists, Stroup said, adding some words of advice for other marijuana-using parents, especially (but not only) in places where attitudes toward the herb are hide-bound and hardened.

"If you're in a place like Idaho and you're a young parent, never smoke in front of your kids, so if that issue ever arises, you can make sure nobody can say you were smoking marijuana and kids were playing in the same room," he counseled. "You have to be able to demonstrate convincingly that you are providing a safe and secure place for your kids. In places like Idaho, you could lose custody over your kids for something many of us in many parts of the country take for granted."

Getting the kids back is only part of the problem for the Rineharts. Idaho treats even small-time pot possession seriously -- it's one of those place where people still actually do get jail time for it -- and the couple is facing possible felony charges for possessing more than an ounce of trim.

"I'm living in an ongoing panic attack," said Lindsey Rinehart. "They update their warrants every five hours, so I check in frequently, and first thing in the morning. Because of my illness, I can't handle physical pressure very well, and I'm afraid they could hurt me when arresting me, so my lawyer has asked that if they do charge me, they just cite me."

All the stress isn't helping, and now, Rinehart can't have her medicine, either.

"I have prescribed meds to suppress my immune system, but those make me really sick. With cannabis, I only had to take it every other day," she explained. "Now, I have to take it every day, and it's so dangerous we have to regularly check my heart, liver, kidney, and eye function. And if I have pain, I'll have to go back to hydrocodone. I'll be going back on those meds I had been able to taper down from with cannabis."

But despite the trials and tribulations, neither the Rineharts nor Sarah Caldwell have been cowed, and their travails have energized supporters as well.

"People are really mad about this and are getting involved," said Rinehart. "We even have people reaching out to help fund Compassionate Idaho.

"People are coming out of the woodwork after hearing our kids got taken because of our activism," said Caldwell. "People are saying they want to help. Education is key here -- a lot of people here believe the Reefer Madness, but this is a non-toxic plant; it can't hurt you."

"The bigger picture is that we don't want this to happen to more families," said Rinehart.

"We're getting more calls than we ever did about child custody," Stroup reiterated. "There are still people being seriously damaged from what's left of marijuana prohibition. Few go to jail for marijuana anymore, but many lose custody of their kids. These repercussions may be more subtle, but they are not insignificant."

The Rineharts and Sarah Caldwell still have to deal with Child Protective Services, and the Rineharts are still waiting to see if they will face criminal marijuana and child endangerment charges. But in the meantime, there are 55,000 signatures to be gathered to get medical marijuana on the ballot and start changing Idaho's reactionary response to marijuana.

Colorado employers can legally fire marijuana users from their jobs, the state Court of Appeals ruled Thursday in a 2-1 decision. Although the case was brought by a medical marijuana user, the ruling will have any even broader impact given that the state has now legalized marijuana for all adults.

The case was Coats v. Dish Network LLC, in which Brandon Coats, a quadriplegic telephone operator for Dish Network and registered medical marijuana patient, was fired by Dish Network after testing positive for marijuana during a drug test. Paralyzed by a car crash as a teen, Coats had been a registered patient since 2009. Dish Network cited no other reason for firing Coats other than his positive drug test result.

Coats challenged his firing, citing Colorado's Lawful Activities statute, which prohibits employers from firing workers for "engaging in any legal activity off the premises of the employer during nonworking hours." But both the trial court and now the appeals court rejected his challenge, holding that because marijuana remains illegal under federal law, the Lawful Activities statute does not apply.

"For an activity to be lawful in Colorado, it must be permitted by, and not contrary to, both state and federal law," the appeals court said.

Judge John Webb dissented, saying he could not find a case addressing whether Colorado judges must consider federal law in determining the meaning of the Colorado statute.

Coats' attorney, Michael Evans, said in a statement that the ruling will have a broad impact in the state.

"This case not only impacts Mr. Coats, but also some 127,816 medical marijuana patient-employees in Colorado who could be summarily terminated even if they are in legal compliance with Colorado state law," Evans said.

And with adult marijuana legalization now in place in the state, it is not just medical marijuana users who stand to be affected.

The ruling is expected to be appealed.

Similar rulings allowing employers to fire medical marijuana users have been upheld by courts in other states, including California, Michigan, and Montana.

Kansas Gov. Sam Brownback (R) Tuesday signed into law a bill that requires applicants for welfare and unemployment benefits to undergo drug testing if there is "reasonable suspicion" they are using drugs. People who test positive would have to undergo drug treatment and job training at state expense before becoming eligible for cash assistance.

According to Senate Bill 149, "reasonable suspicion" may be derived from "applicant's or recipient's demeanor, missed appointments and arrest or other police records, previous employment or application for employment in an occupation or industry that regularly conducts drug screening, termination from previous employment due to use of a controlled substance or controlled substance analog or prior drug screening records of the applicant or recipient indicating use of a controlled substance or controlled substance analog."

It is not clear why having worked or applied for a job in "an occupation or industry that regularly conducts drug screening" creates "reasonable suspicion" that someone is using drugs, but that's what the law says.

Gov. Brownback signed the bill during a Tuesday afternoon, saying the state had an obligation to its residents to help them break their addictions and improve their lives through treatment and job training.

"Drug addiction is a scourge in Kansas. This is a horrific thing that hits so many people," Brownback said. "What this effort is about is an attempt to get ahead of it, and instead of ignoring the problem to start treating the problem."

Critics of the bill, including the American Civil Liberties Union state chapter, argued that public benefits recipients don't use drugs any more frequently than anyone else, that such laws perpetuate existing stigmas, and that they unnecessarily invade privacy. But those arguments did not sway the legislature or the governor.