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Chronicle AM -- June 13, 2014

Jamaica will decriminalize pot possession and Bermuda is thinking about it, legalization initiatives in Alaska and Oregon get big bucks donations, medical marijuana reform is moving in the DC city council, and more. Let's get to it:

MPP Gives Alaska Initiative Campaign Big Cash Contribution. The Marijuana Policy Project, which is backing the Alaska legalization initiative, has just kicked in another $140,000. That's the second largest contribution to the campaign yet (the biggest, also from MPP, was $210,000), and pushes its total contributions to over half a million dollars. The organized opposition -- Big Marijuana, Big Mistake, Vote No on 2 -- has, on the other hand, raised only $31,000, most of it in a single donation by an Alaska Native village corporation.

Peter Lewis Family Gives Oregon Initiative Campaign Big Cash Contribution. A PAC controlled by heirs of Progressive Insurance founder and drug reform funder Peter Lewis has donated $250,000 to the New Approach Oregon legalization initiative. Lewis had donated $96,000 before his death last fall, and there were fears his death could end his reform largesse, but his family is carrying on. The group has raised more than $900,000 overall.

SurveyUSA Oregon Poll Has 51% for Legalization. A new SurveyUSA poll in Oregon has 51% supporting marijuana legalization, with 41% opposed, and 8% undecided. The poll comes as three legalization initiatives are in the final weeks of signature-gathering to put the issue on the November ballot. Initiative organizers are not going to breathe easy with numbers like these, though; the conventional wisdom is that initiatives want to be polling at 60% or above before the campaign begins in earnest. Click on the link for demographic and methodological details.

Medical Marijuana

DC Council Moves Toward Approving Expanded Medical Marijuana Access. The District of Columbia city council moved ahead yesterday with plans to expand access to medical marijuana. In a joint session of the Health and Judiciary and Public Safety committees, the council gave preliminary approval to two bills. Bill 20-766, cosponsored by every member of the council, would repeal the qualifying conditions list and allow physicians to recommend marijuana to any patient they think marijuana would benefit. Bill 20-678, will increase the number of plants a cultivation center could possess from 95 to 500, better ensuring that patient need is met.

Feds Warn Casinos to Not Take Bets Made With Marijuana Money. Federal regulators addressing a banking secrecy conference in Las Vegas yesterday warned casinos they can't accept bets from people working in the marijuana industry unless the casinos undertake rigorous background checks and allow the federal government to monitor the bets. That's because casinos are subject to the same financial reporting requirements as financial institutions. It's a lengthy report; click on the link to read it all.

Sentencing

Fair Sentencing Act Gets Another Cosponsor. Add Rep. David Joyce (R-OH) to the list of cosponsors of the federal Fair Sentencing Act of 2013. He signed on yesterday. That makes 24 Democrats and 14 Republicans. The bill is before the House Judiciary Committee. Clicking on the link will take you to the bill.

Law Enforcement

Virginia Sheriff's Office Makes Mass Drug Bust… Again… and Again. The Amherst County Sheriff's Office announced yesterday that a county grand jury had indicted 68 people on drug charges after a months-long investigation by the department. It's the third mass bust since 2010's Operation Silent Night and 2012's Operation Avalanche. The sheriff's office seems to understand--at least on some level--the futility of such operations: "It stops these folks from selling drugs [but] as soon as you remove these folks, someone else takes their place. It's a never-ending cycle we're working on," a spokesman said.

International

Jamaica Will Decriminalize Marijuana Possession. Jamaica will decriminalize the possession of small amounts of marijuana, the government announced yesterday. It will also allow possession for some medical and scientific purposes. And it will allow possession for religious purposes. Justice Minister Mark Golding said that the cabinet is supporting a proposal to decriminalize the possession of to two ounces of the ganja. Under the proposal, those caught with marijuana could be subjected to fines, but not criminal charges.

Bermuda's Attorney General Says Government Should Consider Marijuana Decriminalization. As the Bermudan government mulls marijuana reform, new Attorney General Trevor Moniz has come out for decriminalization. Moniz would prefer "a system where if you get caught with a small amount of marijuana, you don't go to court and you wouldn't have any criminal record," he said. "In New York and the UK., they have a caution only for a first offence, which may need to be broadened. I'm in favor of small steps, incremental steps, rather than a big leap," he added.

Barcelona Bans New Cannabis Clubs for a Year. Citing a proliferation of private cannabis clubs and a lack of regulation, the Barcelona city council announced today it was instituting a moratorium on new clubs for one year. The crackdown comes just days after a club was closed for illegal sales. The clubs allow members to grow and consume their own cannabis, but they aren't supposed to sell the stuff to outsiders. The clubs have been attracting cannabis tourists from around the world.

Conflict in Turkish Municipality Tied to Marijuana Crop. Three weeks of violent protests in the municipality of Lice in Diyarbakir Province, where Kurds predominate, are linked to the looming marijuana harvest, some of the profits from which are destined for the Kurdistan Workers Party (PKK), according to this report. Violent incidents have been ongoing since demonstrators attacked a security forces outpost with homemade bombs and Molotov cocktails, and soldiers opened fire, killing the nephew of a "notorious trafficker."

Obama Administration Announces Banking Guidelines for Marijuana Business

The Obama administration Thursday afternoon announced new guidelines that will allow financial institutions to provide services to marijuana businesses in states where it is legal. The guidelines will apply to both medical marijuana and legal marijuana states.

Some 20 states and the District of Columbia allow for medical marijuana, while two states, Colorado and Washington, have legalized marijuana commerce for adults.

Banks and other financial institutions have been increasingly unwilling to deal with marijuana-related businesses for fear of breaking federal laws. That has led to an untenable situation where marijuana businesses are forced to deal in large amounts of cash.

The guidelines were issued by the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) in concert with the Department of Justice. Deputy Attorney General James Cole is also issuing supplemental guidance to prosecutors on how to decide whether to prosecute federal money laundering and Banking Secrecy Act violations related to legal marijuana commerce.

In a joint statement, the two departments said the guidelines will provide "greater financial transparency" in an industry where the federal government is concerned about diversion and the encroachment of organized crime. The guidelines envision financial institutions helping law enforcement with "information that is particularly valuable" by filing regular reports that can provide insight into the industry's contours.

The issuance of the guidelines is the next step in the administration's de facto acceptance of legal marijuana and medical marijuana. Last August, the Justice Department announced it would not seek to undermine state marijuana laws and issued guidance to prosecutors (the "Cole memo") telling them to lay off unless businesses or individuals were violating a set of enforcement priorities, such as diverting marijuana outside the state or making money for organized crime.

Ethan Nadelmann, head of the Drug Policy Alliance, pronounced it a good thing.

"It appears that the Obama administration is trying to provide as much protection as possible for the marijuana industry, given the constraints of federal law," he said. "The assurances the administration have provided appear fairly substantial and will hopefully prove sufficient so that banks will feel safe doing business with the marijuana industry. I have to say I'm impressed by how the White House is trying to make this work, especially given the inability of Congress to do anything constructive in this area."

So did Steph Sherer, head of the medical marijuana advocacy group Americans for Safe Access, although she called for a more comprehensive federal response.

"We have been pushing the federal government for years to make these commonsense concessions and we're pleased that the Obama Administration is finally doing so. At the same time, a piecemeal approach to medical marijuana policy is shortsighted and is an issue that deserves a comprehensive public health solution," she said.

"We will certainly be working with banks, credit unions, and credit card companies to ensure proper implementation of this federal guidance," continued Sherer. "Removing the risks of operating as an 'all-cash' business cannot be overstated, but we will also continue to put pressure on the Obama Administration to wrap these types of discrete practices into a more comprehensive medical marijuana policy."

Washington, DC
United States

Holder Says Marijuana Banking Rules Coming Soon

Attorney General Eric Holder said Thursday that the Obama administration would soon announce regulations that would allow banks to business with legal marijuana businesses. Financial institutions have been scared away from such businesses by the threat of legal action for dealing in the profits of a commodity still illegal under federal law.

Attorney General Eric Holder (usdoj.gov)
The Obama administration had previously signaled it was working to address the issue, but it now appears action is imminent.

"You don't want just huge amounts of cash in these places. They want to be able to use the banking system," Holder said during an appearance at the University of Virginia's Miller Center. "There's a public safety component to this. Huge amounts of cash -- substantial amounts of cash just kind of lying around with no place for it to be appropriately deposited is something that would worry me, just from a law enforcement perspective," he explained.

"We're in the process now of working with our colleagues at the Treasury Department to come up with regulations that will deal with this issue," and the new rules are coming "very soon," Holder said. "It is an attempt to deal with a reality that exists in these states."

Holder did not specify whether his remarks were aimed solely at Colorado and Washington, which have legalized marijuana commerce, or were directed more generally at states that allow for legal medical marijuana.

A Justice Department spokesman later "clarified" Holder's remarks to say that instead of new regulations, Holder was speaking of issuing a "guidance" to prosecutors and federal law enforcement. Whether such a "guidance" without further guarantees from the federal government will be enough to assuage bankers' fears remains to be seen.

But marijuana industry advocates applauded the attorney general's remarks.

For the legal, regulated cannabis industry, this is very welcome news," said National Cannabis Industry Association executive director Aaron Smith. "We have been anxiously awaiting clarity on the banking issue from the Justice and Treasury Departments for many months. To hear that guidance will be issued 'very soon' is encouraging. It's critical that we fix this issue before February 20, when our Colorado members must pay their first round of state taxes, or the Colorado Department of Revenue may be forced to accept more than $1 million in cash payments."

Smith added that the NCIA was "grateful" to Holder and other federal officials who have been working on the issue, and that getting it resolved "cannot come soon enough."

Washington, DC
United States

Legal Marijuana No Simple Matter for Colorado Retailers [FEATURE]

special to the Chronicle by Denver-based journalist Rebecca Chavez

Starting January 1, any person in Colorado over the age of 21 can walk into a retail marijuana facility and purchase marijuana with just a show of ID. While the process should be simple for those who choose to imbibe legally, things have not been so simple for the dispensary owners who have made the choice to sell retail marijuana. Luke Ramirez is one of these owners. His store, Walking Raven, sits on one of Denver's busiest streets.

For Ramirez, planning for retail marijuana sales began in February of 2012, when Walking Raven officially endorsed Amendment 64, the legalization initiative that won at the ballot that November. Even with almost two years of planning behind him, he finds that there are still a lot of hurdles to overcome. It wasn't until May of 2013 that Ramirez and other dispensary owners knew what would be expected of them by the state. Even with state legislation settled, Amendment 64 allows for municipalities to come up with even stricter rules for retail marijuana stores.

Denver started working on its own regulations in September, and wasn't done when the Chronicle spoke with Ramirez in late December. Though he was only the seventh person in the city of Denver to apply for a license, the constant changes mean that he won't be able to open until about January 10, over a week beyond the official start of recreational marijuana sales. In late December Ramirez was still getting calls about changes to marijuana laws at the city level.

The process has been similar for dispensary owners all over Denver, which means it might be one of the few places where a legal retail marijuana shortage will happen right away. The licensing for retail locations and retail grows is happening at the same time. This would be a problem for those trying to open on January 1, except that the state has allowed a one-time transfer of medical marijuana to retail. This transfer is how all stores will start, and it gives a little something extra to the consumer as well.

The edible companies have to go through the same process as other marijuana facilities, but some are opting out in the early stages. During the one time transfer, marijuana stores can make some edibles retail that otherwise wouldn't be available. This means some store owners are stockpiling certain items that they feel will be popular with retail consumers.

Ramirez has opted out of stockpiling because he simply can't afford it. The cost of selling retail marijuana is incredibly high, which prices smaller dispensaries out of an immediate switch. All told, Ramirez has spent $60,000 dollars going through the process of getting licensed and prepared to make the switch. Before he actually gets his license he expects to spend about $10,000 more.

Inside Walking Raven (Rebecca Chavez)
Money is a huge concern for retail marijuana dispensaries, and Ramirez is unsure of whether they will be able to make it all back during the first few months of retail sales. He acknowledges that the supply for retail just won't meet the demand, and worries that owners will see the same marijuana shortage that caused some of them to temporarily close their doors in 2012. This, of course, affects the people who work behind the counter. Ramirez wants to make sure that all of his employees are well-taken care of, but he acknowledges that he may have to cut back on hours at some point.

The marijuana shortage has another effect on the market. With marijuana prices possibly going as high as $70 for an eighth, Ramirez says that retail marijuana "won't get rid of the black market until supply meets demand."

In the meantime, his store and many others will have to compete with the grey market that has sprung up on Craigslist since the passage of Amendment 64.

Despite the many difficulties in his way, and the five inspections that he has to go through, Ramirez is confident that he is making the right choice. While he cannot sell retail marijuana at present, he is concerned to ensure that marijuana is still available for his current customers: medical marijuana patients.

"Patients definitely still need medicine," he says, and that's why he's sure to always have some on hand, segregated from retail marijuana for non-patients.

Retail and medical marijuana are sold in the same store, but they have to be kept in separate containers. Medicinal users can purchase retail, but retail consumers cannot get any of the medical marijuana regardless of a possible shortage. Despite eventual plans to sell only 10% of his product as medicinal, Ramirez is determined to always be able to take care of the patients.

They are, after all, the ones that supported him before the end of prohibition in Colorado.

Denver, CO
United States

Hemp in the Time of New Federal Marijuana Policy [FEATURE]

It's not just medical and legal marijuana states that watched the Justice Department's announcement of its response to marijuana law reforms in the states with interest. Nine states have laws regulating the production of industrial hemp, and ten more have asked Congress to remove barriers to industrial hemp production.

Rep. Massie, Comm. Comer & Rep. Polis (Vote Hemp via youtube)
Hemp is also moving in the Congress. An amendment to the Farm Bill cosponsored by Reps. Earl Blumenauer (D-OR), Thomas Massie (R-KY), and Jared Polis (D-CO) passed the House on a vote of 225-200 in July and will now go to a joint House-Senate conference committee. And the Industrial Hemp Farming Act (House Resolution 525 and Senate Bill 359) is pending in both chambers.

At a Tuesday Capitol Hill briefing organized by the industry group Vote Hemp (video embedded below), state and federal elected officials said they thought the Justice Department's policy directive on marijuana opened the door not just to regulated medical and legal marijuana, but also to industrial hemp production. Some states intend to move forward, they said.

"That Department of Justice ruling pertained to cannabis," said Kentucky Agriculture Commissioner John Comer, "and hemp has always been banned because it's in the cannabis family. The Department of Justice ruling pertained to states with a regulatory framework for cannabis, and we feel that includes hemp as well. Our legislation set up a regulatory framework."

The legislation Comer is referring to is Kentucky Senate Bill 50, the Bluegrass State's industrial hemp bill, which passed the legislature with bipartisan support, gained endorsements by both of the state's Republican US senators, Mitch McConnell and Rand Paul, and became law without the governor's signature in April. It establishes an Industrial Hemp Commission and sets up procedures for licensing farming and processing.

"We have a hemp commission meeting Thursday, and we are going to request that Rand Paul send a letter to the DEA telling them we intend to get going next year unless the Department of Justice tells us otherwise," Comer said. "We are taking a very proactive stance in Kentucky. We've been trying to replace tobacco, and hemp is an option not only for our farmers, but it could also create manufacturing jobs in our rural communities."

The commission did meet Thursday, and it voted unanimously to move forward with industrial hemp production, aiming at producing hemp next year.

"That's our first goal, to get the crop established. Then, once companies and industries see that we have a crop here established and growing, we believe industries will start coming here looking for it instead of importing it from other countries," said Brian Furnish, chairman of the Industrial Hemp Commission, after the Thursday vote.

According to Vote Hemp, Kentucky isn't the only state planning on moving forward with hemp next year. Vermont just released its Hemp Registration Form that allows farmers to apply for hemp permits and the Colorado Department of Agriculture is developing regulations to license hemp farmers in 2014. North Dakota has issued permits for several years now.

Imported hemp is now a $500 million a year industry, Vote Hemp's Eric Steenstra said.

Congressman Thomas Massie (R-KY), who also played an important role in passing the Kentucky bill and who is a cosponsor of the House hemp bill, said he was encouraged by the Justice Department policy directive, but that it was not enough.

"We need more than a Justice Department ruling," he told the press conference. "As a farmer and entrepreneur, I want some certainty. I want a legislative remedy for this, and that's why I continue to push hard for our bill, which would exclude hemp from definition as a controlled substance."

Vote Hemp's Eric Steenstra
But while the House hemp bill now has 47 cosponsors, it still has a long row to hoe. The hemp amendment to the Farm Bill, which would allow hemp production for university research purposes, has already passed the House and awaits action in conference committee.

"If you can attach an amendment to a spending bill, then you can get action," said Massie. "I have to give credit to Rep. Polis for doing this. This is a farm issue, not a drug issue. And while there was debate over whether it was wise to even have a vote, it passed. People decided spontaneously to vote for it as an amendment."

While the Senate has not passed a similar provision, Massie said he was hopeful that it would make it through conference committee.

"There is no equivalent in the Senate, there is no companion amendment, but we do have [Senate Minority Leader] Mitch McConnell, who is all for it," he said. "I'm hopeful it will survive, and we'll continue to work on the standalone hemp bill."

"It was important to get the House language in the Farm Bill," said Polis. "Not only does it allow universities to do research that is needed, but it also symbolically moves forward with embracing the potential for industrial hemp production."

Polis said he was cheered by the Justice Department's policy directive when it came to hemp.

"They listed eight enforcement priorities, and industrial hemp isn't even on the enforcement radar," the Boulder congressman said. "We see no federal interest in going after states or hemp producers. The risk is minimal. But minimal isn't good enough for some folks, and that's why we want to continue to gather support for the Industrial Hemp Farming Act. You don't want to have to depend on a federal prosecutor or the attorney general not getting up on the wrong side of the bed in the morning."

Industrial hemp may be an afterthought for Justice Department policy setters, but the recent guidance has emboldened hemp advocates to push forward faster than ever. Getting hemp research approved in the Farm Bill would be a good first step; passing the Industrial Hemp Act would be even better. But it doesn't look like some states are going to wait for Congress to act.

Washington, DC
United States

Senate Holds Hearing on State Marijuana Legalization [FEATURE]

The Senate Judiciary Committee Tuesday afternoon held a hearing on marijuana legalization and conflicts between state and federal marijuana laws. Led by committee Chairman Sen. Patrick Leahy (D-VT), the hearing featured testimony from the deputy attorney general who has set Justice Department policy, two officials in states that have legalized marijuana and one critic of marijuana legalization.

The hearing marked the first time Congress has grappled with the issue of responding to state-level marijuana legalization and was notable for its emphasis on making legalization work in states where it is legal. It was also notable in that of all the senators present, only one, Sen. Charles Grassley (R-IA), bothered to dredge up the sort of anti-marijuana rhetoric that had in years and decades past been so typical on Capitol Hill.

"Marijuana is a dangerous and addictive drug," said Grassley, who turns 80 next week. "It's illegal under international law as well, and the treaty requires us to restrict its use to scientific and medical uses. These [legalization] laws flatly contradict our federal law. Some experts fear a Big Marijuana, a Starbucks of marijuana," he lamented.

Grassley's lonely stand reflects changing political realities around marijuana policy. The other senators who spoke up during the hearing -- Democrats Leahy, Richard Blumenthal of Connecticut, and Sheldon Whitehouse of Rhode Island -- all represent states where voters have already expressed support for medical marijuana and a region where support for outright legalization is high. They were all more interested in removing obstacles to a workable legalization than in turning back the clock.

"Last November, the people of Colorado and Washington voted to legalize marijuana, and these new laws are just the latest example of the growing tension between state and federal marijuana laws and the uncertainty about how such conflicts are resolved," Leahy said as he opened the hearing. "Marijuana use in this country is nothing new, but the way in which individual states deal with it continues to evolve. We all agree on the necessity of preventing distribution to minors, on preventing criminal enterprises from profiting, and on drugged driving. But I hope that there might also be agreement that we can't be satisfied with the status quo."

The first witness was Deputy Attorney General James Cole, author of last month's policy directive notifying state governments that the Justice Department would not seek to preempt their marijuana laws and instructing all federal prosecutors to leave legal marijuana alone -- with a number of exceptions. Sales to minors, the use of guns or violence, profiting by criminal groups, a marked increase in public health consequences like drugged driving, and distribution of marijuana into non-legal states are all among the factors that could excite a federal response, Cole's directive noted.

On Tuesday, Cole reiterated and went over the policy directive for senators, but the most striking part of his testimony was his admission that the federal government could not effectively put the genie back in the bottle.

"It would be very challenging to preempt decriminalization," Cole conceded in response to a question from Leahy. "We might have an easier time preempting the regulatory scheme, but then what do you have? Legal marijuana and no enforcement mechanism, which is probably not a good situation. You would also have money going to organized criminal enterprises instead of state coffers."

The three Democratic senators all prodded Cole and the Justice Department to do something about the legal marijuana (and medical marijuana) industry's problems with banks and financial services. Because of federal pressure, such institutions have refused to deal with marijuana, leaving those businesses drowning in cash. The senators also questioned reports that the DEA had been telling armored car companies not to do business with marijuana businesses.

"What about the banking industry?" asked Leahy. "A cash only business is a prescription for problems. We're hearing that DEA agents are instructing armored car companies to stop providing services to medical marijuana companies. It's almost as if they're saying 'let's see if we can have some robberies.' What is the department going to do to address those concerns?"

"The governors of Colorado and Washington raised this same issue," Cole acknowledged. "There is a public safety concern when businesses have a lot of cash sitting around; there are guns associated with that. We're talking with FinCEN and bank regulators to find ways to deal with this in accordance with laws on the books today."

"There should be specific guidance to the financial services industry," a not-quite-mollified Leahy replied.

The committee then heard from King County (Seattle), Washington, Sheriff John Urquhart. "The war on drugs has been a failure," the sheriff said bluntly. "We have not reduced demand, but instead incarcerated a generation of individuals. The citizens decided to try something new. We, the government, failed the people, and they decided to try something new."

Urquhart saw no great tension between the federal government and legal marijuana states, and he, too, brought up the issue of banking services.

"The reality is we do have complementary goals and values," Urquhart said. "We all agree we don't want our children using marijuana. We all agree we don't want impaired drivers. We all agree we don't want to continue enriching criminals. I am simply asking that the federal government allow banks to work with legitimate marijuana businesses who are licensed under this new state law."

The committee also heard from Kevin Sabet of Project SAM (Smart About Marijuana), the voice of 21st Century neo-prohibitionism.

"In states like Colorado," he said, "we've seen medical marijuana cards handed out like candy, we've seen mass advertising. At the marijuana festival in Seattle we saw 50,000 people smoking marijuana publicly; it's the public use of marijuana that worries me. I don't see the evidence of trying to implement something robust, especially in the face of an industry that will be pushing back against every single provision. In a country with a First Amendment and alcohol and tobacco industries that profit off addiction, I worry that, inevitably, American-style legalization is commercialization, no matter the interests of state officials and regulators."

But nobody except Grassley seemed to be listening.

Marijuana legalization advocates and drug law reformers liked what they heard Tuesday.

"It feels like there's a paradigm shift underway in the Justice Department's interpretation of federal drug control law," said Ethan Nadelmann, executive director of the Drug Policy Alliance. "They seem to recognize that drug control should be first and foremost about protecting public health and safety, and that smart statewide regulatory systems of the sort that Colorado and Washington are proposing may advance those objectives better than knee-jerk enforcement of federal prohibitions."

"For years, the legalization movement has been gaining traction as people learn this is neither a fringe issue nor a partisan one, but one responsible for deep inequities in our justice system, the expansion of criminal gangs and the increase in unsolved violent crimes," said Law Enforcement Against Prohibition (LEAP) board member and former Denver cop Tony Ryan. "There's a long road ahead, and this hearing leaves many questions unanswered, but this historic discussion means we are on our way to a more rational and effective drug policy."

"The Department of Justice is finally taking seriously the dangers that a lack of access to simple banking services poses to consumers, employees and business owners," said Aaron Smith, director of the National Cannabis Industry Association. "We are encouraged that the growing consensus among essentially all stakeholders is that banking access must be available to legal businesses. It portends a quick reform to this dangerous and unnecessary situation."

"The era of robust state-based regulation is here," said Bill Piper, director of national affairs for the Drug Policy Alliance. "Legalizing marijuana and shrinking the number of people behind bars in the US is an issue the left and right can join together on. Like the repeal of alcohol prohibition, the repeal of marijuana prohibition will save taxpayer money, put organized crime syndicates out of business, and protect the safety of young people."

But at a time when marijuana prohibition remains the federal law of the land, perhaps former Seattle police chief and LEAP member Norm Stamper had the most down-to-earth take.

"While I would have liked to have seen a substantive change in policy, what we were really listening to in that hearing was the sound of a changing political climate," said Stamper. "People who can't agree on any other political issue are coming together over this one, and politicians on both sides of the aisle ignore that at their own peril."

Washington, DC
United States

The IRS War on Medical Marijuana Providers [FEATURE]

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.

DEA Targets FedEx, UPS in Online Pharmacy Battle

Charged with cracking down on the diversion of prescription drugs, the DEA has pursed doctors, pharmacists, pharmacy chains, and wholesale drug suppliers. It has now turned a baleful eye on shipping companies as well, with differing results -- at least so far.

The Orlando Sentinel reported Tuesday that both UPS and FedEx had admitted in corporate filings that they were the targets of DEA probes into packages of pills shipped from online pharmacies. Prescriptions filled by online pharmacies are illegal if there is not a real doctor-patient relationship, and the DEA maintains that prescriptions written by "cyber doctors" relying on online questionnaires are not legal.

FedEx has strongly pushed back against the DEA probe, but UPS has now buckled under the pressure. In a Friday statement, the DEA announced that UPS had agreed to forfeit $40 million it had been paid for shipments by online pharmacies and to enter into a "compliance program" to ensure online pharmacies can't use its services. The deal was part of a non-prosecution agreement the shipper signed with federal prosecutors in Northern California.

DEA accused UPS of knowingly shipping the illegally-prescribed drugs between 2003 and 2010 because "it was on notice, through some employees" that such activities were occurring. DEA also accused UPS of failing to do anything about it.

"DEA is aggressively targeting the diversion of controlled substances, as well as those who facilitate their unlawful distribution," said DEA Administrator Michele Leonhart. "This investigation is significant and DEA applauds UPS for working to strengthen and enhance its practices in order to prevent future drug diversion."

FedEx may prove a tougher nut to crack. Officials there called the federal probe "absurd and disturbing" and said it threatened customer privacy. They also accused the DEA of failing to cooperate with them in efforts to resolve the problem.

"We are a transportation company -- we are not law enforcement, we are not doctors and we are not pharmacists," FedEx spokesman Patrick Fitzgerald said in a prepared statement. "We have no interest in violating the privacy of our customers by opening and inspecting their packages in an attempt to determine the legality of the contents. We stand ready and willing to support and assist law enforcement. We cannot, however, do their jobs for them."

FedEx complained that rather than working with the shipping industry to come up with solutions, the Justice Department appeared focused on finding ways to prosecute shippers.

"This is unwarranted by law and a dangerous distraction at a time when the purported illegal activity by these pharmacies continues," Fitzgerald said.

FedEx has been a major campaign contributor to US Rep. John Mica (R-FL), whom the Sentinel reported had sent a letter to Leonhart and Attorney General Eric Holder asking them to recognize "the difficulty and unfairness of requiring those carriers to assume responsibility for the legality and validity of the contents of the millions of sealed packages that they pick up and deliver ever day."

Mica told the Sentinel that while he is "concerned about prescription drugs," it was inefficient to try to turn shipping companies into drug policy enforcers. "You can't stop commerce; you can't open every package," Mica said. "I'm only asking them for a reasonable approach."

But it doesn't appear that DEA and the Justice Department see things the same way as Rep. Mica does.

San Francisco, CA
United States

Mitch McConnell Endorses Kentucky Hemp Bill

In a statement last Thursday, Senator Mitch McConnell (R-KY), the minority leader in the US Senate, endorsed pending legislation in his home state that seeks to reintroduce industrial hemp cultivation there. The bill already has the support of the state's other US senator, Rand Paul, and Agricultural Commissioner James Comer, who were instrumental in bringing McConnell on board.

Is it sunrise for industrial hemp in Kentucky? (votehemp.org)
"After long discussions with Senator Rand Paul and Commissioner James Comer on the economic benefits of industrialized hemp, I am convinced that allowing its production will be a positive development for Kentucky's farm families and economy," McConnell said. "The utilization of hemp to produce everything from clothing to paper is real, and if there is a capacity to center a new domestic industry in Kentucky that will create jobs in these difficult economic times, that sounds like a good thing to me."

But McConnell first had to be reassured that industrial hemp wouldn't somehow turn into recreational marijuana. Comer apparently managed the trick.

"Commissioner Comer has assured me that his office is committed to pursuing industrialized hemp production in a way that does not compromise Kentucky law enforcement's marijuana eradication efforts or in any way promote illegal drug use," McConnell said.

In a statement of his own last Thursday, Comer expressed enormous gratitude for McConnell's support.

"When the most powerful Republican in the country calls to discuss your issue, that's a good day on the job," Comer said. "Leader McConnell's support adds immeasurable strength to our efforts to bring good jobs to Kentucky."

The hemp bill, Senate Bill 50, sponsored by Sen. Paul Hornback (R-Shelbyville), would direct the state Agriculture Department to create a program for licensing industrial hemp producers, but would not go into effect until there is a change in federal law, which bans the production -- but not the importation -- of industrial hemp.

In addition to both US senators, the bill has also garnered the support of two of the state's six US representatives, US Reps. John Yarmuth (D) and Thomas Massie (R). The two congressmen, Sen. Paul, and Commissioner Comer will all testify in favor of the bill.

"Our federal delegation is showing tremendous leadership," Comer said. "They recognize this is not a partisan issue. It's about jobs. And we will continue to push forward to make sure Kentucky is first in line for them."

State legislative leaders are also firmly backing the bill. Senate Majority Leader Damon Thayer (R-Georgetown) joined Sen. Hornback in convincing the Northern Kentucky Chamber of Commerce to endorse the bill. It did so Wednesday.

The bill gets a hearing in the Senate Agriculture Committee on February 11.

Frankfort, KY
United States

First Private Marijuana Clubs Open in Colorado

At least two members-only recreational marijuana clubs opened in Colorado Monday, one in Denver and one in the small southern Colorado town of Del Norte, according to the Associated Press. The club openings come less than a month after Gov. John Hickenlooper certified the results of the November vote on Amendment 64, which legalized for adults 21 and over the possession of up to an ounce and the cultivation of up to six pot plants.

BYOB
Amendment 64 also requires the state government to come up with rules and regulations for a legal marijuana commerce within a matter of months. The clubs avoid the regulatory tangle by not actually selling marijuana. Instead, they charge a fee for membership, and paid members can bring their own marijuana and smoke it convivially at the club.

In Denver, Club 64 opened Monday afternoon, less than 24 hours after organizers announced they would create it. It already had 200 members, who had shelled out $29.99 each for the privilege of joining. The club, which will meet monthly at different locations, will charge the same fee each month.

"It's just a place for adults to exercise their constitutional rights together," Denver marijuana attorney Rob Corry told the AP. "We're not selling pot here."

As reggae blasted from speakers below a glittering disco ball and "The Big Lebowski" played on a wall screen, club members shared puffs and hugs as they gathered to celebrate the new year and the new era.

"Look at this!" club organizer Chloe Villano excitedly told the AP. "We were so scared because we didn't want it to be crazy. But this is crazy! People want this."

Not every marijuana reformer in Colorado is on board, according to a CNN report published New Year's Day. "Much of our success with Amendment 64 was making the soccer moms comfortable," an advocate told CNN, adding, "This is not the fight we want to have right now." The advocate spoke anonymously, in order to avoid creating a rift in the community, according to the CNN report.

In Del Norte, the Whitehorse Inn opened Monday afternoon, becoming the first private marijuana club in the state. But according to the Denver Post, publicity surrounding the opening resulting in owner Paul Lovato losing his lease. While Lovato had the keys to the property, his lease didn't actually start until Tuesday, and when the landlord saw the publicity, he canceled the lease before it went into effect.

"By opening early I kind of screwed myself out of my building," Lovato said Tuesday.

He had planned to open at midnight Monday, just after New Year's Eve ticked over to New Year's Day, but moved up his opening by a few hours after hearing about Club 64. Lovato wanted to be first.

"It was really unexpected," he said of the lease cancelation. "I got caught up in the whole 'I want to be the first to open' thing. And I did that. I was the first... I'm pretty proud of that."

If Lovato has lost his location, he hasn't lost his club. He said he was expecting visitors from nearby New Mexico to show up Tuesday.

"We're doing the White Horse Inn at my house today," he said.

America now has its first legal marijuana dens.

CO
United States

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