As laws regulating medical marijuana in California evolve, the clash between state and federal laws continues to pose legal and financial gray areas for marijuana-related businesses.
In 1996, the passage of Proposition 215, also known as the Compassionate Use Act, made California the first state to legalize medical marijuana. The act gave “seriously ill” residents the right to use marijuana for medical purposes with a doctor’s recommendation. Patients, caretakers and prescribing doctors were protected against criminal prosecution under the new law.
Gov. Gray Davis signed Senate Bill 420, also known as the Medical Marijuana Program Act, in 2003 to clarify the earlier law and create the state’s medical marijuana program. The bill spelled out the current distribution model where patients and caregivers form nonprofit collectives or cooperatives to cultivate medical marijuana.
Late last year, Gov. Jerry Brown signed into law three bills collectively known as the Medical Cannabis Regulation and Safety Act. According to the Department of Consumer Affairs, the bills aim to establish a system of licensing and regulations for the medical cannabis industry by Jan. 1, 2018.
As proposed, the new system would seek to replace the current distribution system with a more regulated commercial business model.
Under the new laws, marijuana-related businesses would need approval from their local government and apply for a state license.
While more than two dozen states have laws allowing medical or recreational marijuana use, federal law continues to view the drug as a Schedule I narcotic under the Controlled Substances Act. Schedule I drugs, which include heroin, LSD and Ecstasy, are classified by three criteria:
- No currently accepted medical use in the United States
- A lack of accepted safety for use under medical supervision
- High potential for abuse
Edward Wicker, a San Diego-based attorney who specializes in helping new medical marijuana businesses to follow all applicable laws, said his clients face numerous challenges. The biggest challenge, he said, is that federal authorities won’t acknowledge “medical marijuana,” regardless of state law.
“That’s always the big white elephant in the room,” Wicker said.
After Colorado and Washington legalized the drug for adult recreational use in 2012, Deputy Attorney General James Cole issued a four-page memo clarifying how the Department of Justice would enforce marijuana laws in states that have legalized the drug in some form.
The August 2013 document, known as the “Cole Memo,” said the department won’t likely prosecute marijuana-related criminals who follow state laws and don’t fall under certain “enforcement priorities.” The priorities include distribution of marijuana to minors, revenue from marijuana sales going to criminal enterprises, shipping marijuana from states where it’s legal to other states and using state-authorized marijuana activity to cover other illegal activity
Wicker said the marijuana businesses that follow state laws are not likely to be prosecuted by federal authorities. However, he said, that stance could change “at the whim of any administration.”
“The federal prohibition is a huge cloud that looms over medical marijuana in California,” Wicker said.
Federal laws also preclude marijuana-related businesses from using banks to handle their finances.
Wicker said marijuana businesses can deal in cash only, or adopt sophisticated business models that work around federal laws. The latter approach, he said, can place business owners at risk of violating other federal laws.
Some nonprofit marijuana collectives hire a management company, Wicker said. The company is a separate business that provides services to the nonprofit, including access to a bank account. Wicker said management companies can be legal in “certain circumstances.”
The risk of violating federal money laundering laws, Wicker said, is a big reason why major corporations haven’t ventured into the marijuana business.
“Each and every transaction is a violation of federal law,” Wicker said.
Wicker said he urges his clients to work with a certified public accountant to ensure that they pay all appropriate taxes, which can provide additional hurdles.
Tim Lavelle, a CPA with the Poway-based Lavelle & Associates, said the financial challenges for medical marijuana collectives and dispensaries can be particularly daunting. Lavelle said prospective clients who want to open a legitimate marijuana-based business are often shocked to learn that they can’t open a bank account or deduct most expenses on their taxes.
Some, he said, walk out of his office and never come back, while others are willing to “bite the bullet.”
Like all businesses, marijuana-related businesses must pay state and federal taxes. The state Board of Equalization accepts cash payments for sales tax payments. Conversely, the Internal Revenue Service won’t take cash, forcing marijuana-related businesses to use roundabout methods to pay taxes.
“It’s almost like they don’t want them to pay taxes,” Lavelle said.
Payroll taxes for employees pose an additional hurdle. Lavelle said businesses typically use a bank account to make federal tax deposits.
Lavelle said payroll providers that serve marijuana businesses often have to use escrow accounts to complete payroll transactions. Escrow accounts allow a third party to receive the money and disburse it to the IRS.
“Some attorneys will tell you that’s illegal,” Lavelle said.
The U.S. Office of the Comptroller of the Currency describes money laundering as the “criminal practice of filtering ill-gotten gains or ‘dirty’ money” to make the money look like proceeds from legal activities. Money laundering involves placing unlawful proceeds into the financial system, using complex transactions to separate money from its criminal origins and using other transactions to make the money appear legal.
Lavelle said California’s shift toward licensed commercial operations will likely attract investors and more money to the industry.
“It’s going to be even more chaotic,” Lavelle said.
Lavelle said one of his clients recently began using a service that allows their businesses to have a bank account by following strict guidelines outlined by the U.S. Treasury’s Financial Crimes Enforcement Network in 2014. The guidelines ask banks to keep extensive records and watch out for any activity consistent with the priorities listed in the Cole Memo.
The service, which Lavelle did not name, is currently working with a single bank.
“If it goes well for one bank, I’m sure other banks will sign up,” Lavelle said. “So there is some light at the end of the tunnel.”
The clash between state and federal laws has left local law enforcement in a tricky situation. Kings County Sheriff Dave Robinson said the county receives a federal grant of $50,000 per year for marijuana enforcement.
Robinson said the U.S. Drug Enforcement Administration considered a request to reclassify marijuana as a Schedule II drug, which would acknowledge a “currently accepted medical use” in the United States. The DEA denied the request in July 2016 and reaffirmed its position that marijuana has no accepted medical use.
“If marijuana is such a wonder drug, why aren’t there more people in Kings County who have gone down to get a medical marijuana card,” Robinson said.
The state Department of Public Health administers a voluntary identification card program to help law enforcement identify patients who can legally possess certain amounts of the drug. According to the department, more than 90,000 medical marijuana identification cards have been issued since 2004.
There have been just 42 cards issued in Kings County since the program went into effect in 2008. The cards, which are issued by the county health department, are valid for one year and must be renewed annually.
As of September, only one card had been issued in Kings County this year.
Local law enforcement, Robinson said, doesn’t hassle citizens who have a doctor’s recommendation to use marijuana for legitimate medical conditions. However, he said, the drug has no established dosage or guidelines for how much is safe to use.
Robinson said the amount of THC, the main psychoactive substance in marijuana, has continued to increase over the past several decades.
On Nov. 8, California voters will consider Proposition 64, which would legalize recreational marijuana for adults 21 and over.
“Regardless of what happens in the election,” Robinson said, “marijuana will still be illegal.”
This article is part of a series on marijuana and how it affects Kings County.