Current Status of Medical and Recreational Cannabis in the US as of December 2016
Prop 64 & You
Most of the attention of California’s Prop 64, the Control, Regulate and Tax Adult Use of Marijuana Act, has been focused on the legalization of recreational cannabis use for adults 21 and up.
A lesser publicized, yet equally impactful part of Prop 64, aims to retroactively reduce or eliminate prior marijuana felony and misdemeanor convictions. Starting November 9, 2016, individuals can begin to petition the court to reduce or remove their previous convictions.
How Does Prop 64 Work?
Prop 64 employs a similar method of reduction that was previously utilized after the passage of Proposition 47, where a defendant will be presumed to be eligible for reduction or elimination, unless the prosecution can demonstrate through “clear and convincing evidence that the petition does not satisfy the criteria.”
It is important to note that this only applies to a defendant’s eligibility, not their “suitability” for reduction or elimination. In order to prove that a defendant is not suitable for reduction or elimination, the prosecution must demonstrate that the such reduction would create an “unreasonable risk of danger to public safety.”
For a more thorough discussion click here.
Do You Need an Attorney to Petition for Reduction Under Prop 64?
This all depends on the circumstances surrounding your case. In most cases, people with prior convictions of possession do not have additional criminal convictions and may not require the assistance of an attorney. However, for many others who have prior drug-related convictions and/or any other misdemeanor or felony convictions, it advisable to consult with an attorney to evaluate your odds of successful petition.
Where to Look For Help
The Prop 64 Clinic is a volunteer run organization that helps individuals clear their prior marijuana offenses. The Prop 64 Clinic conducts case evaluations and provides individuals with resources to navigate the criminal expungement and reduction process. The Prop 64 Clinic is open to individuals of all income levels. In the upcoming weeks The Prop 64 Clinic will hold free legal clinics in and around the greater San Diego area. For more information contact The Prop 64 Clinic.
Like a country with no ocean, intellectual property rights without the protections afforded by the federal government are acknowledged but not respected. There are a plethora of issues a cannabis business faces when filing for a federal trademark, all of which diminish brand value and the possible remedies federal registration provides.
The authority of the USPTO lies in Article 1, Section 8 of the Constitution, “the Congress shall have power… To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”
In 1946, Congress passed the Lanham Act, also known as the Trademark Act of 1946, which governs federal trademark law including the registration, maintenance, and protection of trademarks. To acquire a federal trademark an applicant must prove that its mark is both distinctive and used in interstate commerce. Trademarks include words, names, symbols, colors, sounds, and smells that help a brand differentiate and distinguish its products or services to consumers.
A federally registered trademark provides its owner with a number of protective benefits including: constructive notice to the public of the registrant's claim to the mark and a presumption of ownership; a presumption of the registrant's exclusive right to use the mark nationwide in connection with the goods or services specified in the registration; the ability to use the US registration as a basis for priority registration in other jurisdictions; and the ability to record the US registration with the US Customs Service to prevent importation of infringing goods. These protections form the bedrock that a brand requires to establish its presence on a national and international level.
Trademarking Cannabis at the Federal Level
Between 1993 and 2013, 503 cannabis related trademark applications were filed with the USPTO. In just the past two years, the USPTO received 748 cannabis related trademark applications. Obviously this influx is directly attributable to the recent legalization of adult recreational cannabis use in Colorado, Oregon, Washington, and Alaska, and the potential and probable legalization in California and a number of other states.
In April 2010, the USPTO created a new trademark category for processed plant matter for medicinal purposes, namely medical marijuana. However, the USPTO quickly reversed course after just three months, calling the category a mistake. During the brief life of the newly established class, no cannabis trademarks were granted by the USPTO. In the years since, the USPTO has clarified its position on cannabis trademarks, and has denied any applicant whose product or service directly touches the plant. Section 907 of the USPTO Trademark Manual of Examining Procedure (TMEP) states that:
In order for an application to have a valid basis that could properly result in a registration, the use of the mark has to be lawful, i.e., the sale or shipment of the product under the mark has to comply with all applicable laws and regulations. If this test is not met, the use of the mark fails to create any rights that can be recognized by a federal registration.
In 2011 the USPTO updated TMEP to directly address registering a cannabis mark, and the discord between federal and state law:
Evidence indicating that the identified goods or services involve the sale or transportation of a controlled substance or drug paraphernalia in violation of the CSA would be a basis for issuing an inquiry or refusal… regardless of state law, marijuana and its psychoactive component, THC, remain Schedule I controlled substances under federal law and are subject to the CSA's prohibitions.
The position of the USPTO is clear. Cannabis is a Schedule I controlled substance, Schedule I controlled substances are illegal under the CSA, no trademarks will be issued for products or services that violate the CSA. This hardline position of the USPTO has pushed cannabis businesses (and their attorneys) to think and act creatively. Like many burgeoning industries that operate in the grey between legal and illegal, cannabis businesses have turned to alternative methods to protect and grow their brands.
Trademarking Ancillary Products
A workaround for cannabis companies looking to achieve federal trademark protection is to register ancillary products with their desired mark. One thing to keep in mind is use in commerce means, “the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark.” This means that a cannabis company cannot register a trademark for a product or service that they do not intend to use in commerce. Another issue lies in how an examining attorney would treat a cannabis company’s ancillary product. If the examine attorney finds that the non-cannabis product may potentially violate the CSA, she may issue an inquiry or denial, in accordance with the TMEP.
Despite all of these hurdles, the benefits of a federally registered trademark may outweigh the negatives. The holder of the mark would be entitled to use the registered trademark symbol, cite the registration in demand letters, and rely on the registration protections in an infringement action.
At the state level trademarks are protected by common law unfair competition principles as well as state trademark statutes. Registration of a state trademark allows its owner to file claims for trademark violations under the state trademark statute, and puts an official date on a trademark registration. Currently, Washington, Colorado, Oregon, Nevada, and Arizona all allow trademark registration for cannabis and cannabis related products. However, California’s trademark statute closely mirrors the Lanham Act. This means that California cannabis businesses will be denied trademark registration if their products or services directly touch the plant.
On a positive note for California cannabis businesses, registration is not a condition for owning a protectable trademark. Also, business names and fictitious business names may be protectable as a trademark by filing formation documents with the state, “which creates a rebuttable presumption that an entity has the exclusive right to use the trade name filed, as well as a confusingly similar name.”
Licensing cannabis products allows companies that have established a reputation in their home state to build upon their brand and goodwill by offering their products in other cannabis friendly jurisdictions. However, because cannabis and cannabis products cannot be legally moved across state lines, this is easier said than done. To complicate the matter further, each state has limiting residency requirements which may prohibit out of state individuals and entities from investing or operating in the cannabis trade.
Cannabis businesses have utilized a number of different methods to ensure uniform production and packaging, and to provide consumers with consistent products such as: establishing a management company that provides equipment, non-cannabis supplies, and training to licensees, in exchange for a royalty on each product sold; selling branded packaging; and supplying all of the non-cannabis ingredients to a licensee.
Opportunities in California under MCRSA
On October 9, 2015, California Gov. Jerry Brown signed into law the Medical Marijuana Regulation and Safety Act (MCRSA). The MCRSA comprised of three bills (Assembly Bill 243, Assembly Bill 266, and Senate Bill 643) is intended to provide “comprehensive regulatory framework for the production, transportation, and sale of medical marijuana.” While the MCRSA only applies to medical marijuana, it is widely anticipated that these regulations will serve as the foundation for legalized recreational adult use by 2018.
There are intellectual property implications that come along with the passing of MCRSA. Assembly Bill (AB) 266 prohibits cannabis packages and labels from being attractive to children. This will directly impact a cannabis companies brand strategy by limiting its ability to use colors and images that may be deemed too alluring to minors. There is also potential that cannabis packaging will be treated similar to cigarette packaging in Australia and some European countries, where branding is limited to nondescript type at the bottom of a cigarette package.
MCRSA calls for the creation of a certified organic cannabis designation and organic cannabis certification program. Organic certification is governed by the National Organic Program (NOP), a regulatory program housed within the USDA. According to the USDA, “NOP-accredited certifying agents may not certify the domestic production of industrial hemp [or marijuana].” This means that until cannabis is rescheduled, cannabis businesses will not be able to obtain a USDA organic certification.
MCRSA also allows for the establishment of cannabis appellations. Appellations are legal defined geographic locations used to identify where a particular food product is grown (i.e., Napa Valley for wine). Under MCRSA, it is unlawful to label, market, or package cannabis claiming it was grown in a particular appellation, when it was not. In a non-Schedule I world, a cannabis appellation group would have the potential to apply for a certification mark with the USPTO. A certification mark certifies that goods or services originate in a specific geographic region. However, as with trademarks, the USPTO will not register a certification mark that violates the CSA.
Cannabis companies that provide products and services that do not directly touch the plant are able to register federal trademarks. For example Leafly (a website that provides its visitors with cannabis recommendations, dispensary locations, and cannabis related events), and Weedmaps (a website that finds local dispensaries, delivery services, and doctors’ offices) were both granted federal trademarks.
Assembly Bill 2679
Last week California Governor Jerry Brown signed into law Assembly Bill 2679, which exempts collectives or cooperatives that manufacture medical cannabis products from state criminal sanctions if specific standards are met. This iteration of the law will only remain in effect until one year after the Bureau of Medial Cannabis Regulation begins issuing licenses pursuant to the Medical Cannabis Regulation and Safety Act (MCRSA).
AB 2679 should help alleviate the fear of criminal prosecution, law enforcement harassment, and asset forfeiture for current and prospective medical cannabis manufacturers while the rules and regulations of MCRSA and Prop 64 are finalized over the next fifteen months. However, AB 2679 does not give medical cannabis manufacturers the freedom to operate with impunity.
It is still necessary that a medical cannabis manufacturer obtain a permit from their local municipality to operate in accordance with local law. Also, under MCRSA a local permit is required to apply for a state license.
Staying Compliant with AB 2679
AB 2679 lays out the following guidelines for a medical cannabis manufacturer to abide by in order to avoid state criminal sanctions.
Utilizes only manufacturing processes that are either solventless or that employ only nonflammable, nontoxic solvents that are generally recognized as safe pursuant to the federal Food, Drug, and Cosmetic Act.
Utilizes only manufacturing processes that use solvents exclusively within a closed-loop system that meets all of the following requirements:
The system uses only solvents that are generally recognized as safe pursuant to the federal Food, Drug, and Cosmetic Act.
The system is designed to recapture and contain solvents during the manufacturing process, and otherwise prevent the off-gassing of solvents into the ambient atmosphere to mitigate the risks of ignition and explosion during the manufacturing process.
A licensed engineer certifies that the system was commercially manufactured, safe for its intended use, and built to codes of recognized and generally accepted good engineering practices
The system has a certification document that contains the signature and stamp of a professional engineer and the serial number of the extraction unit being certified.
The collective or cooperative receives and maintains approval from the local fire official for the closed-loop system, other equipment, the extraction operation, and the facility.
The collective or cooperative meets required fire, safety, and building code requirements
Other applicable standards, including complying with all applicable fire, safety, and building codes in processing, handling, and storage of solvents or gasses.
The collective or cooperative is in possession of a valid seller’s permit issued by the State Board of Equalization.
The collective or cooperative is in possession of a valid local license, permit, or other authorization specific to the manufacturing of medical cannabis products, and in compliance with any additional conditions imposed by the city or county issuing the local license, permit, or other authorization.
For purposes of this section, “manufacturing” means compounding, converting, producing, deriving, processing, or preparing, either directly or indirectly by chemical extraction or independently by means of chemical synthesis, medical cannabis products.
In August 2016 the USDA, DEA, and FDA released a Statement of Principles on Industrial Hemp to clarify the Agricultural Act of 2014, which legalized the cultivation of industrial hemp for research purposes.
The Statement reiterates that hemp growing and cultivation, “may only take place in accordance with an agricultural pilot program to study the growth, cultivation, or marketing of industrial hemp established by a State department of agriculture or State agency responsible for agriculture in a State where the production of industrial hemp is otherwise legal under State law.”
Only institutions of higher learning, State departments of agriculture, or persons licensed by State department of agriculture are free to cultivate hemp. However, hemp products may not be sold for commercial purposes.
Industrial hemp is defined as the plant Cannabis sativa L. and any part or derivative of such plant, including seeds of such plant, whether growing or not, that is used exclusively for industrial purposes (fiber and seed) with a tetrahydrocannabinols concentration of not more than 0.3% on a dry weight basis.
While the Agricultural Act of 2014 may eventually benefit hemp research, it does little to help individual farmers in California.
Starting January 1, 2017, AUMA allows farmers to grow industrial hemp without the need of a federal license. However, growing hemp in California will violate the Farm Bill until the California Department of Food and Agriculture (or a similar agency) establishes its pilot program.
Agricultural research institutions, institutions of higher learning, as well as individuals are able to cultivate industrial hemp under AUMA.
Individuals are free to sell hemp for commercial purposes, however, they are subject to more stringent regulation than research and institutions of higher learning. Under AUAM commercial hemp farmers are required to obtain a laboratory test report from a DEA registered testing facility, indicating the level of THC from a random sampling of the dried flowering tops. The sample must be accompanied by (a) the registrant’s proof of registration, (b) seed certification documentation for the seed cultivar used, and (c) the THC testing report for each certified seed cultivar used.
To pass as California industrial hemp the percentage content of THC must be less than or equal to 0.3%. If the test results indicate THC levels higher than 0.3% but less than or equal to 1.0%, additional samples must be submitted and tested. If further tests indicate a 0.3% – 1.0% THC level, the hemp must be destroyed within 45 days. If THC levels are greater than 1% the hemp must be destroyed within 48 hours.
The California Department of Food & Agriculture (CDFA) released the initial draft outline of the Medical Cannabis Cultivation Program (MCCP) regulations. Part of the draft includes the requirements to obtain a state cultivation license. One of the most important parts of this draft is the requirement of a "local license, permit, or other authorization from a local jurisdiction to cultivate."
As the draft becomes final it will be interesting to see what "other authorization" actually means. Will that mean that cultivators operating in a grey area (without a local permit) will be considered in compliance? If not, will these cultivators have any path to state licensure? There is still a lot of work to do at the state level to answer these and so many other remaining questions.
CDFA will be holding a number of public scoping workshops throughout California in the September.
Below is the language from the CDFA draft.
APPLICATIONS FOR CULTIVATION LICENSES:
Application Requirements: Licensees will have to provide the following, at a minimum, in order to be considered for a license:
- Board of Equalization seller’s permit number
- Proof of fingerprinting submission to the California Department of Justice.
- Copy of a local license, permit or other authorization from a local jurisdiction to cultivate, and related California Environmental Quality Act (CEQA) documentation.
- A cultivation plan detailing grow site dimensions, chemical use protocols, water source and storage, waste removal plan, security protocols, inventory tracking procedures, quality control procedures, product storage and labeling, and details regarding the method of compliance with applicable MCCP environmental requirements.
- Proof of the legal right to occupy the proposed cultivation site.
- Proof of a bond in the amount of $25,000.
- If applicable, copy of a valid Fish and Game Code section 1602 lake or streambed alteration agreement or written verification from the Department of Fish and Wildlife that an agreement is not required.
- If applicable, approval of water diversion and water rights.
- If applicable, a certificate of rehabilitation for a conviction.
Applicants will also need to attest to the following:
- A license is only valid for the single, identified location.
- The proposed location is located beyond a 600-foot radius from a school.
- The applicant is not a licensed retailer of alcoholic beverages.
- The applicant is an “agricultural employer.”
- For an applicant with 20 or more employees, the applicant will enter into a Labor Peace Agreement.
- Comply with prohibition of weapons and firearm at the cultivation site.
- Under penalty of perjury, the information in the application is complete, true and accurate; the applicant has read and is familiar with all applicable laws and regulations .
The cannabis landscape is currently in a dramatic shift, from one of prohibition to nationwide regulation. In order for this transformation to materialize, cannabis must be removed from its Schedule I designation. Under the CSA, a controlled substance may be rescheduled either through legislative or administrative action.
Congress has the power to pass law amending the CSA to reschedule or even de-schedule cannabis from its current Schedule I classification. For example, introduced in February 2015, the Regulate Marijuana Like Alcohol Act (H.R. 1013) directs the Attorney General to issue a final order that removes marijuana in any form from all Schedules of controlled substances under the CSA; allows the Secretary of the Treasury to issue permits for the importing, shipping, selling, purchasing, producing, packaging, and warehousing of marijuana; and grants the FDA the same authorities with respect for marijuana as it has for alcohol.
The second method to reclassify cannabis is through an administrative action brought by either an outside party, the Secretary of Health and Human Services (HHS), or by the US Attorney General (through the DEA). The CSA allows the DEA to “transfer between… Schedules” or “remove any drug from the schedules… if he finds that the drug does not meet the requirements for inclusion in any Schedule.”
The DEA will take into account eight factors when considering rescheduling a controlled substance:
- Its actual or relative potential for abuse;
- Scientific evidence of its pharmacological effect, if known;
- The state of current scientific knowledge regarding the drug or other substance;
- Its history and current pattern of abuse;
- The scope, duration, and significance of abuse;
- What, if any, risk there is to the public health;
- Its psychic or physiological dependence liability;
- Whether the substance is an immediate precursor of a substance already controlled under this subchapter.
The DEA must also request scientific and medical analysis regarding the controlled substance from HHS. HHS has delegated this responsibility to the US Food and Drug Administration (FDA).
“[The] FDA conducts for Health and Human Services a scientific and medical analysis of the drug under consideration, HHS then recommends to DEA that the drug be placed in a given Schedule. DEA considers HHS’ analysis, conducts its own assessment, and makes a final scheduling proposal in the form of a proposed rule.”
While the DEA has consistently denied petitions to reschedule cannabis, they are currently assessing two petitions and have already received the scientific, medical, and scheduling recommendations from HHS. In an April, 2016 joint statement, the DEA along with HHS and the Office of National Drug Control Policy stated that they hope to release their decision in the first half of 2016. Despite the optimism of a definitive statement from the DEA regarding cannabis’ scheduling status, the current political climate may cause the agency to delay its decision until the presidential election has been decided.
In 1996 California became the first state to legalize medical marijuana. Proposition 215, known as the Compassionate Use Act, allows patients to posses and cultivate medical marijuana when deemed appropriate by a physician for the treatment of any illness for which marijuana provides relief. The Compassionate Use Act did not create a state regulatory agency or provide guidelines on possession limits, taxes, or a patient registry. Local jurisdictions are able to adopt ordinances to regulate or prohibit the location, operation, or establishment of medical marijuana businesses. With no uniformity across the state, the availability, civil, and criminal enforcement of medical marijuana varies greatly from jurisdiction to jurisdiction.
In 2003, Senate Bill 420 passed creating possession and cultivation limits of eight ounces per patient, a voluntary identification card program administered by the State Department of Health Services, and prohibited the sale of marijuana for profit. The possession limits of SB 420 were later found to be unconstitutional in People v. Kelly, however a patient must still show that an amount over eight ounces is medically necessary. In 2005, the California State Board of Equalization began requiring sellers of medical marijuana to hold a seller’s permit and pay sales taxes.
Despite operating in a legal grey area with little to no statutory framework for the past twenty years, California is the largest cannabis market in the world, with a total market size of $1.3 billion in 2014. The California market is expected to grow exponentially with the recent passage of three bills designed to bring structure and uniformity to the California cannabis industry.
On October 9, 2015, California Gov. Jerry Brown signed into law the Medical Marijuana Regulation and Safety Act (“MMRSA”). MMRSA, comprised of three bills (Assembly Bill 243, Assembly Bill 266, and Senate Bill 643) is intended to provide “comprehensive regulatory framework for the production, transportation, and sale of medical marijuana.” While MMRSA only applies to medical marijuana, it is widely anticipated that these regulations will pave the way for legalized recreational adult use by 2018.
MMRSA creates the Bureau of Medical Marijuana Regulation (“BMMR”) within the Department of Consumer Affairs. BMMR is responsible tracking licenses and the movement of cannabis and cannabis products throughout the state. BMMR will oversee distributors, dispensaries, and transporters. MMRSA appoints the Department of Food and Agriculture to regulate and license cultivation; the Department of Pesticide Regulation to develop standards for the use of pesticides in cultivation; the State Department of Public Health to develop standards for the production and labeling of edibles; the Department of Fish and Wildlife and the State Water Resources Control Board to regulate the effects of cultivation on water resources.
MMRSA establishes a multi-tiered licensing system for medical marijuana cultivation, manufacturing, testing, distribution, transportation, and dispensaries. There are ten cultivation licenses determined by the square footage of the facility, its location inside or out, and the type of lighting used. Two manufacturing licenses distinguished by the use or nonuse of volatile solvents. One testing license, one distribution license, and one transportation license. Two dispensary licenses, determined by the total number of facilities operated.
There are a number of restrictions on the types of licenses held to prevent vertical integration within the industry. In general, only two different licenses may be held by a licensee. For example, a licensee may hold a transportation and distribution license, but no other. A small cultivation licensee may hold a manufacturing license, but a medium cultivation licensee may not.
There are no residency requirements for owners, directors, employees, or investors of a medical marijuana business. However, prior conviction of an offense substantially related to the functions or duties of the business applied for, including a felony controlled substance conviction, may result in denial of a license. A licensee must obtain a local permit or license prior to obtaining a state license, or a licensee will be subject to revocation or termination of the state license.
While there are no express tax provisions within MMRSA, it does authorize local cities, counties, and municipalities to assess fees and taxes on all medical marijuana related business within their jurisdiction. Nothing in MMRSA limits a local jurisdiction’s ability to regulate or prohibit the location, operation, or establishment of a medical marijuana business.
In a departure from the language of SB 420, MMRSA includes in the definition of person, “a firm, partnership, joint venture, corporation, limited liability company, etc.” This means that moving forward medical marijuana businesses will be able to operate as for profit entities, eliminating the necessity to operate as collective and cooperative non-profits.
With the passing of MMRSA and recent adult use legalization in neighboring states, advocates and activists determined to legalize adult use recreational marijuana see this as the perfect time to introduce ballot measures in California. In an April 2015 study the Public Policy Institute of California found that fifty-five percent of Californians believe marijuana should be legal.
In 1982 Congress enacted IRC § 280E largely in response to Jeffrey Edmondson v. Commissioner, a case in which the Tax Court allowed an illegal business engaged in the sale of amphetamines, cocaine, and marijuana to recover the cost of the controlled substances and claim certain business deductions. Congress stated that:
There is a sharply defined public policy against drug dealing. To allow drug dealers the benefit of business expense deductions at the same time that the U.S. and its citizens are losing billions of dollars per year to such persons is not compelled by the fact that such deductions are allowed to other, legal, enterprises. Such deductions must be disallowed on public policy grounds.
IRC §280E reads:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
The result of 280E is an effective tax rate on marijuana-related businesses that can reach between 60-90 percent. Business expenses scrutinized by the IRS include employee salaries, utilities, health insurance premiums, marketing and advertising costs, rent, and independent contractor payments. This treatment by the IRS has made it very difficult for these businesses to remain profitable and has resulted many closing their doors after only a few years.
While deducting ordinary and necessary businesses expenses is prohibited under 280E, marijuana-related business are allowed to deduct cost of goods sold (“COGS”). If employed correctly, categorizing certain expenses as below the line deductions can mitigate the detrimental impact of 280E. A marijuana-related business must carefully examine each business expense to determine if that expense directly contributes to the costs associated with the production of marijuana. Supply costs (such as printed labels placed on medical marijuana bottles), material costs (such as seeds), and labor costs (such as planting, harvesting, sorting, and cultivating) may all potentially be included in COGS.
Another option to mitigate the impact of 280E is to diversify the services offered by a marijuana-related business. In Californians Helping to Alleviate Medical Problems, Inc. v. CIR (“CHAMP”), the tax court held that a taxpayer’s caregiving services and its provision of medical marijuana were separate trades or businesses for purposes of 280E, and does not preclude taxpayer from deducting the expenses attributable to the caregiving service. In CHAMP a business that offered caregiving services and medical marijuana to its members with debilitating diseases was able to attribute nearly 90 percent of certain expenses to the caregiving services portion of the business. If executed properly, offering supplemental services, such as selling clothing, accessories, and smoking devices can be an effective technique to thwart 280E. Using different cash registers for marijuana and non-marijuana products, selling marijuana and non-marijuana products in separate areas of a retail store, and allocating employee hours to marijuana or non-marijuana activities are a few methods to ensure favorable tax treatment. As later court decisions evidence, failure to keep meticulous financial records and clearly delineate between services offered may result in less than favorable treatment under 280E.
In Olive v. CIR, the court found that a medical marijuana dispensary was precluded from deducting ordinary and necessary business expenses under 280E because selling medical marijuana was the only income generating activity it was engaged in. The provision of vaporizers, food and drink, yoga, games, movies, and counseling services offered by the dispensary at no costs to its patrons did not qualify as a separate trade or business. The court distinguishes this case from CHAMP by comparing two hypothetical bookstores. Store A sells books and provides complimentary amenities to its patrons. Store B sells books AND sells coffee and pastries. The book and food sales by store B qualify as a separate trade or business while the book sales and complimentary amenities offered by store A do not.
In Canna Care v. CIR, a medical marijuana dispensary was found to owe more than $800,000 in federal taxes after the court determined the sale of medical marijuana was the primary source of income and the sale of books and t-shirts did not qualify as a separate trade or business. The court was not able to determine the percentage of income derived from the sale of medical marijuana from the income derived from sale of books, t-shirts, and other items.
Both Olive and Canna Care illustrate marijuana-related businesses will be held to a strict standard when trying to establish different revenue sources as a separate trade or business. To mitigate the full force of 280E it is imperative that these businesses clearly delineate between different services, charge for non-marijuana products and services, keep service specific financial records, and establish protocols to ensure all employees properly allocate their time.