Attorney General Sessions rescinded, effective January 4, 2018, previous enforcement priorities of the DOJ related to marijuana – including the Cole Memo. The Sessions Memo dictates that federal prosecutors should follow the “Principles of Federal Prosecution” originally set forth in 1980 and subsequently refined over time in chapter 9-27.000 of the U.S. Attorney’s Manual. Sessions goes on to state in his memo that “These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” It is important to note that Sessions has not previously set any specific enforcement priorities with respect to marijuana, nor has this memo created any new enforcement priorities of the DOJ. Rather Sessions has removed the foundational guidance that states have relied on to regulate the production and distribution of marijuana pursuant to state law and the will of each states’ citizens. The Cole Memo actually set 8 enforcement priorities for the DOJ with respect to marijuana, which Sessions has now unilaterally rescinded.
“Sen. Cory Gardner of Colorado wants to attach an amendment to the GOP-led tax reform bill that would allow state-legal marijuana growers, processors and sellers to deduct normal businesses expenses from their taxes.” Section 280E of the tax code, forbids businesses from deducting otherwise ordinary business expenses (advertising expenses, insurance, employee wages, etc.) from gross income associated with the “trafficking” of Schedule I or II substances. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance under the Controlled Substances Act. Gardner’s amendment will include a 280E fix so that the provision no longer applies to marijuana businesses that operate in accordance with state or local laws.
What does this mean?
A 280E fix would be monumental for the cannabis industry. The inability for state-legal cannabis businesses to take deductions for normal business expenses has the potential to cripple the industry if not addressed in the near future. While I believe that getting this amendment in on the tax bill is a moon shot, I hold out hope that it is still a possibility. At a minimum, the GOP is finally listening to the plights of our industry and is attempting to be part of the solution.
On June 27, 2017, a three-judge panel for the 10th U.S. Circuit Court of Appeals vacated a district court ruling that nixed Denver-based Fourth Corner Credit Union’s bid to receive a master account with the Federal Reserve Bank of Kansas City. Fourth Corner has been waiting since the end of 2015 for such ruling. The ruling effectively allows for the credit union to continue with its lawsuit against the Federal Reserve in an attempt to obtain its master account so it can function as a state-legal credit union in Colorado.
What does this mean?
The opinion relied on the fact that the case is not about Fourth Corner violating federal drug laws. U.S. Circuit Judge Robert E. Bacharach wrote: “The district court dismissed the amended complaint, reasoning that Fourth Corner would use the master account to violate federal drug laws. This ruling was erroneous,” Essentially, the district court relied on suspicions about what Fourth Corner might do and such standard is not sufficient to approve a motion to dismiss.
Fourth Corner still has a long road to haul until it can reach a resolution, but this ruling is a positive step towards normalization of state-legal marijuana in Colorado.
Last week, the DOJ sent a letter to trustees who handle consumer bankruptcy reminding them that marijuana is a federally illegal drug and warned them not to handle any money from the sale of marijuana-related property. The letter goes on to state “Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets.”
What does this mean?
Colorado courts have already dismissed numerous cases where the company was engaged in state-legal marijuana cultivation and sales, so this is nothing new. However, this letter might be illustrative of Attorney General Sessions’ previous statements that the DOJ will increase legal scrutiny on marijuana.
While it is clear that marijuana business likely do not have federal bankruptcy protection based on the current law, there are state laws regarding the receivership and assignment for the benefit of creditors that can be utilized to assist a failing marijuana company deal with its debts.
Today, on 4/20, I was invited by the Academy of Hospitality Industry Attorneys (AHIA) to present on Colorado marijuana issues at the Spring 2017 meeting in Colorado Springs, CO. This presentation will take a look at the current marijuana market in Colorado as well as discuss national marijuana trends. For more details, please read here.
My esteemed colleague and frequent medical marijuana commentator, Fred Miles, was quoted in the NY Times article “When Retirement Comes With a Daily Dose of Cannabis“. Check this article out for a great read about the increasing number of older Americans living in assisted living communities and nursing homes using cannabis for relief from aches and pains as an alternative to prescription pain medicine.
Myself, Winn Halverhout and Fred Miles were interviewed by Advisory Board about the main challenges facing providers related to medical marijuana, how the new administration might change the legal landscape, and more.
Check out the article here. Advisory Board is a best practices firm that uses a combination of research, technology, and consulting to improve the performance of health care organizations around the world.
According to a prominent cannabis advisory firm, the cannabis industry raised over a $1 Billion in investment dollars in 2016. These investments included public companies on the TSXV (cultivation and extract company), NYSE (REIT) and NASDAQ (pharmaceutical company).
What does this mean?
Majority of large investments are going into real estate and pharmaceutical company – as these investments are not subject to the strict regulatory environment restricting ownership of companies that cultivate and sell cannabis. Big money will continue to flow to “non-plant touching” business in 2017; however, I expect a fair amount of consolidation in the cultivation and retail sectors.
Yesterday the DEA published a final rule providing for a new drug code for “Marihuana Extract” . The DEA states that this will allow them to track quantities of “Marihuana Extract” separately from marijuana to aid in the compliance with relevant drug treaties. This new rule is set to become effective on January 13, 2017. The DEA’s new definition for “Marihuana Extract” includes: “an extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, other than the separated resin (whether crude or purified) obtained from the plant.”
What does this mean?
Fundamentally this does not represent a change in federal law, as cannabinoids extracted from “marihuana” (as defined in the CSA) are federally illegal. However, the plain language of the new definition does appear to expand the CSA’s reach to cover cannabinoids extracted from the genus Cannabis not just “marihuana”. This means that cannabis businesses that have imported permissible parts of the plant Cannabis sativa L., are now also likely prohibited from extracting cannabinoids from such plant material.
NOTE: Given the varied implications, my firm is further analyzing the implications to the cannabis and pharmaceutical industries. We will provide an update when appropriate.
There has been a lot of speculation about what a Trump administration, and particularly a DOJ lead by Jeff Sessions, will mean for our burgeoning Marijuana industry. The short answer is nobody knows, and given the fact that the Trump team seems intent on using obfuscation as a strategy, I don’t think we will have any clarity on this issue any time in the near future.
The better question then becomes, what does the industry need to be prepared for? I’m working from the assumption that state-regulated marijuana is not coming to an abrupt end, but that we should expect greater attention from the DOJ in the coming years. Sloppy and apathetic operators will be most at risk. Though larger brands will also want to be wary of becoming a political trophy. Leases and other agreements need to better contemplate enforcement actions. Inventory tracking, pro-active employee and sales policies, and strict compliance with your state regulatory regime will be of paramount importance.
Our industry has seen an incredible increase in sophistication and maturity over the last 6 years. As of now, it looks like that pace will need to quicken if we want to continue to thrive.