Tag Archives: California

280E and Recreational Cannabis: It Keeps Coming Back to This

As California nears a ballot vote on legalizing recreational cannabis, the Ninth Circuit has ruled on the very important issue of whether cannabis businesses may deduct their business expenses. While the case, Olive v. Comm’r, dealt specifically with a medical cannabis business, it has far-reaching implications for future cannabis businesses (regardless of whether they’re medical or recreational). Deductions allowed for business expenses are the keystone tax benefits and incentives for taxpayers to run their own businesses. Without these deductions, running and owning a business becomes an even more cumbersome and costly endeavor. This, in turn, diminishes incentive for current black-market participants to enter the legal sphere. (See my previous post for a discussion on why these consequences should matter to all Californians, proponents and opponents of legalization alike).

On July 9, 2015, the Ninth Circuit affirmed a previous Tax Court decision denying a medical cannabis dispensary the typical tax deductions afforded for ordinary and necessary business expenses. Petitioner, herein referred to as Taxpayer, owned a medical marijuana dispensary and was denied deductions for his business expenses because his particular business fell under one very consequential exception of the Federal Tax Code: section 280E. Despite months of speculation as to whether Section 280E applies to cannabis businesses, it is now clear that it does apply to medical cannabis businesses, and, based on the rationale of the Court, will apply to recreational cannabis businesses as well.

For those unfamiliar with section 280E, it specifically prohibits deductions for business expenses incurred where the  “trade or business” consists of trafficking controlled substances prohibited by federal law. The Controlled Substances Act classifies cannabis as such a substance and federally prohibits its use or sale. Marijuana businesses are required, like all other businesses, legal or illegal, to adhere to both state and federal tax laws. 280E changes liability substantially: cannabis businesses have to capitalize the cost of the business expenses and have to wait until the product is off the shelves to report the “Cost of Goods Sold” (COGS). The items that constitute COGS are much more limited than the plethora of expense types typically allowed under the business expense deduction. COGS, for example, include the cost of purchasing inventory (or product such as cannabis flower), and storage. In contrast, the business expense deduction includes rent, employee wages, and insurance, among others.

In Olive v. Comm’r, Taxpayer argued that 280E should not apply and he should be allowed to deduct his business expenses. His argument relied on recent federal directives (e.g., the Cole Memorandum, 2015 Appropriations Act (128 Stat. 2217), etc.), which cumulatively give states the latitude to implement legalized cannabis systems without federal interference. The Court disagreed and pointedly explained that the applicability of section 280E to cannabis businesses is wholly separate from recent federal directives regarding the enforceability of federal preemption of statewide legalized cannabis systems. The Court’s opinion rested on the statutory interpretation and authority within section 280E, and the meaning of “trade or business” as used in the tax code.

First, the Court opined that recent federal directives regarding cannabis do not preempt or reverse the current statutory law governing tax deductions for business expenses. The determination of whether section 280E applies to cannabis businesses is a matter of statutory interpretation of section 280E and the Controlled Substances Act (CSA). To date, Congress has not amended or repealed the CSA. Thus, the sale and use of cannabis remains prohibited by the CSA, i.e., federally prohibited. And, as mentioned above, section 280E specifically precludes deductions for businesses whose “trade or business” consists of activities that are federally prohibited. The language of both federal provisions is simple and easy to interpret. The Court found that the first prong, as to whether the “trade or business” was federally prohibited, applied, and therefore prohibited the taxpayer from deducting his business expenses.

Next, the Olive Court defined “trade or business,” saying an activity constitutes a “trade or business” where the activity was entered into with the dominant hope and intent of realizing a profit. 792 F.3d 1146 at 1149 (citing 477 U.S. 105) (emphasis added). The Court was clear that Taxpayer’s sale of medical cannabis was the only activity that met the “trade or business” standard as it was the only one that generated income. The Taxpayer’s business offered patrons other services including, but not limited to, yoga, counseling, and food and drink. However, all of those activities were offered free of charge to patrons. Thus, the Court concluded that the free services were clearly not offered with the dominant hope and intent of realizing a profit. In the Court’s view, Taxpayer’s only “trade or business” was the sale of medical cannabis.

The Court recognized that the taxpayer’s business was legal on the state level. However, federal law still controls where the issue being litigated deals with federal tax law. Despite federal directives that have eased or eliminated enforcement of the CSA, the law is still the law in this court’s eyes. And unlike other tax codes, section 280E uses clear and plain language. There is no other way for the Court to interpret such a statute. Unfortunately, recreational cannabis also clearly falls under the CSA prohibition and therefore to section 280E. Thus, the analysis used here will remain the same. Section 280E will continue to pose a costly problem for cannabis businesses.

Although the Ninth Circuit’s ruling is legally sound, it is a disappointing outcome for cannabis businesses held in the states comprising the circuit. It also sets a strong precedent for other circuits to follow. For California, however, this ruling comes at an opportune time as it and a number of its sister states prepare for the so-called inevitable legalization of recreational cannabis. Armed with the knowledge that 280E will apply to cannabis businesses, California can take a more proactive approach and establish a state tax model that considers the effects section 280E will have on its local businesses.

States embarking on legalizing recreational cannabis should recognize the 280E problem and realize that it will continue to cost cannabis businesses more than those in other industries. Implementing a new recreational cannabis system with high State taxes will win votes and may draw in high revenues initially, but such a system will only make it more challenging for small businesses and new business owners to remain profitable and open for business. High taxes also do not help educate users on safety or help diminish the social harms associated with cannabis use. (See “Cigarettes and Booze” for the full discussion on this topic). Lower taxes or incentive programs that include state tax credits for compliance, on the other hand, are great options to relieve recreational cannabis businesses from the cumbersome consequences of 280E. Incentive programs and State tax credits can also be especially useful for encouraging “best practices,” or compliance with regulations that are specifically designed to lower specific social harms. (See my earlier post for examples from the tobacco and alcohol industries). From a business and economic perspective, they could also lead to a more stable industry by allowing businesses to flourish and thereby remain in the legal market. Above all, such options incentivize market participants to enter the legal sphere, and will help small businesses grow within California.

Marijuana Patients Facing Eviction: Responding to an Eviction Action

A recent article on Canna Law Blog touched on aspects of the landlord/tenant relationship that have been taking center stage in the marijuana policy debate in states where recreational marijuana or medical marijuana has been legalized. The article correctly provided a detailed overview of eviction actions as they apply to marijuana dispensaries and importantly focused on the specific laws and regulations that govern commercial tenancies. As marijuana dispensaries pop up throughout the United States, a multitude of legal issues will arise with them. For example, are all marijuana contracts illegal as contrary to public policy? In other words, given that marijuana is not yet legal at the federal level, are people who contract with marijuana dispensaries forming an illegal, unenforceable contract? These questions will be addressed in articles to come.

For now, I will focus on one specific contract: the tenancy lease. Many articles have correctly analyzed issues arising out of commercial tenancies (such as dispensaries). While some articles have accurately indicated that commercial evictions are often based on allegations of “illegal activity,” many have improperly classified the issues as applicable to all landlord and tenant relationships. I intend to set the record straight.

This article is part two of a mini-series that examines the substantive aspects of eviction actions filed against tenants who use marijuana. It will provide tenants with a detailed description of the arguments a landlord may make in an eviction action for marijuana use.

Part one gave tenants some background on their right to a jury trial and encouraged tenants to use this right to leverage negotiations in their favor. Over the past two years of both attending court to assist in client representation and observing the unlawful detainer calendar on a weekly basis, I have seen only ONE defendant request a jury trial. The judge in that case firmly declared that he would never deny a defendant’s right to a trial by jury. I was motivated to write the last article because the judge’s statements caused a change in the landlord attorney’s attempt to reach an agreement and negotiate the case. The landlord attorney walked back and forth between the defendant and his client in an attempt to get them to reach an agreement so as to avoid the lengthy (and might I add, expensive) trial.

The goal of this article is to provide tenants with additional leverage in settlement negotiations. As described in the pervious article, there are many benefits to settlement such as: reduced expenses, reduced stress, privacy, predictability, saved time, and (perhaps most importantly) flexibility with regards to the outcome. While a judgment may be legally correct, the outcome may not always be fair to both tenants as one will ultimately end up with nothing (other than a hefty attorney bill). Settlements allow for both sides to potentially reach terms that are mutually beneficial. Ultimately, this article will provide tenants with information that, if used in negotiations, will result in fair outcomes.

First, I will examine the specific laws that allow a landlord to begin an eviction action. Second, I will explain what the laws mean for a tenant and how a landlord may use the law against a marijuana user. And third, I will lay out the potential arguments to be raised by the tenant.

Disclaimer: This post is intended to provide general information about your rights as a tenant. It should not be understood to provide legal advice. Should you receive any court documents, please contact an attorney regarding your particular issue.

The Law: Evictions in General

As discussed in my previous articles, an unlawful detainer action (eviction action) is the process by which a landlord may legally evict a tenant. Evictions arise for many reasons. Perhaps the most common are non-payment of rent and breach of the lease agreement.

Under California law, and for the purposes of this article, a landlord is a person who owns a residential rental unit. The landlord rents the unit to a tenant for that tenant to live in. The only person or entity that has standing to evict a tenant is the owner of the property. As discussed earlier, the landlord may evict tenants for their actions as well as their guests’ actions. In most instances, a tenant’s guests are, in the eyes of the law, an extension of the tenant named on the lease agreement. Unlike standing, where only the landlord may begin the eviction action, if a tenant’s guest is smoking marijuana on the premises, the law views this as if the tenant himself is the one smoking marijuana.

What Gives Rise to an Unlawful Detainer Action?

Eviction actions in California are governed by the California Code of Civil Procedure Section 1161(3). This section provides that a tenant who has failed to perform a condition or covenant of the lease agreement is guilty of unlawful detainer if the tenant has been served with a “3-Day Notice.” In other words, a landlord who suspects that a tenant is using marijuana in his unit may begin the eviction process by serving a “3-Day Notice.”

The Notice must:

  1. Be in writing;
  2. Say the full name of the tenant or tenants;
  3. Have the address of the rental property;
  4. Say what the tenant did to violate the lease or rental agreement; and
  5. Say the tenant has the chance to fix the problem or move out in 3 days.

Tenants who have been served with a “three day notice” should make sure that it complies with the statutory requirements. Failure to comply with any of these requirements will render the entire case moot and force the landlord to reissue the notice until it complies with all the requirements. Courts have given the requirements of Section 1161(3) strict interpretations. This means that the landlord must meet all the requirements and that if he fails to meet these requirements (even slightly) courts must rule in favor of the tenant. For example, where a landlord fails to include the total amount of rent due in a “3-Day Notice,” courts will generally require the notice to be corrected and served again.

If the landlord files an eviction action based on a faulty notice, they will have wasted approximately three weeks in court proceedings only to show up to court and be told that they will need to serve the tenant with an adequate notice. This means more time for the tenant to remain on the premises and to try to negotiate with the landlord.

Given the fact that most (if not all) lease agreements include a “no smoking provision,” using medical or recreational marijuana in a rental unit is likely to constitute a violation of a tenant’s lease agreement. Therefore, if a lease agreement prohibits smoking, Section 1161(3) allows a landlord to serve the much-dreaded “3-Day Notice” and begin the eviction process. However, at this point, the tenant is not yet “guilty” of unlawful detainer.

Failure to Perform a Covenant or Condition of the Lease Agreement

Tenants should review their lease agreement to verify that the lease agreement does in fact include such a provision. If a lease agreement fails to prohibit smoking, this specific argument may not be used against the tenant. The reason for this is that a tenant cannot be in breach of a lease provision that does not exist in their lease agreement.

It’s important for tenants to be aware that a landlord has, at his disposal, many other arguments that he may raise in a marijuana eviction case. For example, violations of implied or express covenants, such as creating a nuisance, possession of an illegal substance, or using the unit to carry out illegal activity, are all grounds for a landlord to initiate the eviction process. Unlike the “no-smoking” provision, these violations exist regardless of whether they were expressly included in the given lease agreement. Landlords have an unconditional [statutory] right to raise these arguments. Likewise, tenants have a duty to comply with them.

When is a Tenant “Guilty” of Unlawful Detainer?

Within the context of the “no-smoking” provision, using marijuana in an apartment is a breach of the lease agreement. This breach allows the eviction process to begin; however, it does not necessarily mean that a tenant is guilty of unlawful detainer. Despite the law’s language favoring landlords, a landlord that decides to pursue an eviction action still bears the burden of proving that the tenant has committed an unlawful detainer. Ashlers v. Barrett, 4 Cal.App158, 160 (1906).

How does a landlord prove that a tenant is “guilty” of unlawful detainer?

In order to prove that a tenant is “guilty” of unlawful detainer the landlord must show: 1.) that the marijuana usage at issue in the case constitutes a material breach and 2.) that the tenant has failed to vacate the unit within the notice period. Given the fact that the second element is very easy to prove, this article will focus on the first element.

First, the landlord must have proof that a tenant in fact breached the lease agreement by committing a specific act that the lease agreement prohibits. Where marijuana is involved, it may be based on testimony from someone who observed the tenant using marijuana. Unless a landlord or neighbor can testify under oath that he saw the tenant using marijuana, the landlord will likely run into problems trying to prove that the tenant actually used marijuana on the premises.

Many landlords don’t live on the same premises as their tenants; therefore, complaints about marijuana are likely to come from other tenants who claim that they can smell pot. This argument is weak, primarily because it is difficult to show that the smell is actually coming from one particular unit (assuming the tenant hasn’t taken it upon himself to “hot box” the apartment unit). In an eviction action that does not involve an eyewitness, the tenant will likely be required to testify under oath. Tenants should be aware of the consequences of lying under oath. If a tenant has indeed used marijuana on the premises, it’s in their best interest to try to negotiate a settlement. However, a tenant who has used marijuana on the premises can use this lack of evidence to negotiate additional time to move out or possibly enter into a probationary tenancy.

Second, the landlord must prove that the marijuana usage in that particular instance constitutes a “material breach.” Courts have declared that breaches that are only technical or trivial (as opposed to “material”) will not support forfeiture in an unlawful detainer action in an unlawful detainer action. See McNeece v. Wood, 204 Cal 280, 285 (1928). Hence, even if a tenant has been seen smoking marijuana in their rental unit, the tenant is not necessarily guilty of unlawful detainer unless the particular instance is so severe that it constitutes a “material breach.” For example, smoking marijuana in a rental unit every day is very likely to constitute a material breach. However, a single time that involved a guest is not likely to constitute a material breach because most courts recognize that one instance is not significant enough to result in an eviction.

While not covered extensively in this article, tenants should keep in mind that they have additional defenses such as substantial compliance with a covenant. Knight v. Black, Cal. App. 3d. (1985) Additionally, courts have not drawn a clear line between a trivial breach and a material breach. Thus, even where a given breach is deemed “material” the tenant may still argue that enforcement would be unconscionable and inequitable.

My next article will specifically look at marijuana evictions as they arise in public housing. As discussed in a previous article, while landlords are required to follow the eviction process requirements for all tenancies, public housing tenants stand to lose much more. I will also analyze the potential effects of a recently proposed HUD regulation.

Remember, this is an article, not an attorney. If the above matters apply to you please seek legal advice from you local Legal Aid or pro-bono attorney.

So What Should California Do with On-Site Consumption?

In the 2016 election, California has important decisions to make regarding legal recreational marijuana beyond simply whether to allow it or not. Where and how consumers access the marijuana market is an equally important consideration that bill crafters and policymakers must give serious forethought to. Luckily, Colorado, Washington and the other legalized states have provided living laboratories for the different means of controlling and regulating a legalized recreational marijuana market.

My past have detailed the different legal and regulatory systems that Colorado, Washington, and other recreational marijuana states have implemented for their marijuana markets, specifically regarding on-site consumption businesses such as marijuana lounges, and how such businesses organize and operate themselves within the crisscrossing legal frameworks created by state anti-smoking laws, local ordinances and regulations, and the requirements of the marijuana bills themselves. From the patchwork of pros and cons observed from each regulatory system, patterns have emerged that can guide California policymakers and bill drafters to best craft sensible recreational marijuana laws that carefully balance the potential for state and business revenue against the perceived social costs and negative externalities of legalized recreational marijuana.

In this post, I will detail the recommendations for how California could craft sensible policy for the creation of on-site marijuana consumption businesses, including retail point of sale consumption (RPOSC) businesses, made throughout my previous blog posts. I will offer further guidance on how marijuana RPOSC businesses—distinct from the marijuana-lounge type enterprise which has been the predominant business form within the fledging marijuana hospitality market—can be used to redevelop areas within cities in a similar manner to the effect craft breweries, wine bars, and urban gastro-pubs have had in underdeveloped areas across the state. I will highlight the potential sales and business tax income that previously legalizing states have left on the table by not providing clear guidelines for the creation of businesses in the secondary marijuana hospitality market. Lastly, I will explain what can be done to best foster an environment where business, local government, and social health issues are all accommodated.

Increased tax revenue from new marijuana markets has been cited by advocates as an important reason to legalize recreational marijuana. Recent reports project the amount made in taxes for the last twelve months by the state of Washington at $44 million, while Colorado projects total revenue for the year since legalization at $69 million. Differences in the way marijuana is taxed in each state account for much of the differences in revenue, although experts still believe money is being left on the table by states who still allow relatively unfettered access to medical marijuana markets which aren’t subject to the same degree of taxation as recreational cannabis, and thus, sell at lower prices. The still substantial black market also still supplies a large share of the cannabis consumed in Colorado: a 2014 Colorado Department of Revenue report stated that of the roughly 130 metric tons of marijuana consumed in the state that year, only 77 tons of it was sold through medical and recreational dispensaries. As increasing data shines light on the potential state and local revenue lost to the black market, California can observe the patterns and better craft the laws governing its recreational marijuana market.

Indeed, in order to avoid many of the problems posed by the black market’s continued existence in recreational marijuana states, California must find a way to convince many of the growers and sellers in its black market to fold their historically illegal or quasi-legal (via the states barely regulated medical system) enterprises into the legal marketplace. This is represented most visibly by the Emerald Triangle in Northern California (Humboldt, Medicino, and Trinity counties), which has a long history with black market marijuana production. Allowing regions and cities to create tourist and entertainment destinations could be one way to convince otherwise reticent regions to join the legal market, especially if federal trademark law eventually allows marijuana entrepreneurs and regions to trademark particular “terroirs” or “appellations” as used in wine to differentiate growing regions, as well as marketing marijuana as specifically from the Emerald Triangle or grown through organic methods or by a particular grower. In fact, organizing the various growers in Humboldt County into a market resembling the wineries in Napa Valley is a goal of the Emerald Growers Association and the California Cannabis Voice-Humboldt, two industry advocacy groups for Northern California and the Emerald Triangle.

Experts such as Mark Kleiman from the University of California, Los Angeles, have also noted that if the increasing supply due to the newfound ease and legality of growing cannabis causes the retail price of cannabis to drop below the roughly $10-$20 a gram in current recreational markets, tax percentages tied to the value of sold marijuana would cause revenues to drop further. He offers two answers: a specific excise tax based on the quantity sold rather than the price, or a tax on the potency of the marijuana gauged via the THC content of the product, similar to the different taxation levels for beer and hard liquor. Taxes such as these could serve to simultaneously squeeze out the black market while reducing societal harms from increases in substance use disorder, similar to other “sin taxes” on cigarettes and alcohol.

While the question of how to correctly tax marijuana to balance the social costs and revenue for the state while maintaining a healthy market is a complicated one (see this series of blog posts by fellow classmate/blogger Alexa Quinn for an in-depth analysis of the tax issues related to marijuana), policymakers should also look for complementary means to generate revenue from the recreational marijuana market. This could be done by allowing the creation of entertainment/hospitality industries serving the marijuana market like the aforementioned RPOSC businesses from my other blog posts. These could be bud-pubs in the style of craft brewpubs, or cannabars attached to marijuana greenhouses like wine bars attached to vineyards in the Napa Valley which were mentioned above as potential industry models.

RPOSC businesses can also provide opportunities for the generation of state and local tax revenues beyond what is traditionally been generated by the cultivator-processor-seller cycle of the marijuana market. For instance, lawmakers could add another level of taxation by requiring taxes to be charged when the grower/processor sells to the RPOSC business like a budpub, and again when the budpub sells to the customer to be consumed on premises. This style of taxation would be similar to the way Washington state taxes its marijuana market, i.e. a sales tax for growers to processors, processors to retailers, and retailers to customers. This tax would be likely be passed onto the final price of the marijuana for the consumer, although if wholesale prices continue to fall as expected in recreational markets, the final price tag would only be slightly higher relative to the price when buying at a retail cannabis dispensary, analogous to the difference paid by purchasing a six-pack of beer or bottle of wine at a grocery store versus a pint of beer or glass of wine ordered from within a social bar setting. Whether the tax is based on a percentage of total sale price, quantity of product, or more sophisticated method like THC percentage would be up to policymakers and as noted above is its own complicated issue.

Fortunately, the organizations who are jockeying to craft the resolution that will be on the California ballot in 2016 have so far understood that the on-site consumption issue is a missing link to a complete and healthy marijuana market. The first submitted version of the proposed recreational marijuana bill for California’s 2016 election, titled “The California Craft Cannabis Initiative,” creates a new agency called the California Cannabis Commission which may develop a licensing system for retail locations where marijuana products “may be purchased, sold, served, consumed, and otherwise disposed of in a licensed premises in a manner similar to licensed premises serving alcoholic beverages,” i.e. RPOSC businesses. The bill also contains various zoning requirements banning craft and commercial marijuana grows from residentially zoned areas, while permitting municipalities to draft additional zoning laws for cultivation, processing, and on-site consumption businesses. This language shows the support and understanding from industry advocates not just for the development of a viable recreational marijuana market, but also for actual RPOSC businesses where cannabis is sold and consumed on premises. Future lawmakers should focus their efforts on the above mentioned form of RPOSC business, as opposed to on-site consumption business-types where customers are only allowed to bring and consume their personally acquired cannabis, rather than cannabis products sold from the cannabar, due to proprietors having to shoehorn their business model within conflicting marijuana laws not designed with on-site consumption enterprises in mind. Hopefully, other future recreational marijuana initiative proposals being written for California will also allow RPOSC businesses.

For municipalities and lawmakers, future RPOSC business forms have a number of advantages over the currently existing smoking lounge format seen in Colorado Springs and Nederland, Colorado. First, allowing the sale and consumption of marijuana on the premises allows for safe and easy monitoring of customer intoxication and age levels via carding and employee monitoring. This is augmented by providing opportunities for the business and consumer to be informed about the particular strains and form of the marijuana product (flower vs. concentrate vs. edible) through labeling and “menus”, and also how it will be consumed (vaporizing vs. concentrate/dab “rigs” vs. traditional smoking vs. eating) in a safe manner.

Second, by allowing these businesses to operate kitchens and/or other forms of entertainment like the pool tables, televised sporting events, parlor games, live music or DJs seen within currently existing lounge or pub-type establishments, the businesses could become profitable and desirable entertainment locations for 21 and up crowds outside of their attraction as cannabis consumption locations. This could reap additional taxes through food and drink sales and the corresponding corporate/income tax increase from a successful business. In addition, if considering the long term development of the area around a RPOSC business standing alone or as part of a larger marijuana tourism district, popular RPOSC businesses could increase property values and the economic activity of secondary businesses in the area (like other entertainment venues and restaurants/eateries) in a manner similar to the revitalization seen caused by new craft breweries in under-developed urban areas within California cities like San Diego, San Francisco and Oakland.

Third, legalizing recreational marijuana into a system similar to how California regulates alcohol and providing social settings for marijuana consumption via RPOSC businesses­ that only allow certified-legally grown marijuana—similar to the manner alcohol is sourced, purchased, and consumed at bars and entertainment venues—would create larger demand for marijuana grown and produced within the legal system. In this system, it is likely that user preference between different marijuana products in the marijuana market would necessitate patented, trademarked or otherwise certified strains, varietals, terroirs, appellations and marijuana business copyrights to handle the vast proliferation of products within the new marketplace.

For various reasons, the current smoking lounges existing in Colorado have not spurred this described proliferation of commercialized marijuana strains and brands. One reason could be because the marijuana smoking lounges in Colorado generally operate by requiring customers to bring their own marijuana products in order to maintain their anti-smoking exemption as “social clubs” under a state’s Clean Air Act (explained in greater depth in Additionally, some businesses that allow on-site cannabis consumption decline to personally sell recreational cannabis products due to local ordinances banning recreational marijuana sales. Although important for black market concerns, business owners have no easy way to determine whether the cannabis products their customers are consuming originate from legal growers, and likely don’t want to know. Thus, cannabis lounges that don’t sell marijuana products would seem to be less effective at stimulating overall tax growth and compliance with the legal scheme for recreational marijuana than RPOSC businesses because the marijuana consumed within is not guaranteed to come from the legal market. The equivalent access to social marijuana lounges, along with the lower prices, provides an continuing disincentive for consumers to purchase marijuana from the legal recreational market; conversely, RPOSC business in California that only sell legally grown and sourced bud, and do not allow in outside products similar to bars, could be a constructive tool for communities to reduce their black market grower and seller populations.

As noted above, future RPOSC businesses should be required to stock marijuana products grown from sellers operating within the legal market as certified by an agency responsible for monitoring that market.  As examples, the previously legalized states have often tasked their agencies controlling alcohol or revenue with the additional marijuana responsibilities. Colorado created the Marijuana Enforcement Division out of its Department of Revenue, while Washington expanded the mandate of its Liquor Control Board to also handle marijuana licensing and enforcement. Oregon vested its Oregon Liquor Control Commission with the authority to implement and enforce its new recreational market. What agency will take the lead in California is unknown, though the concept is clearly in play as evidenced by the California Craft Cannabis Initiative’s aptly named California Cannabis Commission. Whatever agency ends up with lead enforcement should be capable of monitoring simultaneously the production, processing, and retail sale aspect of the recreational marijuana market, and will likely need funding from the state’s budget in addition to a specific percentage of funds allocated from marijuana tax revenues.

Additionally, California’s federal lawmakers should make every possible effort in lobbying the IRS and major banks for changes to the way the financial system treats cannabis businesses. Currently, most business done by marijuana businesses in Washington and Colorado is conducted in cash due to reticence by banks to accept deposits from an industry that is still federally illegal. The IRS does its part in Section 280E of the federal tax code by denying tax deductions from marijuana businesses other than for costs of goods sold even for dispensaries operating within the law in legalized states. As Forbes notes, this means deductions can be taken on “wages, rents, and repair expenses attributable to production activities,” but not for wages, rents or repair expenses related to general business or marketing activities such as the actual maintenance of a storefront for the direct sale and consumption of cannabis products. If RPOSC businesses eventually settle into business and revenue cycles similar to bars and restaurants, they will need access to deductions from their state and federal taxes to remain viable investment and business opportunities.

Lastly, the interaction between RPOSC businesses and California’s Clean Indoor Air Act must be legislatively clarified to provide clear guidelines to future businesspeople who seek to invest in the cannabis entertainment and hospitality industry. The California Craft Cannabis Initiative’s language makes no mention of how the Clean Air act affects the potential business forms taken by RPOSC businesses, just that the Commission “may” create licenses for a business where cannabis is consumed onsite.

As I mentioned in my previous blog post, current guidelines (PDF) issued by the California Attorney General at the end of 2011 indicated that serving food or drink relegates the “primary purpose” of smoking-related business away from “smoking,” which previously qualified them for the workplace exemption to the Clean Indoor Air Act. This provision could be an issue for RPOSC businesses seeking to allow marijuana smoking inside their business, as they could not qualify for the same exemption that hookah bars and cigar lounges receive. This could be solved via a simple legislative amendment, though holding the California legislature to the same level of political cooperation and proactivity displayed by the Colorado and Washington legislatures in legislating fixes to their respective recreational marijuana markets seems an unsafe bet at best. It would be easier to write the amendment into the final initiative’s language, although this would make future efforts to amend it difficult due to the vagaries of the California initiative system.

All in all, California has a number of options about how to create a viable marijuana market in 2016 that addresses issues raised by the states that have previously fully legalized marijuana. However, it will require political will and cooperation between the various interested factions within the California marijuana market, from southern California storefront retailers to Bay Area intellectual property entrepreneurs on up to Emerald Triangle growers and cultivators to properly create a uniquely Californian market that best serves California’s varied regions and constituents, while simultaneously providing a successful example for recreational legalization efforts across the country. Along with many other important decisions in the 2016 election, California’s voters will get an opportunity to collectively choose their state’s future and relationship with legal recreational marijuana: hopefully, this blog has educated you, the reader, be you citizen, policy maker and/or entrepreneur with a stake in the market, about the efforts being undertaken now and in the past to shape the form and nature of the nascent marijuana market by California and her sister states, and what relationship we, as citizens, want our state to have with recreational marijuana.

What We Don’t Know About the Black Market Workforce and Why it Matters for Successful Regulation of Recreational Cannabis

The danger of making assumptions about who makes up the black market labor force is illuminated by Keith Humphreys’s recent article – “The stereotype of the college-educated pot smoker is wrong.” In the article, Humphreys cites Professor Jonathan Caulkins, who is quoted as saying “Most of the marijuana market is more Wal-Mart than Whole Foods.” Yes, we all know that stereotypes are not often truly representative of the people they are trying to describe. But what was most interesting about the article (aside from the irony that Caulkins used a stereotype about where the poor shop in order to explain a stereotype we have) was the explanation for the college grad-stoner stereotype – that human beings “have a tendency to overestimate the representativeness of their own experience.” Meaning that the people who feed the discussion in our media and political culture (journalists, policy analysts, politicians, etc.) “portray and discuss the world they know, which in fact is a small slice of the U.S. marijuana scene.” Why shouldn’t we make assumptions about who makes up the black market workforce? Because successful regulation of the recreational marijuana market depends on turning the black market green, which requires transitioning the people within the black market to the legitimate market. Admitting there is a lot we don’t know about the black market workforce and their ability to transition to the state-regulated market is the first step in the process of determining what regulations best serve our purported state interests.

First off, it is important to establish that I am defining successful regulation as promoting public safety and preventing diversion of profits to illicit enterprises. Not only are these high priorities for California, these are the priorities of enforcement of the CSA outlined by the Cole Memo. Addressing these priorities serves the interest of the state and is the best option for avoiding the scrutiny of the federal government. From preventing distribution to minors to preventing growing marijuana on public lands, all of these goals are served by transitioning the black market workforce to the state-regulated market. While street level dealers don’t check identification, regulated marijuana storefronts will be required to. Legitimate business will pay taxes and keep financial records, preventing money from marijuana sales from going to criminal enterprises. Passing state regulations that present significant economic barriers and barriers related to criminal records will bar more individuals from participating in the legal market. Will those barred from operating in the legal market continue to operate their businesses illegally?

It is more likely we will have better information on this issue in California after state regulation. There is no good information on the black market workforce because it is not something that people discuss openly. The black market is characterized as such because it takes place in the shadows. It is meant to be a mystery to those on the outside looking in. Recreational marijuana is still illegal in much of the United States, and those on the supply side are unlikely to self-incriminate. If marijuana is legalized in California it is possible there will be more information about the black market because individuals won’t be silent for fear of prosecution. The information that we currently don’t know that would be valuable to this discussion is who it is that makes up the black market workforce and what their skills are, both within and outside of the marijuana industry.

For the purposes of this blog series, I am concerned with individuals currently working with illegal marijuana as their primary vocation, meaning people who do this as their main source of income (which does not necessarily equate to full-time). I am not focusing on the individuals who sell, trim, or grow as supplemental income for two reasons. First, they are less likely to have as large an impact on black market supply, therefore there are less worries about diversion if they continue to operate in the black market. Second, they already have an additional source of income. If they continue to work in the black market because they are barred from working in the state-regulated market, it is not because they are dependent on illegal work as their sole source of income. People who are willing to break the law for additional income should not be the focus of incorporation into the legal market because successful regulation will only work with individuals who follow the rules. There is something inherently different about those who break the law because it is the only way they can make a living or because they are politically or morally opposed to cannabis prohibition and those who break the law for some extra cash.

Now, within the group of people working in the marijuana industry as their primary source of income, there are different specializations, skillsets, and levels of skill. There are those on the production side, ranging from growers with years of experience to those who trim for a season, and then there are those on the distribution side. Within these groups it’s possible to discuss likelihoods and possibilities for transition to a state-regulated market in general terms. But the odds of an individual continuing to work in the black market if barred from entering the legal market depends on their skillset and reasons for working in the black market to begin with.

For those who are doing less-skilled work full-time, whether seasonally or steadily, any barriers may make a legitimate marijuana job not worth pursuing. Maybe even an application process would not be worth the trouble. The full-time grower and cannabis activist is more likely to jump through the hoops of the application process than someone just trying to make a dollar because they are personally invested in the concept of state regulation. This distinction is important when considering how barriers to entry into the recreational market will affect differently situated people in distinct ways. What will skilled growers with criminal records do if they can’t get a job in the newly legal recreational market? What if there are insufficient incentives to transition to the legal market? Odds are, like in Colorado, some growers will continue to operate in the black market.

While there is a lot of discussion about those growing marijuana, what about those selling it? This is the most important group when considering successful regulation as qualified above; dealers are making a lot of the money and are the access point to marijuana for users. It would seem that this group would be the most important to consider incorporating into the legitimate market. But unlike growing marijuana, where the necessary skills don’t change drastically moving from the illicit to legitimate markets, operating a storefront requires additional skillsets that the average dealer probably does not possess, i.e. managing employees and bookkeeping. Will there be a place for dealers or will we be leaving out those who may be the most important to include? If excluded, will they continue to operate in the black market?

The job market outside of recreational marijuana could affect an individual’s propensity to continue operating in the black market. Barriers to non-marijuana-related employment might leave some stranded. Work experience, education, and criminal records all affect an individual’s ability to find a job. When a person has been selling or growing marijuana illegally for a living, connections outside that industry might be hard to come by. Additionally, filling out the work experience section of a job application could be tough. Individuals with criminal records are the most likely to be barred from entering any state-regulated market in California, and they are also less likely to find gainful employment elsewhere. We know that communities of color are more likely to shut out by barriers based on criminal records because of disparate enforcement, creating a heightened inability to transition from the black market. We already know criminal records limit job opportunities outside of the marijuana business. It appears as though the one thing we can know for certain is that the communities most injured by the failed war on drugs could continue to be left behind in the new paradigm of state regulation.

Ultimately, every individual in the black market has a unique circumstance. Considering there is so much that is unknown about the makeup of the black market, it is best to operate under the assumption that there are certain ripples and effects of legalization that we can’t plan for. We don’t know if someone is going to continue growing and selling marijuana illegally, turn to selling harder drugs, or go into a different industry, and we don’t know what their motivations will be. If we want successful regulation, we need to turn the black market to the legal market, and frankly we don’t know enough about the existing black market to make sweeping statements about what people will do if they can’t work within the state-regulated system. This is why it is important to build a market that will be as inclusive as possible, without compromising the integrity of state regulation.

While the market needs to be inclusive enough to bring the black market workforce into the fold, there also needs to be the financial incentive for people to want to work in the state-regulated market. In my next post, I will explore the economic barriers to entry to existing marijuana markets with a focus on capital requirements and finding the balance between supply and demand. Specifically, I will be comparing the recreational markets in Colorado and Washington and notable medical marijuana structures in other states, looking ahead at what would be best for California.

Monopolistic Competition: Napa Valley Wine Industry As A Model For California Cannabis Cultivation

historical_photo_sign_napa

In response to Ohio’s new recreational marijuana ballot initiative Keith Stroup, founder of NORML recently wrote, “Big money has entered the [marijuana legalization] picture, and we will have to deal with that. I prefer to keep the focus on personal freedom and stopping the arrests, but in some states we may have to swallow hard and accept legalization that is profit driven.” He said this in reply to Ohio’s new marijuana bill ResponsibleOhio. While I agree that big money will drive legalization, it is my opinion that Mr. Stroup is overstating the inevitability of the oligopoly market structure. I advocate for a middle ground that has been successful in other agricultural markets similar to cannabis, the Napa valley model of monopolistic competition. Monopolistic competition allows the little guy to compete with the big guy so long as his or her product is valued and therefore marketable. An oligopoly that allows a few key players to both persuade with their financial contributions, and dictate market structure, is not setting good precedent. If the government insists upon a monopolistic competition structure, big money will flow and small growers will be able to compete with larger growers. This model also promotes economic stability by keeping small growers viable, therefore increasing participation in the legal market for current cannabis famers. There is an answer out there to these goals and the Ohio Oligopoly is not it. California cannabis legalization can adopt the Napa model being advocated by growers in the Emerald Triangle that will encourage big money to align with small sustainable growers in a market dictated by the government, not big money.

In monopolistic competition there are many sellers with differentiated products on the supply side and many buyers creating demand based on preference, letting the market determine price and quantity. This is different from a monopoly where there is only one supplier and the buyers are subject to price fixing. The wine industry is an excellent example of monopolistic competition; the market is determined by many varieties, differentiated by growing regions, and consumer preference/demand for taste, price and advertising. There isn’t one market for wine, but many different ones depending on your price, tastes and brands. People select within reds or whites, or even within chardonnays or pinot noirs. This is why “wine” is a bundle of monopolistic markets, not a single undifferentiated market.

In contrast, ogopolistic markets are less competitive because several large firms have disproportionate control of the market. The cell phone industry is an example of an oligopolistic market in the U.S. where AT&T, Verizon, Sprint and T-Mobile determine price and we the consumers do not have any meaningful choice. To quote T-Mobile “[t]his is an industry filled with ridiculously confusing contracts, limits on how much data you can use or when you can upgrade, and monthly bills that make little sense,” and yet over 91% of American adults own a cell phone.

ResponsibleOhio would establish an oligopolistic market. According to the ResponsibleOhio website:

“There are ten initial commercial growing sites. They will be operated by separate companies and have to compete with each other on price and quality, which is the exact opposite of a monopoly. There is no coordination between them, they will be trying to make money by selling the best goods at the best prices to stores, dispensaries and manufacturers.”

Although ten cultivation licenses would not qualify as a monopoly, the amendment was introduced and paid for by the ten companies who will receive the ten cultivation licenses, making it look a lot like an oligopoly. We do not know enough about the marijuana market to be sure, but based on the fact that Colorado has approximately 800 cultivation licenses, it would stand to reason that 10 competitors, compared to 800, would have disproportionate control of the market and therefore the upper hand on cannabis price determination in Ohio.

After substantial pushback, the ResponsibleOhio Amendment added adult at home, non-commercial cultivation of four plants so long as that adult obtained a license. In short, if you are an adult marijuana user in Ohio, you can obtain a license to grow four plants that may or may not produce the amount of cannabis you need, or be at the mercy of the ten companies who proposed, paid for, and now own the cannabis cultivation market. Based on the above discussion of oligopolies, you can see why citizens of Ohio may not want this Amendment to pass.

On the other hand, if this is the only way to obtain access for medical marijuana users in some states and protect them from being criminalized for using medicine, we may have to accept “big money” and oligopolies as the lesser of two evils.

California is not Ohio, however. It is a progressive state when it comes to medical marijuana as demonstrated by being the first state to decriminalize and legalize medical marijuana all the way back in 1996. Because of this, California already has a cannabis cultivation industry supplying both medical marijuana retailers and illegal dealers. Some say that the lack of strict regulation on cultivation and other aspects of the medical marijuana market in California is genius; some say it is the worst medical marijuana legislation in the country. Irrespective of these opinions, California is known for its high quality and locally produced cannabis.

Recent polls in California show support for legal recreational marijuana use at 53%. Transitioning illegal growers into legal growers will be a determining factor in the success of any legislation with the goal of stamping out the black market. Trying to bring black market growers into a legal market is better because you’ll discourage other forms of crime that may happen if these people are simply pushed out. For California, the real question becomes what kind of legal recreational marijuana market can legislators, big money, and growers agree upon to ensure compliance and promote legality. One way to do this is to ask the growers.

As I talked about in my last blog post, at least 25% of Humboldt County’s economy is based on dollars from the illegal cannabis market. Because of that fact, this region faces a disparate impact with the predicted 2016 legalization of their illegal cash crop. However, the black market notoriety Humboldt has for its ability to produce large quantities of high value cannabis could provide a mutual benefit for local growers and state legislators. Both want to maintain their respective constituencies and to create rational and effective cannabis policies. The great news is California Cannabis Voices- Humboldt (CCVH) and Emerald Growers Association (EGA) have a solution- protect small cannabis farmers.

Cultivation and policies that provide a pathway to regulation for the states robust network of diverse cannabis farms was the focus of last month’s State of Cannabis Growing in 2015 conference hosted by the EGA. Simultaneously, EGA and the Mendocino Cannabis Policy Council (MCPC) are collaborating and working with Jeremy Daw of ForteFive Consulting to produce an economic white paper to highlight the importance of the cannabis market in Mendocino County. Mr. Daw is in the middle of his research but has already come to some important conclusions. According to Willits News, Mr. Daw believes marijuana has “low cross price elasticity and is fungible and that this quality will make it difficult for boutique growers competing in a market where large central valley farms are producing the product very cheaply.” Most products in monopolistic competition markets share these qualities. “However, if the state enforces regulations concerning regional and appellation, as with wine, it would create a way for growers to clearly signal the value-added nature of their product to consumers. Then small boutique cannabis growers, like Napa valley wineries, could be competitive.”

Perhaps in response to Mr. Daw’s call for state support of small cannabis farmers, Mendocino County CEO Carmel Angelo, 3rd District Supervisor Tom Woodhouse, and 2nd District Supervisor John McCowen participated in the first Northern California Regional Summit on the Economic Impacts of Legalized Cannabis on March 5, 2015. Representatives from the California State Association of Counties (CSAC) and the Rural County Representatives of California (RCRC) also attended the Summit. The goal of the Summit was to develop a regional and unified position statement to help shape state legislation. While the primary focus of the Summit was on the potential economic impacts on the region, additional critical topics included environmental impacts, regulatory framework and other local government issues.

CSAC provides a variety of lobbying and advocacy services for all 58 California counties. With regard to cannabis, CSAC’s medical marijuana policy supports the right of individual counties and their supervisory bodies to determine how to enact regulations, prohibitions and guidelines regarding all aspects of the cannabis industry.

The RCRC is a 34-county membership organization which also provides advocacy and services, but with a more focused mission of addressing issues that pertain to rural areas. The RCRC supports a statewide regulatory program which would include licenses to grow, transport, distribute and sell cannabis products, uniform standards for cannabis potency, proper labeling and an allowance for “appellation” or branding. It strongly supports environmental enforcement and believes that the composition of a state cannabis oversight board should include several rural county supervisors or representatives.

The Napa model is the height of the monopolistic competition market structure coupled with state enforced regulation. The Napa model creates an environmentally friendly as well as economically salient world-renowned smaller growers market. Both CCVH and the EGA are advocating making regions of the Emerald Triangle the next Napa Valley. Monopolistic competition is necessary to create the Napa Valley model. In order to create competition between smaller cannabis farms, the state will have to protect and enforce regulations concerning region and appellation of cannabis. The current California law regarding wine labeling could act as a model. Wine labeled “Napa” or “Napa Valley” must be made from 75% grapes from Napa and be produced within the state of California. (Bus. & Prof. Code §25241, Bronco Wine Co. v. Jolly). Napa Valley wines sell for between $50-$100 a bottle. California law prohibits wine companies like Charles Shaw from labeling their two dollar wine as being “from the Napa Valley” without meeting the above criteria.

CCVH proposed legislation mirrors Napa land use ordinance in three ways. First, the ordinance recognizes the unique appellation of Humboldt County cannabis and recognizes rural agriculture of the plant as cultural heritage. Second, it proposes a local commission to regulate the quality and environmental impact in order to hold the label “Humboldt Grown” cannabis in the same esteem as Napa’s registry. And third, it designates four different types of farms based on square footage and the regulation and licensing needed for those farms. The smaller the farm the less regulation is needed, which incentives smaller farms over larger farms. It appears as if the authors of CCVH land-use ordinance are teeing up to be the next Napa Valley.

In conclusion, a big money and oligopolistic model of cannabis legalization is not a foregone conclusion. By utilizing the framework of regulation and competition in the highly successful wine market in California, our legislators have a road map to follow which can lead to economic stability in the Emerald Triangle. A mode of legalization that promotes small business, encourages healthy competition, and keeps small farmers afloat is low hanging fruit well within our reach.

Excise Tax: What is it good for?

A recent Huffington Post headline read “Legal Marijuana Has Already Generated $15 Million For Schools”. The funds are appropriations from Colorado’s marijuana tax revenue. The appropriations weren’t the result of magic, but were instead the result of specific terms in Colorado’s Amendment 64 that levied an excise tax on recreational marijuana and specifically dedicated that revenue to schools. An excise tax is a tax on the sale or use of a particular good or service. It is more commonly known as a sin tax and is typically attached to goods or services deemed to be harmful or otherwise discouraged (e.g., alcohol, tobacco, and gambling).

An article from the Canna Law Blog outlines four government purposes for levying excise taxes: “1) generating revenue; 2) tailoring the tax burden to those that benefit from the services the excise tax funds; 3) controlling externalities; and 4) discouraging consumption of potentially harmful substances individuals might over-consume absent taxation.” The third and fourth purposes are the most relevant to an excise tax on marijuana, with the primary focus on controlling externalities such as youth use, prevalence of illicit markets, and marijuana abuse.

At first glance, levying an excise tax seems to be an obvious choice. But, as I argued in my last post, there are a lot of “unknowns” about how the marijuana market will respond to legalization. There is also an issue with whether the marijuana market is well-suited to an excise tax. While market research is limited, current research shows marijuana to be largely inelastic in demand. That means that market demand doesn’t change dramatically with price changes, so raising the price via taxation won’t decrease demand. Teens aged 12-17 are the only group showing any relative price sensitivity. If these numbers are true, an excise tax on marijuana won’t help control many externalities and won’t discourage consumption because people will be happy to pay more, not consume less. Even if consumption didn’t decrease, however, revenue generated from an excise tax would benefit California and could be earmarked for programs that aim to improve social welfare such as, education, youth substance use prevention, and more. This article explores some of the ways a marijuana excise tax revenues can improve social welfare and also explores some of the important drawbacks that an excise tax would have on California’s overall marijuana market.

California has experience levying excise taxes on alcohol, gasoline and tobacco products. An excise tax on marijuana is likely next in line given our familiarity and the precedents among states with recently legalized marijuana. Colorado, Oregon and Washington all implemented excise taxes on marijuana. As mentioned earlier, Colorado implemented a marijuana excise tax that specifically reserved the first $40 million raised each year for school infrastructure. Oregon and Washington, on the other hand, dedicated their excise tax revenue to a variety of different programs including, but not limited to, school funding, research on marijuana’s health impacts, youth education, enforcement of new regulations, and similar programs focused on reducing externalities. California should prioritize funding research with tax revenue given the lack of reliable data currently available. There is great need for scientific research that analyzes the health and intoxication effects of the 80 plus compounds in marijuana, the development of reliable testing modules for quality control, and also DUID. Sociological research is also important because marijuana’s current illegality severely limits our ability to gather reliable data on consumer usage patterns, the true size of the market, user quality of life, and long-term social outcomes (e.g., user productivity, mental health, and increases in overall usage).

An excise tax on recreational marijuana has both positive and negative implications for society. On the positive end, the funds collected from excise taxes can be dedicated to a particularized cause. For Colorado it is school infrastructure; for Oregon and Washington it is a host of various social programs. Either way, the excise tax revenues guarantee funds to specified causes that aim to improve social welfare.

The downside to sin taxes is that, by its nature, the tax is typically associated with the sale and/or use of a particular good or service, which presents a very costly issue for marijuana businesses. Ordinarily, businesses can deduct the costs of doing business—such as materials, rent, advertising, etc.—from revenues, meaning that they pay tax only on profit. Under federal law 280E, however, marijuana businesses cannot claim these deductions. Instead, they have to capitalize those costs and report them as cost of goods sold (COGS) once the product is actually off the shelves. However, COGS only includes direct costs of production and labor: it does not include all costs.

Given the state of federal law, recreational marijuana businesses subjected to a state excise tax will most likely not be able to deduct those taxes from their federal bill—meaning that they will have to pay for it twice. Let’s say the wholesale cost of an ounce is $50 and a retailer has to pay $50 in excise tax when she buys it from the grower. The retailer then passes the cost on to the consumer and adds $50 in profit, making the total cost of the ounce $150 ($50 to he grower, $50 excise tax, $50 markup). But even though the profit is only $50 in this scenario, the retailer cannot deduct the cost of the excise tax and instead has to pay tax on $100 ($150 revenue minus only the cost of the goods from the grower, $50). The retailer pays the excise tax and then, when that cost is passed on to the consumer, the reimbursement for the excise tax has to be reported as income. This is not a problem with excise taxes, but more a problem of excise taxes combined with 280E.

One negative aspect of these federal costs is that they force businesses to impose much higher pre-tax prices. High prices post-legalization could prove to be costly for society by way of preserving the dominance of the black market. Marijuana businesses also suffer huge profit losses due to the combination of the federal tax costs and state imposed tax burdens, such as excise taxes. These combined costs may make it difficult for such businesses to survive tax season, never mind make any profit. There have been suggestions that a potential cure may be as simple as imposing the excise tax on marijuana production so it could be included in COGS, but it is unknown whether the federal government will accept such clever maneuvering. For now, federal deduction exclusions remain a very real detriment to marijuana businesses profit margins and their ability to thrive in this burgeoning market.

Why should we care about whether marijuana businesses profit? For starters, the livelihoods of Californians depend on the state’s economic success. In 2013, California was ranked the 8th largest economy in the world. That makes for a very large pool of employees and individuals dependent on California’s economic health. Moreover, according to the ArcView Group, California’s legal marijuana market is the largest in the U.S., worth an estimated $1.3 billion. Colorado has a smaller market but legalization still created upwards of 10,000 new jobs for Coloradans. Even if California market estimates are optimistically high, the numbers and experience in Colorado reveal that marijuana business failures post-legalization could have crushing results for Californians. Thousands of individuals who invested their lives and money to this burgeoning industry would be thrust into unemployment or, worse, driven to the black market. All things considered, it would be prudent for us to examine the consequences federal deduction exclusions have for California’s economy post-legalization.

The takeaway from today’s discussion is that there are social but also economic harms that a marijuana excise tax can offset or exacerbate if not thoroughly considered in tandem. Additionally, an excise tax is just one mechanism by which the positive outcomes discussed today can come to fruition. The state could also achieve these through other forms of taxation or by funneling a portion of the funds from licensing fees into research or other worthy causes. As my title suggests, the discussion of levying an excise tax on marijuana really boils down to the question, “What is it good for?” Recall the metaphor of the marijuana tax seesaw from my first post. The consideration of a marijuana excise tax has a similar seesaw; this seesaw has competing social interests on either end. On one end we can generate funds for projects that increase social welfare (sociological research, reducing/preventing youth access, elimination of marijuana criminality), and on the other, we can increase socio-economic health (encourage new businesses, move black market participants into legal market) by generating less tax revenue to allow new (local) marijuana businesses to thrive. To remix a Motown hit song, “sing it with me, Excise tax- huh- what is it good for?…” Unlike Edwin Starr, we cannot unequivocally claim “absolutely nothing,” but it is still a worthy question to ask.

Alexa Quinn for Drug Law and Policy

Follow Drug Law and Policy on Twitter @DrugLawPolicy or Alexa @aquinn_dlp.

You can also contact Alexa Quinn by email: aquinn.dlp@gmail.com.

Let’s Go to the Cannabar: On-site Cannabis Consumption in California

Once only a distant dream of social activists and enthusiasts, the reality of completely legal marijuana in California now appears to be a distinct possibility with the upcoming 2016 election. (Recent polls here and here) If California goes the route of an increasing number of Western states, whose ranks swelled to four with the recent 2014 midterms (adding Alaska and Oregon to Colorado and Washington, who officially legalized in 2013), Californians will be able to legally purchase, grow, possess and consume marijuana without the doctor’s prescription currently required under Proposition 215.  Many important questions regarding the specifics of commercial marijuana cultivation and processing have been addressed by the legislatures of those previously enacting states, with more tweaking no doubt in store for California’s bill writers and legislators.

Fortunately for California, Colorado and Washington started their experiments with legalized marijuana markets first. This allows us glean important lessons and determine shortcomings within their regulatory schemes that California can improve upon if it votes to legalize. Specifically, the question of where to consume legal marijuana has dogged citizens and legislators alike in those first two enacting states. This presents an important opportunity for California to make its own mark on the progress of marijuana legalization, or more specifically, to determine the relationship California’s citizens want our state to have with legal marijuana consumption.

With this blog series, I will seek to shine light on the important issues behind that where question. I’ll detail the concept of what I call “retail point of sale consumption” (RPOSC), e.g. the consumption, smoking or otherwise, of cannabis on the site of a commercial venue created to socially enjoy marijuana. What potential forms those commercial entities eventually take is largely dependent upon how California crafts our regulatory schemes for marijuana, and what effects our current state and local anti-smoking ordinances will have on any potential RPOSC businesses; however, we can look to similar business entities (or the lack thereof) in Colorado, Washington (no longer operating as on site consumptions locations), and Amsterdam to gain a feel for what RPOSC could look like in California.

As mentioned, inherent to the where to consume legal marijuana question comes the important discussion of how California’s citizens envision their state’s relationship with marijuana. Do we see it as a “sin” product to be taxed and regulated similar to alcohol and tobacco? Or is there something socially or physically dangerous about marijuana consumption that warrants removal from the social/public sphere to a degree greater than alcohol or tobacco? While my classmates may dig deeper into those particular tax or moral questions, they are salient to addressing the utility versus social cost of allowing marijuana consumption to be brought out of the privacy of the home and into specific use lounges and social establishments.

If Californians decide that RPOSC is a good idea, what forms will it take? California could copy its current commercial marijuana entity, the medical dispensary, and perhaps expand currently existing exemptions for tobacco lounges (under state and local anti-smoking ordinances like AB13 enacted by the CA legislature in 1995) to allow marijuana consumption (via smoking, vaporizing, or eating) on those sites.

Marijuana businesses similar to actual cigar lounges could also be feasible, and do not depart far from currently existing business models. By age restricting access, and maintaining a closed venue with proper ventilation, marijuana enthusiasts could purchase marijuana buds or pre-rolled joints similar to a purchase made at a tobacco or cigar store, and stay to enjoy their purchase.

If Californians desire, they could embrace more commercially advanced forms of RPOSC. Marijuana “lounges” like “The Lazy Lion,” a lounge/social club in Colorado Springs, CO, sell daily or monthly “memberships” to access the private interior of the lounge. Inside, enthusiasts  have access to multiple video games systems and TV’s, an expansive selection of bongs and pipes, a DJ, different marijuana strains available for purchase, and a sophisticated concentrate (“dabs”) bar offering “happy hour” prices from four to five every day. Replace the marijuana sales with craft beer, and the above description could very well be about a well-appointed bar currently found in a California urban area where an individual may go to enjoy an alcoholic beverage.

To extend the bar example, the hypothetical California “cannabar”/ “budpub” could sell marijuana that they or those in their local area grew, noting to customers the particular flavors and production process for different strains in a similar manner as the vintner, brewer, or bartender may do for a wine, beer, or spirit. The “craft” model of beer in California and other states has created a lucrative and growing industry of breweries, gastro-pubs, and restaurants that has revitalized formerly undesirable areas in Oakland and San Diego, usually zoned for industrial/commercial uses; why can’t this same model be applied to marijuana production and sales, with a new generation of “bud-pubs” serving the same upscale, organic, locally-sourced food and marijuana from reputable local farmers and marijuana cultivators (or even the business’s personal grow) that current craft beer breweries and pubs tout?

Questions on the forms and functions that businesses offering RPOSC could take are important to answer if and before we legalize, as having a well-planned legalization scheme can benefit the state by providing firm rules for entrepreneurs and investors to rely on if they intend on investing any sums of money into RPOSC and other cannabis related businesses.

Finally, despite our state’s long social history with marijuana, including the aforementioned Prop. 215, California was not in the first group of states to fully legalize. While placing out of the top four is not ideal if looking for Olympic medals, in California’s case, slow and steady could indeed win the race. But how can California win the race when starting years behind? The answer: create business-savvy marijuana laws that provide the greatest benefit to our state and local communities, while identifying and minimizing social costs. If RPOSC is balanced correctly and intelligently, our regulatory model could serve as an example for states and communities around the country to allow the safe, effective and lucrative operation of retail point of sale marijuana consumption businesses.

-Philip Brody for the Drug Law and Policy Blog