Tag Archives: marijuana reform

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.

Current Regulation of On-Site Marijuana Consumption in Other States: What can California learn?

With the legalization of marijuana in four states and the District of Columbia, policymakers and citizens have had to address the important question of where we should allow adults to consume legal marijuana. Within a legalized state, where marijuana possession and consumption is a commercial act rather than a criminal one, it is important that potential marijuana smokers have clear rules delineating where they may and may not consume marijuana. How policymakers have and will address this question says a lot about how a state’s relationship with marijuana will develop, what forms its legal marijuana market will take, and if retail point of sale consumption businesses (RPOSC) will be allowed within the new marketplace.

Current municipal medical marijuana regulations in California, and the vast majority of Colorado and Washington municipalities, expressly ban on-site marijuana consumption at dispensaries and cannabis clubs. As I’m highlighting with this article, this has created issues both for adults who come from out of state and are staying at hotels or other multi-unit buildings, and citizens of the state who do not own single-family dwellings that are exempt from state anti-smoking ordinances (see, e.g., Colorado’s Clean Indoor Air Act and its medical marijuana amendment, and Washington’s Inititative 901 which extended the state’s smoking ban to indoor locations like bars and restaurants).

Such state and municipal smoking bans, originally aimed at tobacco smokers, have largely been interpreted to also cover medical and legal marijuana smoke, although a few municipalities in California, like San Francisco, have passed resolutions strengthening the smoking bans while clarifying that valid medical cannabis dispensaries are exempt. Indicating further progress, Anchorage, Alaska recently became the first U.S. municipality to expressly allow “hash cafes” by regulation, alongside the group of “cannabis lounge/bars” that have popped up in Colorado Springs, Colorado.

However, placing limits on where to consume cannabis is an ongoing issue for the vast majority of the municipalities in Washington and Colorado since their marijuana laws went into effect. While Colorado allows anyone 21 and older to purchase marijuana at licensed retail stores, they simultaneously ban the on-site consumption of marijuana or marijuana byproducts on dispensary grounds, while also providing authority via the Colorado Constitution Article 18 Section 16-6(d) for landlords and other property owners to ban/regulate marijuana usage and possession on their private property.

Colorado’s legislation also left room for cities and municipalities to craft specific regulations for their area. For example, both the city of Denver, in section 24-408 of its municipal Health and Sanitation code, and Boulder,  in section 6-16-8(a) of its Health, Safety, and Sanitation code, promptly took the opportunity to clarify Colorado’s ban of public consumption to extend to specific on-site consumption bans for retail locations. Washington also bans on-site consumption at licensed marijuana retail locations (section 14(5) of the enacting legislation).

The result of the already existing smoking bans, plus the ongoing battles around official definitions of “public consumption” written into regulations drafted by local municipalities, have led to cannabis consumption being largely restricted to private single dwelling homes, even in states that have legalized marijuana’s possession and consumption. The lack of places to consume cannabis has even been reported to lead to an increase in negative outcomes for marijuana users: without a place to smoke or vaporize cannabis, they instead eat an edible, which for inexperienced users can be problematic.  (An article on the difference between smoking marijuana and eating marijuana edibles notes that onset of effects can take anywhere from a half to two hours versus the near instant impact of smoking or vaporizing). But should consumption be limited to the privacy of a specific type of home, to the exclusion of people who don’t have similar access? For the marijuana market, what does that mean for adults who wish to travel into the state for potential “marijuana tourism” and for individuals who don’t live in or have access to places where they can consume cannabis products legally?

In Colorado, tourists travelling into the state to engage in cannabis tourism are limited as to where they may consume their newly purchased marijuana. A secondary market has sprung up offering “marijuana tours,” where a tour van or limo drives paying customers from dispensary to dispensary in a manner similar to a wine tour, thereby allowing the passengers to enjoy their purchases in between destinations within the “privacy” of the vehicle.

For a marijuana tourist, the question of where to sleep after such a tour is important. As noted above, the Colorado Constitution allows private property owners to ban marijuana use and possession on their properties. This includes hotel owners who may wish to prohibit individuals who are merely in possession of marijuana from staying on their premises, not just those who wish to consume it there. The Colorado Clean Indoor Air Act limits smoking in hotels to 25% of the available rooms, so even if entrepreneurial business owners wanted to establish a marijuana-friendly hotel, they would still be limited in their ability to do so. Washington has a similar 75% for rooms in a hotel under their smoke-free requirement in its Clean Air Act, although the Washington Lodgers Association, a trade association for the states hoteliers, has made no additional recommendations besides suggesting that hotels promulgate a clear marijuana policy for their guests. Despite the lack of clear rules, online searches for hotel rooms in legal marijuana states have soared close to 50% as more and more people see marijuana-friendly states as viable vacation sites, providing willing and entrepreneurial hoteliers a growing market to cater to.

In addition to the current businesses mentioned above, it seems there are opportunities to alleviate these consumption issues through the responsible development of businesses allowing on-site consumption. RPOSC businesses such as “budpubs”, “cannabars”, and “vape lounges” that I mentioned earlier in the article and in my first post could simultaneously alleviate public-use issues, generate additional tax revenue for the state, and serve as lynchpins for economic redevelopment.

Currently, in legalized states and for California’s medical system, municipalities may lawfully restrict the locations where dispensaries exist. For Colorado, the combination of local zoning restrictions prohibiting dispensaries within residential and main street zoning areas, plus a required 1000 feet separation from schools, childcare and rehab facilities, has resulted in dispensaries usually being located in the outskirts of urban areas generally zoned for commercial and industrial uses. Some observers, like Professor Jeremy Németh from the University of Colorado Denver, have pointed out this often means dispensaries are located in socio-economically disadvantaged areas, whose residents are unable to mount the “not in my backyard” campaigns to local civic and economic leaders in order to have the dispensary located elsewhere (Read the full paper . While retail point of sale consumption businesses will no doubt face similar outcries, being able to elucidate the beneficial elements of redevelopment through “green” entertainment districts with RPOSC locations to these areas will certainly help create a positive response. Already, elected officials have realized the value of retail medical marijuana facilities in their localities: Professor Németh’s paper mentions Oakland Councilwomen Rebecca Kaplan, who cites medical marijuana businesses as a key driver of revitalization of the Uptown neighborhood in Oakland that had previously been vacant and underdeveloped. This same value, if properly regulated, can be derived from RPOSC businesses as well.

For the creation of RPOSC businesses to be beneficial to the quality of life and economic health of a community, there must be a comprehensive system for zoning and regulating where these businesses can exist. This must include plans in advance for limiting the potential negative side effects such as public over-consumption, smell, and increased loitering and foot/vehicle traffic, and maximizing the positive benefits they can bring to a community through increased land values, increased economic activity continuing into secondary markets like entertainment venues and restaurants, and  more  jobs.

If California legislators and city government officials look to the already prosperous examples of craft breweries, wineries, wine bars and brew pubs, they may realize a successful model already exists, currently overseen by the California Department of Alcoholic Beverage Control, to regulate future on-site consumption businesses. However, future RPOSC establishments in California must confront another regulatory hurdle besides zoning: our state and local indoor smoking bans.

As mentioned above, Colorado and Washington both ban the indoor smoking of tobacco through their state clean indoor air acts. Additional amendments later extended these provisions to also cover marijuana. However, within both acts are a few exceptions. For instance, Colorado has exemptions for “cigar-tobacco bars” and workplaces not open to the public with 3 or fewer employees in section 25-14-205 of their Clean Indoor Air Act, while Washington provides almost no exemptions beyond that for private residences and certain private workplaces under section 70.160.060 of their Clean Indoor Air Act.

In Colorado, this exemption for workplaces not open to the public has been used by at least one private marijuana lounge, Club Ned in Nederland, Colorado. According to Club Ned’s attorney Jeff Gard in an article published about the club, the major hurdle to opening a cannabis café was the state’s Clean Air Act. But he found inspiration from the way Veterans of Foreign Wars posts allowed members to smoke indoors: if they could structure their business as a private, members –only club, with restrictions such as membership dues, having a certain percentage of their revenue coming from those dues, few employees, and members bringing their own cannabis, they could operate within the Clean Indoor Air Act. After working out additional zoning issues with the town of Nederland, the club opened in April 2014 and has operated successfully ever since.

Because similar restrictions on indoor smoking exist within California’s Clean Air Act, along with similar exemptions for tobacco shops and smokers’ lounges, any RPOSC businesses in California would have to fall under existing regulations or seek to have additional exemptions created for them. In order to qualify as a smoker’s lounge or tobacco shop under the California Indoor Clean Air Act, the business’s “primary purpose” must be the smoking or sale of tobacco products. The California Attorney General in 2011 issued an opinion on this meaning by clarifying that food or alcohol cannot be served at a smoker’s lounge or tobacco shop, or it alters the primary purpose of the establishment away from tobacco sales or consumption, thus losing its exemption under the Clean Air Act. Similarly, the California Attorney General also found that bars and taverns with 5 or fewer employees were not exempt from the Act and thus could not allow smoking within the building. Unless new exemptions are created for any potential marijuana RPOSC businesses, the above restrictions provide tough but not insurmountable restrictions on creating and running a potential marijuana lounge.

Another potential avenue for a marijuana RPOSC business comes from the idea of a “vaporizer lounge,” which could potentially avoid the restrictions on smoking inside businesses. However, with the rising popularity of e-cigarettes, California has been wrestling with the idea of banning their use entirely. A recent bill in the California Senate by Senator Mark Leno of Sacramento would seek to broaden the definition of “tobacco product” in the current anti-smoking laws to include electronic cigarettes in order to ban them in bars, restaurants, hospitals and other workplaces. However, there appears to be an exemption for medical marijuana, as the bill states that its “provisions do not affect any law or regulation regarding medical marijuana.” What effect this would have on the potential for legal marijuana on-site consumption businesses is unknown, but either way, requiring that RPOSC businesses only allow vaporizing of marijuana would be a possible compromise clarified by the legislature and/or a loophole in the law for businesses to exploit.

In my next article, I will focus in-depth on the growing handful of RPOSC businesses in legalized states that are currently dealing with similar zoning and regulatory issues, and what lessons can be learned by future similar businesses and municipalities in California as to where and how to zone where such RPOSC businesses can exist for the betterment of both the business and municipality.

What About the Children Who Want to go to College?

As a graduating law student, I spend a lot of time thinking about my student loan debt. While the thought of how much money I owe the government occasionally paralyzes me with fear, I’ve grown to appreciate the fact that I qualify for many forms of financial aid and have to overcome virtually no obstacles when it comes to asking for educational loans.

Students with drug convictions, both adults and juveniles, have significant trouble obtaining financial aid. Had I been misfortunate enough to have picked up a marijuana or drug conviction during my time in school, it would have been significantly more difficult for me to secure student loans. Few students are aware that if convicted of a drug offense, they become ineligible for federal financial aid (grants, loans, and work-study) for certain periods of time, depending on the nature of the offense and when it happened. The following chart summarizes financial aid eligibility for drug convictions:

Offense Possession of Illegal Drugs Sale of Illegal Drugs
First 1 year of ineligibility from date of conviction 2 years ineligibility from date of conviction
Second 2 years ineligibility from date of conviction Indefinite period of ineligibility
Third Indefinite period of ineligibility Indefinite period of ineligibility

Students with drug convictions may be able to regain eligibility if they successfully complete an approved drug rehabilitation program or pass two unannounced drug tests, in which case they will not have to wait the full term of years to receive aid again. Regardless, if they are convicted of a drug offense while receiving federal aid, they may be held liable for returning the aid they received. The nature of financial aid distribution means that if someone were convicted on October 1, 2014 of a drug offense, then they would have to return proportional tuition and living expenses for the rest of October, November, and December, and any yearly aid that was distributed at the beginning of the school year. All these complications affect anyone receiving aid, regardless of his or her age.

But this is a column about the children. So I want to focus on those we’ve already become well acquainted with: justice-involved kids. I already discussed how justice-involved youth interact with marijuana prohibition through the juvenile courts, and now I want to consider how a marijuana conviction can continue to affect a child, even after they become an adult. Today we will consider the story of Luis, another fictional youth whose story is not unlike many I have encountered working in juvenile court.

Luis was a kid trying to do his best in some rough circumstances. He attended high school and graduated with his diploma just before his 18th birthday. He had been accepted to and planned to attend a great four-year state college, and he was very much looking forward creating a career for himself. Luis’s family was emotionally supportive of him and his college plans, but they weren’t going to be able to contribute financially. While Luis knew he was eligible for financial aid, he also knew making some extra money whenever he could was a good idea. So he started selling pot to some local college kids. One day, Luis was caught giving a friend half an ounce. Luis was arrested and brought into juvenile court.

Luis was lucky in that he was charged only with “giving a gift less than an ounce,” a misdemeanor under California law. He receives only probation. However, his college plans are now in jeopardy, since he is no longer eligible for financial aid. He is now faced with two options: he can either wait a full year to be eligible for financial aid again or pursue early reinstatement by way of a treatment program or random drug testing. Both options may, in the long run, still allow Luis to pursue his degree, but they both come at the high cost of time. Even if he pursues early reinstatement, random drug testing may not necessarily be expedient, and rehabilitation programs are often 45 days or longer. Any period of time preventing a prospective new college student from beginning their studies can be discouraging, especially if it’s a delay caused by an interaction with the justice system.

I gave the example of a misdemeanor marijuana crime for Luis’s story, but anyone convicted of a “drug offense” is subject to federal financial aid suspension. But what counts as a drug offense? It’s very unclear. When filling out the FAFSA (Free Application for Federal Student Aid), applicants are asked if they have ever “been convicted for the possession or sale of illegal drugs for an offense that occurred while you were receiving federal student aid?” A U.S. Department of Education regulation states that a “conviction means only a conviction that is on a student’s record,” however “record” is never defined. Under California law, simple possession of marijuana is only an infraction which does not appear on criminal records. A marijuana infraction may therefore technically affect student aid, but since it does not appear on a student’s criminal record, students arguably aren’t obligated to report it on their FAFSA applications since it does not meet the Department of Education’s definition of “conviction.” Juvenile convictions pose similar confusions, since juvenile courts do not technically “convict,” rather they “find petitions to be true” or juveniles “admit petitions.” Further, the same Department of Education regulation which authorizes the suspension of financial aid for any student convicted of offenses under federal or state law involving the possession or sale of illegal drugs further defines “illegal drugs” as those defined by section 802(6) of the Controlled Substances Act. Section 802(6), unsurprisingly, includes marijuana. More precisely, it includes all drugs labeled schedule I, II, III, IV, or V; marijuana is a schedule I drug. So it’s a reasonable assumption that the Department of Education intended to include marijuana offenses in suspension eligible offenses.

The question for California, and Californian students, therefore becomes: will legalizing recreational marijuana for adult use change anything? In the case of simple possession, it’s possible that it will. If adult use becomes legal, then no adult will be charged with simple possession again, since it will no longer be a state crime. But which “adults” will be included in any “recreational adult use” laws? Most likely, Californians will follow suit with Colorado and Washington (and soon Oregon and Alaska) and legalize for adults over 21. This means that adults under 21 and juveniles will still not be able to legally possess marijuana, and that if caught, may face possession charges. These possession charges, likely infractions, would be subject to the same level of confusion as simple possession infractions today. Convictions other than simple possession will likely remain suspension eligible, since as misdemeanors and felonies they are convictions under the Department of Education’s definition, and marijuana will continue to be an illegal drug as determined by the Controlled Substances Act. It appears as though the only solutions, when it comes to federal financial aid, may be national legalization or rescheduling marijuana out of the Controlled Substances Act.

It is worth mentioning that students who do not qualify for federal financial aid may still be able to qualify for state financial aid. I won’t go down the rabbit hole of what federalist issues are implicated if California were to pick up the tab for students disqualified from federal aid, but suffice to say that it is a possibility, albeit a complicated one. It is further worth mentioning that state financial aid is traditionally significantly smaller than federal aid. Therefore, were California to provide aid to students ineligible for federal aid due to marijuana convictions, a much larger amount of state aid may be necessary.

Next time I will be returning focus to our juvenile children, and examining the consequences marijuana possession can have for kids in the context of schools.

Clare McKendry for Drug Law and Policy – Follow us on Twitter @DrugLawPolicy

 

Gambling with Tribal Marijuana

For this post I will look at the application of state criminal jurisdiction to non-tribal members while on tribal lands; first at the jurisdictional framework in general, and then at a brief history of federal Indian gaming regulations to better understand the legal limitations of tribal marijuana cultivation. In my last post I discussed Federal Public Law 280 (PL-280) and the delegation of criminal jurisdiction over tribes and their members to state agencies and courts. State criminal jurisdiction does not apply to tribal lands where the alleged crime is regulated—and not strictly prohibited—by states. This raises the question: Does state criminal jurisdiction under PL-280 extend to the activities of non-members of the tribe while on tribal lands? For example, if a tribe opens a “cannabar” for non-tribe members to purchase and imbibe marijuana while on tribal lands, would the actions of those non-members be within the criminal jurisdiction of California, the U.S., or the tribe? The answer to this question depends on whom we ask. The current U.S. Supreme Court case law and lower court statutory interpretations find that federal criminal jurisdiction (or state criminal jurisdiction in PL-280 states) over non-members extends to their activities on tribal lands. Which, continuing from the earlier example, non-members would be subject to federal or state criminal jurisdiction for acts committed on tribal land, and could be prosecuted for violating the state or federal law by purchasing marijuana for recreational use at a cannabar located on tribal lands. But a group of constitutional theorists argues that these activities are beyond the reach of state, and perhaps even federal, criminal jurisdiction in PL-280 states. What does this jurisdictional quagmire mean for tribes seeking to sell marijuana to non-tribal members for use on tribal lands? Is “casino”-style marijuana consumption and sale possible?

Does PL-280 extend state criminal jurisdiction to activities of non-members while on tribal lands? In Oliphant the U.S. Supreme Court ruled that tribal criminal jurisdiction does not apply to non-members, noting that “[n]on-Indians are not subject to the jurisdiction of Indian courts and cannot be tried in Indian courts on trespass charges. Further, there are no Federal laws which can be invoked against trespassers.”  Mark Oliphant was a non-tribe member residing on the Suquamish reservation in Port Madison, Washington. During the tribe’s annual Chief Seattle Days celebration, Oliphant was arrested by tribal police and charged with assaulting a tribal officer and resisting arrest. He was arraigned before a tribal court, and after bailing out; he filed for a writ of habeas corpus in Ninth Circuit relying on the claim that the Suquamish court did not have criminal jurisdiction over non-members. The Ninth Circuit found in favor of the Suquamish, and Oliphant appealed to the Supreme Court. The Court found that tribal sovereignty is not strictly geographical, and thus the tribal court’s criminal jurisdiction does not automatically extend over non-members while they are present on tribal lands. Rather, non-members are subject to the federal (or in PL-280 states, the state) statute that would apply if the crime had been committed outside of tribal boundaries. The Court did not question the tribe’s power to arrest, and in fact found that the tribal agencies must turn over and “not to shelter or conceal offenders against the laws of the United States, but to deliver them up to the authorities for trial.” It also noted that the basis for this policy was to provide protection for tribal members “from the violences [sic] of the lawless part of our frontier inhabitants,” or to put it another way, to protect the American Indians from non-members entering tribal territory and committing what would be considered crimes by the federal government had it occurred on non-tribal soil. Oliphant further elucidated that tribes have sovereignty over their members, and the right to assert jurisdiction where no Congressional jurisdiction has been asserted (or asserted and then delegated to states via PL-280).

Cohen’s Handbook of Federal Indian Law, the preeminent source for understanding the intricacies of U.S. tribal law, also lends clarity to the convoluted point of tribal jurisdiction over non-members while on tribal lands. Citing Oliphant as authoritative precedent, Cohen’s Handbook notes that even a regulatory PL-280 state law, which would normally not be enforceable in Indian territories, may be enforceable on tribal lands where it “affects non-Indians and survives the Court’s infringement/preemption test.” The test, as explained by the Court in Mescalero Apache Tribe is that “if [the state regulation] interferes or is incompatible with federal and tribal interests reflected in federal law [it is preempted], unless the state interests at stake are sufficient to justify the assertion of state authority.”

There are some critics that question whether the federal government acts within the scope of its constitutional powers by delegating inherently federal jurisdiction to states; an issue which has never been addressed by the U.S. Supreme Court in regards to the application of state law to tribal lands.

The lower courts that have addressed this issue have set aside the issue with minimal or circular analysis. In Anderson, James Anderson, a member of the Klamath tribe residing on the Klamath reservation, appealed his conviction of second-degree murder in Oregon state court to the Ninth Circuit. He appealed to the Court on the basis that Oregon state courts did possess criminal jurisdiction in this case as the homicide had occurred on Klamath land, and the defendant is a member of that tribe. The Ninth Circuit did not agree, and found that, “[t]he [Congressional] power over Indians was deemed not so inherently or exclusively federal as to apply beyond the extent to which the federal government has preempted the field, and the federal government could thus withdraw from the field and turn the subject matter back to the states when it chose to do so.” However, the presumption that the states possessed original jurisdiction over tribes, and that the federal government had preempted the state powers on those lands, is unsupported by statute, treaty, or constitutional amendment. Tribes, recognized in the U.S. Constitution as falling under the same umbrella of federalist powers as states and foreign countries, never entered into treaties with state governments to cede jurisdiction, but rather made treaties with the federal government to cede their jurisdiction in a limited manner. As Cohen’s Handbook notes, “[U.S.-Indian t]reaties must be understood as grants of rights from Indian people who reserve all rights not granted.”

The false presumption first promulgated in Anderson was relied on in other cases reviewing the PL-280 for its constitutionality. In Agua Caliente the District Court noted that, “Public Law 280, like other similar laws in recent years, is a withdrawal by Congress from its preemption in this field. It has done so in this case by express grant to the state of authority…to the extent that any further withdrawal by the Federal Government occurs, the sovereignty of the state becomes enlarged to that extent.” Again, there is no existing evidence or support of this presumption, except that this is the relationship between federal powers and state jurisdiction outside of tribal lands. The express purpose of federalism is for federal jurisdiction to extend to “certain enumerated objects only, and leaves to the several States a residuary and inviolable sovereignty over all other objects.” But this only exists where original state jurisdiction would otherwise exist. Keeping in mind that this issue has never been argued before the Supreme Court, it is possible that the Court would find in favor of the federalist principles, and rule that where the federal government has withdrawn from a jurisdiction, the sovereignty of tribes would become enlarged to that extent.

How does this relate to marijuana sales on tribal lands? Which criminal jurisdiction applies on tribal lands matters to non-members seeking to imbibe or purchase marijuana from tribe-operated dispensaries? Under the majority view, it appears that non-members cannot commit acts on tribal lands that are considered crimes in state or federal court. This is due in part to existing statutes and Supreme Court decisions, and seems to be the most largely accepted interpretation of the law. However, a splinter group of theorists among the minority view argues that the federal government cannot delegate its criminal jurisdiction to states. Under one interpretation of the principles of federalism this could mean that where the federal government has withdrawn from the field of criminal jurisdiction (i.e. via attempting to delegate this power to states) that jurisdiction is restored to the tribes. The tribes would have the criminal jurisdiction that would otherwise be granted to the states under PL-280, and could determine whether non-members could purchase or imbibe marijuana on their land. Of course, this is not a view supported by the existing case law, but since the Supreme Court has not addressed the question, it remains an argument to be made.

When first hearing of the interaction between PL-280 and the CSA for tribes, it may seem natural to conclude that the state criminal jurisdictional exception extends to non-members in such a way that “casino”-style marijuana sales (i.e. tribal dispensaries providing marijuana for on-site consumption by non-members) seem inevitable. To better understand why this not the case, an examination of the history of American Indian gaming is necessary. From the outside, it may seem a rather straightforward matter; tribal sovereignty in conjunction with PL-280 allows for casino and gaming in states that do not completely prohibit gaming (i.e. operating a state lottery). However, the power to organize casinos and gaming on reservations is still within the jurisdiction of the federal government. This is because the Federal Indian Gaming Regulatory Act of 1988 (IGRA) re-asserted federal jurisdiction to regulate the conduct of gaming on Indian Lands, established the National Indian Gaming Commission (NIGC), as well as a regulatory structure for Indian gaming in the United States, essentially closing the jurisdictional loophole left open under PL-280 by the Cabazon decision.

Based on Cabazon, which held that in PL-280 states where gaming is a regulated activity and not a prohibited activity (e.g., states with a state-operated lottery), tribal gaming was determined not to fall within the state’s jurisdiction to regulate. The Court further elucidated that only Congress “could effectively place limits on the Indian Gaming industry.” For precedential support, the Court relied on the Mescalero Apache Tribe preemption test mentioned earlier in this post. Within a year of the Cabazon decision, Congress passed the Indian Gaming Regulation Act (IGRA). The stated purpose of the IGRA includes the establishment of Federal Regulatory powers over Indian gaming and a Federal commission to oversee and apply such powers (NIGC). Cohen’s Handbook notes that although the IGRA does not mention PL-280, it operates to supersede state jurisdiction because it is a more recent statute asserting exclusive federal control over violations of Indian gaming. Under the IGRA, tribes are required to enter into compacts with the states in order to participate in Class III gaming, which includes all gaming not covered in Class I and II, specifically anything not closely resembling bingo or “social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as a part of, or in connection with, tribal ceremonies.” Tribes retain jurisdiction over Class I and Class II gaming; subject to any “prohibitive” limitations placed by states (very similar to the tribal jurisdiction limitations mandated by PL-280).

In those states where tribes have sought Class III compacting agreements, the state has not granted criminal jurisdiction as a result of the IGRA legislation, rather states have a per se veto power over Indian proposed regulation of such activities, as iterated in
§ 2710(d)(3) of the IGRA:

“Any Indian tribe having jurisdiction over the Indian lands upon which a class III gaming activity is being conducted, or is to be conducted, shall request the State in which such lands are located to enter into negotiations for the purpose of entering into a Tribal-State compact governing the conduct of gaming activities.”

The IGRA included a provision for tribes to file suit in U.S. District Court against states failing to enter into negotiations or that negotiate in bad faith these compacts with tribes. However, in Seminole Tribe the Supreme Court ruled that this provision was not within the constitutional power of the federal government, and that states were immune to suit by tribes under the Eleventh Amendment. Despite the fact that the language of the IGRA seems to be a broad grant of jurisdiction to the District Courts over suits brought by Indian tribes against States that had not consented, the language was held as “insufficient to constitute a clear statement of an intent to abrogate state sovereign immunity.”  Thus, tribal sovereignty was limited by the passage of the IGRA, but state sovereignty (under the Eleventh Amendment) was not.

This is important because there has been some recent discussion of state legislation in Washington essentially re-asserting state jurisdiction over marijuana cultivation or sale on tribal lands. However, any resulting legislation would be open to legal challenge. This is because while the federal government can re-assert federal jurisdiction via federal statute in states where PL-280 applies, such as it did with the IGRA, the principles of federalism do not allow for states to assert their criminal jurisdiction without direct delegation by the federal government. Those states either have criminal jurisdiction over drugs (where that drug has been strictly prohibited) or they don’t (where there is existing regulatory state legislation). In PL-280 optional states, or states that were offered the opportunity to claim state criminal jurisdiction under PL-280, but were not mandated to accept that jurisdiction, such as Washington, Arizona, and Montana, further analysis is necessary to determine whether PL-280 is applicable. Several of these optional states have state constitutional disclaimers that prevent PL-280 from applying (according to the McClanahan decision), and cannot claim criminal jurisdiction until these constitutional disclaimers were nullified. Cohen’s Handbook notes, “[i]f a state has not assumed jurisdiction under Public Law 280, it may not acquire jurisdiction over Indians independent of that Act.”  This is especially true in Washington, which is blocked from fully asserting criminal jurisdiction over tribes by its own constitutional disclaimer, and so would lack PL-280 jurisdiction on two counts; first it would lack jurisdiction under PL-280 because it has not fully assumed that jurisdiction, and secondly, because if PL-280 were to fully apply, the state regulates but does not prohibit marijuana sales and cultivation, and so would not have jurisdiction over the tribes that chose to engage in those activities.

As recently as March of this year, tribes were granted the ability to prosecute non-Indians for certain crimes under Special Domestic Violence Criminal Jurisdiction, including criminal violations of protective orders. While this federal action may partly overturn Oliphant, it is not clear whether this opens the door for greater tribal jurisdiction over crimes committed on reservations. If it did and tribes were able to determine for themselves what recreational drug use was allowed on their lands by non-members, the risk of investing in the marijuana industry would be largely alleviated.

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.

Marijuana and Tax: It’s Complicated

The other day I was walking my dog through a park and I saw two children gleefully playing on a seesaw. As I returned home and got back to work the image of the seesaw stuck with me. The seesaw is a great metaphor for the legalized marijuana tax conundrum because it demonstrates the challenge of balancing interests. If we imagine California’s marijuana tax scheme as the seesaw, we can see the Golden State’s two primary objectives sitting at each end: generating state revenue on one end and reducing externalities (social harms attributed to marijuana use) on the other. Although both objectives can play nice, if the interests are not balanced and cognizant of the other, one end of the seesaw will crash into the dirt while the other soars sky high. And the dirt in this case isn’t the playground kind that can be dusted off; it is muddied public policy that would incentivize the black market.

The good news is that balancing these objectives is attainable and reasonable. First, generating state revenue is attainable once a system to tax marijuana is in place. Colorado is a great example of this: it gained a new source of revenue by implementing a multi-faceted tax approach that generated $52,570,081 in 2014. The recreational marijuana market generated $40,968,203 alone. Second, tax can serve as a mechanism to offset some of the most salient social harms attributed to marijuana use such as youth access and use, drug crime, and the health risks of ingesting unregulated products.

The difficulty of deciding how to tax marijuana is not only in trying to balance interests. The idiosyncrasies of the marijuana market add to the difficulty of creating a balanced tax structure. We have very limited data on the marijuana market due to its status as an illegal drug. As such, it is difficult to gather reliable information about marijuana users and how they respond to market changes. This creates a lot of guesswork and “best estimations” which may be wrong and could create problems once in play within a burgeoning market. In addition, the marijuana plant itself is unlike anything else we have taxed before. Alcohol and tobacco are the nearest in kind to marijuana but both substances are easier to tax by nature. We are able to tax distilled spirits by alcohol content because alcohol is a homogeneous material that lends itself easily to testing. Marijuana, on the other hand, is not homogenous and technology still needs to be developed for reliable potency testing processes. The heterogeneity of marijuana plants also distinguishes it from tobacco because taxing marijuana by unit or weight is not as effective as it is to tax cigarettes (details of this are discussed below).

In order to meet our objectives we need to establish the type of tax, basis for the tax, the rate, the collection point, and the market structure that will best achieve our objective(s). None of these variables is mutually exclusive and there are various ways to stack them. For example, marijuana can be taxed by weight, potency, price, or even by product type (e.g., raw material, edibles, concentrates). The tax can be imposed on growers, processors, retailers, consumers, or some combination of these. Each of these combined, however, has different degrees of efficacy. If we really want to meet both objectives (revenue and reducing negative externalities), we’ll need to consider the different benefits and drawbacks to each approach. Each approach will require different tradeoffs and will have real-life effects on consumer usage, safety, and even business sustainability. The discussion on how to tax marijuana is lengthy and complicated. Today, the goal is to start the conversation by looking at the various tax bases and how each can help California meet its tax objectives.

Let’s move now to discussing how the various tax bases fare on the seesaw of generating revenue and offsetting externalities. First, a tax based on price is easy to administer but does not necessarily help control prices. This will not bring in much revenue if post-legalization prices plummet as predicted by many in the industry. Revenue aside, there are numerous other reasons price control is desirable. The most salient is thwarting youth access. It is well established that youth substance use rates are particularly price sensitive. Youth access and use decrease as prices increase. One important caveat to a price-based tax is that it only remains easily administrable if it functions in a horizontally integrated system. Rather than have “jacks of all trades,” horizontally integrated systems feature distinct entities with limited roles within the market (e.g., growers, processors, and retailers). The RAND study “Considering Marijuana Legalization” explains that a horizontally integrated system is preferable when imposing price-based taxes because they depend on the existence of a real price—normally, on an arm’s-length sale between unrelated parties. On the other hand, if prices do start and remain high, a price-based tax can be too high and push consumers into illegal black markets. Going back to the seesaw image, it is apparent that a price-based tax alone cannot achieve both objectives of legalizing marijuana. The seesaw of marijuana tax objectives can only come close to being balanced if we compromise the amount of revenue generated for more positive impacts on social harms. Further, the outcome of a balanced seesaw depends on multiple variables aside from price alone.

Marijuana can also be taxed by weight. Similar to a price-based tax, a weight-based tax is also easy to administer. It also has the distinct feature of bringing in a steady amount of revenue since it isn’t determined by market price. The difficulty of a weight-based tax is in the details. For instance, the weight of each marijuana plant changes over time due to drying and trimming and weight changes aren’t exact among each plant. We have to establish timelines for when marijuana plants should be weighed and our timelines may not coincide with the initial objectives of taxing the product. The main concern, however, is the risk that it will incentivize production of higher potency products. This is a disadvantage for three reasons. One, consumers may unwittingly ingest more potent products, which may lead to health and safety issues. Two, the tax base wouldn’t encourage consumers to purchase less potent products. Third, potential revenue for higher potency products would never be captured within the market.

Another option is a tax based on potency or product type which has the benefit of addressing more externalities but would be difficult to administer given our current lack of knowledge regarding marijuana compounds. It’s important to clarify that for purposes of brevity in this post, I am conflating potency and product type (some edibles might be less potent, others might be more). A tax based on potency and/or product type can be used to shape usage patterns and implicitly impose limits or restrictions on how marijuana can be consumed. Therefore, it is advantageous in the sense that it addresses more social harms related to marijuana use. For example, California could impose a higher tax on products that typically yield higher potency and are more difficult to dose appropriately (e.g., edibles and concentrates). This could encourage users to purchase products, such as raw marijuana, which is typically smoked. This could be a desirable outcome because our familiarity with this form of marijuana enables us to better predict behavioral outcomes and leads to shorter durations of intoxication. In contrast, California could promote lung health and discourage smoking marijuana by taxing the raw material higher than other ingestible forms. Potency could be measured by the amount of THC, CBD, or THC:CBD ratio. However, the difficulties and inaccuracies in current technology for testing potency pose an immediate obstacle to the feasibility of such a tax. Plus, even a single marijuana plant can have inconsistent potency throughout. Finally, our experiences with the tobacco and alcohol industries have taught us that higher taxes do not always have positive impacts on public health.

At its inception, any potency-based tax should have at least three features. First, a potency-based tax would have to be set in ranges. These potency ranges would need to be set high enough to discourage divergence to black markets. Second, any potency tax would need to include a provision for revision based on timely reviews of any developments in new information regarding potency ranges and/or limits. Third, the previous feature necessarily requires at least some of the revenue be dedicated to research that can advance the system. Research could explore various topics such as testing modules, scientific improvements in measuring potency, and studies on the effects different products and potency had on users’ intoxication levels.

This discussion of the various ways to tax is only the tip of the iceberg and will be covered in more detail in future posts. Of particular interest is the history of alcohol and tobacco taxes. Both can serve as a great resource for what works and what doesn’t in terms of taxing to affect use and offset social harms. After we cover the lessons learned from above, you can join me in the related discussion of which market structure (vertical or horizontal integration) better facilitates particular tax methods. Join me next time for a discussion on sin taxes and the impact they can have on the burgeoning marijuana market.

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.

Why Tribes Don’t Need Your Permission

Late last year the U.S. Department of Justice made an announcement that American Indian tribes may grow and sell marijuana on tribal land so long as they adhere to the federal conditions required of states that have legalized marijuana, and with the consultation of the local U.S. Attorney’s office. As a result of the announcement many tribes, including the Pomo and the Red Lake Band, are seeking to implement a regulatory framework that would adhere to those federal conditions. Others have voiced concern that the vague wording of the DOJ memo will leave tribes vulnerable to prosecution on the federal, state or county level. But what if California tribes did not need the permission of the federal government to cultivate marijuana without the threat of criminal prosecution?

The United States Supreme Court has recognized an exemption for tribal lands from the application of state law. For example, in Washington v. Confederated Tribes of Colville Indian Reservation the Court held that “tribal sovereignty is dependent on, and subordinate to, only the Federal Government, not the States.” However, where Congress has delegated this power to states, state law would be enforceable on tribal land.

Under Public Law 280, the federal government delegated criminal law enforcement to California and a handful of other states, making the state penal code enforceable on tribal land. This rule is subject to one caveat: if the state generally permits the conduct at issue, subject to regulation, it must be classified as a civil or regulatory charge, rather than criminal, and thus PL-280 would not authorize its enforcement on an Indian reservation. Furthermore, the definition of generally permitted conduct is extensive. The Supreme Court held in California v. Cabazon Band of Mission Indians that “even to the extent that the State and county seek to regulate short of prohibition, the laws are preempted” from application on tribal land. One possible conclusion is that by regulating marijuana, even for medical purposes, California has preempted state or county marijuana laws from applying to tribes.

Tribal law still applies, of course. And some tribes have strict anti-drug policies, which may be enforced by tribal police on those lands. However, those tribes that are within the borders of a state with PL-280 in effect would be able to independently determine how to regulate marijuana without the need to invoke the protection of the recent memo. What this means is that for tribes seeking to benefit from the restrictive nature of the marijuana market the fear of criminal prosecution can be at least somewhat alleviated (however, this blog post does not constitute legal advice; anyone seeking to take action must consult with a licensed attorney).

In my next post I will be considering whether PL-280 would also allow for “casino-style” recreational marijuana use, or the use by non-tribal members while on tribal lands, and if so, whether what the ramifications of such use would be.