The federal tax reform law that passed in December 2017 included a new incentive, the qualified opportunity zone (QOZ) regime.  The purpose of this tax incentive is to unlock and redirect trillions (yes, trillions) of capital gains into investments into new businesses, and substantial improvements to existing businesses, so long as those businesses are located in a QOZ (generally, designated  low income census tracts from the 2010 census).  The tax world has been abuzz about this enormous opportunity since the IRS issued taxpayer-friendly proposed regulations in late October.  Our summary of the QOZ regime is here, but the basic mechanics are simple: when taxpayers sell appreciated property (e.g., stocks or real estate) they can “roll” the gain into a new investment, with tax benefits for both the original “rolled” gain (deferral and up to 15 percent gain elimination) and the new investment (no tax on future gain).

In our summary, we highlighted the ability to secure QOZ benefits in urban areas, some of which are already attracting investments. QOZ benefits also are available for cannabis-business investments.  There are many QOZs in rural areas that are perfect for grow and processing operations; many urban and suburban QOZs may be good locations for retail outlets and dispensaries.

There are limitations on the types of business that can qualify for QOZ benefits, so no liquor stores, golf courses or sun tan parlors.  But Congress incorporated its “bad business” list from a Code section that has not been changed since 1986.  Accordingly, the “bad business” list does not include cannabis-related activities. (Please don’t ask us to explain why the cannabis industry is punished under one provision of the Tax Code but allowed to take advantage of another provision of the Tax Code; the best we can say is “it’s Congress.”)

So check the map before buying or building. You may find that some locations are more desirable than others, either because it will be easier to raise money from others, save taxes for yourselves, or simply turn out to be a neighborhood in which gentrification occurs more rapidly than normal.

It comes as no surprise that several Canadian cannabis company employees and investors will be traveling to the United States this week to attend the largest cannabis industry conference in the world, MJBizCon, in Las Vegas. The conference lists several Canadian companies among its speakers and will cover a variety of topics including investment, branding and an assessment of Canada’s first month of legalization, but for those wishing to cross the border into the U.S. for the conference, there are additional considerations that must be taken into account.

On October 9, 2018, United States Customs and Border Protection (CBP) revised its Policy Statement on Canada’s Legalization of Cannabis and Crossing the Border (the “Revised Statement”). Prior to this date, CBP had taken the position that merely being an employee (or an investor) of a legal cannabis business in Canada could result in inadmissibility under Section 212 of The Immigration and Nationality Act. See INA §212(a)(2)(C).

INA §212(a)(2)(C) permanently bars an individual if a CBP officer has reason to believe that he or she is an illicit trafficker in a controlled substance, or a knowing assister, abettor, conspirator or colluder in illicit trafficking. Prior to the Revised Statement, there were already a number of reported cases of employees and investors of Canadian cannabis businesses receiving lifetime bans under INA §212(a)(2)(C). Although these cases appeared to be limited to ports of entry on the West Coast, they demonstrated that employees and investors of Canadian cannabis companies were being banned as illicit traffickers.

The Revised Statement was welcome news for employees and investors of Canadian cannabis companies as it opened up the possibility of travel to the U.S. once more, but with a very import caveat. The current position taken by CBP is as follows:

A Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada, coming to the U.S. for reasons unrelated to the cannabis industry will generally be admissible to the U.S. However, if a traveler is found to be coming to the U.S. for reason related to the cannabis industry, they may be deemed inadmissible.

The Revised Statement confirms that employees of Canadian cannabis companies should be admissible if their reasons for coming to the United States are “unrelated to the cannabis industry.” This clearly includes traveling purely for vacation (for example, visiting with family) and even business visitor activities that were completely unrelated to the cannabis industry.

However, although the Revised Statement was a step in the right direction, CBP’s current stance means that someone can be barred merely for visiting a U.S. investor in his or her Canadian cannabis company or, you guessed it, attending a cannabis conference in the United States such as MJBizCon.

On October 25, 2018, the Canadian Press reported that they had received an email from Stephanie Malin, CBP Branch Chief for Northern/Coastal Regions, which stated the following:

If the purpose of travel is unrelated to the cannabis industry such as a vacation, shopping trip, visit to relatives, they will generally be admissible to the U.S. However, if they are coming for reasons related to the industry, such as the conference… they may be found inadmissible.

This statement by Ms. Malin in an ominous reminder that for Canadians wishing to come to the U.S. for conferences such as MJBizCon, there is a risk that you may be denied entry.

If you want to hear more about this issues, Lane Powell’s own Dustin O’Quinn and Sativa Rasmussen will present a Continuing Legal Education Society of British Columbia webinar on Tuesday, November 20, titled “The U.S. Border After Cannabis Legalization in Canada.” The presentation will start at noon PST and cover:

  • U.S. immigration law and how it’s impacted by some states’ legalization of cannabis,
  • Cross-border transactions to the U.S.,
  • Overview of U.S. policies that affect Canadians, and
  • Potential forms of relief.

The event is intended for lawyers who represent clients involved in the cannabis industry or clients who conduct business with cannabis-related industries.

For more information or to register for the conference, please visit the event website.

The cannabis industry is celebrating a lot of good news this week — support for legalization continues to grow while opposition dwindles steadily. Voters in three more states passed marijuana measures to increase the legal availability of cannabis both medically and recreationally. Two highly visible cannabis opponents, House Representative Pete Sessions and Attorney General Jeff Sessions, have departed from their respective federal positions.

Reports are estimating that the passage of recreational cannabis in Michigan, along with the medicinal cannabis measures approved in Missouri and Utah could generate upwards of $2 billion in medical and recreational sales. This additional round of state legalization is a clear indicator of our country’s continued march toward the ultimate objective for an end to federal prohibition. The new tally brings the total number to 33 states and the District of Columbia having adopted some form of legal access to cannabis.

This, coupled with the Democrat’s win in the House of Representatives and Pete Sessions failed re-election bid in Texas cannot be overstated. Sessions had been one of Congress’ most powerful and vocal marijuana prohibitionists and he used his position as Chairman of the House Rules Committee to further his agenda. While serving in his role as Chairman, Sessions’ panel consistently blocked cannabis proposals from advancing to the floor for a vote, including several bipartisan proposals over the past few years. In fact, due to Pete Sessions, no cannabis amendments have been voted on by the House of Representatives in two years. This blockage has now been removed and cannabis advocates will gain a new friend in Democrat Colin Allred. The Congressman-elect is a civil rights attorney who campaigned on healthcare and has been vocal in his support for medical cannabis.

The cannabis community was already having a good week following the results of the midterm elections when the industry lost one of its biggest opponents in Washington on Wednesday afternoon when Attorney General Jeff Sessions resigned at the request of President Trump. Sessions, who once famously said “good people don’t smoke marijuana,” has pushed for greater enforcement of the federal ban on marijuana throughout his tenure as Attorney General. Last January, Sessions rescinded the prior federal guidance to U.S. Attorneys, which mandated a mostly hands-off stance for enforcement of federal cannabis law against people complying with state cannabis law.

As Attorney General, Jeff Sessions ultimately had little effect on states’ autonomy for allowing cannabis — his greatest impact was to discourage private investment into the industry and sustain barriers to financial services, such as banking and commercial lending. Jeff Sessions’ exit is credited for the boost in prices of most marijuana stocks and investments shortly after his resignation was announced. Canada-based Tilray closed up 30 percent while Canopy Growth and Aurora Cannabis rose 8.1 percent and 9 percent respectively. Cronos Group added 8.4 percent.

Although we can only speculate at this point regarding the speed and manner in which legalization will occur moving forward, the direction cannabis laws are headed leaves little doubt that cannabis prohibition is coming to an end.

Today we’re highlighting an interesting case out of the 6th Circuit. In K.V.G. Properties, Inc. v. Westfield Ins. Co., 900 F.3d 818 (6th Cir. 2018), a commercial landlord was denied insurance coverage for damage caused to his property by tenants who were illegally growing marijuana there. The landlord leased property to a group of commercial tenants for “general office or light industrial business.” Id. at 820. The DEA raided the property and caught the tenants growing “lots of marijuana.” Ibid. In the process, the tenants caused roughly $500,000 of damage to the property. The landlord evicted the tenants and filed an insurance claim. The landlord’s insurer denied coverage due to an exclusion for losses resulting from any “[d]ishonest or criminal act” by persons to whom the property was entrusted. The landlord sued the insurer, removed the case to federal court, lost, and appealed. On appeal, the 6th Circuit affirmed the district court’s ruling, addressing two interesting issues in the process.

First, the court discusses whether to apply state or federal law to determine if a loss results from a “criminal act.” At the time of the loss, medical marijuana was legal in Michigan under the Michigan Medical Marijuana Act. The court states that “we would hesitate before reading a Michigan insurance policy to bar coverage for a ‘criminal act’ when Michigan law confers criminal and civil immunity for the conduct at issue.” Id. at 822. The court eventually determined that the tenants’ activities were criminal under both state and federal law (more on that below), and so their musings on federalism are not precedential, but it is interesting to note that the 6th Circuit Court of Appeals appears open to the idea of ignoring the federal prohibition on cannabis and applying state law when considering issues governed by state law (such as insurance coverage).

Second, the 6th Circuit provides an important piece of tactical advice for landlords of cannabis businesses. The 6th Circuit ultimately determined that the question of state or federal law doesn’t need to be answered, because the tenants’ activities were illegal under both state and federal law, and therefore were “criminal acts” regardless of the choice of law. They reached this conclusion due in part to the presumption of illegal activity created by the DEA raid, but primarily due to the landlord’s own assertions in the eviction proceeding, including the statement that “[t]enant illegally grew marijuana” and that the [i]llegal growing of marijuana” was a “continuing health hazard.” Per the Federal Rules of Evidence, pleadings are binding statements that can be admitted as evidence against that party in subsequent legal proceedings. The takeaway here is to know your coverages and exclusions. The landlord likely could have found himself with a winnable federalism argument about what constitutes a “criminal act” had his attorney carefully tailored the eviction pleadings to avoid assertions of criminal conduct. Whatever was gained by a speedy eviction was lost by pleading into an exclusion from insurance coverage.

If you are a landlord considering evicting a cannabis business, contact us today. Our cannabis and real estate teams are experienced in these kinds of interdisciplinary issues, and stand ready to assist.

We are proud to support Seattle University’s 6th Annual Northwest Marijuana Law Conference taking place on Friday, November 16. Josh Ashby and Sativa Rasmussen are the program’s Co-Chairs and will lead the conversation, bringing together experts from the law and the industry to provide critical focus and frameworks.

Ben Pirie will present on “Updates on Marijuana Law in Washington, Litigation, Dispute and Financial Issues” at 9:45 a.m.

Justin Hobson will present on “The Impact of Oregon, Canada and California on the Legalization of Marijuana Across the United States” at 11 a.m.

Other topics include:

  • Cannabis and the Constitution
  • The Impact of the 2017 Changes in Tax Law
  • Greening the “Green”: Sustainability in Cannabis Cultivation, Processing and Distribution
  • Growing Investments by Banks and Big Money in the Cannabis Industry
  • Ongoing Issues of Employment Law in the Cannabis Industry
  • Cannabis IP: Federal and State Protection of Trademarks and Other Intellectual Property

Date: November 16, 2018

Time: 8:30 a.m. to 5:15 p.m.

Cost: $225 General Registration | $195 Seattle U Law Alumni | $150 Non-Attorney

Credits:  Approved for 7.0 CLE Credits

(Live webcast and in-person options available.)

For more information and to register, visit the event website.

The Food and Drug Administration (FDA) has issued an announcement seeking public comment on the “abuse potential, actual abuse, medical usefulness, trafficking, and impact of scheduling changes on availability for medical use” of cannabis and several other substances now under international review.

This announcement comes in response to the upcoming meeting of the World Health Organization’s Expert Committee on Drug Dependence (ECDD) in Geneva, Switzerland in November. The ECDD will be evaluating whether to recommend that certain international restrictions be placed on the plant.

Under current U.S. federal law as well as global drug policy agreements, cannabis is classified in the most restrictive category of Schedule I. Consequently, nations who are signatories of such drug control treaties are expected to treat cannabis as an illegal substance, not that this has stopped countries such as Canada and Uruguay from legalizing cannabis nationwide.

Earlier this year, ECDD determined that cannabidiol (CBD), a component of cannabis shown to have medical benefits without intoxicating properties like other cannabinoids such as THC, should not be scheduled under international drug control conventions.

“CBD has been found to be generally well tolerated with a good safety profile,” the UN body found in its critical review. “There is no evidence that CBD as a substance is liable to similar abuse and similar ill-effects as substances…such as cannabis or THC, respectively.” The Committee went on to recommend that preparations considered to be pure CBD should not be scheduled.

This determination confirms a statement by the FDA that CBD should be completely removed from federal control. Specifically, the agency found that CBD has a “negligible potential for abuse” and has a “currently accepted medical use in treatment.”

Despite this, because of the international drug treaty obligations, the FDA conceded that the substance should be placed under the least-restrictive category of Schedule V.

Having said that, in its analysis to DEA the FDA noted that “if treaty obligations do not require control of CBD, or if the international controls on CBD change in the future, this recommendation will need to be promptly revisited.”

The FDA’s statement that was released in May preceded the ECDD determination that CBD should not be globally scheduled, and was part of the federal government’s approval and rescheduling last month of CBD-based drug Epidiolex, which is used for severe epilepsy disorders.

The ECDD has also agreed to undergo an in-depth critical review of the marijuana plant and its resins and extracts, including CBD and THC. That new review is what triggered the FDA’s request for public comment.

For now, the FDA will be accepting comments on cannabis as well as the other substances currently under review until October 31, 2018. Interested parties can submit written comments here.

Just in case you missed it, Rep. Earl Blumenauer (D-OR) sent a memo to Democratic congressional leaders on Wednesday outlining a comprehensive plan to legalize marijuana in the United States as soon as 2019. You can read the full text here, and we couldn’t have said it better ourselves. It’s hard to overstate the importance of the comprehensive federal marijuana reforms outlined by Rep. Blumenauer (up for reelection next month — Lane Powell endorses civic engagement), which would address banking, taxation, safe access for veterans, criminal justice reform, states’ rights and scientific research. With Canada positioning itself recently as the world leader on sensible cannabis policy, the question is — why not us?

I am thrilled to announce that we have added three well-recognized industry leaders to our Cannabis Team roster. Joshua Ashby and Sativa Rasmussen joined the firm on September 4 from Ashby Law Group PLLC in Seattle, and Ben Pirie joined from 7 Point Law in Portland in June. The experience these three bring with them strengthens our ability to help legal cannabis businesses navigate the complex regulatory environment in both Washington and Oregon and achieve long-term success.

Ashby will assume the role of Co-Chair of the Team, serving alongside Justin Hobson. He is one of Washington’s most experienced recreational marijuana transactional lawyers and authored the seminal guide on the state’s cannabis industry, Lost in the Weeds. Josh advises cannabis businesses on general corporate, mergers and acquisitions, and real estate transactions while guiding clients through the industry’s highly regulated landscape. He received his J.D. from Seattle University School of Law, and his B.S., summa cum laude, in Aeronautics from Embry-Riddle Aeronautical University.

When asked why Lane Powell was the right fit, Josh commented:

The interdisciplinary nature of the firm’s Cannabis Team allows us to provide a better client experience by offering a holistic approach to address all of our clients’ legal needs from trademark procurement and brand protection to employment practices and beyond.

Sativa advises cannabis businesses on corporate governance and contract law, internationally and domestically. She also represents businesses in highly regulated industries with their transactional, regulatory and compliance needs. Sativa has extensive experience negotiating transactions, drafting documents, and communicating the needs of her clients to the Washington State Liquor and Cannabis Board and other administrative agencies. She received her J.D., cum laude, from Seattle University School of Law and B.A.s in Political Science, magna cum laude, and Criminal Justice, magna cum laude, from Washington State University.

Ben counsels cannabis businesses on a wide range of corporate and regulatory needs, including contracts, entity formation and governance, intellectual property, mergers and acquisitions, and compliance. He is active in engaging with state and local governments in order to ensure common sense, business-friendly regulation of the cannabis industry. Ben received his J.D. from Lewis & Clark Law School and a B.A. in Art History and Chemistry from Duke University.

Our interdisciplinary team provides a myriad of legal services such as compliance strategies, business transactions and solutions, real estate, plant and process patents, dispute resolution, sophisticated state and federal tax counseling, and more. We also maintain close ties with regulators and anticipate the impact of proposed rule changes to our clients’ businesses, and regularly share those updates here on the blog. Learn more about our team.

A few months ago, we chronicled a suit that Josephine County brought against the State of Oregon, which challenged the legality of the state’s marijuana laws. On August 30, Federal Magistrate Judge Clarke recommended dismissal of the lawsuit. In succinct fashion, Judge Clarke noted that Josephine County lacks standing to sue the State of Oregon on constitutional grounds because the county is a political subdivision of the state. As additional grounds for dismissal, Judge Clarke explained that the state has not (yet) placed any substantive limitation on the county’s regulation of marijuana, such that there is no live controversy for the court to address.

Judge Clarke closed by noting the hypocrisy of the county’s lawsuit:

Finally, on a practical rather than legal note, the Court is unpersuaded by Josephine County’s argument that the State is “requiring” it to “aid and abet a federal felony.” The County has provided no evidence to the Court that it has attempted to ban any and all marijuana use and production, as would be theoretically required by full compliance with the [Controlled Substances Act]. Instead, the County merely seeks to limit the use and production in rural residential zones, while continuing to allow marijuana use and production in other instances. Apparently the County is only worried about aiding and abetting federal felonies on certain kinds of land and not others.

Judge Clarke leaves open two important substantive issues — whether Josephine County can retroactively prohibit marijuana production in rural residential zones and whether the federal Controlled Substances Act preempts state level marijuana laws. His Report and Recommendation will be referred to a federal Article III judge for review — the parties have 14 days to submit objections.

The White House Office of National Drug Control Policy (ONDCP) recently released “An Initial Assessment of Cannabis Production, Distribution, and Consumption in Oregon 2018 – An Insight Report.” The report “does not purport to be a policy evaluation or policy performance review; rather [the] assessment provides a verifiable analysis of assorted information and data.” A review of the data and its presentation raises more questions than it answers. The assessment presents data in a way that conflates Oregon’s adult-use, medical and black markets. As a result, it is challenging to determine what, if any, policy response might be appropriate.

The U.S. Attorney for the District of Oregon provided a statement in response to the assessment. The statement describes the production, distribution and consumption in Oregon as “out of control” and suggests, “state officials should respond quickly and in a comprehensive manner to address the many concerns raised.” The U.S. Attorney requests, “continues to be for transparency, responsible regulation, adequate funding, and a willingness to work together.” He further adds, “[i]t’s time for the state to wake up, slow down, and address these issues in a responsible and thoughtful manner.”

Fair enough. So let’s take a look the assessment and see how meaningful the current data really is. The assessment’s key findings include:

  • The Oregon Burn Center spent $9.6 million for initial acute care treating impatient burn victims from July 2015 through January 2018 that related to cannabis extract production.
  • During the same period, law enforcement investigated 64 cannabis processors, 21 of which resulted in fire or explosion.
  • A mature cannabis plant consumes 22.7 liters (6 gallons) per day.
  • A single kilogram (2.2 pounds) of finished flower requires 5.2 megawatt hours of electricity — this is equivalent to running a 1,000 watt grow light 24 hours a day for 225 straight days!
  • Cryptocurrencies such as bitcoin and ether are used for cannabis transactions.
  • A glut of cannabis stockpiles stemming from overproduction caused a 50 percent annual price drop since 2016.
  • As of 2018, only 31 percent of available cannabis inventory was distributed, leaving 69 percent unconsumed within the adult-use program.
  • Illicit cannabis cultivation on public lands persists unabated, despite the state-sanctioned adult-use market.
  • Illicit out-of-state distribution persists after the emergence of the state-sanctioned adult-use market.
  • Oregon’s annual production capacity far exceeds its estimated annual consumption demands — there is one grow site for every 19 users (probably includes both medical and recreational grows, but not adult-use home grows).

There is an obvious elephant in the room.  The production and sale of cannabis remain illegal under the Controlled Substances Act, and the Attorney General has made his views on the state legalization of marijuana quite clear. So there might well be an inherent bias as a result (similar to EPA’s recent conclusion that larger cars will reduce fatalities and fuel consumption because people will drive less because fuel will be more expensive and they can carry more groceries in their cars). That said there is the obvious problem of cannabis demand throughout the U.S., including in states without medical or adult-use programs. Prior to its medical and adult-use programs, people were illegally producing and exporting cannabis from Oregon. Few would question the conclusion that Oregon has, and will continue to have, an export problem when there is money to be made from illegally producing and selling cannabis.

Still, at least two of the data points stand out as possibly incorrect or at least misleading given the report’s statement that they constitute “verifiable analysis of assorted information and data.” The first is the statement that a single mature plant consumes, on average, 6 gallons of water per day. The second is that it takes approximately 5.2 megawatts of electricity to produce a single kilogram of (indoor) finished flower.

Digging deeper into the assessment, it notes, “definitive information varies about the water needs of cannabis cultivation with estimates ranging widely from 1 to 15 gallons daily.” The six gallons per day figure comes from a California study. That study relied on “high-resolution aerial imagery to estimate the number of marijuana plants being cultivated in four watersheds in northwestern California” and “estimated the water demand of marijuana irrigation.” However, the water estimates “were based on calculations from the 2010 Humboldt County Outdoor Medical Cannabis Ordinance draft.” I was unable to locate a specific water estimate in that ordinance. It simply states, “the cultivation of marijuana in areas not served by public water systems may result in large, unregulated withdrawals of water from creeks, streams, and rivers.” It remains unclear where the 6 gallons per day figure actually comes from, how accurate it actually is, and whether it equally applies to indoor and outdoor operations, which are in compliance with state law.

The claim that it takes approximately 5.2 megawatts of electricity to produce a single kilogram of finished flower comes from a 2017 paper titled “High Time to Assess the Environmental Impacts of Cannabis Cultivation.” The paper does not analyze electricity use, but rather states “it has been estimated that the power density of marijuana cultivation facilities is equal to that of data centers and that illicit grow operations account for 1% of the U.S.’s average energy use.” The paper cites a 2012 paper titled “The carbon footprint of indoor Cannabis production.” A subsequent paper titled “Trends and Observations of Energy Use in the Cannabis Industry,” citing the 2012 study, notes the author “calculates that it takes approximately 13,000 kWh per year to operate a standard production module that is 4’x4’x8’. This is based on a production cycle of 78 days, for 4.7 cycles per year, and simple assumptions about the equipment capacities and use.” There is an obvious leap between a small 4’x4’ grow space and larger indoor production facilities that employ LED lighting. Indeed, the author of the subsequent paper suggests that, “falling product prices will drive the need for more competitive operating costs, which will largely be presented in the form of energy efficiency.” There are arguably energy savings from larger indoor grows, outdoor production and the use of indoor greenhouses that rely on light deprivation techniques.

My view is that the U.S. lost the federal war on all drugs long ago, not just cannabis. Nevertheless, the law is the law and, regardless of Oregon legalization, we cannot permit growers to operate on federal lands. OLCC licensed businesses must support efforts to eliminate market participants that do not follow the rules, and they must take better care to ensure that their product does not enter the black market. Lastly, OLCC enforcement also needs to be stepped up — following adequate funding from the State Legislature — if for no other reason than to prevent further wrath of the federal government.

Most of our readers probably concur that the U.S. Attorney’s call to Oregon to “wake up” is misplaced. Our federal anti-drug resources would be far better directed at the community-destroying opioid crisis, but that seems unlikely to happen under the current Attorney General unless and until Congress gets its act together to pass the STATES Act. Evidence already exists that medical marijuana (1) reduces the daily doses filled for opioids, (2) reduces opioid overdose deaths, and (3) facilitates the substitution of marijuana for opioids. Removing cannabis from the Controlled Substances Act in states where the people and the local government have decided that there are larger public health issues to worry about would allow our federal government to not only respect public sentiment regarding cannabis but also liberate funds do help those affected by life-destroying pharmaceuticals.