Cannabiz & Company — a news and media service providing weekly broadcasts on cannabis business news — launched its inaugural post on January 31 with a guest appearance from our very own Justin Hobson. During the broadcast, the hosts discussed a recent Portland Business Journal article that chronicled the struggles that cannabis producers are facing in the Oregon market including intense competition and plunging prices. Justin commented on the state of the industry in Oregon, including an overview of the regulatory issues (e.g. Oregon has a free-market system), increasing industry consolidation and tips for how small cannabusinesses can compete. Check out the broadcast below — to see the update on Oregon and to hear Justin’s commentary skip to 7:00.

Cannabiz Connection…Creating Buzz Around Cannabis Business News

Join us for our weekly Cannabiz and Company broadcast LIVE on our Facebook page. Hosted by Jamie Cooper and Debra Borchardt and powered by Cannabiz Connection and Green Market Report.

Posted by Cannabiz and Company on Wednesday, January 31, 2018

Here at Pipeline, we aim to keep our readers up to date on developments in the law that affect the cannabis industry. In that vein, we share two interesting articles from the venerable New York Times and wonder how Jeff Sessions might react to these business developments.

First, is the re-imagination of a pothouse — or rather the use of hemp in construction.

Could AG Sessions try to huff and puff and blow this house down? It is hard to imagine how anyone — at least anyone other than the highest law enforcement official in our country — would try to use the law to prevent the use of hemp as a construction material, especially given the remote risk of ingestion.

The Controlled Substance Act contains a very broad definition of “Marihuana”:

“The term ‘marihuana’ means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 U.S.C. § 802(16). [Emphasis supplied].

The underscored exception, although it seems straightforward, has never clearly applied to hemp. Section 7606 of the Agricultural Act of 2014 (aka the “Farm Bill”) authorizes only institutions of higher education (e.g., universities) and state Departments of Agriculture to grow and cultivate “industrial hemp,”[1] and then only for agricultural research purposes where permitted under state law. The clear implication is that growing hemp for construction purposes could be viewed by the federal government as equivalent to trafficking in a schedule I drug. Does anyone care to predict where our Attorney General’s fear of cannabis begins and ends?

While it is unclear if industrial hemp is included within the Controlled Substance Act’s definition of “marihuana,” it is still arguably a Schedule I substance if it includes THC in any concentration (even below 0.3% ). This is because a material, compound, mixture or preparation that contains any quantity of THC is defined as a Schedule I controlled substance. However, cannabis contains a number of other cannabinoids, including cannabidiol (CBD), many of which have beneficial effects on human health and no psychoactivity. Most sources of industrial hemp, and the CBD derived therefrom, are likely to contain at least trace amounts of THC.

Second, we found this article of interest and wonder how the federal government’s views toward CBD might morph into concern that these beauty products could become a gateway drug for your grandmother. You might reasonably ask, “How could AG Sessions possibly object to use of CBD as pain relief or cosmetics, again not designed or labeled for ingestion?” Although, we have learned that some people ingest creams and lubricants containing high THC to circumvent adult-use dosing limits, or potentially when desperate times call for desperate measures. Risky click of the day goes to this Vice article describing what happens when you drink an entire bottle of THC infused personal lubricant.

We begin by reminding our readers that, about a year ago the DEA clarified that they consider CBD a Schedule I substance — allegedly for the purpose of tracking it separately from THC on research matters. The DEA made real “progress” in that tracking effort in the spring and summer of this year — see this The Cannabist article for an English language explanation or the DEA’s explanation here.

Needless to say, not everyone agrees that the DEA has authority to treat CBD as Schedule I. Most objections rely on the Farm Bill, which allowed growth and cultivation of industrial hemp from which (we thought at least) much CBD is derived. However, the DEA maintains that reliance on the Farm Bill is misplaced, arguing that it authorized the growth and cultivation of industrial hemp and that legislation did not permit the production of “non-FDA-approved drug products made from cannabis.” This fight was hot and heavy in Indiana last year where the state AG attempted to remove CBD oils from the market. Somewhat surprisingly, the DEA itself has apparently told Indiana to chill out.

Bottom line: the DEA considers at least some CBD as a Schedule I substance and it is probably too early to predict how it will shake out.

Second, CBD companies need to consider the FDA. On November 1, 2017, the FDA issued a news release regarding CBD products. The news release notes that the FDA issued “warning” letters to four companies “illegally selling products online that claim to prevent, diagnose, treat, or cure cancer without evidence to support” such claims.

Third, trying to convince an IRS agent that CBD should not be subject to IRC section 280E could prove a challenge in light of recent DEA pronouncements. Section 280E applies to anyone trafficking a Schedule I substance. The DEA pronouncement gives the IRS ammunition to audit and propose adjustments to any CBD business not applying 280E on their tax returns.

So, is your CBD product a Schedule I substance? The answer could well depend on how the CBD was produced. If the single chemical entity CBD comes from the flowers of any cannabis plant (including Cannabis ruderalis aka industrial hemp), where CBD is abundant and not the excepted parts noted above, it is probably treated as a Schedule I substance because it will have at least trace amounts of THC and thus illegal to possess in the U.S.

On the other hand, there are good arguments that synthetic CBD is legal if it is created by chemosynthesis or biosynthesis and contains no other cannabinoids. Similarly, there are good arguments that natural CBD from the exempted parts of marihuana are legal. These types of CBD are expensive (which is what you get when you derive CBD from material where you are least likely to find it), but is readily available from companies like Isodiol.

Here’s an article from last month about a company claiming to synthesize CBD (a soluble in hydroethanol) from hops, a plant related to cannabis. Not everyone believes them.

In sum, anyone trafficking in CBD and hemp should be thinking about these issues and consider them carefully.

[1] Defined under the Farm Bill as marijuana with a tetrahydrocannabinol (THC) content of 0.3 percent or less — THC being the principal psychoactive component of cannabis.

Sometimes the best place to hide something is in plain sight. That’s what Congress did in December when they passed the tax reform. In plain sight they (inadvertently?) muted the impact of 280E for corporate taxpayers.

How? Why? Because Congress lowered the corporate tax rate to 21%. IRC 280E denies deductions for costs associated with “trafficking in controlled substances,” which includes marijuana because it is still listed as a Schedule I substance under the Controlled Substances Act. Consequently, unless business expenses can be included in the cost of goods sold (COGS), expenses incurred in a cannabis-related business are deductible when computing federal taxes. This rule presents a material tax problem for retailers, though other cannabis-related businesses can certainly be caught in this web.

By lowering the Federal corporate tax rate to 21% from 35%, the law now reduces the impact of the IRC 280E expense disallowance to about 60% of what it was prior to January 1 of this year. For example, a C corporate taxpayer who had $100X of net income after $30X of IRC 280E disallowance would pay tax of $35X last year. That same taxpayer with the identical income now pays tax of only $21X, muting the impact by 21% of the disallowed expense.

Taxpayers organized as C corporations don’t need to do anything except celebrate. Taxpayers organized as flow-through taxpayers, such as subchapter S corporations and LLCs taxed as partnerships, should look at their 280E exposure and consider whether restructuring might make sense.

We recently reported that the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) was retaining its Bank Secrecy Act marijuana guidance. Last week, a senior official in the Department of the Treasury indicated that, as a result of U.S. Attorney Sessions’ recent actions, FinCEN is reviewing the guidance it issued on February 14, 2014 entitled: “BSA Expectations Regarding Marijuana Related Businesses.” Any rescission of that guidance is likely to have significant effects on any cannabis business using any forms of payments other than cash.

We’ll continue to keep on top of this issue and share our insights as the federal positions evolve.

As we reported last week, U.S. Attorney Jeff Sessions issued a memorandum on January 4 rescinding the seminal cannabis “Cole Memo” and other DOJ guidance involving cannabis. This has raised continuing issues and confusion for financial institutions concerning what the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) would do concerning the guidance it issued on February 14, 2014 entitled “BSA Expectations Regarding Marijuana-Related Businesses.”

This morning, we received the following note from the FinCEN’s Resource Center:

“The SAR reporting expectations outlined in the February 14, 2014 guidance, FIN-2014-G001 remains in place.  FinCEN will continue to work closely with law enforcement and the financial sector to combat illicit finance, and we will notify the financial sector of any changes to FinCEN’s SAR reporting expectations.”

We’ll continue to keep on top of this issue and share our insights as the federal positions evolve.

In what could hardly be characterized as a surprise, on January 4, U.S. Attorney General Jeff Sessions issued a memorandum (the “Sessions Memo”) that rescinds the seminal cannabis “Cole Memo” of August 29, 2013 and other previous Department of Justice (DOJ) guidance involving cannabis. The implications of this rescission for the medical and recreational marijuana businesses that have been rapidly developing throughout the United States are uncertain.

The Cole Memo played a critical role in the development of marijuana businesses in the states that have approved marijuana production, manufacturing and sales in their states. The Cole Memo, issued during the Obama administration, directed the Department of Justice and the U.S. Attorneys’ offices to focus their prosecutorial authority for marijuana enforcement under federal law only in specific limited areas, such as sales to minors, interstate sales, criminal enterprises and drugged driving. The Cole Memo relied on “prosecutorial discretion,” indicating that “Main Justice” left it to the local U.S. Attorneys’ Offices as to whether to emphasize the prosecution of cannabis activity authorized under state laws.

While the Cole Memo effectively instructed U.S. Attorneys to limit cannabis prosecutions, federal laws remain on the books that make it a crime to possess, sell or manufacture marijuana, or to aid or abet others in doing so. (21 U.S.C. §841(a)(1) and 18 U.S.C. §2). Moreover, there are other federal statutes that can result in criminal or civil penalties for engaging or supporting cannabis manufacture, production or sales, including: 18 U.S.C. §371 (conspiracy to manufacture and distribute a schedule I controlled substance), 18 U.S.C. § 1962(d) (conspiracy to participate in a pattern of racketeering activity) and 21 U.S.C. § 881(a)(6) (civil asset forfeiture).

The Sessions Memo does not eliminate prosecutorial discretion. Instead, the Sessions Memo eliminates the Cole Memo’s enforcement priorities and states U.S. Attorneys “should follow the well-established principles that govern all federal prosecutions.”  The Sessions Memo notes that prosecutorial discretion involves weighing all the relevant factors, “including federal enforcement priorities set by the Attorney General.”  It is not clear whether Jeff Sessions considers marijuana an “enforcement priority.” The DOJ’s fiscal year 2018 budget request included a request for $403 million to target violent criminals trafficking drugs into the U.S. It also included a request for federal funds to “combat the prescription drug and opioid epidemic,” but did not specifically mention marijuana as a priority.

The Sessions Memo is consistent with other actions taken by the DOJ. On November 16, 2017, Attorney General Sessions issued a memo prohibiting improper guidance documents. The press release accompanying the memo stated, “The Attorney General’s Regulatory Reform Task Force, led by Associate Attorney General Brand, will conduct a review of existing Department documents and will recommend candidates for repeal or modification in light of this memo’s principles.”  Arguably, the Cole Memo was one of those existing DOJ documents.

Among the various DOJ guidance rescinded by the Sessions Memo is the February 14, 2014 DOJ memo regarding marijuana related financial crimes. The same day the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance to “clarify Bank Secrecy Act expectations for financial institutions seeking to provide services to marijuana-related businesses.” FinCEN issued its guidance in light of “related guidance by the [DOJ] concerning marijuana-related enforcement priorities.” It is unclear how FinCEN will respond to the Sessions Memo, but we should expect a decline in the number of financial institutions offering services to marijuana-related businesses.

While individual U.S. Attorneys will continue to have prosecutorial discretion in their federal districts to de-emphasize cannabis prosecutions, it is highly likely that in some locations U.S. Attorneys may now want to move forward in bringing criminal and civil actions against those engaged directly or indirectly in the marijuana business. Attorney General Sessions’ rescission of the Cole Memo removes an impediment to such actions and may be seen by U.S. Attorneys and federal prosecutors as an encouragement to actually encourage them.

At this time, it is difficult to predict how this will affect people directly involved in the manufacture, production and sale of marijuana and those — such as financial institutions or other service providers — that are providing important services to these businesses. While it is possible that some states, such as California, may try to go to court seeking relief, the Constitution’s Supremacy Clause (Art. VI, Paragraph 2) likely makes any such state activity futile.

In the meantime, a Congressional appropriations rider from 2014 prohibiting the DOJ from using funds to interfere with state laws legalizing medical marijuana remains in place, at least until January 19, 2018. The U.S. Court of Appeals for the Ninth Circuit ruled in 2016 that this rider prevented federal medical marijuana prosecutions unless the defendants were not strictly complying with state laws. In light of Attorney General Sessions’ actions today, it is unclear whether the appropriations rider will be renewed or, if it is, whether the DOJ will challenge the Ninth Circuit’s ruling that the rider prohibited federal medical marijuana prosecutions.

We will continue to update clients on these important developments, and encourage you to seek legal counsel to discuss the full implications of this action.

A case in Yamhill County Circuit Court in McMinnville, Oregon pits two farms — a vineyard and a potential commercial marijuana grower — against each other, implicating the scope of Oregon’s Right to Farm law. At issue in Mahesh v. Wagner is a proposal by the owner of nearly seven acres of farmland to grow marijuana next door to an established 580-acre vineyard and a 19-acre vineyard currently in development.

Yamhill County initially approved the marijuana farm, as well as a facility that could process more than 30,000 pounds of marijuana per year, but later withdrew approval for the processing facility. The adjacent vineyard owners filed a lawsuit alleging claims for trespass and nuisance because the marijuana farm will “generate foul-smelling particles that will become airborne and migrate by air” to the neighboring vineyards and “negatively impact the quality and suitability of grapes . . . including but not limited to the use of the grapes for wine.”

The Yamhill County Circuit Court denied the vineyard owners’ motion for a temporary restraining order to prevent development of the marijuana farm. Subsequently, the owners of the marijuana farm sought to have the lawsuit dismissed, relying in part of Oregon’s Right to Farm and Right to Forest Act. The court also denied that motion.

Oregon’s Right to Farm statute (ORS 30.936) provides that farming practices on lands zoned for farm use shall not give rise to any private right of action or claim for relief based on nuisance or trespass. This immunity, however, does not apply where the offending farming practice results in damage to commercial agricultural products.

The marijuana farmers contended they are immune from suit because Oregon courts have held that the “mere allegation” of a farming practice is sufficient to invoke immunity under the Right to Farm statute. The vineyard owners countered that the statute explicitly excludes claims based on damage to commercial agricultural products and their allegation of damage to current and future grape crops brings them within the scope of the exception. The vineyard owners also argued that the legislature never intended the statutory immunity to apply to disputes between farms, contending that the purpose of the statute is to protect agricultural lands from the expansion of residential and urban uses.

The Circuit Court agreed with the vineyard owners stating, “The Right to Farm Act does not provide such blanket immunity as to support dismissal of the complaint on its face.” The court, however, also noted that the immunity could be an affirmative defense at a later stage of the case, leaving the issue open for future proceedings after discovery and motion practice.

No Oregon appellate court decisions have considered the question of whether the Right to Farm Act applies to disputes between farmers and courts in neighboring states have come down both ways. The Washington Supreme Court interpreted that state’s statute as prohibiting such use, even though the Washington Right to Farm statute does not have the same explicit exemption as Oregon. The Washington Supreme Court held that the Washington statute is a narrow codification of the common law “coming to the nuisance” defense and that it does not “insulate agricultural enterprises from nuisance actions brought by an agricultural or other rural plaintiff, especially if the plaintiff occupied the land before the nuisance activity was established.” By contrast, a California court of appeals held that California’s Right to Farm statute applies broadly to a bar a nuisance action brought by one commercial agricultural entity against another commercial agricultural entity.

Because the issue remains unresolved in Oregon, it may take further litigation between these parties to bring the issue to appellate review. Even if the exception does permit the vineyard owners to proceed with their nuisance and trespass lawsuit, additional hurdles remain, including squaring the issues with the Oregon courts’ prior rulings that harm alone is not sufficient to find nuisance and that a balancing of interests is required.

Our client Periodic Edibles has launched a podcast focused on the business and science of cannabis. Wayne Schwind, the CEO and Founder of Periodic Edibles — a cannabis-infused caramel company — hosts the show. The podcast takes a deeper look at business owners, founders and executives inside the cannabis industry and features stories about how they entered the industry, what they’re currently working on and where they see the cannabis industry going. Give it a listen!

Determining the fair market value of an interest in a cannabis business is a difficult task. Existing and potential clients frequently ask us how cannabis businesses should be valued and whether or not there are any “trends” in assessing value. These questions are not surprising given the various instances where a valuation is important. You may find yourself asking how much a cannabis business is worth in any of the following circumstances:

  1. Estate Planning
  2. Business Succession Planning
  3. Shareholder/Member Agreements
  4. Business Disputes
  5. Securities Offerings
  6. Dissenter’s Rights
  7. Mergers & Acquisitions
  8. Lending & Finance
  9. Tax Planning
  10. Transfer Pricing

Certified appraisers generally use three different approaches to valuing an asset, including a cannabis business.  Those approaches are:

  1. Asset Approach —Also known as replacement cost. How much would it cost to rebuild the asset?
  2. Market Approach — What are the value-comparable businesses? Relies heavily on the availability of comparable datasets and subjective adjustments.
  3. Income Approach — Commonly used for income-producing real estate. Value is determined using the expected future cash flow of the income-producing asset.

There are advantages and disadvantages to each approach. Furthermore, business owners and potential investors should make valuation adjustments given the inherent risks involved and the speculation of federal legalization. It may be appropriate to discount the value of a business given the inherent risk of federal enforcement. However, it may also be appropriate to inflate the value of a business given the potential impact of federal legalizations.

We encourage our readers looking for additional information from the experts themselves to check out this great blog.

Most government agencies rely on an informal rulemaking process when drafting and finalizing rules interpreting the law. This process generally requires the appropriate government agency to notify the public of the proposed new rule or proposed modifications to existing rules. The government agency generally must consider all comments received before finalizing a rule.

An exception to the public-comment period generally applies for “emergency” or “temporary” rules. Emergency and temporary rules are usually effective immediately, but are temporary in length. Unless the agency takes additional action, most temporary and emergency rules will expire.  A formal rulemaking and comment period generally applies before an emergency or temporary rule becomes permanent.

We encourage our clients and blog readers to participate in the rulemaking process.

The Oregon Department of Revenue (ODOR) issued a Notice of Proposed Rulemaking on October 19, 2017. ODOR scheduled a public hearing regarding these proposed rules on November 28, 2017 in Salem, Oregon.

ODOR proposes the adoption of two new rules – OAR 150-475-2030 and 150-475-2030. The stated need for the latter rule is to “codify the tax categorization of various products sold by marijuana retailers.” However, our review of the proposed rule includes a drafting error, inconsistent defined terms between the proposed rule and state statute, and an attempt to subject the sale of cannabis “seeds” to the state’s 17 percent retail sales tax. Our view of the applicable Oregon statute is that the retail sales tax does not apply to cannabis seeds as currently drafted and the proposed rule improperly classifies cannabis seeds as “immature plants.” Our Cannabis Team drafted and submitted the following public comments to ODOR and intends to attend the public hearing in Salem later this month.