Marijuana Perception and Legalization

 Once upon a time, Americans viewed marijuana as a dangerous drug leading to serious addiction and crime. According to the 1936 cult classic movie Reefer Madness, “women cry for it and men die for it.” Over time, the perception that marijuana is a dangerous gateway drug has changed dramatically, notwithstanding Attorney General Jeff Session’s views to the contrary. According to a Pew Research Center survey conducted in October 2017, 61 percent (about six-in-ten) of Americans believe marijuana should be legalized. According to that same survey, 56 percent of Baby Boomers (those 54 to 72 years of age) support marijuana legalization. This same group will soon be populating senior housing and care communities. In fact, in Oregon, the majority of the medical marijuana users are between 60 to 64 years of age.

The legalization trend is also on the rise. As of January 2018, recreational and medical marijuana is legal in eight states — Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington — plus the District of Columbia, and 22 states have legalized medical marijuana.[1]

Marijuana and Senior Care and Housing

Marijuana use in senior housing, such as assisted living communities and nursing homes, poses unique challenges. First, allowing marijuana use in facilities and communities could subject owners and operators to serious enforcement remedies under the Controlled Substances Act (CSA), which classifies marijuana as a Schedule 1 Drug (the same classification as substances like heroin and LSD). Second, nursing homes and assisted living communities also face complex risk-management issues when they allow marijuana use. Some of which we discuss below.

Nursing homes are particularly at risk as they are regulated by both federal and state law.  Because marijuana remains illegal under federal law, nursing homes that permit marijuana use and storage on its premises could be exposed to significant enforcement actions. Under CSA, anyone who knowingly possesses marijuana, leases, rents or controls a place where marijuana is used can be subject to criminal prosecution, forfeiture of assets, such as vehicles, real property and leasehold interests. Furthermore, if the nursing home accepts Medicare, it must comply with certain federal requirements necessary to continue its participation under Medicare. One of those requirements is compliance with federal law. By permitting marijuana use, a nursing facility risks losing its Medicare certification — often its primary source of reimbursement. Consequently, most nursing home operators do not permit any marijuana use on its premises.

While assisted living communities are also subject to CSA, many in Oregon, Washington, Colorado, California and other states where marijuana is legal, do permit the use of medical or recreational marijuana. Often these communities view the use of marijuana as a resident-right issue, and some states, such as California and Colorado actually provide state regulatory guidance on use of marijuana in communities.

Risk Management Issues

If an assisted living community is planning to or already does allow marijuana use, it should be wary of the following issues.

Storage and AdministrationUnder state regulations, assisted living communities are required to store and administer medications to residents, or if self-administered, must confirm that residents can safely store and consume medications. Medical marijuana comes in various forms and there is no standardized dosing. Communities should at minimum, evaluate a resident’s ability to consume/ingest marijuana and ensure others cannot access the marijuana by providing locked storage units.

Primary Caregivers. Some medical marijuana laws (such as those in Oregon and Washington) permit a medical marijuana patient to designate a primary caregiver who can possess and store marijuana on behalf of the patient. A primary caregiver can be owners and staff members of an assisted living community.  Due to the risk of theft, loss and possible enforcement action, we recommend communities have clear written policies for both staff and residents that no assisted living community employee shall serve as a primary caregiver.

Care Planning. Developing and regularly updating an individualized resident care plan is at the heart of assisted living. Because marijuana may affect judgment, interfere with medications, lead to loss of balance/coordination, increase appetite or have other side effects, a community must have robust protocols to assess marijuana use in residents. Failure to do so could lead to significant regulatory citations and even malpractice liability.

 Usage Areas. Most laws legalizing marijuana ban use in public places, including hallways, community areas or visible locations. Clean-air laws also ban smoking or vaping inside public buildings or places of employment. A community should either develop policies limiting where a resident can use marijuana or, to help avoid potential liability, simply ban smoking or vaping of marijuana.

Mobility Devices. Mobility devices can pose difficult challenges on their own, adding marijuana impairment exacerbates that challenge. At a minimum, communities should require residents who use mobility devices to inform the communities if the residents plan to consume marijuana.  The community should assess interventions to reduce the risk of harm to the residents and others. These may include removing electric scooters or wheelchairs until such residents are no longer impaired.  

Best Practices

 Some best practices include:

  • Inform residents at or before admission about your marijuana policies. Surprises are not good in this industry;
  • Assess a resident before use of marijuana to establish a baseline. Care planning is key to minimizing your risk. Consider whether you need a negotiated risk agreement;
  • If a medical marijuana patient, obtain proof of registry card;
  • Inform your staff and residents that you do not permit staff to act as designated caregivers;
  • Do not permit your staff to administer or store useable marijuana, unless required by state law;
  • Do not permit residents to store marijuana plants at your community; and
  • If you allow marijuana, provide state informational brochures about safe and legal marijuana use.

Regardless of whether your community or facility permits marijuana use, it should have robust written policies and procedures addressing the use and storage of marijuana and take into account the risk management issues discussed above. For more information, including additional best practices, please do not hesitate to contact us.

Postscript: Gabi Sanchez provides additional thoughts on the topic in Senior Housing News’ April 19 post titled “Senior Living Providers Can No Longer Blow Off Pot Policies.”

[1]Marijuana Legalization by the Numbers,” CNN (January 4, 2018)

The Washington Court of Appeals Division II has ruled that Clark County can lawfully ban the retail sale of marijuana within its unincorporated areas. In a unanimous decision issued on March 13 in Emerald Enterprises, LLC v. Clark County, the court rejected arguments that the Washington Uniform Controlled Substances Act (USCA) preempts a Clark County ordinance banning the retail sale of recreational marijuana in unincorporated areas so long as the federal government listed marijuana as a controlled substance. The USCA codified Initiative 502 and legalized the limited production, processing, and sale of recreational marijuana in Washington. The court said the USCA does not grant retailers an affirmative right to sell marijuana, it does not authorize retail stores in the unincorporated areas of every county, and it does not prevent a county from prohibiting retail recreational marijuana sales.

The court’s ruling is the first appellate decision in Washington state on this issue and follows an earlier Washington Attorney General’s opinion that the USCA does not preempt local government action and that local governments retain the authority to enact bans on marijuana sales. The decision also is consistent with the Washington State Liquor and Cannabis Board’s regulations that explicitly provide for local governments to retain zoning authority.

In addition to Clark County, four other Washington counties (Franklin, Klickitat, Walla Walla, and Yakima) and 77 cities prohibit retail marijuana sales.

In our last installment, we discussed the reasons why Oregon’s cannabis sales tax should not apply to cannabis seeds. So what do you do if you believe that a retailer wrongfully charged you sales tax on seeds or any other cannabis item? There’s a law for that!

Oregon Revised Statute (ORS) 475B.740 requires that cannabis retailers return taxes imposed on a sale that is not taxable upon written notice from the Oregon Department of Revenue (ODOR). The relevant ORS on the refund process is not clear or easy to follow. However, the Oregon Legislature granted ODOR broad authority to establish rules and procedures regarding the cannabis sales tax — and it did just that.

ODOR created Oregon Administrative Rule (OAR) 150-475-2060, which provides the relevant how-to of the specific process a consumer must follow for obtaining a refund of excess taxes paid, as follows:

  1. Within 30 days from date of sale, the consumer requests a refund in writing to the retailer by mail or hand delivery. The request must include the retailers (i) name, (ii) the nature of the excess tax paid, (iii) the remedy requested, and (iv) the receipt clearly identifying the date of purchase and proof of payment.
  2. If within 60 days of the request the retailer does not return the excess tax paid, then the consumer may appeal to ODOR within 120 days of the date of the original request for a refund.
  3. ODOR must refund excess cannabis sales taxes upon satisfactory proof that (a) the consumer paid an excess tax to the retailer, (b) the excess tax was not refunded, and (c) the consumer made a timely request for a refund.

One small problem: ODOR believes the sales tax equally applies to seeds and immature plants, (i.e., ODOR concluded the sales tax on seeds is legal). So don’t hold your breath waiting for ODOR to voluntarily send you a check.

Once you’ve exhausted these options, you are left with the Oregon Tax Court. The Tax Court is the sole, exclusive, and final judicial authority for questions of law and fact in Oregon. The Tax Court is broken into two separate divisions — the magistrate and the regular divisions. Cases typically start at the magistrate division and may later be appealed to the regular division. A taxpayer that is unhappy with a regular division decision may appeal to the Oregon Supreme Court.

A taxpayer appeals the failure of ODOR to issue a refund by filing a complaint against ODOR with the Tax Court no later than 90 days following the decision to deny the request for refund. With any luck, the Tax Court will agree with our position that the cannabis sales tax does not apply to seeds. As the saying goes, there are only two certainties in life — death and taxes.

One more thing. Even if you win, you’ve probably lost. ORS 305.490 requires that taxpayers pay a filing fee for each complaint or petition. The current filing fee is $265. The statute also provides for the recovery of costs and reasonable attorney’s fees in limited circumstances. However, those circumstances are generally limited to situations involving an individual’s request for a refund for a tax measured on net income and property tax matters. Costs and reasonable attorney’s fees are not recoverable in sales tax matters.

Takeaway for Consumers

ODOR probably got it wrong in concluding that the cannabis sales tax applies to cannabis seeds. Anticipating a challenge to their weak position, ODOR has created a number of onerous obstacles for anyone willing to challenge their authority.  Fighting ODOR on this issue is probably not worth the cost. A consumer spending $100 on seeds this spring will generally pay $20 in sales tax. Getting that sales tax refunded requires that you jump through the hoops noted above. If the retailer and ODOR refuse to make the refund, then you’re stuck paying $265 to recover $20 — creating a loss of at least $245, because the $265 cannot be recovered under current law. This doesn’t begin to account for the time and effort involved jumping through all of these hoops. The only way we’ll ever know if ODOR got it wrong is if someone is willing to take up the fight on principal. Even then, a win in Tax Court probably means the Oregon Legislature will “fix” the law in a future legislative session. If this happens, we can only hope that the Legislature will be kind enough to expand recovery of costs and reasonable attorney’s fees to sales tax matters.

Takeaway for Seed Retailers

Be wary of refunding any taxes to your customers because you can be held liable for not collecting and remitting the tax.

The Oregon Department of Revenue (ODOR) recently issued a permanent administrative rule relating to the retail sales tax imposed on certain marijuana items. OAR 150-475-2100. The rule itself provides guidance to retailers on how certain types of marijuana items should be classified and how such items should be subject to the retail sales tax imposed on them. However, the administrative rule reaches beyond the statutory language adopted by the Oregon Legislature to suggest that, somehow, cannabis seeds are subject to the retail sales tax. Prepare yourself for a bit of legal analysis and simple logic. Let’s take a look at how ODOR got it wrong.

The Law

The Oregon Revised Statutes (ORS) cannabis tax rules are codified in ORS 475B.700 through ORS 475B.760. ORS 475B.700 contains the relevant definitions for the cannabis tax. The provision includes definitions for the terms “cannabinoid product,” “immature marijuana plant” and “useable marijuana.” Each of these terms are defined by reference to their definition under ORS 475B.015.

ORS 475B.705 contains the enabling language and the tax rates. It states that a tax is imposed on “the retail sale of marijuana items” in Oregon. The tax is imposed on the consumer, but withheld and remitted by the retailer. ORS 475B.705(2) imposes a 17-percent tax on the retail sales price of several marijuana items, including “immature marijuana plants” and cannabinoid products other than those intended to be used by applying the product to the skin or hair.

ODOR’s Administrative Rule

ODOR adopted Oregon Administrative Rule (OAR) 150-475-2100 regarding the retail sales tax imposed on certain cannabis items. The rule states that the definitions found in ORS 475B.015 apply the terms used in the rule and that “seeds” are taxed at the rate in ORS 475B.705(2)(c).

Getting It Wrong The Legal Analysis

The Oregon statute covering the retail sales tax begins by creating defined terms. There is nothing inherently wrong with doing this. In fact, ORS 475B.700 creates defined terms not otherwise used by chapter 475B. However, it fails to do something important. It fails to incorporate the many defined terms found in ORS 475B.015. The defined terms found in ORS 475B.015 only apply to ORS 475B.010 through 475B.545. Among the terms incorporated are cannabinoid product, immature marijuana plant, marijuana items and usable marijuana.

Let’s jump to the low hanging fruit. ORS 475B.015(24)(a) defines the term “marijuana seeds” to mean “the seeds of the plant Cannabis family Cannabaceae.” The definition of “marijuana seeds” is not carried over to the tax section by virtue of ORS 475B.700. It’s glaringly omitted. OAR 150-475-2100 attempts to remedy this by rule and adopting all defined terms in ORS 475B.015.

Next, the term “marijuana” is defined by ORS 475B.015(17)(a). It means “the plant Cannabis family Cannabaceae, any part of the plant Cannabis family Cannabaceae and marijuana seeds.” The definition of “marijuana” is not carried over to the tax section by virtue of ORS 475B.700. It’s also glaringly omitted. Again, the administrative rule attempts to remedy this by adopting all defined terms in ORS 475B.015.

One important term that is carried over to the tax section is the term “marijuana item.” The enabling language found in ORS 475B.705(1) states “a tax is hereby imposed on the retail sale of marijuana items in this state.” Marijuana items are defined by ORS 475B.015(19) to mean “marijuana, cannabinoid products, cannabinoid concentrates and cannabinoid extracts.” Cannabis seeds do not fall within the definition of cannabinoid products, cannabinoid concentrates or cannabis extracts. That only leaves “marijuana” as the potential category for cannabis seeds. If we assume that the defined terms in ORS 475B.015 carried over to the tax section, then it is clear that cannabis seeds are “marijuana” as that term is defined, and therefore, would be a “marijuana item.” However, we cannot make this assumption because ORS 475B.700 fails to incorporate the defined term “marijuana” from ORS 475B.015.

But wait, there’s more. ORS 475B.705(1) simply states that taxes are imposed on the retail sale of marijuana items. ORS 475B.705(2) sets the applicable tax rates — and this is where the Oregon Legislature really swung and missed. Tax rates are set for the following items:

  • Marijuana leaves,
  • Marijuana flowers,
  • Immature marijuana plants,
  • Cannabinoid edibles,
  • Cannabinoid concentrates,
  • Cannabinoid extracts,
  • Cannabinoid products intended to be applied to the skin or hair, and
  • Cannabinoid products not intended to be applied to the skin or hair.

Cannabis seeds do not fit within any of these. The only reasonable possibility is that they are cannabinoid products not intended to be applied to the skin or hair. So let’s take a look at the defined term “cannabinoid products.”

ORS 475B.015(5)(a) defines cannabinoid products to mean “a cannabinoid edible and any other product intended for human consumption or use, including a product intended to be applied to the skin or hair, that contains cannabinoids or dried marijuana leaves or flowers.” Cannabis seeds are not edibles, and they are not intended for human consumption. They are also not used for any cannabinoids that they may contain. Cannabis seeds are intended to be germinated, grown and harvested. ODOR may argue that this intent constitutes “use” within the meaning of ORS 475B.015(5)(a), but this should be a losing argument.

ODOR did not look to the cannabinoid product argument when making their permanent administrative rule. OAR 150-475-2100(2)(c) states that seeds are subject to the rate set by ORS 475B.705(2)(c). That section imposes a 17-percent tax on “immature marijuana plants.” It doesn’t impose a tax on seeds. A plant is not a seed. Therefore, the tax imposed by ORS 475B.705(2)(c) cannot apply to cannabis seeds.

You may recall our prior blog post on making a difference. We provided written comments to ODOR suggesting that they lacked statutory authority to tax seeds. They disagreed with our position. In their written response (PDF), ODOR makes two arguments. First, they argue cannabis seeds are a “marijuana item.” Second, they argue that there was legislative intent to tax all marijuana items, including seeds. Lastly, they believe it is appropriate to tax seeds at the rate imposed on immature plants in an attempt to comply with the statutory language.

The first argument fails a law school admissions test (LSAT) logic problem.  ODOR’s argument relies on the defined term “marijuana” found in ORS 475B.015(17)(a). The defined term “marijuana” does not apply to the tax statutes. The defined terms relevant to the retail sales tax on cannabis items are found in ORS 475B.700. Those terms do not include a definition for “marijuana.” Reliance on the definition found in ORS 475B.015(17)(a) is misguided.

Legislative intent is a tool used to interpret statutes, contracts and other items when an item is ambiguous. Legislative intent is not used when a document or statute is facially clear — meaning there is no ambiguity in the drafting. There is only one potential term that might be ambiguous. That term is the word “use” in the definition of cannabinoid product. My view is the term “use” is intended to mean utilizing and consuming the THC, CBD or other cannabinoids the product contains. It should not mean germinating a seed to create a seedling, immature plant, mature plant and finally useable marijuana.

Even if we lost the cannabinoid product argument, ODOR’s permanent administrative rule states that seeds are subject to the tax rate imposed on immature plants. Seeds and immature plants are separately defined terms — a seed is not a plant. Therefore, the tax rate imposed on immature plants should not be imposed on seeds.

What’s Next?

So what do you do if you’ve purchased seeds in Oregon and paid the sales tax ODOR says you must pay? Stay tuned for our next post on the fun hoops ODOR set out for you to request a refund!

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 not 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.