As my clients know, I constantly advise my corporate collective clients to file tax returns of all types, including: Federal and state income taxes, payroll taxes; and State Board of Equalization sales tax returns. The State Board of Equalization last week issued a press release stating their desire to regulate and track cultivator to distributor transactions state wide. This is the link to the release: LINK. A Board member, Horton, is proposing legislation to regulate the distribution of marijuana from the growers to the retailers as a way of controlling illegal sales and assessing tax when properly due. “The time is overdue for the state to provide leadership for this industry regarding the manufacturing and sale of marijuana similar to what we did for cigarettes and liquor,” Horton said. “Such proposed controls will have the same effect of regulating and controlling sales and capturing the appropriate sales tax.” Under proposed legislation, the BOE would administer a statewide license program for every marijuana grower, importer, wholesaler, and retailer in order to regulate marijuana sales in the state. A tax would be imposed on the distribution of medical marijuana at a rate equivalent to that imposed upon tobacco products. Any marijuana or marijuana products distributed by any unlicensed person would be subject to seizure. In addition, the unlicensed person would be subject to a fine of up to $5,000 or imprisonment not to exceed one year in county jail, or both.
Obviously we can debate the merits (or not) of this proposal. However, I perceive several significant points in this development. First, the Board is impliedly saying that cannabis sales are legal. This eviscerates the bogus arguments being raised by many district attorneys, zoning boards and other government officials that cannabis sales are illegal. Second, when I spoke with the Asst. Planning Director for San Bernardino County in an effort to get sensible regulations (as opposed to the ban) enacted, he stated that he wanted state wide control and guidance. While his stated desire is an example of shirking zoning responsibilities, the State Board’s plan would be a first step toward meeting that criteria. Access may actually be facilitated by state wide regulation and licensing requirements. It is NOT my preferred means, but it is a means to that end.
5. Conclusion I predict in a few years, the zoning and permit issues will be well settled. In the meanwhile, the next generation of bans or severely limited access is upon us. If the State Board of Equalization gets its way, cannabis prices will, in all likelihood, increase as a near punitive tax will be imposed. However, the state wide comprehensive regulation may result in less restrictive zoning limitations.
In the next issue I plan on not only updating you on recent developments, but also to speak briefly about state and federal income taxation relative to cannabis businesses. If you have any questions or comments, or have an idea for future articles, please contact me.
2. San Bernardino County Ban and Alternatives
Since last month’s newsletter, several significant developments have unfolded. First, San Bernardino County’s Planning Commission recommended that the Board of Supervisor enact a zoning ordinance that would only allow hospitals, home health care agencies, elderly home care and hospice to distribute medicine. My office, on behalf of a class of collective presented testimony at the two public hearings for this issue and even wrote a proposed ordinance which would sensibly regulate the location of medical cannabis collectives. If you would like to obtain a copy of the proposed ordinance, please contact my office. In my scarce free time, I will be working on assembling a better website with links to articles and other information regarding this issue. You can and should make your voice heard at the County Supervisor meeting. To my knowledge, the Board has not yet announced when they will meet to review and presumably pass the de facto ban. However, the County’s website does post agendas a few days before the Tuesday meetings.
The key issue to focus upon is that the County’s proposed regulation is different than the illegal ban enacted in Anaheim. In prior newsletters, I have extensively analyzed the Qualified Patients v. City of Anaheim case. Here, the County is attempting what I consider the newest type of ban. On its face, the ordinance seeming allows the aforementioned health facilities to dispense cannabis. However, as stated in the San Bernardino Sun’s article with my interview (published on February 11, 2011, (no link available)) there is no reliable evidence that any collective meets these requirements. My office is involved in efforts to obtain those licenses. However, there are serious practical hurdles, such as whether any of these agencies are incorporated as per the Attorney General Guidelines relating to collectives; whether state and federal financing would be in jeopardy if one of these health care business distributed cannabis to patients, and whether “public” as opposed to residential patients could even access the facility. So even though the ordinance appears to allow access, the reality is that patients are denied access. I anticipate further litigation to protect patients’ access rights.
3. County of Los Angeles Ordinance
On February 10, 2011, the Second District of the California Court of Appeal held that Los Angeles’s county zoning ordinance relating to medical cannabis collectives was lawful. In the first case of its kind, the court held that Art. XI, Sec. 7 of the California Constitution did NOT prevent the county from passing severely restrictive limitations on cannabis collectives. While the legal challenge to the ordinance failed, the factual and evidentiary challenge was not adequately presented. The court left open the possibility of a factual challenge to the $11,500.00 permit fee charged by the county. Also, there was no evidence as to whether the county was improperly processing the applications with the idea of denying the applications outright. I am predicting a request for review by the California Supreme Court. I will report further developments as they occur.
1. Introduction The legal issues facing medical cannabis patients, cultivators and collectives continue to evolve at a rapid pace. An individual patient’s right to grow, possess and use cannabis is well established. The collective distribution of medicine amongst many patients is my primary concern. Virtually all cities and counties in Riverside and San Bernardino, and most cities in Los Angeles, Orange and San Diego counties, use zoning regulations, in conjunction with denial of business licenses, to prevent collective patients access to medicine. San Bernardino County is attempting to pass a new ban, which while seemingly allowing cannabis distribution, would really prevent patient access. Meanwhile, the State Board of Equalization is attempting to create a state wide permit and licensing scheme to regulate transactions throughout California.
3. Corporate compliance-tax returns As you know, your collective must be state law compliant. This means that you must collect and remit taxes of all kinds, including payroll, sales and probably income tax. Though I am not a tax advisor and I am not providing tax advice, you should be working with your tax preparer to file the appropriate forms at the appropriate times. In my next newsletter I plan on discussing the tax ramifications relating to the feds refusal to recognize medical marijuana. In the meanwhile, I recommend that each of you undertake a complete review of your corporation to ensure that your bylaws are current and best protect you and your organization; that meeting minutes are prepared and filed to reflect your business affairs; and that you file the appropriate documentation with the Secretary of State to keep your corporation lawful. Your corporation is the ONLY protection you have from criminal prosecution. Following the Attorney General’s guidelines requires a corporation. If your corporation is suspended for failure to file the appropriate paperwork, (or simply failing to maintain your corporate formalities) it can result in your arrest and criminal prosecution. Whether it is my office or any other competent professional, I advise you to conduct a corporate compliance audit each year.
4. Conclusion The end of prohibition of medical marijuana is in sight. Until recently, police were the primary means of enforcement. Once law enforcement was curtailed, particularly federally, code enforcement has been used to harass and deny patients access to medicine. The newest front on this battle is with land use and planning departments. My office is committed to winning this battle with you. In conclusion, the law is still not clear on the zoning bans on cannabis businesses. The law is still evolving rapidly. The current laws can change overnight. Nevertheless, my office’s business practice is committed to bringing you the most up to date information possible.
2. Zoning bans The largest hurdle the medical marijuana community still faces is the refusal of most Southern California cities and counties to allow medical marijuana businesses by virtue of restrictive zoning/permit/licensing laws and regulations prohibiting collectives from operating. There is no doubt that local jurisdictions are doing all they can to thwart the establishment of any businesses involving medical cannabis. These locales use multiple means to prevent patient access. Sometimes, it is an outright ban on medical cannabis business. See, for example, Riverside County Ordinance 348, section 3.3 which states, in part: “In no event, however, shall a medical marijuana dispensary as defined in this ordinance [sec.21.51i] be considered a permitted or conditionally permitted use in any zone classification. A medical marijuana dispensary is hereby prohibited in all zone classifications and no permit of any type shall be issued therefore.” On behalf of my clients, my office is challenging the constitutionality of one of these types of bans based on the case Qualified Patients Assoc. v. City of Anaheim (2010) 187 Cal.App.4th 734, which invalidates zoning bans relying upon the federal Controlled Substances Act. However, some planning departments are using a temporary ban (a moratorium) to prevent my clients from operating. A moratorium necessarily expires within 24 months of enactment. (see Gov. Code, §65858.) As you probably know, though medical cannabis has been allowed in California since 1996, under prior federal administrations, local (state) police would contact federal DEA offices to investigate and prosecute local collectives. When Obama became President, his Attorney General, Eric Holder, issued a memorandum stating that the feds would not interfere with state laws relating to marijuana, though the feds would continue to prosecute if firearms, excessive cash or other indicators of criminal activity are present. (http://blogs.usdoj.gov/blog/archives/192) Once the state police could no longer invoke easily federal jurisdiction to criminally prosecute state compliant medical cannabis providers, distributors and patients, local jurisdictions turned to code enforcement and zoning regulations in an effort to prevent the distribution of medicine. Therefore, after 2008, some jurisdictions simply banned these businesses, while others enacted moratoriums. Because moratoriums are limited to 24 months, those moratoriums are expiring and a new wave of bans is coming.
1. Decriminalization A new year is upon us and the legal issues facing the medical marijuana community continue to rapidly evolve. Former Gov. Schwarzenegger signed Senate Bill 1449 (amending Health and Safety Code 11357) which is a new law decriminalizing possession of less than one ounce of non-concentrated cannabis. This means that even non-patients (those without a medical recommendation for the use of cannabis) can possess small amount of marijuana (less than one ounce (28.5 grams) without fear of a felony or misdemeanor prosecution. Of course, possession with intent to sell or distribute is still a crime in California, unless such actions are undertaken as part of a medical marijuana collective or cooperative.
The facts in City of Claremont v. Kruse (2009) 177 Cal.App.4th 1153 are virtually identical. The cannabis collective operator, Kruse, applied for a business permit for medical cannabis, but was denied as no zone specifically authorized that use. Rather than seek a zoning amendment as required by the Claremont municipal code, Kruse simply opened up business without a license. The city issued a cease and desist letter, an administrative citation, and then brought a civil lawsuit to shut down Kruse’s business. The court ordered the business shut down because Kruse failed to follow the procedures set forth under Claremont’s municipal law to obtain “permission” to conduct his business. Again, Kruse failed to challenge the zoning laws through “city hall” before going to court. In my mind, these cases stand for the proposition that you must follow the local zoning rules. If the laws are silent as to whether medical cannabis is allowed, and the jurisdiction requires the business owner to obtain a determination that the proposed business (cannabis) “fits” within the existing uses, then the business owner better follow that procedure. Legally, this is called “exhausting your administrative remedies.” My office can assist you in this time consuming and expensive process. That procedure, however, is not typical, as most jurisdictions have outright BANS on medical cannabis businesses. When the business is banned outright, there probably is no need to seek administrative permission, for zoning purposes, to operate the cannabis business. Rather, the business owner should file a declaratory relief action in court, which is exactly what the cannabis collective and patient did in Qualified Patients Association v. City of Anaheim. Alternatively, the applicant can apply for a business license, be denied and then seek administrative and, ultimately, a court’s review of that process.
In QPA, the City of Anaheim enacted an outright ban on medical cannabis businesses and added a criminal penalty for violating the zoning ban. The city challenged the lawsuit by claiming that its ban was authorized. The trial court agreed with the city and the case was dismissed. QPA appealed. The Court of Appeal ruled that trial court should NOT have dismissed the case, and sent the case back to the trial court for a further hearing. No decision was reached as to whether the outright ban was lawful. Despite the fact that the critical issue (whether a city or county can ban all cannabis businesses) was not addressed, the QPA court did state the cities cannot simply argue that since cannabis is against federal law, a city can ban the business. This result can be viewed as a glass half full. I believe that the most significant issue facing medical cannabis from a civil law perspective (not criminal) is whether a city or county’s ban complete ban on cannabis businesses is legal. The court in QPA states: “We do not decide whether the CUA or the MMPA [medical cannabis laws] preempt the city’s ordinance because we conclude the issue is not properly before us….Whether the MMPA bars local governments from using nuisance abatement law and penal legislation to prohibit the use of property for medical marijuana purposes remains to be determined.” (Qualified Patients opinion, at 23-24.) Nevertheless QPA does provide a very interesting analysis of whether “storefront dispensaries (2)” can exist under the current laws and AG guidelines. A very careful analysis of the nature of the existing business among its members is critical. In conclusion, the law is still not clear on the zoning bans on cannabis businesses. The law is still evolving rapidly. The current laws can change overnight. Nevertheless, my office’s business practice is committed to bringing you the most up to date information possible. If you have any questions or comments, do not hesitate to contact me.
(1) The defendant in Naulls failed to indicate in his application for a business license that he intended to operate a medical marijuana dispensary, instead describing the business as “miscellaneous retail.” Based on that application, the city issued a business license; however, had the defendant provided the correct information, his application would not have been granted. (Naulls, supra, 166 Cal.App.4th at p. 427, 83 Cal.Rptr.3d 1.)
(2) My clients are aware of my practice to not use that term, but rather to refer to the business as a collective.
Legal notices: Mass mailings of bulletins describing new cases or other legal updates may not constitute regulated communications under Ca. Rules Prof. Con. 1-400, even where the attorney's name or other professional designation is included. [See Los Angeles Bar Ass'n Form.Opn. 494 (1998)] Cal. Prac. Guide Prof. Resp. Ch. 2-E. However, in an abundance of caution, I must disclose that this newsletter does not create an attorney client relationship, and is not a guarantee, warranty or prediction of past, present or future results.
As promised, I am writing to describe one of the most anticipated medical cannabis decisions currently in the Court of Appeal: Qualified Patients Assoc. v. City of Anaheim. (QPA.) Unfortunately, the court did not address the most significant issue as to whether a city (or county’s) complete ban on cannabis businesses is lawful. Expect more litigation before that issue is answered. Medical cannabis is lawful under California law provided that the Attorney General’s guidelines and related laws (CUA/MMPA) are followed. The issues I primarily assist my clients with relate to the formation of a proper entity to conduct a cannabis business and the land use (or prohibition) against medical cannabis businesses.
Presently my clients are faced with an irreconcilable problem: under state law, medical cannabis is legal, but as a matter of zoning laws in a city or county, medical cannabis businesses are illegal. In other words, what is legal in the state is illegal in city of Riverside, unincorporated Riverside County and almost everywhere in Southern California. Until now the two leading cases were City of Corona v. Naulls, and City of Claremont v. Kruse. These case opinions are located on my website (realpropertyattorney.net) and many other places. A review of the issues addressed there is appropriate before analyzing the impact of QPA. In City of Corona v. Naulls (2008) 166 Cal.App.4th 418, 83 Cal.Rptr.3d 1 (Naulls,) Naulls opened a medical cannabis dispensary without a license from Corona. (1) Corona's municipal code listed all of the permitted uses within each zoning district, but did not include selling or distributing marijuana among the classified uses. Persons seeking to use their property for a non-classified use in Corona were required to follow procedures for obtaining the Planning Commission's approval of use.1 The defendant in Naulls failed to indicate in his application for a business license that he intended to operate a medical marijuana dispensary, instead describing the business as “miscellaneous retail.” Based on that application, the city issued a business license; however, had the defendant provided the correct information, his application would not have been granted. (Naulls, supra, 166 Cal.App.4th at p. 427, 83 Cal.Rptr.3d 1.) Corona were required to follow procedures for obtaining the planning commission's approval of such use. Naulls failed to follow those procedures. Corona's municipal code expressly stated that any condition caused or permitted to exist in violation of its provisions constituted a public nuisance. The court concluded that Naulls’s failure to comply with the city's procedural requirements (obtain a business license) before operating a medical marijuana dispensary “created a nuisance per se” pursuant to Corona's municipal code, and upheld the issuance of a preliminary injunction closing down the business. Naulls did not challenge whether the zoning laws unconstitutionally interfered with California’s cannabis laws, as Naulls failed to pursue the matter through “city hall” before going to court.
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