Mr. Cannabis Law, a full-service law firm focused exclusively on the marijuana and hemp industry, is excited to announce the addition of Steven D. Avalon, Esq. as an associate attorney at Mr. Cannabis Law. Mr. Avalon is a regulatory and transactional attorney with experience in federal regulation of marijuana and hemp as well as mergers and acquisitions experience with middle market transactions.

Mr. Avalon worked both as in-house counsel to a publicly traded cannabis investment firm and as an associate at a boutique firm specializing in transactional and regulatory law. During his time as in-house counsel, Steven oversaw mergers and acquisitions valued at over $50 million as well as ensured compliance within local, state, and federal law in the cannabis space. He also has experience lobbying Congress in Washington, D.C., making frequent trips to the nation’s capital to advocate on behalf of the cannabis industry. Finally, Steven helped navigate state laws to set up dispensary sites as well as statewide delivery for a Florida Medical Marijuana Treatment Center.

Dustin Robinson, Founding Partner of Mr. Cannabis Law, provided his comments on the addition of Mr. Avalon: “Mr. Avalon’s unique skill-set that combines cannabis-specific M&A experience with a deep understanding of cannabis operational compliance is going to make him a tremendous asset to our clients. The hiring of Mr. Avalon demonstrates Mr. Cannabis Law’s unwavering commitment to providing our clients and the cannabis industry with access to sophisticated legal expertise from professionals that are deeply passionate about the industry.”

 

Florida Hemp Companies Purchasing Out-of-State Product to be Used in Food Must Ensure the Hemp Comes From an “Approved Source” - Mr. Cannabis LawWith the complications surrounding certified seed in the state of Florida and other complications causing delay of hemp production within Florida, our clients with Hemp Food Establishment Permits are being forced to source hemp product from outside of Florida. Some are sourcing fully packed finished product while others are sourcing extract that will be formulated and packaged within Florida. Some are sourcing direct from suppliers outside of Florida while others are sourcing through brokers or distributors. Some are sourcing from nearby states like Tennessee while others are sourcing from west-coast states like Oregon.

 

Regardless of the where, what, and how of the product being sourced, all food consisting of or containing hemp or hemp extract must be sourced from an “approved source.”  Fla. Admin. Code. R. 5k-4.034(4)(a). Fla. Admin. Code R. 5k-4.034(2)(a) defines an “approved source” as a “food establishment manufacturing, processing, packaging, holding, or preparing food or selling food at wholesale or retail that meets local, state, or federal food safety standards from the jurisdiction of origin.” In order to demonstrate that the product is from an “approved source”, a Florida Hemp Food Establishment should require its supplier provide (a) a valid food license/permit; (b) the most recent food safety inspection report; and (c) a Certificate of Analysis verifying that the hemp product has been tested and contains less than 0.3% THC on a dry weight basis.

 

In many instances, applying the “approved source” rule is simple. Assume a Florida hemp retailer purchases a hemp tincture from a licensed Virginia hemp company. Similar to Florida law, Virginia regulates hemp tinctures as food and requires that the hemp companies obtain a food license and a food safety inspection report. Thus, the Florida hemp retailer should be able to easily obtain from the Virginia company the valid food permit, the most recent food safety inspection report, and a Certificate of Analysis verifying that the hemp product has been tested and contains less than 0.3% THC on a dry weight basis.

 

However, in other instances, the “approved source” rule is more complex. Assume that a Florida hemp retailer purchases a hemp tincture from a hemp company located in a state that does not regulate hemp as a food. Such company would likely not be able to produce a food license nor would it be able to provide a food safety inspection. Thus, such hemp tincture would not be from an “approved source” and the Florida hemp retailer should refuse to do business with such out-of-state hemp company.

 

Another instance that may cause confusion is when there are several middle-men between buyers and sellers. As the hemp supply chain has developed, many of these deals involve a broker or distributor that is trying to conceal the identity of the seller so that the buyer doesn’t try to go direct to the seller. For example, assume a Florida hemp retailer purchases a hemp tincture from a licensed Virginia hemp company but it is being purchased through a broker that is trying to conceal the identity of the Virginia hemp company. Under such circumstances, the Florida hemp retailer must demand that the broker provide a valid food license and a food inspection report for the seller. If the broker is not willing to produce such documentation, then the Florida hemp retailer should walk away from the deal.

 

The “approved source” rule is just one example of the complications created by a lack of uniformity in state hemp programs and a lack of guidance from the FDA with respect to hemp extract used in food. The team at Mr. Cannabis Law is here to help you navigate through this complex web of laws and regulations rife with legal inconsistencies and legal contradictions.

 

 

Two Distinct Legal Frameworks for Two Products that are not so Different

By: Dustin Robinson and Sean Hardwick

 

Can the Hemp Industry Transact with the Marijuana Industry? - Mr. Cannabis LawHemp and marijuana are botanically similar. Specifically, hemp is defined as cannabis with a concentration of 0.3% THC or less on a dry weight basis. However, cannabis is classified as marijuana both federally and in the state of Florida once the cannabis contains more than 0.3% THC on a dry weight basis. For operations, hemp and marijuana require a similar supply chain and infrastructure. While most states separate the hemp and marijuana industries into two distinct legal frameworks, the two industries could potentially complement one another through cooperation between hemp and marijuana operators. Yet, most state marijuana laws do not even contemplate the possibility of the two industries transacting with one another. This is a big mistake and states need to update their laws. Allowing hemp and marijuana operators to transact will improve supply issues in the marijuana industry; provide more sales channels for the hemp industry; improve patient access; and reduce costs in both industries.

 

There are numerous ways the hemp industry could one day transact with the marijuana industry. For example,  the hemp industry could sell CBD isolate to marijuana companies to be converted into THC distillate. There are several companies who have filed patents on technology that can do this in a safe and efficient manner. Another way in which the hemp industry could one day transact with the marijuana industry is by providing marijuana companies with various isolated cannabinoids derived by hemp, including, but not limited to, delta-8 THC, CBD, CBN, and CBG. It is much cheaper to produce these minor cannabinoids by using hemp than marijuana. And there is an increasing demand for these minor cannabinoids as additional research studies are published demonstrating their potential benefits.

 

However, the laws in most states prohibit these types of transactions. For example, in Florida a marijuana licensee must grow, process, dispense, and deliver the marijuana it sells; and it cannot contract out for these activities and it cannot purchase product from another grower to be processed. Thus, a Florida marijuana licensee cannot purchase CBD isolate or any minor cannabinoids from a hemp company. If a Florida marijuana licensee was able to purchase the CBD isolate or minor cannabinoids, it would improve patient access; drive down costs; and allow the marijuana licensees to develop more innovative products. It would be a win for the hemp industry, marijuana industry, patients, and customers.

 

Additionally, hemp companies and marijuana companies can create strategic partnerships. The sale of hemp-derived products occurs online and in retail stores. Therefore, a hemp producer needs to generate traction with its customers on the hemp producer’s website, a hemp distributor’s website, or through retail store. Yet, stand-alone hemp product stores are often unsuccessful. Furthermore, the sale of hemp products in other retail stores such as grocery stores, pharmacies, or convenience stores is generally not a primary focus for the retail store. By contrast, marijuana may only be lawfully sold within a state-licensed dispensary facility. Further, marijuana dispensaries are seen as a reliable place to purchase cannabis products because each marijuana product must undergo rigorous testing and can be tracked after it is sold. Specifically, each marijuana product is tested for potency; microbial contaminants; metals contaminants; and residual solvent contaminants (if any solvents were used during manufacturing). In addition, all marijuana products are tracked using the state’s track-and-trace system. Therefore, hemp products sold in a marijuana dispensary will be viewed as more reliable. As a result, hemp producers and marijuana dispensaries will both benefit. Specifically, hemp producers can generate higher revenue from sales to dispensaries and reach more customers from the exposure the hemp product receives from being sold within marijuana dispensaries. Furthermore, marijuana dispensaries can offer customers a wider variety of products. Therefore, commerce between hemp and marijuana operators benefits both hemp and marijuana operators.

 

In short, the interaction between hemp and marijuana can create a variety of benefits for both industries. While Colorado has provided guidance for the hemp industry to transact with the marijuana industry, most states have not established frameworks that allow for hemp operators and marijuana operators to transact with one another. Because marijuana remains a Schedule I controlled substance under the Controlled Substances Act, any transaction between the hemp operator and marijuana operator may be federally illegal. Furthermore, without established regulations or clarification from a state’s marijuana or hemp program, transactions between hemp and marijuana operators may violate state law as well. As more states recognize the interaction between the hemp and marijuana industries, the lines between the two industries will be further blurred which will further buttress the need for federal legalization.

 

 

 

 

 

By Dustin Robinson and Zachary Hyman

This article is featured in the eBook, Pivot Under Pressure: A Comprehensive Guide to Minimize Impact and Revitalize Your Small Business, which is available at https://millenniallaw.com/pivot/

 

The ABC’s of Cannabis and Coronavirus - Mr. Cannabis LawThe Coronavirus has impacted many businesses and industries, including the Cannabis industry.  The Coronavirus closures and government regulations concerning the distribution of Cannabis has created uncertainty as it relates to the future of the industry. To make matters worse, federal funding is not available, and Cannabis companies cannot file for bankruptcy. However, Assignment for the Benefit of Creditors (or “ABC”) state statutes, such as Florida Statute Section 727.104, provide an affordable alternative to bankruptcy that permits business owners to close while limiting your potential liability.

The ABC proceeding is commenced with the execution of an irrevocable assignment in writing.  Upon execution of this assignment, the party receiving the assignment receives control over a “legal estate” comprising of all of the assets of a business, and the assignor (or business) loses power and control over its property. Then, the assignee, or neutral third party who is responsible for marshalling and selling the assets of your business, commences an assignment proceeding. Generally speaking, an ABC is an efficient, relatively economical, and faster means for the administration of insolvent estates in Florida, and remains a viable alternative to Bankruptcy, especially if bankruptcy is not available to a company.

Below is a summary of what an assignment for the benefits entails, and how it can benefit your business.

  1. You get to choose the assignee. Pursuant to Fla. Stat. § 727.104, the people or entities in control of a business can select the assignee, or the person that will be managing the liquidation process, which gives flexibility in the approach to be taken with respect to your company, and the assignee can operate your business during the pendency of the ABC process.
  2. ABCs Limit Liability. An assignee has the right to reject real and personal property leases, and may be required, at a maximum, to only pay back rent and future rent not to exceed the greater of one year’s rent or fifteen percent of the rent remaining, and rent must be charged at the contract rate. Damages arising from the termination of employment agreements are also limited.
  3. Unsecured Creditors Cannot Pursue Collection Efforts. An unsecured creditor, such as a credit card company, or a creditor that does not have a security interest in your businesses’ assets, is prohibited from commencing any claims against your business, and must file a proof of claim in the Assignment of Benefits Case. As a result, all of the claims against your business, with the exception of secured claims, mortgages or other claims where a creditor has a security interest in your business’ property, must be heard and addressed in a single forum.
  4. The Assignee Can Assign and Prosecute Claims. The Assignee can assign and prosecute claims on behalf of your business, and certain legal defenses to such claims, such as claims based on your participation in the wrongdoing, do not apply to an assignee. This means the assignee can sell potential claims on behalf of your business at a higher value to creditors.

The ABC process provides business owners, for whom bankruptcy is not available, because they are in the Cannabis industry or cannot afford the process, a mechanism to close their company and limit potential liability from creditors. If your business is struggling, then the ABC process may be a viable solution to your financial distress. Consult with an attorney or financial advisor to see if the ABC process is appropriate for you and your business.

By: Dustin Robinson and David Butter

Florida Super Licenses Receive Another Dose of Steroids: But Will They Accept the Boost? - Mr. Cannabis LawFlorida medical cannabis licenses have become known as “super” licenses for three reasons.

 

  • First, Florida’s licensing structure is vertically integrated. Licensees are required to oversee the entire supply chain, including cultivating, processing, dispensing, and delivering. Vertical integration provides licensees with significant control from seed to sale. Vertical integration is unique—most states with cannabis programs have a horizontal licensing structure, which means licenses are specific to certain segments of the supply chain. For example, in Illinois, you could apply for a cultivation license or a transportation license.

 

  • Second, there is a limited number of licenses. In 2014, the Florida legislature created the “super” licenses, originally issuing only five. Over the course of the past five to six years, more licenses have been issued. Today, only 22 licenses have been issued, 13 of which are actively operational. Operators who acquired a license in 2014 got a substantial head start over operators who received their license in later years.

 

  • Third, licensees can open an unlimited amount of retail dispensary locations. Most states with cannabis programs place a cap on the size and number of facilities for growing, processing, and dispensing. Until this month, Florida allowed each licensee to open 25 dispensaries and an additional 5 dispensaries for every 100,000 patients who register for Florida’s cannabis program.

 

Recently, these Hulk-Hogan licensees received a new boost. Florida’s cap on dispensary locations (as mentioned in bullet point 3 above) expired on April 1, 2020. Previous to the expiration, licensees could open up to 35 dispensaries because there are over 300,000 registered patients in Florida’s registry. Since its expiration, licensees can now flex their muscle into an unlimited number of dispensaries.

 

But this isn’t their first dose. Along the way, the licensees have picked up juice. The repeal on the ban of smokable cannabis gave licensees a shot in the arm, prompting licensees to expand production, operations and retail footprints. This was effective—more than 22,000 pounds of smokable product were sold in less than six months. Now, with the expiration of the dispensary cap, the “super” licenses have an opportunity to expand business operations.

 

Even though gone, the dispensary cap left scars. It was the spark of much confusion and litigation, resulting in state health officials agreeing to allow two licensees—Trulieve and Surterra Wellness—to open more than 35 dispensaries, exceeding the state cap.

 

So why aren’t the licensees celebrating and heading to the gym with their new boost? After all, “super” license status is what attracted large multi-state operators to purchase Florida licenses for big bucks including, MedMen, Curaleaf, Surterra, Cansortium, iAnthus, Columbia Care, Acreage, Green Thumb Industries, Green Growth Brands, VidaCann, and AltMed.

 

Because most licensees are so strapped for cash, they cannot afford the syringe and needle to complete the injection. Production has been an ongoing problem for licensees as most of them are already having trouble keeping quality product on the shelves. Opening more dispensaries would kill cash flow and put an additional strain on these production issues. The coronavirus pandemic forced several licensees to pivot into a delivery model and put their dispensary model on the back burner.

 

The silver lining is these issues can be resolved if the Florida legislature implements a horizontally integrated structure. A horizontally integrated cannabis program would limit cash demands on operating these licenses; allow licensees the ability to be an expert on specific parts of the supply chain; foster innovation in production methods and product mix; and provide more access to patients.

 

On the surface, removing the cap would seem to put additional muscle on the individual licensees, but a more effective supplement for the market as a whole would be the implementation of a horizontally integrated program. Luckily, the Florida Supreme Court has an opportunity to weigh in on the constitutionality of vertical integration in the Florigrown case and potentially provide a clearer pathway for a fair and balanced marketplace.

Bringing Clarity to a Trippy Legal Framework

By: Dustin Robinson, Founding Partner of Mr. Cannabis Law and Mr. Psychedelic Law

Are Magic Mushrooms and Sclerotia Truffles Legal in Florida? - Mr Cannabis LawOver the past six months, the Mr. Cannabis Law team has received several inquiries from clients interested in selling magic mushrooms and sclerotia truffles in Florida; and the clients are insistent that magic mushrooms and sclerotia truffles are legal in Florida based on the client’s google searches. At first, I thought to myself that these clients must be “tripping.” But, upon further research, I realized that this misconception is based on a reasonable misunderstanding of two basic legal concepts: (1) facial v. as applied constitutionality; and (2) mens rea.

The Florida Case – Fiske v. State

The case that is causing much of the confusion is the 1978 case of Fiske v. State, 366 So. 2d 423, 424 (Fla. 1978). In Fiske, the defendant was arrested after leaving a field. Police officers found a bag of wild mushrooms near him. Id. The mushrooms were taken into the custody and the mushrooms were tested. Id. The tests concluded that the mushrooms contained psilocybin. Id. Under the Florida Statutes, “any material which contains a quantity of the hallucinogenic substance ‘psilocybin’” was labelled a Schedule I controlled substance. Id. Importantly, the statute does not specifically list wild mushrooms as a Schedule I controlled substance. The defendant was found guilty for possession of the psilocybin, which was a felony of the third degree. Id. The defendant appealed his case to the Florida Supreme Court.

The Florida Supreme Court determined that the Florida Statute was unconstitutional “as applied” to the defendant. Id. The court reasoned that the statute did not mention magic mushrooms or any other psilocybin organic substance that can grow naturally in the wild. Id. Furthermore, the court determined that if the statute specified that psilocybin can be found in certain identifiable mushrooms, and named the mushrooms that contained psilocybin, the statute would give notice to a prospective defendant that possession of certain mushrooms could be a crime. Id. Without the Florida Statute specifying that naturally growing mushrooms could contain psilocybin, a defendant does not have the proper notice or knowledge that some naturally growing mushrooms may contain a Schedule I substance. Id. Thus, the court determined that the Florida Statute was unconstitutional “as applied” because the statute did not give the defendant a “fair warning” that possession of the naturally grown mushrooms he possessed was a crime. Id. Therefore, the defendant did not have the required mens rea to be found guilty of possession of psilocybin. Id. Yet, the court made clear that the Florida Statute is “facially” constitutional because the statute can be applied in other circumstances where the defendant had the requisite mens rea. Id. Importantly, the Florida Statute has not been revised since Fiske and the Florida Supreme Court has not reversed its position in Fiske. Thus, Fiske is still good law in Florida.

“Facial” v. “As Applied” Constitutionality

In order to gain a full understanding of the Fiske holding, one must understand the the difference between “facial” v. “as applied” constitutionality. A statute’s constitutionality can be challenged “facially” or “as applied.” A statute is unconstitutional “on its face” when it would be unconstitutional in every situation. In contrast, a statute is unconstitutional “as applied” when the application of the statute is unconstitutional because of the fact-specific circumstances of the case. When a court finds that a statute is “facially” unconstitutional, the court will void the entire statute since it is unconstitutional under any circumstances. In contrast, when a court finds that a statute is unconstitutional “as applied”, the statute will remain in force but the circumstances for which that statute is constitutional will be narrowed. In Fiske, the court found that the statute was unconstitutional “as applied” to the facts and circumstances of the case.

Mens Rea

“Mens Rea” refers to a person’s mental state at the time of carrying out the act of a crime. Because of due process, a person’s mens rea must have some sort of level of intent in order to be guilty of a crime. In other words, a person who has committed a criminal “act” cannot be guilty of a crime unless such person has the requisite mens rea when committing such criminal act. A prosecutor in a criminal case must prove mens rea beyond a reasonable doubt. If a statute does not put an individual of ordinary intelligence on proper notice of the nature of the crime, an individual cannot have the required mens rea to commit such crime. While ignorance of the law is no excuse, that principal “may be abrogated when a law is so technical or obscure that it threatens to ensnare individuals engaged in apparently innocent conduct.” United States v. Caseer, 399 F.3d 828, 837 (6th Cir.2005). In Fiske, the court found that the defendant did not have the requisite mens rea since the defendant was not aware that magic mushrooms contained magic mushrooms and the defendant was not on notice that magic mushrooms contain psilocybin since magic mushrooms were not specifically listed in the statute.

Key Takeaways from Fiske v. State

  1. Fiske stands for the general proposition that criminal intent is required to commit a crime.

 

While many believe that the holding in Fiske means that possession of magic mushrooms in Florida is legal, such is not the case. Instead, Fiske stands for the general proposition that criminal intent is required to commit a crime. Florida Statute Section 893.03(1)(c)(33) lists psilocybin as a Schedule I controlled substance in Florida and has not been updated following Fiske to specify which natural substances include psilocybin. This means that a defendant may not be on notice as to which natural substances contain psilocybin and thus the defendant would not have the requisite mens rea. This issue is raised in Florida Jurisprudence, Second Edition March 2020 Update, which states, “the classification of ‘psilocybin’ may violate due process as applied to a defendant whose conviction arises out of possession of a bag of wild mushrooms that are determined to contain the drug, as the statute does not advise a person of ordinary and common intelligence that the prohibited substance is contained in a particular variety of mushroom.[1] Therefore, the issue of Florida Statute Section 893.03(1)(c)(33) not providing criminal defendants proper notice as initially raised by Fiske in 1978 remains an unresolved issue today.

 

  1. Fiske does not stand for the proposition that a natural substance that is not specifically listed as a controlled substance (i.e. magic mushrooms) is legal when it includes another natural substance that is specifically listed as a controlled substance (i.e. psilocybin).

 

The Fiske case did NOT hold that a natural substance that is not explicitly listed as a controlled substance (i.e. magic mushrooms) is legal when it contains a controlled substance (i.e. psilocybin). Instead, the court based its decision on the lack of evidence demonstrating that the defendant had knowledge that magic mushrooms contain psilocybin.  See also United States v. Hassan, 578 F.3d 108 (2d Cir. 2008) (holding that khat is an illegal substance even though it is not explicitly listed as a controlled substance since khat contains cathinone which is a controlled substance; but also noting that the prosecutor would need to have proven beyond a reasonable doubt that the defendant knew that khat contained cathinone);  United States v. Mire, 725 F.3d 665, 679 (7th Cir. 2013), (holding same); State v. Reckards, 2015 ME 31, 113 A.3d 589, 594, (holding same).

 

  1. Fiske makes it very difficult for prosecutors in Florida to prosecute defendants for possession of psilocybin unless the prosecutor has evidence to prove beyond a reasonable doubt that the defendant had knowledge that the magic mushrooms contained psilocybin.

 

The precedent established by Fiske makes it very hard for prosecutors in Florida to prosecute a defendant for possession of psilocybin. If magic mushrooms were explicitly listed as a controlled substance in Florida’s statutes, then a defendant would be on notice and would not be able to claim ignorance of the law. But, since magic mushrooms are not listed as a controlled substance in Florida’s statutes, the defendant is not on notice and thus the prosecution must prove beyond a reasonable doubt that the defendant knew the magic mushrooms contained psilocybin.  Without any modification to the Florida Statutes, a prosecutor will find it difficult to prove a defendant actually knew the mushrooms in the defendant’s possession contained psilocybin.

 

  1. Fiske does not support the commercialization of magic mushrooms containing psilocybin or sclerotia truffles containing psilocybin.

 

The Fiske case does not offer much support to businesses that want to sell products that contain psilocybin. If a business were to grow, process, or sell a naturally-grown substance that contained psilocybin (ie magic mushrooms or sclerotia truffles), all business activities would likely be criminal. Following Fiske, the business and its agents would have the requisite mens rea or criminal intent to commit a crime. Specifically, if a business advertises or otherwise markets its psilocybin-based product, the business is operating with the requisite criminal intent of possessing and handling a controlled substance – psilocybin. To create commercial opportunities for psilocybin products, the Florida Statute would need to clarify which products that contain psilocybin are explicitly prohibited. Otherwise, businesses selling magic mushrooms or sclerotia truffles are operating at their own peril.

 

[1] 16B Fla. Jur 2d Criminal Law—Substantive Principles/Offenses § 1319

Since the Stay-At-Home Order, the Mr. Cannabis Law team has jumped into action with assisting clients to adjust their business operations; and assisting clients and others apply for stimulus loans. We’ve also been busy continuing to speak on various topics to make sure we educate the public on important current events. Below is a recap of just a few of our recent speaking events:
  • Founding Partner of Mr. Cannabis Law – Dustin Robinson – interviewed with Illinois Cannabis attorney Thomas Howard to update the Illinois market on the current status of cannabis in Florida. We discussed the history of cannabis in Florida; the court cases currently pending in Florida; the current state of the law in Florida; and the future of cannabis in the State of Florida. We also discussed some of the challenges in the Illinois adult-use application process. The Mr. Cannabis Law team completed 5 Illinois Adult-Use Dispensing Applications, 1 Illinois Craft Grow application, and 1 Illinois Transportation application. Dustin and Thomas discussed some of the challenges they faced during this application process.
  •  Founding Partner of Mr. Cannabis Law – Dustin Robinson – attended a webinar with Minorities 4 Medical Marijuana. Dustin was able to talk with Roz McCarthy, Erik Range, and all the other members of Minorities 4 Medical Marijuana on important issues in cannabis. Specifically, Dustin was able to provide insight as to what he learned about the Illinois Cannabis Social Equity Program through Dustin’s significant work completing various cannabis applications in Illinois. On every application Dustin drafted in Illinois he included a partnership with Minorities 4 Medical Marijuana to ensure that his client was committed to diversity, inclusion, and social equity.   Dustin also ensured that every Applicant was at least 51% owned and controlled by a social equity applicant. Dustin, Roz, and Erik explored the different frameworks for social equity programs across the country. They were also able to discuss the stimulus package and how it impacts cannabis businesses.
  •  Founding Partner of Mr. Cannabis Law – Dustin Robinson – attended episode 12 of Elevate Your Grind . In this episode, Dustin discussed the stimulus package, including the Economic Injury Disaster Loan Program, the Paycheck Protection Program, and various other programs that are available at a federal, state, or local level. Dustin also discussed the reasons he started Mr. Cannabis Law and how he provides a unique service whereby clients receive big-law quality legal service with a boutique firm level of attention. Dustin also discussed his newest venture of Mr. Psychedelic Law, which is a not-for-profit focused on using medical and spiritual research to drive legal reform of psilocybin mushrooms and other psychedelics.
  •  Founding Partner of Mr. Cannabis Law – Dustin Robinson – attended an Instagram Live Feed with Leafstyle. Dustin discussed various parts of the stimulus package and explained how people can apply for loans. Dustin expressed the importance of working with your accountant or lawyer to make sure you are getting the full benefit of the money made available. Dustin also discussed the Unemployment Benefits that are available and how to apply for such benefits. Dustin also discussed why marijuana companies are not eligible for federal funds; however, Dustin also shared some different ideas on how marijuana companies may be able to access stimulus money in the future.
Dustin has various upcoming events, including a CLE for attorneys on Cannabis Law on 4/15; and a webinar on the Stimulus, FDA, and Assignment of Creditors that will be available on 4/20.

By: Sean Hardwick, Regulatory Analyst at Mr. Cannabis Law

The IRS faces Internal Revenue Code § 280E reporting issues.

One of the many headaches of all marijuana operators, tax professionals, and the IRS is Internal Revenue Code (I.R.C.) § 280E. Regulated marijuana companies often pay taxes that are substantially

higher than operators in other industries. Section 280E of the I.R.C. states, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act)…” Because marijuana is a Schedule I controlled substance, marijuana businesses are unable to deduct ordinary businesses expenses. Thus, marijuana companies can pay an effective tax rate upwards of 70% according to the National Cannabis Industry Association.[1] Marijuana companies may only deduct cost of goods sold (COGS), as clarified in Patients Mut. Assistance Collective Corp. v. Comm’r of Internal Revenue, 151 T.C. 176, 204 (2018). In Patients Mut. Assistance Collective Corp., the court clearly articulated, “All taxpayers–even drug traffickers–pay tax only on gross income, which is gross receipts minus COGS.”

 

The meaning of the COGS has created confusion for marijuana operators and tax professionals. According to The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance by the Treasury Inspector General for Tax Administration (TIGTA) published on March 30, 2020, TIGTA conducted analysis of a random sample of marijuana businesses in California, Oregon, and Washington. TIGTA found 59% of marijuana businesses in California, Oregon, and Washington likely required I.R.C. § 280E adjustments in 2016.[2] In other words, the majority of marijuana companies reported taxable income that was lower than required. As a result, TIGTA determined the tax assessment impact from the sample of marijuana businesses in California, Oregon, and Washington was about $7.3M total.[3] Furthermore, TIGTA forecasts that the tax impact for the entire state of California, Oregon, and Washington due to marijuana operators underreporting taxable income was around $48.5M in lost taxable revenue in 2016 and $242.6M in lost taxable revenue when projected over 5 years.[4]

 

Cannabis operators underreport COGS by making adjustments to COGS under I.R.C. §§ 263A, 168(k). To illustrate, I.R.C. § 263A(a)(2) states, “Any cost which (but for this subsection) could not be taken into account in computing taxable income for any tax year shall not be treated as a cost described in this paragraph.” Therefore, I.R.C. § 263A(a)(2) prevents a marijuana business from obtaining a tax benefit by capitalizing indirect expenses because of the restrictions placed by I.R.C. § 280E. Furthermore, marijuana operators are making adjustments to COGS using accelerated depreciation under I.R.C. § 168(k). Under Treas. Reg. § 1.471-11(c)(2)(iii)(b), the only adjustment to COGS for a marijuana operator in accordance with I.R.C. § 280E would be book depreciation on assets “incident to and necessary for” marijuana production or manufacturing. Book depreciation is the amount of depreciation expense calculated from fixed assets that is recorded in a business’ financial statements. Book depreciation is different than tax depreciation, which is used for a business’ tax return. Book depreciation is often lower than tax depreciation in the early life of the asset as most assets are depreciated using straight-line depreciation for book purposes but accelerated depreciation for tax purposes. Therefore, in the early life of the asset, a business can record a higher profit in its internal income statement, while paying a lower income tax on its tax return. Yet, many marijuana operators are using accelerated depreciation to make greater adjustments to COGS than permitted.

 

Internal Revenue Code § 471(c) creates further complications for state-regulated marijuana operators.

 

In 2018, I.R.C. § 471(c) took effect with The Tax Cuts and Jobs Act. As a result, a small business that generates less than $25M in revenue is not subject to the general rule for determining inventory.[5] Instead, a small business may elect to use an internal accounting procedure as an alternative of the general inventory rule established by I.R.C. § 471(a).[6] Specifically, under I.R.C. § 471(c), a marijuana businesses that generates less than $25M in revenue may be permitted to implement an internal accounting method that labels all or most of the business’ operating expenses as COGS. Therefore, a marijuana operator can make adjustments to COGS by categorizing expenses excluded under I.R.C. §280E as COGS. As a result, the marijuana operator with less than $25M in revenue can substantially reduce its tax liability.

 

[7]

On the surface, this appears to be a victory for marijuana operators. Small marijuana companies can save thousands to millions of dollars in tax liability. Yet, without clear guidance from the IRS on whether I.R.C. § 471(c) applies to marijuana operators, a marijuana operator may unintentionally underreport tax liability while acting in good faith to comply with I.R.C. § 471(c). As a result, the marijuana operator risks an IRS audit, penalties, a potential revocation of the state-issued marijuana license, and criminal tax evasion charges by following I.R.C. § 471(c). Therefore, following I.R.C. § 471(c) could have dire consequences to the marijuana operator. To protect marijuana operators, tax professionals, and the IRS, TIGTA recommended that the IRS provide formal guidance on the application of I.R.C. § 471(c) in conjunction with I.R.C. §280E. However, The IRS did not agree with TIGTA, citing other priorities.[8] The IRS clarified after the the 2019-2020 Priority Guidance Plan is resolved, developing guidance between I.R.C. §§ 280E, 471(c) will be considered.[9] Until the IRS provides guidance to the marijuana industry, marijuana operators and the IRS will continue to struggle to maintain uniform industry compliance. As a result, the IRS will continue to see a greater number of marijuana businesses underreporting tax liability.

 

Another issue created by I.R.C. § 471(c) is the tax treatment of different marijuana businesses. Specifically, small marijuana businesses that generate under $25M in annual revenue may reduce tax liability substantially by implementing an internal accounting method, while larger marijuana operators (e.g., multi-state operators) that generate more than $25M in revenue will have a much greater tax liability following the general inventory rule of I.R.C. § 471(a). Therefore, without clear guidance from the IRS, similar marijuana businesses face disproportionate tax treatment. This uncertainty surrounding I.R.C. § 471(c) creates further complications for a marijuana business to maintain compliance with the IRS.

 

The Founding Partner of Mr. Cannabis Law – Dustin Robinson – is both a CPA and an attorney. While this area of cannabis tax law is extremely gray and has little guidance, Dustin and the rest of the Mr. Cannabis Law team are able to counsel clients on both the legal and tax impacts of different strategic approaches for calculating taxable income. The Mr. Cannabis Law team also works to structure any cannabis operations or deals to attempt to minimize a negative tax impact and to limit exposure to enforcement action. If you are a cannabis business that has questions about the tax implications of your business, do not hesitate to contact Mr. Cannabis Law.

[1] “Internal Revenue Code Section 280E: Creating an Impossible Situation for Legitimate Businesses”, National Cannabis Industry Association, https://thecannabisindustry.org/uploads/2015-280E-White-Paper.pdf

[2] “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.” Oversight.gov, Treasury Inspector General for Tax Administration, 30 Mar. 2020, oversight.gov/report/tigta/growth-marijuana-industry-warrants-increased-tax-compliance-efforts-and-additional.

[3] Ibid.

[4] Ibid.

[5] I.R.C. § 448(c)(1) states that a corporation or partnership meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the three-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $25,000,000.

[6] I.R.C. § 471(c)(1)(B)(ii)

[7] “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.” Oversight.gov, Treasury Inspector General for Tax Administration, 30 Mar. 2020, oversight.gov/report/tigta/growth-marijuana-industry-warrants-increased-tax-compliance-efforts-and-additional.

[8] “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.” Oversight.gov, Treasury Inspector General for Tax Administration, 30 Mar. 2020, oversight.gov/report/tigta/growth-marijuana-industry-warrants-increased-tax-compliance-efforts-and-additional.

[9] Ibid.

This is an interview between Montel Williams and Founding Partner – Dustin Robinson – on Let’s Be Blunt! Montel and Dustin discuss cannabis real estate transactions, cannabis trademarks, cannabis corporate transactions, 2018 Farm Bill, USDA interim rules, FDA regulations, cannabis employment law issues, upcoming changes to the cannabis industry, probable cause, and much more!

 

 

As a Florida cannabis attorney who has worked on social equity applications in other states, I have seen the good and the bad of social equity programs and am hopeful that Florida can learn from the mistakes and the successes of other states. Florida currently has four provisions that arguably provide for social equity in the marijuana industry: (1) reserving one of the ten licenses that were supposed to be available in 2017 for a black farmer that was a class member of Pigford v. Glickman 185 F.R.D 82 (D.D.C. 1999); (2) requiring applicants to have strong diversity plans; (3) requiring applicants’ management, ownership, and employment to reflect an involvement of minorities and veterans (a similar provision is included in SB210, a bill recently proposed by Senator Thurston); and (4) allocating $10 of the identification card fee to the Division of Research at Florida Agricultural and Mechanical University for the purpose of educating minorities about marijuana for medical use and the impact of the unlawful use of marijuana on minority communities. While each of these provisions are steps in the right direction, all of these provisions (individually and collectively) fall far short of fulfilling any social equity purpose.

DEFINING THE PURPOSE OF A SOCIAL EQUITY PROGRAM

In order for any program to be successful, it is important to first define what exactly the program sets out to achieve: the purpose or the goal. Rather than me providing my personal opinion (which I couldn’t help but to do at the end of this section), let’s look at what some other states provide as their purpose or goal:

  • Illinois: In the interest of establishing a legal cannabis industry that is equitable and accessible to those most adversely impacted by the enforcement of drug-related laws in this State, including cannabis-related laws, the General Assembly finds and declares that a social equity program should be established. – Cannabis Regulation and Tax Act, H.B. 1438, § 7-1(b) (2019).
  • Massachusetts: The commission shall, in accordance with chapter 30A, adopt regulations consistent with this chapter for the administration, clarification and enforcement of laws regulating and licensing marijuana establishments. The regulations shall include: procedures and policies to promote and encourage full participation in the regulated marijuana industry by people from communities that have previously been disproportionately harmed by marijuana prohibition and enforcement and to positively impact those communities – An Act to Ensure Safe Access to Marijuana, 2017 Mass. Acts. 55 § 26 (a 1/2)(iv).
  • California: It is the intent of the Legislature in enacting this act to ensure that persons most harmed by cannabis criminalization and poverty be offered assistance to enter the multibillion dollar cannabis industry as entrepreneurs or as employees with high quality, well-paying jobs. Sen. Bill 1294 § 2(f) (Reg. Sess. 2017-2018) 2018 Cal. Stat. (aka California Cannabis Equity Act of 2018)
  •  California: It is the intent of the Legislature in enacting this act that the cannabis industry be representative of the state’s population, and that barriers to entering the industry are reduced through support to localities that have created local equity programs in their jurisdictions. Sen. Bill 1294 § 2(g) (Reg. Sess. 2017-2018) 2018 Cal. Stat. (aka California Cannabis Equity Act of 2018)
  • Pennsylvania: It is the intent and goal of the General Assembly that the department promote diversity and the participation by diverse groups in the activities authorized under this act. – Medical Marijuana Act, 2016 Act 16§ 615(a)
  • Michigan: The department shall promulgate rules to implement and administer this act pursuant to the administrative procedures…including: a plan to promote and encourage participation in the marihuana industry by people from communities that have been disproportionately impacted by marihuana prohibition and enforcement and to positively impact those communities. – (MCL 333.27958, 2018 IL 1) (aka Michigan Regulation and Taxation of Marihuana Act)

As seen above, the common theme for most Social Equity Programs is the goal of repairing the damage caused by prior cannabis criminalization that had long term, adverse effects on low income and minority communities. Unfortunately, Florida’s laws are devoid of any clearly stated purpose. As a result, we are left with spotty provisions that do not fulfil a broader, clearer purpose. For example, while the Pigford preference certainly rights-the-wrong of previous discrimination to one black farmer, it has nothing to do with helping those adversely impacted by cannabis criminalization and it is extremely underinclusive of the rest of the minority and veteran population.

My recommendation is that we add the following provision to our Florida Statutes: “Florida Statute Section 381.986 hereby establishes a Social Equity Program with a goal to achieve equity in ownership, management, employment, opportunity, and accessibility in the cannabis industry to minorities and others adversely impacted by the enforcement of drug-related laws in this State, as well as to veterans.” This type of clear and concise statement in the Florida Statutes would set a tone for equality and would breathe life into the substantive social equity provisions to follow.

ALLOCATING SPECIFIC POINTS FOR SPECIFIC CRITERIA

The Illinois Cannabis Regulation and Tax Act explicitly provides that an applicant receives 50 points out of the 250 available points for qualifying as a Social Equity Applicant, which is determined on a binary basis. In other words, a Social Equity Applicant automatically receives 20% of the available points simply for qualifying as a Social Equity Applicant. This means that it is practically impossible for an applicant to be awarded a license if such applicant is not a Social Equity Applicant. As a result, I predict that nearly every application submitted for an Illinois Conditional Adult Dispensary Organization License on January 2, 2020 will be a Social Equity Application, which will practically guarantee that some sort of social justice will be served.

In a way, the Pigford preference at least guarantees that there will be one minority applicant that wins a Florida license. But, as for the remaining Florida licenses and the remaining minorities, the requirements in Florida Statute Section 381.986 of a diversity plan and involvement of minorities and veterans are too general to ensure that minorities and veterans will have the opportunity to be owners, managers, and leaders of Florida marijuana businesses. Experienced cannabis-application-drafters will be able to draft applications satisfying such general criteria while knowing that the OMMU will likely have too few resources to actually enforce compliance to such criteria once a license is awarded.

Instead, Florida law should allocate specific points for achieving specific criteria. For example, Florida law could provide X% of the points for applicants that have 10 full-time employees that have been adversely impacted by cannabis criminalization or are veterans. To qualify, the employee would need to either (1) reside in a “disproportionately impacted area” (to be defined by certain criteria demonstrating a certain poverty level or unemployment rate); (2) have been arrested for, convicted, of, or adjudicated delinquent for a minor marijuana-related offense; or (3) be a veteran with a DD Form 214.  This is extremely similar to the Social Equity criteria provided in the Illinois Cannabis Regulation and Tax Act with a few tweaks for my veteran buddies. By having specific points for achieving specific criteria, Florida would be providing a clear pathway for success for veterans, minorities, and others adversely impacted by the cannabis criminalization.

OWNERSHIP/CONTROL AND VARIANCES – THE MONEY CHALLENGE

The application process for marijuana licenses is extremely competitive. The applications can be thousands of pages; and you need to hire an attorney that has a strong understanding of navigating the laws and department rules. Consequently, applying for a license can range from $100,000 to $500,000; and, even after spending that money, there is no guarantee that you will be awarded a license. Do social equity applicants have that kind of money with which to gamble? Of course not! Unless the State of Florida decides to provide state-issued loans to Social Equity Applicants, the Social Equity Applicant will need to partner with someone with the capital; and will also need to build a team to bring in the cannabis expertise.

This is how it typically works:

  • a client, who is probably a marijuana licensee in another state, hires a cannabis attorney;
  • the client finances the entire application process, often costing anywhere from $100,000-$500,000;
  • the client or attorney finds a person whom satisfies the criteria of a Social Equity Applicant or a PigfordApplicant;
  • the attorney selects a menu of documents, depending on the state’s particular statute, which may include:
    • An Operating Agreement (to establish ownership and control by the Social Equity Applicant or PigfordApplicant);
    • A Buy-Sell Agreement (providing the client an option to purchase the interest of the Social Equity Applicant or Pigford Applicant);
    • A Management Agreement (providing rights to profits to a management entity owned by the client); and/or
    • Loan Documents (providing various covenants and warrants that significantly limit the control of the Social Equity Applicant or Pigford Applicant).

While the Social Equity Applicant may have ownership and control, the partner financing the application will surely want covenants under Loan Documents; options under the Buy-Sell Agreement; and/or some sort of management fee through a Management Agreement.

Just to  be clear: there is nothing illegal or even improper about the above scenario. In any industry, the person or entity putting up the money is going to want to have protections through options, covenants, warrants, profit-sharing, or other provisions. Indeed, such a person or entity would not put up the money if they were not able to get such protections. Afterall, would you finance a $500,000 application if you were not able to ask for equity or have a loan that allows you to foreclose on the license in the event of default? Absolutely not! As long as the applicant is honest in the application and discloses everything requested, there is nothing wrong with protecting an investor’s investment.

The money-challenge doesn’t end with the application. Once a Social Equity Applicant or Pigford Applicant is awarded a license, they now need to operate the license. In Florida, with the vertically integrated structure, the applicant will need about $20,000,000 to make it operational. Do Social Equity Applicants adversely impacted by cannabis criminalization have that kind of money? No! So now the Social Equity Applicant or Pigford Applicant is forced to either sell the license or raise debt or equity to finance the operation. This comes with additional legal documents that include options, covenants, warrants, preferential distributions, profits-interest, and other provisions that will significantly restrict the Social Equity Applicants ownership and control. On the one hand, the stated purpose of the Social Equity Program is not served if the Social Equity Applicant is allowed to simply sell his/her license. But, on the other hand, without allowing for transfer of interest or raising of debt, the Social Equity Applicant or Pigford Applicant is left with a license that cannot become operational due to lack of financing. This begs the question of what type of variances will be allowed by the Department after a license is awarded.

Thus, it is imperative that the legislature: (1) clearly establishes what type of loan/equity/control arrangements are permissible for Social Equity Applicants (perhaps even provides state financing for Social Equity Applicants); (2) requires documentation of such arrangements during the application process; and (3) establishes a variance standard that balances the goal of the Social Equity Program with the realistic financial needs of a Social Equity Applicant.

CONCLUSION – IF WE CAN DREAM IT, THEN WE CAN MAKE IT HAPPEN

This is not an exhaustive list of issues and solutions for a Social Equity Program. That would take way too long and I need to get back to drafting an Illinois Social Equity Application. But this article hopefully provokes thought and productive discussions during this legislative session; and perhaps, if we can dream it, then we can make it happen!