Oakland marijuana dispensaries concerned over potential prosecution, taxes

Medical marijuana supporters and business people in Oakland reacted angrily last week to dual blows from the federal government—a prosecution warning and a massive tax bill—as they speculated on the possible consequences for patients and the local marijuana industry.

“It blows my mind that the federal government would completely ignore the local communities and states trying to regulate medical cannabis responsibly,” said Dale Sky Jones, the head of Oakland’s Oaksterdam University, which offers training for working in the medical marijuana industry. “They are basically taking cannabis and putting it back in the hands of violent drug cartels.”

At an October 7th press conference in Sacramento, California’s four U.S. attorneys announced that they had each sent warning letters to the owners or landlords of at least 16 dispensaries in certain regions of the state. A press release from the office of André Birotte Jr., U.S. Attorney for the Central District of California, said the letters warned of dispensaries “operating in violation of federal law,” and gave recipients two weeks to “take the necessary steps to discontinue the sale and/or distribution of marijuana,” or they could face criminal prosecution, fines and forfeiture of assets.

The press release also said the initial warnings were sent to areas where local officials have asked the federal government for help ousting marijuana operations. So far, there have been no reports of East Bay dispensaries receiving the letters and there was no specific mention of Oakland, although the city’s burgeoning medical marijuana industry is on the government’s radar. Last winter, as the Oakland City Council was considering a move to license large-scale marijuana growing operations in the city, city officials received two letters—from Alameda County District Attorney Nancy O’Malley in December and San Francisco-based U.S. Attorney Melinda Haag in February—questioning the legality of industrial pot farms like the ones the city plans to license.

In a separate action two weeks ago, the Internal Revenue Service informed the directors of Oakland’s largest medical marijuana dispensary, Harborside Health Center, that they owed $2.5 million in back taxes from 2007 and 2008.

The assessment is based on a federal tax code provision that prohibits the deduction of what most businesses regard as normal expenses, such as rent and payroll, for any enterprise deemed to be “trafficking in controlled substances.” Marijuana is one such substance, classified under the federal Controlled Substances Act as a Schedule 1 drug—those with high potential for abuse and “no currently accepted medical use”— along with ecstasy and heroin.

“We are going to fight the assessment,” Steve DeAngelo, executive director of Harborside, said in an interview last week. “It is an inaccurate and unfair assessment based on the IRS’s allegation that we are a drug trafficking organization. We are not. We are a non-profit community service that provides medicine to sick and dying people.”

Oakland officials have supported and welcomed medical marijuana businesses, arguing that city controls on dispensaries have kept them productive enterprises that contribute substantially to the city’s tax coffers. In the 2010-2011 tax year, Oakland received about $1.4 million dollars in tax revenue from the four licensed marijuana dispensaries in the city, said David McPherson, tax and revenue administrator for the city. This was about 3 percent of the total $52 million tax revenue for Oakland last year. Since the tax on Oakland marijuana dispensaries was recently raised from 1.8 to 5 percent, the tax revenue received by the city will probably be higher this year.

The IRS decision “unfairly singles out legitimate, tax-paying businesses in Oakland by refusing to allow them to deduct normal business expenses on their federal tax filings,” Oakland councilmember Rebecca Kaplan said in a press release. “It’s inappropriate, in a democracy, to treat them as if they are acting illegally.”

Dale Sky Jones said the IRS rule invoked against Harborside was originally meant to prevent large criminal cartels from going into business. Now, she said, “they are applying it to businesses that are, in the eyes of the state, legitimate. But on the federal level, pot, is pot, is pot. It is illegal.”

Communities like Oakland have come to depend on the tax dollars from these regulated dispensaries, she said, to keep schools open, teachers employed, and cops on the street.

“I understand and respect the decision for say, San Diego, who determined as a community that they are going to fight medical cannabis dispensaries,“ Jones said. “They asked for federal support to stop it.” But then there are those dispensaries that have strong approval from the local government, as in Oakland, she said, where the City Council is planning to license four additional medical cannabis dispensaries, in addition to the four already operating. “No one asked the federal government to come in,” Jones said.

Jones said she is concerned for the fate of Oakland’s dispensaries if the federal government starts shutting down facilities. She said she is also worried that this might drive cannabis back to the black market. “Someone is going to stand on that street corner and sell it,” Jones said. “Will we get taxes from it or not?”

These dispensaries seem to be walking the legal line in California, even though all marijuana sales remain illegal under federal law. In order to claim legality under California’s law, any medical marijuana dispensary must operate as a nonprofit corporation; for-profit commercial marijuana operations are prohibited under state law. In the press release, Birotte Jr. suggested that the facilities he is targeting have crossed that line: “While California law permits collective cultivation of marijuana in limited circumstances, it does not allow commercial distribution through the store-front model we see across California,” he said.

These recent developments highlight tensions between state and federal laws surrounding marijuana. The federal Controlled Substances Act prohibits the sale and distribution of all marijuana; there is no federal recognition of marijuana as a medical remedy. At the same time, though, medical cannabis has been legal under California state law since voters approved Proposition 215, or the Compassionate Use Act, in 1996.

“The struggle over cannabis with the federal government has been going on for decades,” said DeAngelo. “I don’t think we are seeing the final battle now.”

DeAngelo said he is consulting a lawyer and expects to release a statement soon about his planned course of action regarding the IRS bill. “Harborside has no intention of closing our doors,” he said. “When we opened five years ago, we made a commitment to our patients. We will keep that commitment.”

If dispensaries are shut down, DeAngelo said, he worries where patients would turn to obtain their medical cannabis. “What U.S. attorneys seem to be saying is, they would rather have people buy it on the street than in legal facilities like Harborside,” he said. “The worst part of the U.S. attorney’s attack is that it is going to put vulnerable patients at greater risk.”

Speaking as an Oakland resident who benefits from city funds and Harborside’s tax contributions, Jones wondered: “How many costs will we not be able to afford if Harborside shuts down?”

The Marin Alliance for Medical Marijuana, in Fairfax, received a similar tax bill in March, as did certain other large dispensaries. The Marin Alliance directors have taken the case to court—a preliminary hearing is scheduled for November 8, according to their website. The landlord of the Fairfax property also received a letter from Haag, California’s Northern District U.S. Attorney, warning him that his property may be seized and he may be prosecuted if the dispensary does not stop selling medical marijuana on his property within 45 days.

Kris Hermes, a spokesperson for Americans for Safe Access (ASA), an organization that advocates against federal marijuana restrictions, said these moves “directly contradict what Obama pledged to do on the campaign trail, which is to not circumvent state laws.”

But Obama’s campaign remarks have been twisted by marijuana advocates, said Roger Morgan, former chairman of the Coalition for A Drug-Free California. “Obama said we are not going to go after the people that are really sick, who believe they need this narcotic to keep them from nausea or vomiting,” Morgan said. “He never said we are going to allow pot shops or cultivation and distribution on the scale we have seen it in California.”

Morgan said he welcomed the actions from California’s U.S. attorneys, calling them “long overdue.”

His biggest concern is for young people, Morgan said, who don’t know how damaging marijuana can be to their brains. He said that because pot usage is highest among 18-25 year olds, he worries about the young person who obtains a doctor’s recommendation, buys marijuana at a dispensary and then uses it recreationally or sells the drug to others. “These dispensaries are illegal—they are just not good,” said Morgan. “The people making big tax dollars on them turn a blind eye to the social costs.”

Los Angeles-based U.S. attorney Birotte, whose jurisdiction includes Pomona, Wildomar and Lake Forest—some of the cities where letters have been sent to marijuana stores warning them to stop selling— said the federal government is targeting cannabis facilities within 1,000 feet of schools or playgrounds. The existing four dispensaries in Oakland are all more than 1,000 feet from such sites, but the City Council is accepting proposals for four new marijuana dispensaries in the city, a process for which they have reduced the required distance to 600 feet, DeAngelo said.

Jason Overman, communications director for Kaplan, declined to comment on how Friday’s threats from the federal government might affect the granting of new cannabis dispensary permits in Oakland. He said the Council has asked attorneys to look into the matter.

The application process for new dispensaries closed on Friday and the City Council is scheduled to begin reviewing the dozen proposals they received. Angel Raich, an Oakland resident and longtime advocate for medical marijuana, said she had planned to compete for one of the four new permits, and had been confident that she would win until her investor pulled out at the beginning of October. She put all her money into applying for this permit and is now facing homelessness, she said. Raich said she lost her financial supporter partly because of moves against medical marijuana at the federal level.

“I have to be out of my place on November 3,” Raich said. “I put everything that I had into applying for a permit to help people. That was my goal, to help medical cannabis patients and help the Oakland community by creating jobs. I gambled, and guess what? I lost.”

Raich, 46, who is recovering from brain surgery and uses medical marijuana for chronic pain, said she has been struggling financially to obtain her supply. Although she does not patronize any of Oakland’s marijuana dispensaries, opting instead for individual caregivers who provide her with medical marijuana, she said patients will suffer if the city is forced to close dispensaries. “It affects people like me,” said Raich. “The dispensaries are really there to provide service and medicine to the patients.”

Raich gained prominence among medical marijuana advocates when she filed a lawsuit in 2001 to stop the federal government from interfering with her right to use medical marijuana. The case was decided in the 2005 U.S. Supreme Court decision Gonzalez v. Raich, which ruled that the federal government can in fact criminalize the production and use of marijuana, even when states approve its use for medical purposes.

Raich said it pains her that this case will now be used against her own cause. But she also said medical marijuana entrepreneurs partially brought this federal scrutiny upon themselves by growing too large and too greedy for profit, thereby attracting the attention of the federal government. “Medical cannabis has changed—it is not about compassion anymore,” Raich said. “It is no longer a movement, it’s an industry.”

It is difficult to know what level of enforcement will follow these actions or whether dispensaries in Oakland could be forced to close. Given scant federal resources, the letters may be a symbolic action meant to intimidate medical marijuana facilities and shut them down “for the price of postage,” Hermes said. The George W. Bush administration used a similar tactic in 2007, when the Department of Justice sent out letters to property owners across the country hosting marijuana operations. Although many were forced to move, most operations easily found new properties.

However, Birotte Jr. told the Los Angeles Times that the Department of Justice will be following up with forfeitures, in which they can seize property and assets.

DeAngelo called the federal actions “unbelievable” in light of the upcoming presidential election and a recent poll showing that 80 percent of Americans support doctor-prescribed marijuana, he said. This poll shows varying levels of support based on the patient’s medical condition.

But as though to address that kind of public sentiment, the statement from Birotte’s office referred to “a marijuana industry in California that has swelled to include numerous drug-trafficking enterprises that operate commercial grow operations, intricate distribution systems, and hundreds of marijuana stores across the state.”

Heightened federal actions against marijuana dispensaries will “throw a wet blanket” on the medical cannabis industry and drive sales back to the street, Jones said. “Someone who wants to buy pot—whether they are an adult, responsible consumer trying to be safer in their choices, or a medical patient—is going to buy it somewhere,” she said. “We are going to have the exact same amount of marijuana bought and sold in California, and in this country, regardless. What is going to change is who is selling it.”