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Key Takeaways From the Third Annual Cannabis Business Summit & Expo

Cannabis Law Blog

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Key Takeaways From the Third Annual Cannabis Business Summit & Expo

Last week, two of our Dykema Cannabis Law Group professionals attended a Cannabis Business Summit & Expo in Oakland, California. After attending numerous seminars and meeting with countless industry insiders, here are their key takeaways from the conference:

1. This Year Will Have a Tremendous Impact on the Cannabis Industry

The cannabis industry has no shortage of energy or passion. To date, that energy and passion has been harnessed by grassroots activists who have helped to enact medical marijuana laws in 25 states and the District of Columbia, and adult use laws in four states and the District of Columbia. The marijuana industry clearly has momentum, but, with eight states having cannabis initiatives on their November ballots, 2016 could prove to be a make or break year for cannabis in the United States. At this point, only one thing is certain: one way or another, the cannabis industry in the United States will look very different on November 9, 2016.

There seems to be a general concern about the large number of proposed ballot initiatives this year, and the impact it is having on fundraising efforts. One panelist noted that the cannabis movement is “dangerously overextended” by the number of ballot proposals. Another noted that four of the eight ballot committees are currently struggling to maintain funding. While these observations may be inspired, at least in part, by efforts to raise money from a cannabis industry that, as many panelists noted, has been conspicuously absent from fundraising thus far, the impact of one or more initiatives failing in November should not be underestimated.

California, now the world’s sixth-largest economy, is clearly the key priority for 2016. While many think that legalization is a foregone conclusion in the Golden State, Lieutenant Governor Gavin Newsom, a lead proponent of California’s adult use initiative noted that passage of the initiative was “not a done deal by any stretch of the imagination.” If California’s initiative fails, the narrative in the country will drastically change from one of the inevitability of marijuana legalization to one where Americans are not yet ready for such a seismic change in drug policy. For better or worse, the vote in California will be a referendum on cannabis legalization, not just in that state, but in the entire country, and electoral defeat could scare off many elected officials tentatively supporting such measures and remove all pressure on Congress to address issues such as access to banking or the application of 280e. Moreover, to add more complexity, even if California passes, if the majority of the other initiatives fail, the headlines may well be that Americans outside of the West Coast are not yet ready for legalized cannabis.

However, if California’s initiative passes, adult use of recreational cannabis will be allowed in the largest state in the nation, and nearly 50 million Americans will reside in states where the adult use of recreational cannabis is allowed under state law. Moreover, that number increases drastically if initiatives in states such as Arizona and Nevada also pass. Those numbers put an immense amount of pressure on congressional leaders to start solving the problems that plague the cannabis industry as a result of the federal and state dichotomy on marijuana laws, and also allow the cannabis movement to continue to gather momentum going into the 2018 and 2020 election cycles.

2.  The Future of the Cannabis Industry is Unclear

While it is overwhelmingly clear that the cannabis industry would prefer that marijuana be removed from the list of scheduled substances altogether, rumors continue to swirl that the DEA will soon move cannabis from a schedule 1 substance to schedule 2. Opinions as to the impact of that change varied widely at the conference. Many presenters opined that a rescheduling would be catastrophic for the industry, allowing pharmaceutical companies to dominate cannabis research and production, while continuing to label cannabis a dangerous substance with a high potential for abuse. Others, however, thought that such a move would be more symbolic, as, unlike schedule 1 substances, schedule 2 drugs are recognized as having a medical benefit. Moreover, several panelists noted that pharmaceutical companies would likely only take up a small percentage of the market in the cannabis industry, and that rescheduling could benefit some industry participants, as pharmaceutical companies may seek to partner with or purchase existing cannabis research businesses.

One interesting observation was that the DEA may reschedule cannabis just prior to the November elections in an effort to erode support for marijuana-related ballot initiatives. To an uninitiated observer, the reclassification may seem to solve many of the problems that the cannabis industry faces, thereby leaving many undecided or tepidly supportive voters feeling as if the initiatives are no longer necessary. Moreover, such an act would force ballot committees to spend time and resources explaining the technical problems that rescheduling creates, which complicates messaging and advertising plans. As discussed above, torpedoing this year’s ballot initiatives has the potential to drastically change the drug reform narrative in the United States.

Whether cannabis remains a schedule 1 substance or is moved to schedule 2, there is a consensus that the more important dynamic is whether the federal government will change course and begin actively enforcing the Controlled Substances Act (the “CSA”). On this point, there seemed to be some consensus amongst presenters and attendees, with most stating that it would be very difficult for the DOJ to recommence enforcing the CSA when more than half of the states have medical or recreational laws in place.

3.  The Cannabis Industry is Thriving

Regardless of the uncertainty over what will happen in November or whether the DEA will reschedule, it is clear that the cannabis industry is currently thriving throughout the United States. Not only did the conference host participants from across North America, but our professionals also met exhibitors and attendees from countless industries, many of which are ancillary to cannabis cultivation, processing, or sale, and never directly touch the cannabis plant. Several years ago, many of these industries and professionals would not have contemplated engaging in the cannabis industry, let alone attending a trade show for cannabis businesses. The participation of these individuals and entities belies the growing acceptance of cannabis, and as other industries continue to see the opportunities presented by the industry, it will undoubtedly continue to grow.

However, nothing speaks to the maturation of the industry and the growing acceptance of cannabis more than the presence of California Lieutenant Governor Gavin Newsom at the conference. Even a few years ago, it would have been unthinkable to have such a prominent elected official keynote a cannabis gathering, and his presence underscores the increasing legitimacy of the cannabis industry.

Moreover, it is not just the participation of ancillary businesses that is driving the industry. As new entrepreneurs and businesses bring their passion, capital, and ideas to the industry, the cannabis industry will continue to evolve and improve. At least one panelist noted that it was imperative that industry pioneers and established businesses embrace new enterprises, particularly those who disrupt the industry and introduce new products and processes. The cannabis industry is rapidly expanding and evolving, and new entrepreneurs are the lifeblood of those changes.

4.  The Application of 280e May Be Changing

The application of IRC § 280e to dispensaries is one of the primary issues facing the cannabis industry today, as it prohibits cannabis-related retailers from taking tax credits or deductions that other businesses are legally able to take, thereby drastically increasing tax liabilities. However, as several panelists noted, the application of 280e to cannabis-related businesses may be changing.

As was thoroughly discussed at the conference, workarounds currently exist for cannabis retailers with regard to 280e. First, the so-called CHAMP case, Californians Helping to Alleviate Medical Problems v IRS, stands for the proposition that dispensaries can separate out business expenses that are not related to cannabis trafficking from those that are related to trafficking, and can claim deductions for non-cannabis related expenses. Moreover, 280e also does not apply to “cost of goods sold,” allowing deductions for expenses such as the cost of cultivation and storing inventories.

While these workarounds are currently available to cannabis retailers, several presenters noted that cases are beginning to question whether 280e is applicable to dispensaries. For example, based upon the specific language in 280e, the Harborside Health Center is arguing that its business does not “consist” of trafficking, but merely includes it as a portion of its overall enterprise. One panelist noted that the judge in that case seemed amenable to the argument and that, if successful, it will prevent 280e from applying to dispensaries. Another panelist noted that his clients are making arguments that seem to be well received by various judges, including that the IRS does not have the authority to determine if a taxpayer is trafficking cannabis, and that the application of 280e to dispensaries amounts to an excessive fine or penalty.

Also, it should be noted that a panelist observed that there have been six United States Tax Court cases involving the application of 280e and cannabis, and that all have involved retail dispensaries. To date, no decisions have been made regarding cultivators, but one panelist noted that he has recently seen the IRS audit a cultivator, and they are closely monitoring developments in that case for broader applicability to the industry.

5.  The Cannabis Industry is Facing New Issues

The major obstacles facing the cannabis industry, including taxation and access to financial services, have been well documented and discussed. However, as the industry expands and matures, it is beginning to experience new and complex issues. For example, many cannabis business are now faced with questions related to intellectual property, such as how to protect their trademarks and trade dress. Moreover, as the medical or recreational use of cannabis becomes legal in more states, businesses who wish to expand to a number of jurisdictions must determine how to license their products without creating franchise agreements.

Additionally, as the cannabis industry expands and investors and businesses with greater resources and deeper pockets enter the industry, it becomes a greater target for civil lawsuits, particularly with regard to products liability. To date, two such cases have been filed related to marijuana: Larrabee and Flores v LivWell, Inc and Kirk v Kirk. While the LivWell case was dismissed earlier this year and a number of presenters opined that the prospects of the Kirk case succeeding were slim, these cases represent a new and important concern for the cannabis industry. To this end, businesses must start to thoroughly consider the contents of labeling and advertising, to develop effective and efficient recall plans, and to ensure that their insurance covers cannabis-related product liability claims.

Clearly, as the cannabis industry matures, it will face the types of issues that face other mature businesses.  While this likely represents an increase in the legitimacy of the industry, it also means that cannabis-related businesses must be more sophisticated and thorough in considering legal issues moving forward.

Conclusion

As the cannabis industry continues to evolve and expand, individuals and businesses wishing to participate in the industry should be mindful of the risks involved in this rapidly-changing environment. To keep up-to-date on emerging issues in the cannabis industry, check back to Dykema’s Cannabis Law Blog.