aBIZinaBOX Inc - CPG

Cannabis Practice Group

Cannabis Biz - California

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IRS Updates CTR Exams

IRS Updates CTR Exams

IRS Updates CTR Exams – While we do a very significant amount of writing for our clients, partners, friends and the cannabis industry in California as a whole, we also do a very substantial amount of reading, and perhaps our three “go-to reads” are

Tax Talk – Virginia La Torre Jecker, Esq  or  Let’s Talk About US Tax“ – Virginia is the expert to turn to when it comes to US tax matters affecting international individuals  Many US persons face US tax issues simply because they live abroad, purchase foreign assets or have a non-US spouse.

Tax Litigator Blog written by the attorneys at Hochman Salkin Toscher Perez P.C. whom we have known for quite some time, and we regard as among the best of breed tax litigators and criminal tax attorneys on the West Coast.

John Schroyer’s Columns at MJBizDaily – John is one of the few cannabis industry reporters in that covers the legal industry in California that understands what investigative journalism is all about.

Each of the three sources listed above has unique features and content that complement IRS Updates CTR Examsour ability to keep our followers informed and up to date. We thought that preface was long overdue, and now to today’s article.

IIRS Updates CTR Exams

Steve Toscher, Esq. has written an article that seeks to summarize an update to Internal Revenue Manual [“IRM”] Sec. 4.10.4 entitled “The IRS Is Using Its Big Data and Reminds Us and Its Agents That They Have Access to Records of Large Cash Transactions at Financial Institutions“.

The IRS has recently provided interim guidance to clarify actions IRS Examiners musttake to analyze and document Currency Transaction Report (CTR) data during an audit.  The Guidance, which is effective immediately, will be incorporated into IRM 4.10.4, Examination of Returns, Examinations of Income.

Prior to incorporation, IRM 4.10.4 provided very little guidance on when and how to use the Financial Crimes Enforcement Network’s (FinCEN) Currency Transaction Reports [See Structuring Rules ]. However, this new guidance assists examiners during an audit of a taxpayer’s returns and income.

The Guidance

Financial institutions are required to report all transactions of currency that exceed $10,000 by filing a FinCEN CTR. Information from this filing may be used by an examiner to decide whether to use additional auditing techniques, question sources of income for which tax has not been withheld, and generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.

IRS Updates CTR Exams

A CTR provides information that an individual was involved in a transaction that exceeded $10,000. It does not provide information as to who the money belonged to. To remedy this situation, the Guidance has provided the following actions an examiner should take to determine whether the individual names on a CTR is the taxpayer in question:

  1. The examiner must confirm the information on the CTR is for the taxpayer in question.
  2. The examiner must confirm the bank account on the CTR is the taxpayer’s, or whether the bank account belongs to an entity related to the taxpayer.
  3. The examiner must trace the transaction on the CTR to the taxpayer’s bank account.
  4. The examiner must determine the origin of the transaction.
  5. If the examiner is unable to establish a relationship between the CTR and taxpayer through an analysis of the financial accounts, the examiner should ask the taxpayer if they were involved in cash transactions over $10,000.
  6. If the examiner cannot trace the transaction and the taxpayer denies involvement in transactions over $10,000, the examiner may consider issuing a summons for the bank account listed on the CTR.

Examiners must document the steps taken to trace a CTR and their conclusions.

IRS Updates CTR Exams

Our view is that Mr. Toscher’s analysis is an excellent start, but it fails to highlight a number of concerns that perhaps are more apparent to us as CPA’s. They include

A rather unexpected and inept focus by the document’s authors on withdrawals from accounts and financial institutions for expenditures, as the funds in those accounts, have already been traced.

Financial institutions, including casinos, must report each receipt and each withdrawal of currency exceeding $10,000 by filing a FinCEN Currency Transaction Report (CTR). See IRM 4.26.5.4.1, Currency Transaction Reports, for information on the FinCEN forms used for reporting CTRs.

The concept of FinCen Query Request [‘FCQ”] needs to be elaborated upon [1]

IRS Updates CTR Exams

The Title 31 implications for structuring transactions to avoid the rules require further development, particularly for non-plant touching businesses that serve the cannabis industry, particularly Circular 230 Practitioners.

IRS Updates CTR Exams

[1] FinCEN Query (FCQ) is an on-line database query application that replaced the Web-based Currency and Banking Retrieval System (WebCBRS) on February 1, 2014, for all Bank Secrecy Act (BSA) users and on March 31, 2014, for all other IRS users. The FCQ application was developed by the Financial Crimes Enforcement Network (FinCEN) as part of the BSA Information Technology Modernization Program and is accessed via the secure FinCEN Portal at https://bsa.fincen.gov. The FCQ application supports a wide range of law enforcement and regulatory users for access to perform report and data information queries on the millions of BSA reports housed within the FCQ database. The system is designed to provide users with expanded query capabilities, including the ability to query multiple fields, use of four available search options, and use of various search methods to narrow or expand query results.

BSA report filings, as required under 31 USC Chapter 53 and 31 CFR Chapter X, are input and processed through the FinCEN BSA E-Filing System located at http://bsaefiling.fincen.treas.gov. E-filing of these reports became mandatory on April 1, 2013, with the exception of the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8300, Report of Cash Payments Over $10,000 Received in Trade or Business. E-filing of FBAR became mandatory on July 1, 2013. Form 8300 filers currently have the option to file these reports electronically or in paper format. FinCEN Form 105, Report of International Transportation of Currency and Monetary Instruments (CMIR), is submitted and processed through the U.S. Customs and Border Protection in the Homeland Security Department.

IIRS Updates CTR Exams

 

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COOPERATIVES – CANNABIS

COOPERATIVES – CANNABIS

COOPERATIVES – CANNABIS – On August 11th we published an article entitled AWFUL ADVICE in which we criticized the Office of the California Attorney General for publishing misleading information relating to cannabis collectives and cooperatives.  [ See Awful Advice ]  We were kind in reference to the material published by the AG’s Office as “awful.”  The material was wholly devoid of competent legal analysis with respect to cannabis collectives and cooperatives.

In fairness to the AG’s Office, the first three Parts of guidelines provide a significant amount of useful guidance for law enforcement.  It is our impression the guidelines published by the AG’s Office were a long-termCOOPERATIVES - CANNABIS project and Part IV was a last-minute addition.  As we pointed out on August 11th, California would have been better served if Part IV was omitted.

The AG’s Office is not the sole agency with serious misconceptions relating to cannabis collectives and cooperatives.  All of California’s cannabis regulatory agencies have committed serious errors in connection with cannabis collectives and cooperatives.  In fact, the source of the erroneous information published by the AG’s Office appears to be the Bureau of Cannabis Control (“BCC”).  The AG’s Office cites erroneous material published by BCC as the authority.

COOPERATIVES – CANNABIS

The mortal sin of the AG’s Office is the agency’s acceptance of the infantile analyses of BCC and CalCannabis of cannabis cooperatives and collectives.  It is inexcusable for the agency that is tasked with providing quality legal advice for California to accept the analyses of other agencies that appear to have been made by untrained personnel rather than make its own analysis of the law.

That BCC and CalCannabis should so badly misconstrue the laws these agencies are tasked with administering is not surprising.  It is, however, wholly unacceptable.  It is obvious to all that California’s roll-out of cannabis regulation is a colossal fiasco.  The reasons for this fiasco are also obvious – lack of careful analysis, lack of qualified legal advice, and a failure to exercise good judgment.

Enough about how we arrived at this circumstance.  It is the circumstance that must be discussed. Those administrative agencies that are interested in cannabis collectives or cannabis cooperatives have expressed a variety of erroneous opinions.  All are erroneous.  All have elements of accuracy.  There is a common thread.  In every instance, the agencies expressed simplistic opinions because the agencies lacked an understanding of the complexities of the subject matter.

We cannot reconcile the conflicting opinions expressed by various agencies.  The conflicts cannot be reconciled.  We decided to write this article to suggest a grouping of cannabis collectives and cannabis cooperatives in order to facilitate the regulation and taxation of these entities in accordance with California law.

COOPERATIVES – CANNABIS

We must first state the parameters for our discussion of the suggested groupings of cannabis collectives and cooperatives.  Cannabis collectives and cannabis cooperatives are a very small portion of the universe of collectives and cooperatives. The universe of collectives and cooperatives that are not cannabis collectives or cooperatives includes agricultural collectives, consumer cooperatives, banking cooperatives, governmental cooperatives, and insurance cooperatives.  This article solely applies to California organizations.  This article is relevant to any organized business activities that facilitate the movement of cannabis from cultivator to consumer.

The material published by the AG’s Office was entitled,  “Guidelines for the Security and Non-Diversion of Cannabis Grown for Medical Use.”  The title is a non sequitur.  Cannabis is cannabis.  California legalized the cultivation, possession and use of medical cannabis in 1996.  Almost 20 years passed before California legalized adult-use cannabis.  Medical cannabis has 20 years of history in California. An extensive body of law exists relating to California medical cannabis.  No comparable body of law exists with respect to adult-use cannabis.

Proposition 64 preserved the rights granted Californians under Proposition 215.  Too many experts on cannabis in California have forgotten that Proposition 215 was preserved in Proposition 64.  Cannabis does not know whether it is medical cannabis or adult-use cannabis.  Medical cannabis in the hands of a cultivator is identical to non-medical cannabis.  Until the cannabis is placed in the stream of commerce, the cultivator may not have decided whether the product is medical cannabis or adult-use cannabis.

While cannabis is cannabis, a collective is not a cooperative.  A cooperative is a legally recognized entity created pursuant to statutory law.  California law authorizes the organization of a number of types of cooperatives.  A collective is an organization recognized under common law.  A medical cannabis collective can exist as a legally recognized organization under California law.  An adult-use cannabis collective cannot be recognized as a legally existing organization under California law.

COOPERATIVES – CANNABIS

We addressed the distinction between collectives and cooperatives because California’s cannabis regulatory agencies, including the AG’s Office, have thoughtlessly failed to do so.  We are writing to suggest that the AG’s Office, as well as the various cannabis regulatory agencies, consider there is a minimum of five different groupings of cannabis collectives and cooperatives that must be identified in connection with California’s regulation and taxation of commercial cannabis activity.

The groupings we suggest the various cannabis regulatory agencies consider are:

“Licensed entities organized pursuant to provisions of California law other than Business and Professions Code (“B&P”), Title 10, Chapter 22, including General Stock Corporations, Limited Liability Companies, Nonprofit Mutual Benefit Corporations, Nonprofit Public Benefit Corporations, Agricultural Cooperatives and Consumer Cooperatives, which are engaged in commercial cannabis activity as medical cannabis cooperatives or as adult-use cannabis cooperatives;

Licensed medical cooperatives organized pursuant to B&P, Title 10, Chapter 22;

Licensed adult-use cooperatives organized pursuant to B&P, Title 10, Chapter 22;

Licensed medical cannabis collectives and cooperatives, not organized  pursuant to B&P, Title 10, Chapter 22, operating in compliance with Proposition 215; and

Unlicensed medical cannabis collectives and cooperatives operating in compliance with Proposition 215.”

As is noted above, all of the groupings of organizations identified above must be licensed pursuant to the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) except for medical cannabis collectives and cooperatives operating in compliance with Proposition 215.  The entities within each of the first four groupings of entities have sufficiently different bundles of rights, powers, and privileges for the purposes of engaging in commercial cannabis activity that the various regulatory agencies must be able to distinguish between them.

We have suggested the five groupings identified above are a minimum.  A number of arguments can be made that the myriad of different organizations we have included within the first grouping will be impossible to regulate and tax in the absence of some subdivisions of this grouping.  For example, we can think of a number of reasons regulatory agencies might want to distinguish between General Stock Corporations operating as cooperatives and Nonprofit Mutual Benefit Corporations operating as cooperatives.  Similarly, a forceful argument can be made that Limited Liability Companies operating as cooperatives must be distinguished from Corporations operating as cooperatives.

COOPERATIVES – CANNABIS

The difference between medical cooperatives organized pursuant to B&P, Title 10, Chapter 22, and adult-use cooperatives organized pursuant to B&P, Title 10, Chapter 22, is significant solely for the purposes the California Department of Tax and Fee Administration (“CDTFA”).  For the purposes of the other cannabis regulatory agencies, there appears to be no regulatory reason for distinguishing between medical cooperatives and adult-use cooperatives organized pursuant to B&P, Title 10, Chapter 22, as long as CDTFA can separately distinguish between the two groups of organizations.

An argument can be made that it was not necessary to identify medical cannabis collectives and cooperatives operating in compliance with Proposition 215 as a grouping of entities.  No cannabis regulatory agency has jurisdiction to regulate such organizations.  It is solely when such an organization fails to operate in complete compliance with Proposition 215 that such an organization runs afoul of California’s regulatory scheme for cannabis.

The lack of competence with which California’s cannabis regulatory agencies have addressed collectives and cooperatives is a symptom of a disease.  It is not the disease.  The disease is the failure on the part of California regulatory agencies to carefully analyze their respective regulatory tasks, to secure quality legal advice, and to exercise good judgment.  Proposition 64 was ill-conceived and poorly written.  California’s cannabis regulatory agencies have made the administration of California’s regulation and taxation of its cannabis industry more difficult and costly through administrative ineptitude.

COOPERATIVES – CANNABIS

 

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Cannabis-Sharia-Finance

Cannabis-Sharia-Finance

Cannabis-Sharia-Finance – Our attempt at covering a topic we wish we knew more about – expert input welcomed for an update/edit.

Sharia, Islamic Law and Narcotics or Psychoactive Drugs

Marijuana, hemp, or hashish is a psychoactive drug from the Cannabis plant, used for recreational or medical purposes. The main psychotropic ingredient of cannabis is a compound called tetrahydrocannabinol or better known as (THC), a compound responsible for causing an intoxicating effect. Marijuana can be consumed Cannabis-Sharia-Financeby smoking, vaporizing, within the food, or as an extract. Under Sharia law, marijuana is categorized under narcotics or “Mukhaddirāt.” In Arabic, muhkadirat or narcotics are any substance that makes a person feels sluggish and lazy, deprives sensation, and covers mind.

Regarding the Sharia rule on narcotics, there is no reference to drugs or narcotics in the early years of the Islamic era, even in the holy scripts of the Quran or the Sunna. Classical fuqaha’ (jurists) did not define what narcotic is even though they talked about various types of intoxicants. Instead, they focused on the general principles regarding intoxication to explain rulings. To understand how the jurists extrapolate a judgment regarding marijuana, we need to understand the reason for the prohibition of wine and alcohol beverages. Sharia law prohibits consuming wine and alcohol beverages, considering it as one of the major sins. The majority of the fuqaha’ (Maliki, Shafi’i, and Hanbali schools of thoughts) said that the reason for the prohibition of wine is the intoxication based on the Prophetic hadith states that “Every drink that causes intoxication is forbidden.”[1]

Cannabis-Sharia-Finance

Based on the prohibition of wine, as a general principle, intoxicants that alter an individual’s mind or affect perception, judgment, behavior, and ability to think are impermissible under Sharia. Therefore, recreational marijuana is forbidden.

Medical Use of Marijuana

Under Sharia, it is permissible to use marijuana for medical purposes under the “Doctrine of necessity,” one of the Islamic Jurisprudence principles that states “necessities permit the forbidden.” However, permissibility is not ultimate, several conditions must be met. The purpose of these conditions is to ensure that there is a real and absolute necessity. Using cannabis-based products and narcotics in general for medical treatment is permissible in the following cases:

    1. If the need for using such substance was an absolute necessity or “dharura” because necessity is the only exception that can make what originally forbidden to permissible. Relieving symptoms of pain, chronic conditions, or acute severe pain is a medical necessity.
    2. If the medicine is prescribed by a qualified and trustworthy physician who is considered as an expert in the field.
    3. In the absence of alternative lawful medicine that has the same efficiency.
    4. Using minimal amount to meet the patient medical need, and any over need doses considered impermissible.
    5. If the medicine does not cause harm that equal to or greater than the damage that already existed based on the Prophet’s (peace be upon him) saying: “There should be neither harming nor reciprocating harm.”

In summary, using narcotics–including cannabis– for recreational purposes is forbidden under Sharia because it is intoxicant that affects the person’s mind and judgment. Using cannabis for medical reason is permissible as long as the condition stipulated above are met.

Cannabis-Sharia-Finance

[1] Sahih Muslim, Book of drinks, Ch.7, every intoxicant is wine and every wine is forbidden, No. 2001. [A]

Sharia Law and Commercial Finance Tranactions

[I pirated this from the website of the Federal Reserve Branch in Richmond, VA merely to share some background about Islamic finance rules] I have some background with this because a number of our clients do business here in Chicago with Devon Bank which is one of the US FDIC Chartered Banks that offers Islamic Finance products.

Islamic finance may be rooted in ancient texts, but as an industry it is relatively young.

The broader field of Islamic economics originated in 1930s India, when the country’s Muslim population, then about one-fifth of its total, feared marginalization by British colonialism and the Hindu-led movement for Indian independence. Heavily indebted Muslim farmers throughout the country were at risk of losing their land. Scholars blamed an abandonment of Islamic principles and called for a return to “true” Islam. Economist Timur Kuran of Duke University, author of several books and articles on Islamic economics, has argued that this revival was part of a broader movement to restore Muslims to their faith, carve out an identity for Muslim minorities, and generally protect Muslim interests. The state of Pakistan emerged from the same effort.

Usury discussions in religious texts far predate this movement, of course. Many followers of Islam, along with other religions, loosened usury restrictions over time, until the last century when older notions of usurious interest were revitalized. Still, what constitutes riba has long been controversial. To some scholars, it means excessive interest — which led poor, indebted citizens to slavery in medieval times — while to others, it means any interest at all. Scholars have also disagreed on the virtues of charging interest for business investment versus consumption, allowing for inflation compensation, and a host of other matters.

Cannabis-Sharia-Finance

Modern Islamic finance takes the narrower interpretation that no interest is permissible. Three alternative products are available in the United States. One of the most common contracts is musharaka, in which the lender and customer own an asset together, with the borrower’s share of the property increasing gradually with his payments until he assumes ownership entirely, with profits and losses shared. In a murabaha contract, the lender purchases an asset — a home or even commercial equipment — on behalf of a borrower, who gradually pays back the principal plus an agreed-upon markup and assumes ownership at the end. Ijara contracts resemble a lease-to-own arrangement that includes both repayment of principal and a rental fee for exclusive use of the asset.

The first bank following Islamic law opened in Egypt in 1963. Following the global oil boom, the industry developed in earnest in the Middle East in the mid-1970s. In the 1990s, the first international accounting standards were developed for Islamic finance, and the first market emerged for Islamic bonds. Those bonds, called sukuk, tie investments to tangible assets that issue payment streams based on their revenues, much like securitized equity financing.

Islamic finance came to the United States in the 1980s when two institutions opened on the West Coast. Their investment and home finance services were available only regionally. The market broadened considerably in the late 1990s, paralleling the Muslim population growth in the United States: 50 percent in the 1990s, and two-thirds in the 2000s.

Cannabis-Sharia-Finance

The institutions operational today provide services in several states, most prevalently where the Muslim population is concentrated. University Islamic Financial (a subsidiary of University Bank) based in Ann Arbor, Mich., serving the large Muslim population of metropolitan Detroit and surrounding states, is the first and only exclusively Sharia-compliant bank in the United States — it offers no other products. Devon Bank in Chicago is the only other bank regularly offering Islamic financing products. Reston, Va.- based Guidance Residential is the largest nonbank financial institution offering Islamic finance services, having provided more than $3 billion — which it claims is nearly 80 percent of the total — in musharaka mortgage financing in 22 states since its doors opened in 2002. California-based LARIBA is another large Islamic mortgage lender, and it also provides business financing.

We are certainly not experts on these topics and would welcome some expertise to refine this piece.

[A] See Medical Marijuana under Sharia

Cannabis-Sharia-Finance

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Awful Advice

AWFUL ADVICE

AWFUL ADVICE – Last week the Office of the California Attorney General published a 16-page report entitled “Guidelines for the Security and Non-Diversion of Cannabis Grown for Medical Use.”

The apparent purpose of this publication is laudable.  The first 12 pages are useful, although we noted the author does not appear to have read then-Attorney General Brown’s 2008 Memorandum on cooperatives and collectives.Awful Advice  The author also appears to have overlooked the “safe and affordable” clause in Proposition 215.  It is perhaps unfair to criticize the author of these guidelines for overlooking the “safe and affordable” clause since most of the population of California appears to be unaware of this clause.

The publication of Part IV of these guidelines – the last four pages – is an embarrassment for the Office of the Attorney General.  Part IV addresses collectives and cooperatives.  This portion of the guidelines should be immediately withdrawn.  The Office of the Attorney General should immediately withdraw these pages with an explanation that this portion of the document was a draft that was not intended for publication.

Awful Advice

We would have directly contacted the author of the guidelines, but the guidelines have no attribution.  We did not attempt to contact Attorney General Xavier Becerra as we assumed, he would not accept our call.

The guidelines would have been fine if Part IV had not been included.  Part IV is entitled, “GUIDELINES REGARDING COLLECTIVES AND COOPERATIVES.”  The author is neither a student of history nor a student of cooperatives.

One example will suffice.  The first five sentences of Part IV.A.1. of the guidelines state,

“1. Statutory Cooperatives: Cannabis cooperatives are subject to the General Corporation Law. (Bus. & Prof. Code, § 26222.5.) A cooperative must file articles of incorporation with the state and conduct its business for the mutual benefit of its members. (Corp. Code, §§ 12201, 12300.) No business may call itself a “cooperative” (or “co-op”) unless it is properly organized and registered as such a corporation under the Corporations or Food and Agricultural Code. (Corp. Code, § 12311, sub. (b); Food & Agr. Code, § 54036.) No business may call itself a “cannabis cooperative” unless it is in compliance with the MAUCRSA. (Bus. & Prof. Code, § 26222.2.) Cooperative corporations are ‘democratically controlled and are not organized to make a profit for themselves, as such, or for their members, as such, but primarily for their members as patrons.’ (Corp. Code, § 12201.)”

Awful Advice

The problem with the preceding paragraph is that the cooperatives referenced in the first and the fourth sentences are Cannabis Cooperative Associations (“CCAs”) organized pursuant to Title 10, Chapter 22 of the Business and Professions Code, and that the cooperatives referenced in the second, third and fifth sentences are cooperatives organized pursuant to other provisions of California law.  It is our impression the provisions of California law that are cited in the second, third and fifth sentences do not even apply to CCAs organized pursuant to Title 10, Chapter 22.

Proposition 64 preserved the rights granted to Californians under Proposition 215.  Old-fashioned Proposition 215 medical collectives and cooperatives continue to be entitled to exist and operate in California.  In addition to Proposition 215 cooperatives, two other groups of cooperatives are entitled under the California law to engage in the distribution of medical cannabis in the cannabis industry.

One group consists of CCAs organized pursuant to Title 10, Chapter 22.  The entities in this group are a special form of corporation.  The other group consists of all entities that are not organized pursuant to Title 10, Chapter 22, and that engage in commercial cannabis activity in California as cooperatives.  The entities in this second group can be one of several types of corporation.  The entities in this second group are not necessarily corporations.

Awful Advice

An entity from either of the groups described in the preceding paragraph is entitled to engage in commercial cannabis activity as a cooperative provided the entity is properly licensed.  Every entity in either group is subject to the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).  Each entity in either group is required to be licensed under MAUCRSA for each commercial cannabis activity in which the entity engages.

We have pointed out on multiple occasions the problems that have been created in the regulation of California’s cannabis industry because the various regulatory agencies have not followed a carefully coordinated and cohesive agenda.  Now we have the Office of the Attorney General issuing guidelines to California’s cannabis industry regarding laws that the Office does not understand.  Perhaps Russia has hacked the Office of the California Attorney General?

Chaos continues to reign.See CCA #1, CCA #2, CCA #3, CCA #4

Awful Advice

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MEDICAL CCAs 101

MEDICAL CCAs 101

MEDICAL CCAs 101 – On August 6th we published an article that described the financial benefits of the use of a properly organized Cannabis Cooperative Association (“CCA”) to move cannabis as an adult-use flower from cultivator to consumer.  [See CCA’s Beat Underground ]  On August 8th we published an article that described the financial benefits of moving cannabis as adult-use oil through a CCA.  [See CCAs Create Profits ]This article describes the additional financial benefits of moving flower from cultivator to consumer through a CCA as medical cannabis rather than as adult-use cannabis.

The spreadsheet immediately below was the starting point for our August 6th article.  This spreadsheet illustrates the division of the proceeds, including all taxes collected from consumers, of the retail sale of flower as adult-use cannabis through conventionally structured businesses.  In this illustration, we have assumed a sale of 250 packages of flower for $40 per 8-gram package.  The $40 sale price includes the taxes collected from consumers.  We have assumed a Local Cannabis Tax rate of 10.0% and a Sales Tax rate of 8.75%.  The operating costs and profits of the dispensary, distributor, and cultivator we have assumed are as stated in the spreadsheet below.

MEDICAL CCAs 101

The $10,000 paid by the consumers for the packages of flower as adult-use cannabis through conventionally structured businesses will be divided among governmental agencies, and the dispensary, distributor, and cultivator, as is reflected in the spreadsheet below.

MEDICAL CCAs 101

The $10,000 paid by consumers for the flower as adult-use cannabis is divided as follows: (1) governmental agencies for taxes collected, both directly and indirectly, from consumers, 30.2%; (2) dispensary revenue, 27.6%;  (3) distributor revenue, 20.4%; and (4) cultivator revenue, 21.8%.

In the spreadsheet immediately below, we have assumed the same 250 8-gram packages of flower are sold as medical cannabis to consumers at a price per package that produces the same gross revenue for the dispensary, excluding the taxes directly collected from consumers, as the sales reflected in the first spreadsheet.  We have further assumed that the Local Taxes on sales of medical cannabis are 5.0% instead of 10.0%.  Since medical cannabis is not subject to Sales Tax, the sale of the 250 8-gram packages for $8,827 will produce a gross revenue of $7,355 for the dispensary.  The $7,355 of gross revenue for the dispensary is the same gross revenue for the dispensary as was generated by the sale of the 250 packages of flower for $10,000 as adult-use cannabis.

MEDICAL CCAs 101

We have included the spreadsheet immediately above to illustrate the changes in the flow of funds caused solely by differences in the taxation of medical cannabis as compared to adult-use cannabis.  The sale of the 250 packages of cannabis flower as medical cannabis provides the consumers with a 11+% discount even though the gross revenue of the dispensary, distributor and cultivator remain the same.

The basis for both of the preceding illustrations is an assumed sale by a cultivator to a distributor of one kilogram of flower at a price slightly over $1,100 per pound including Cannabis Cultivation Tax (“CCT”).  The distributor assumes the CCT.  The net to the cultivator is a little over $950 per pound.  We assumed the cultivator has production costs of $1,410 per kilogram for the flower.  These assumptions produce a before-tax profit for the cultivator of $766 per kilogram.  We have assumed the distributor has additional costs of $1,278 per kilogram and a profit of $766 per kilogram.  For the dispensary, we assumed additional costs of $1,226, and a profit of $1,531, per kilogram.  The additional costs and profit for the dispensary are based on 60% mark-up of the wholesale cost from the distributor.

MEDICAL CCAs 101

The division of the sale proceeds between governmental agencies and the three cannabis businesses changes when the flower is sold as medical cannabis.  The sale of the flower as medical cannabis significantly reduces the taxes collected from consumers.  The allocation of the sales proceeds of $8,827 is: (1) governmental agencies, 16.7%; (2) dispensary revenue, 31.2%;  (3) distributor revenue, 23.1%; and (4) cultivator revenue, 29.0%.

The costs, profits and income taxes of the dispensary, distributor and cultivator in the two preceding spreadsheets are the same.  The sole difference in the preceding spreadsheets is the reduction in the taxes collected from the consumer when the flower is sold as medical cannabis.  In both of the preceding illustrations, we have assumed the cultivator and distributor each have a profit before taxes that is one-half of the profit before taxes of the dispensary.  We have also assumed a 40% income tax rate is applicable to each of the businesses.

In the spreadsheet below we have assumed the same 250 8-gram packages of flower move from cultivator to consumer as medical cannabis through a fully integrated CCA.  We have also assumed the operating costs for the dispensary, distributor and cultivator remain the same with the additional assumption any income tax liability of the dispensary is included in its costs.  We have further assumed the profit to the cultivator is doubled through the use of a CCA.  We have further assumed the reductions in costs and profits at the distributor and dispensary levels from the use of a CCA are passed on to the consumers.

MEDICAL CCAs 101

MEDICAL CCAs 101

The shifting of the amounts to which the tax rates are applied through the use of a CCA produces dramatic savings for the consumers.  We saw this result with adult-use cannabis.  The savings are more dramatic when medical cannabis is sold through a fully integrated CCA.  In the preceding spreadsheet a total of $6.989, including Sales Tax and Local Cannabis Tax, is paid by the consumers for the same 250 8-gram packages of flower.  The sale of this flower as medical cannabis drops the price per package to the consumers from $40 to $27.95.  The total of $6,989 paid by the consumers for the flower as medical cannabis through a fully integrated CCA will be divided: (1) governmental agencies for taxes collected from consumers, 22.1%; (2) dispensary revenue, 17.5%; (3) distributor revenue, 18.3%; and (4) cultivator revenue, 42.1%.

The preceding illustrates why we have been touting CCAs since before this legislation became effective.  The same packages of flower that cost consumers $10,000 as adult-use cannabis can be sold to the consumers as medical cannabis through a CCA for less than $7,000.  California collects all of its CCT and Cannabis Excise Tax (“CET”), and local governmental agencies collect all local cannabis taxes.  Best of all, the cultivators who grow cannabis make twice as much money.  This is the reason the Legislature created CCAs.

The use of a CCA to move extracted oil from cultivator to consumer as medical cannabis produces even more dramatic results than the movement of flower as medical cannabis.   We will shortly publish an article describing the financial benefits of moving oil from cultivator to consumer through a CCA as medical cannabis.

See CCA #1, CCA #2, Better Mousetrap, Awful Advice

MEDICAL CCAs 101

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CA DOJ Medical Cannabis

CA DOJ Medical Cannabis

CA DOJ Medical Cannabis Rule Summary -The 16-page document from Attorney General Xavier Becerra’s office is “a good, solid first step” for enforcement, Kazan said. It spells out what is and what isn’t lawful grow.“I appreciate that it is coming from the top,” he said. The document summarizes more than 20 years of state laws, regulations, and guidelines concerning the growing, distribution and transportation of medicinal cannabis in the Golden State. The purpose of the release was “to reflect the evolution of cannabis legalization in California,” according to a statement from the Attorney General’s Office.CA DOJ Medical Cannabis

California has no uniform marijuana policy despite voter-approved initiatives that have legalized medicinal and recreational cannabis. Each local government is given latitude to decide for itself whether to allow cannabis businesses to operate. When it comes to seizing product or even involving the federal government, Spiker said law enforcement in the past has tended to ‘shoot first, aim later.’ This document provides police with a reminder that “we have a licensed, legal industry, let’s make sure that’s in the back of our minds,” he said. The summary also lets medicinal cannabis patients know both their rights and their responsibilities, he said.” I think they’re collating all these different laws and regulations into one document for the medical industry,” Spiker said.

CA DOJ Medical Cannabis

In 1996, California voters approved Proposition 215, the Compassionate Use Act of 1996, which exempted certain patients and their primary caregivers from criminal liability under state law for the possession and cultivation of marijuana for medicinal use. (Health & Saf. Code, § 11362.5.1 ) In 2003, the California Legislature enacted Senate Bill 420, the Medical Marijuana Program Act, which clarified requirements related to medical marijuana. Pursuant to the legislation, the Office of the Attorney General is required to adopt “guidelines to ensure the security and non-diversion of cannabis grown for medical use.” (§ 11362.81, subd. (d).) To fulfill this mandate, the Office of the Attorney General is re-issuing and updating these guidelines to (1) ensure that cannabis grown for medicinal purposes remains secure and does not find its way to non-patients or illicit markets; (2) help law enforcement agencies perform their duties effectively and in accordance with California law; and, (3) help patients and primary caregivers understand how they may cultivate, transport, deliver, possess, and use medicinal cannabis under California law.2

We are going to have quite a bit to say about the document…as a start…

There is no mention or discussion of Attorney General Brown’s 2008 Memorandum

There is no acknowledgement of possible limitations due ot the “safe and affordable” language in Proposition 215.

The guidelines do not distinguish between “collectives,”  “cooperatives” and “Chapter 22 cooperative associations. “CCA”s”

Our take away for medical cannabis is, that the only thing that has really changed is you had better get a license.

CA DOJ Medical Cannabis

Attorney General Brown’s 2008 Memorandum

 

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CA DOJ Medical Cannabis

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