By Jeffrey Steinborn
Questions that might have been answered in well-considered legislation continue to cast a shadow on the exploding cannabis industry in Washington. Will the federal government prosecute people who are in compliance with state cannabis laws?
Can states tax cannabis commerce (medical or general)? Is it permissible for the state government or safe for the entrepreneur to participate in a system where the documentation required by the state constitutes irrefutable evidence of a federal crime and a waiver of the Fifth Amendment protection against compulsory self-incrimination? Developments give us clues but no answers.
Prosecution: Vague signals from the government hint that compliance with state law may insulate against federal prosecution as long as the business doesn’t threaten certain less-than-clear federal government values.
Legal growing has just begun. To date, nobody in compliance with I-502 has been pursued by federal law enforcement. Recent news coverage disclosed that one of the first I-502 licensees had been running a dispensary with income of about $800,000 a year. Although they may be defensible, dispensaries aren’t legal. We can assume that the plants from his illegal farm begat the plants he’s now growing legally, but the federal government has shown no apparent interest.
Meanwhile, in Kettle Falls, Wash., five medical marijuana patients who were apparently in compliance with state law face up to 10-year mandatory minimum sentences when their case goes to trial in Spokane federal court in July. I haven’t seen the evidence but I’ve been told these patients were not involved in commercial activity.
In Yakima, Wash., an individual was given the choice of going to trial or pleading guilty in federal court to the manufacture of 32 plants.
At the trial, he would not have been allowed to mention his medical use defense, and would have faced an additional mandatory five-year sentence for the shotgun in his bedroom. He believed his conduct was legal under state law and that the federal government had announced an intention to allow this conduct. From his perspective, the federal government is a hostile occupying army imposing its will on unwilling citizens. It’s hard to determine why the federal government singles out some while ignoring others.
The only lesson I’ve garnered from these cases is that if you want to engage in cannabis commerce, be sure there are no firearms anywhere around you — even at your home.
At the same time, the Obama administration has just made a move to rein in DEA Administrator Michele Leonhart, an outspoken hard-line drug warrior who has criticized the Obama administration’s attempts at backing off the harshness of the war on drugs. According to the Huffington Post, Leonhart was recently told that her comments were inappropriate when she distanced herself from President Obama’s suggestion that cannabis is relatively harmless. This optimistic development follows another hint that the federal government is working toward finding a way to accommodate state legalization schemes. A recent memo from the Department of Treasury suggests that if certain guidelines are met, banks may be allowed to accept cash from cannabis businesses.
These are subtle signs — open to interpretation and misinterpretation. Even so, holding a wet finger up to test the wind, I make this fearless prognostication: the current administration will hold back its criminal prosecutions while states struggle to implement a novel social policy and legal scheme.
Taxation and self-incrimination: For some time now, a controversy has gone on between the medical cannabis community and the Washington State Department of Revenue.
The Department of Revenue wants to tax dispensaries, collective gardens and “access points” – any place where cannabis is distributed and cash changes hands. Some are happy to pay, hoping, despite court rulings that their conduct is illegal, that this helps confirm their legitimacy. Others see potential problems. Those who would comply with I-502 may face the same dilemma.
Under I-502, the state intends to tax cannabis commerce at every level — growth, processing and retail sale. Some legal scholars believe that the state can’t tax activity made illegal by federal law without running afoul of the “preemption” doctrine. Some believe that the very steps required to comply with the Department of Revenue require the production of highly self-incriminating documents. Either of these flaws could potentially halt any progress toward implementation of I-502. Fortunately for potential investors who can’t afford to wait too long, it appears the questions may soon be answered.
In May, a declaratory judgment action was filed in the U.S. District Court for the Western District of Washington, asking the court to answer two questions:
1. Whether the state of Washington can tax actual sales of marijuana, medical or otherwise, under state law when it remains illegal federally under 21 USC et seq., the Supremacy clause and Object Preemption Doctrine.
2. Whether enforcement of tax liens on the plaintiff (who “is an individual participating in a ‘collective garden’ as defined by [Washington law])” while that same person is being prosecuted for the same conduct the state wishes to tax violates the plaintiff’s Fifth Amendment rights?
The suit was filed by my office-mate attorney Douglas Hiatt. Though some have criticized Mr. Hiatt for bringing a suit that might very well cripple the affirmative parts of I-502, the conclusion that it’s better to resolve these issues sooner rather than later seems inescapable.
The case is Nickerson v. Inslee, #2:14-cv-00692-MJP. Both questions it raises are pressing. They address real practical problems that lawyers are now confronting regularly. For example, in one case a member of a collective garden has been arrested by state authorities. He was well-papered with a packet created for him by a local attorney who specializes in setting up dispensaries, access points, collective gardens — places where cannabis is distributed. “Setting him up” is exactly what this lawyer did.
All that paperwork is included in the evidence the state intends to use against him. Self-generated documentary evidence that he had three or more employees has caused the prosecutor to threaten a racketeering charge. In state court that’s about five years. In federal court, it’s 15.
So, is it safe to comply with I-502? If I’ve read the signals correctly, probably, if you intend to follow the rules religiously. But be aware of the risk of self-incrimination that accompanies full compliance.
The taxation/preemption question is another one that must be answered before any cannabis commerce can be considered a safe investment. Even the hope of tax revenue has not been enough to keep many jurisdictions from prohibiting any I-502 businesses. Take away the profit motivation, and even more will join those who have enacted moratoria.
Scholars and experts who have reviewed the question of whether states may impose a tax on conduct made illegal by federal law say it is less than clear, but the argument that the federal government has preempted this area is not without merit. Mr. Hiatt might prevail. Add to this the fact that the case has been assigned to the Honorable Chief Judge Marcia Pechman, a sharp, dedicated judge whose dislike for cannabis is well known, and anything is possible.
Washington’s current legalization scheme leaves important questions unanswered. Its uncertainty could be said to invite those not afraid to walk the legal line, while those who are more conservative might be deterred.
Walking the line has become an acceptable standard in many industries. That’s why we have tax lawyers, securities lawyers, and compliance lawyers. Whether it’s a good social policy or a good standard for the cannabis industry remains open to debate. Meanwhile, it would be nice to see some clarity on these potentially troublesome issues.
Jeffrey Steinborn has been practicing law since 1968, primarily in criminal defense, but also adding his experience to the legalized cannabis industry.