IS IT LEGAL TO TAX LARGE POT FARMS?

Berkeley City Attorney Zach Cowan And Oakland Councilwoman Rebecca
Kaplan, Co-author Of Oakland's New Law, Say It Is. But Other Legal
Experts Disagree.

The City of Oakland hopes to make millions of dollars each year by
taxing the four giant medical cannabis growing operations it plans to
permit in early 2011. Likewise, Berkeley hopes to cash in on six large
medicinal pot grows if city voters approve them in November. But both
cities shouldn't start counting too much on the new revenues, because
there are questions as to whether taxing large marijuana farms is legal.

Both cities plan to levy what's called a "business receipts tax" on
their large growing operations. That is, the cities want to tax the
pot farms' annual revenues. Berkeley is asking voters to approve a tax
of $25 for every $1,000 of revenue at each farm. As of late last week,
Oakland appeared ready to ask voters to okay a tax of $50 for every
$1,000 of revenue. In shorthand, Berkeley's business receipts tax
would be 2.5 percent, and Oakland's, 5 percent.

The stakes could be huge. Oakland city staffers project that a giant
grow of 100,000 to 150,000 square feet could generate $2.4 million to
$3.6 million in tax revenues each year. That's a total of $9.6 million
to $14.4 million flowing annually into the city's beleaguered general
fund - or enough to pay the salaries and benefits of 51 to 74 laid-off
cops.

Oakland has taxed the business receipts of cannabis dispensaries for
several years. But the question of whether such taxes are lawful on
pot farms is somewhat murky. Berkeley City Attorney Zach Cowan
contends that they are legal, as does Oakland City Councilwoman
Rebecca Kaplan, an attorney and co-author of the law approved by the
city council last week.

However, Oakland attorney David Stein, who represents the Oakland
medical cannabis dispensary Purple Heart Patient Center, questions the
legality of taxing large pot grows. Stein also contends that the farms
themselves also would be illegal if not operated by a licensed
dispensary. The office of Oakland City Attorney John Russo, which
reportedly questions the legality of the city's new pot-farm law, did
not return a phone call, seeking comment for this story. Office
spokesman Alex Katz said an opinion that the office gave the council
on the issue is confidential.

To understand the legal questions surrounding the pot-farm tax
requires a bit of background. Under federal law, medical pot is
illegal, but the Obama administration has taken a hands-off approach
to the issue in states where voters have endorsed the concept.

Under California law, there must be a direct link between the growing
of the plant and the patient for the cultivation operation to be
lawful. In some jurisdictions, growers actually label each plant with
the name of the patient who ultimately will use it. But in most
places, the grower, the patient, and the dispensary are all members of
the same medical cannabis "collective." This cooperative agreement
provides the link between the grower and the patient needed under
state law. However, the grower is still not allowed to cultivate more
pot plants than would serve all the patients in the collective.

However, if the large farms are not operated by dispensaries, and are
instead controlled by a third party, it raises questions as to whether
such an arrangement violates state law, and also whether it's okay to
tax that third party. Cowan and Kaplan contend that as long as the
third-party grower is also a member of the same collective as the
dispensary and the patient, then the arrangement is okay.

Stein disagrees, however, arguing that if a giant grower has more pot
plants than allowed for the number of patients in the dispensary, then
it breaks the patient-dispensary-grower nexus. "It's clearly a
violation of state law," he said. Stein submitted a letter to the
council last week, outlining his legal objections.

But what if large growers are members of more than one collective and
are growing plants for patients in each of those collectives? Is that
legal? "It's an interesting question," Cowan said. "Let's put it this
way: There's nothing in state law that says they can't."

That's effectively how Oakland and Berkeley plan to set up their large
medical cannabis operations. Each farm will be a member of every
collective they sell pot to, and each will clearly have to be members
of several collectives. It's no different than patients choosing to
belong to more than one collective.

But what about the tax issue? How can Oakland and Berkeley levy the
same business receipts tax twice against the same collective?
Remember, Oakland has been taxing dispensaries for years, effectively
taxing that collective already, and Berkeley plans to begin taxing
dispensaries if voters agree this fall.

Cowan and Kaplan argue that as long as the large pot farms are
separate business entities from the dispensaries, then the cities can
charge them separate business receipts taxes - effectively taxing the
same pot plant twice. It's no different from other retail goods, from
toys to clothes to TVs. They're taxed when sold from a manufacture to
a wholesaler, then again to a store, and then again to the consumer.
From Cowan and Kaplan's perspective, it doesn't matter that the farms
and the dispensaries are part of the same collective or coop; as long
as they're separate legal entities, they can be taxed.

Kaplan said her staff has found a similarity with almond-growers'
cooperatives and other business cooperatives. In those cases, growers
and producers can be taxed on the revenues they earn selling to the
cooperative, and then the cooperatives can be taxed on the revenues
they make when selling them to stores or directly to consumers.

That's the primary reason why both Oakland and Berkeley prefer that
third-party growers, rather than dispensaries, operate the farms. If
dispensaries operate the farms, then the cities can't tax the medical
marijuana twice. They can only tax the business receipts of each
dispensary once - and not the grower since they are the same entity.
To put it another way, having the dispensaries operate the large farms
could cost Oakland $9.6 million to $14.4 million in revenues a year.