FEDS COULD DASH CITIES' HOPES OF TAXING RETAIL POT SALES UNDER PROP. 19

For months, proponents of California's Proposition 19 marijuana
initiative hyped the local tax benefits of legalizing pot for recreational use.

Now, as voters in Sacramento and other cities consider companion
ballot measures to impose taxes on the retail pot businesses that
could open if Proposition 19 passes, the promised revenues may be in jeopardy.

As Californians vote Nov. 2 on Proposition 19, voters in at least 11
cities will decide 14 local marijuana measures. Suddenly the most
controversial of those measures involve attempts by cities to levy a
tax on recreational marijuana sales.

While Proposition 19 permits local governments to tax and regulate
retail pot sales, U.S. Attorney General Eric Holder last week
signaled that the Justice Department is unlikely to stand by and let
that happen.

In a letter to former drug enforcement administrators, Holder raised
the specter that recreational pot businesses that paid taxes on sales
would be admitting to a federal crime.

Holder vowed to "vigorously enforce" federal drug laws and target
"those individuals and organizations that possess, manufacture or
distribute marijuana for recreational use, even if such activities
are permitted under state law."

The ballot measures in Sacramento and several other cities also seek
to impose or increase taxes on the nonprofit medical marijuana
operations that are now legal in California.

In Sacramento, ballot Measure C would allow taxes of up to 4 percent
on existing medical marijuana dispensaries. It would permit a 10
percent tax on retail pot shops if Proposition 19 passes and the city
allows the businesses.

City Council member Sandy Sheedy, who has championed efforts to
regulate the Sacramento pot industry, said the city still hopes to
collect taxes on medical dispensaries. But in light of the federal
stance, she said, it is now unlikely Sacramento would allow
businesses catering to recreational users even if voters approve
Proposition 19.

"If it does pass and the federal government says it will vigorously
enforce the law, then that part (of Measure C) is moot," Sheedy said.
"We are not going to do anything that the federal government is going
to come in and oppose."

No opposing ballot statement was submitted for the Sacramento
measure. City Treasurer Russell Fehr and representatives for police
and firefighters unions called for a "yes" vote.

"The city of Sacramento needs this new revenue to keep providing the
services you depend on," the ballot argument reads.

California already collects an estimated $100 million in local sales
taxes on medical pot shops.

But when it comes to recreational marijuana, legal observers say,
years of litigation -- and a political evolution -- may be necessary
before anything flows into local coffers.

"Proposition 19 will not be a revenue raiser at the state and local
levels in the short run," said UC Davis law professor Vikram Amar.

"I just would not count on this as a meaningful revenue stream
because of the specter of the Drug Enforcement Administration."

In Oakland, construction executive Jeff Wilcox's AgraMed firm has
invested more than $20 million in hopes of opening a city-licensed
industrial warehouse for medical marijuana cultivation and related businesses.

Oakland's Measure V would raise the city's existing tax on medical
pot outlets from 1.8 percent to 5 percent -- and would set a 10
percent tax on recreational marijuana.

Despite threats of federal raids, Wilcox said he isn't giving up on
expanding into retail operations for recreational pot.

"I believe voters make laws to suit the voters of California," Wilcox
said. "It is the state of California. Not the federation of California."

Dale Gieringer, California director for the National Organization for
Reform of Marijuana Laws, said some cities and entrepreneurs may be
willing to test the federal government. He said the legal skirmishes
- -- and federal raids -- could mirror the aftermath of Proposition
215, the medical marijuana law California voters passed in 1996.

"I guarantee you people are willing and interested in filing to open
Amsterdam-style pot clubs," he said. "And anybody who makes a big
fanfare and opens up for sale will probably get busted by the feds."

Across California, the local pot measures vary widely.

Rancho Cordova's Measure O seeks a "personal cultivation tax" of $600
to $900 per square foot for anyone growing pot. Albany's Measure Q
would impose a 2.5 percent tax on retail marijuana sales. Long
Beach's Measure B would set taxes on recreational pot at 15 percent.

At the other end of the spectrum, Measure B-10 in Morro Bay would ban
medical pot dispensaries.

UC Berkeley law professor Jonathan Simon said the measures underscore
the potentially diverse "patchwork" of regulation if Proposition 19 passes.

"You might have some towns that set a very low tax and very few
regulations, seeking to create marijuana commercial zones," Simon said.

But other cities are likely to seek higher taxes, he said, because of
"their desire for revenue and opposition to becoming known as a local pot hub."