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Holland & Hart: Cannabis Taxation: Where Does the Money Go?

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Cannabis tax revenue remains a central argument for legalization. In the decade since adult-use markets first launched, local, and state governments have allocated billions of dollars in collected cannabis taxes to fund educational infrastructure, substance abuse prevention and treatment programs, public safety and many other initiatives designed to improve the lives of those living in states with legal cannabis markets.

There is an irony here. It is almost as if the drug war has turned in on itself, with money from the once demonized cannabis plant being used on treatment and support of individuals addicted to pharmaceutical opioids, alcohol, and other “legal” drugs.

It’s also important to scrutinize how cannabis taxes are structured and acknowledge the harms of overregulation and overtaxation, something we have seen at Holland & Hart time and again helping licensed operators navigate complex cannabis regulations for tax collecting, license transfers, reporting, and other compliance matters. One thing is clear: while the goals are noble, cannabis taxation has its flaws and unforeseen consequences.

Types of Taxes on Cannabis

Tax structures governing cannabis sales vary across legal markets. Some states levy multiple taxes (such as an excise tax on wholesale transfers), and local governments commonly impose their own separate taxes. Of course, all of these cannabis taxes get passed to the consumer, who may also pay general state and local sales taxes on their purchases.

The complexity doesn’t end there. States tax various cannabis products in different ways, including: a percentage-of-price tax, a weight-based tax, and a potency-based tax. For example, Washington levies a 37% sales tax on cannabis purchases, while Illinois does not have any sales tax but does levy a 7% excise tax of value at the wholesale level, a 10% tax on cannabis flower or products with less than 35% THC, a 20% tax on products infused with cannabis, such as edible products, and a 25% tax on any product with a THC concentration higher than 35%.

Cannabis Tax Revenue Funding

All of those percentages of sale add up quite quickly and are allocated in different ways. Some of the cannabis tax revenue goes to education-related initiatives like school construction, school food programs, before- and after-school enrichment programs, and public libraries. Other funding is directed toward public health and community programs like alcohol and drug treatment, job training, conviction expungement, and services for veterans. Investment in traditionally underserved or underdeveloped communities is also common in some states.

It’s important to note that tax structures are subject to change due to sunsetting legislation, ballot initiatives, and other bureaucratic maneuvers. Here is where the money currently goes in some of the states with the highest returns from cannabis taxation.

Colorado

Colorado voters legalized adult use of cannabis in 2012 and state-licensed dispensaries started sales in 2014. Colorado levies a standard state sales tax (2.9%), a retail marijuana sales tax (15%), and a retail marijuana excise tax (15%) on wholesale sales/transfers of retail marijuana. In 2021, Colorado recorded $423,486,053 in cannabis tax revenue.

The state allocates 10% of the collected marijuana retail tax to local governments, apportioned according to the percentage of sales occurring within city and county boundaries. The remaining 90% is allocated as follows:

  • 15.56% of the revenue goes to the General Fund
    • Education
    • Health care
    • Human services
    • Corrections
  • 12.59% goes to the Public School Fund
  • 71.85% goes to the Marijuana Tax Cash Fund
    • Health care
    • Health education
    • Substance abuse prevention and treatment programs
    • Law enforcement
    • Education
      • The School Health Professional Grant program to address behavioral health issues in schools.
      • A grant program to help schools and districts set up initiatives to reduce the frequency of bullying incidents.
      • Grants to fund drop-out prevention programs.
      • Early Literacy Competitive Grants to ensure reading is embedded into K-3 curriculum.
      • A grant to expand concurrent enrollment programs.
      • Grants to fund physical education courses and social-emotional health programs for K-5 students.

Revenue from the excise tax of wholesale sales goes to the Building Excellent Schools Today (BEST) fund. The first $40 million collected annually is earmarked for capital construction projects “to repair or replace Colorado’s most needy public school facilities.” The cannabis money is commingled with State Land Board proceeds, Colorado Lottery spillover funds, and interest accrued in the Public School Capital Construction Assistance Fund. Matching funds are required by statute and calculated based on a series of factors, from the particular district’s bond election efforts over the past 10 years to the district’s assessed value per pupil. School projects completed thanks to the BEST fund include HVAC and electrical upgrades, fire and safety improvements, roof replacements, adding ADA-compliant restrooms and abating hazardous materials.

In Denver, the City Council recently announced approval to use approximately $15 million of Denver’s cannabis sales tax for the city’s first investment program focused on minority and women-owned businesses. Establishing quality job opportunities, a pipeline of entrepreneurs and small business startups, and generational wealth for Denver-based business owners who have historically lacked investment opportunities, are the goals of the Malone Fund.

Washington State

Washington launched adult-use sales in 2014, a few months behind Colorado. With its 37% cannabis retail tax coupled with a 6.5% standard retail sales tax, the state pulled in $559.5 million in 2021. Some of the funds directed to public health and research include:

  • The state health authority for an annual healthy youth survey
    • Measure drug use and other behaviors that contribute to morbidity, mortality, and social problems
  • The University of Washington for marijuana-related educational programs
  • The state’s health professions account
    • Provides an accounting and resource allocation vehicle for licensing activity of health professions
  • Various state departments for research related to pesticides, licensing, accreditation, and testing

California

The largest legal market in the nation adopted laws for legal adult use in 2016 and collected staggering $1.3 billion in revenue in 2021. The initial taxation arrangement for cultivators was $10.08 per ounce for flower, $3.00 per ounce for leaves, and $1.41 per ounce for fresh plant. But, on July 1, 2022, through AB 195 California announced it would remove cultivation taxes and instead impose a 15% excise tax on retail purchases of cannabis or cannabis products beginning in January 1, 2023. Beginning in the 2025–26 fiscal year and every two years thereafter, California will determine whether the cannabis excise tax rate should be adjusted to ensure revenue generated is in line with what would have been collected through the cultivation tax to a maximum of 19% of the gross receipts of retail sales.

This is how the California distributes its cannabis taxes:

  • All regulatory and research costs must be covered first
  • 60% goes to anti-drug programs
    • Youth Education Prevention, Early Intervention and Treatment Account (YEPEITA)
      • Prevention and early intervention services including outreach, risk survey and education to youth, families, schools, primary care health providers, behavioral health and SUD service providers, community and faith-based organizations, foster care providers, juvenile and family courts, to recognize the reduce risks related to substance use, and the early signs of problematic use.
      • Grants to schools to develop and support Student Assistance Programs, designed to prevent and reduce substance use, and improve school retention and performance. Schools with higher than average drop-out rates will be prioritized for grants.
    • 20% goes to environmental programs
      • Combat illegal grows and wildland restoration
      • Road improvement
      • Local park investment
    • 20% goes to public safety
      • Science and policy research
      • Law enforcement
      • Fire protection
      • Local programming to address public health and safety associated with the implementation of Proposition 64.

Elsewhere, Missouri voters in 2018 adopted Constitutional Amendment 2, known now as Article XIV, which includes a provision requiring that fees and taxes generated by the medical marijuana program, less operational expenses, be transferred to the Missouri Veterans Commission for health and care services for military veterans. Since dispensary sales began in October 2020, more than $335 million in sales have occurred—with almost $9 million going to veterans as of the end of 2021—thanks to a sales tax rate of 4% on medical marijuana.

In Oregon, police and mental health treatment centers receive funding, but the biggest recipients are the state’s schools, which receive 40% of the state’s cannabis tax revenue.

At the national level, cannabis remains illegal, but among various bills in Congress, the MORE Act (Marijuana Opportunity Reinvestment and Expungement) has passed the House and if (ever) approved by the Senate, would establish a sales tax at 5% which would increase to 8% over three years. The tax would be imposed on the retail sales of cannabis and proceeds from the tax would go to a newly established Opportunity Trust Fund. A new governmental organization, the Cannabis Justice Office, would be tasked with overseeing the social equity provisions of the MORE Act.

50% of the money would support a Community Reinvestment Grant Program, 10% would support substance misuse treatment programs, and 40% would go to the federal Small Business Administration to support implementation of a newly created equitable licensing grant program. The Community Reinvestment Grant Program would provide eligible entities with funds to administer services and programs for individuals adversely impacted by the War on Drugs.

While the industry has worked with governments to establish reasonable taxation regimes, excessive taxes will drive consumers to the black market. Using cannabis taxes as a resource to fill budget gaps created by tax favoritism of other industries is not a solid approach to responsible fiscal policy. In order for the legalization of cannabis to be a long-term success, the industry, legislatures, regulators, and even prohibitionists need to work together to make sure the safer legal cannabis market is not overtaxed to the point that it can no longer survive.

Source: JD Supra

https://www.jdsupra.com/legalnews/cannabis-taxation-where-does-the-money-6588066/



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Wait? My CBD Business May Be Racketeering? A Potential Existential Crisis We Have Been Warning About

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Even the most responsible hemp operator should understand that it operates in a world full of risk. But I doubt many of them believe they might be accused of racketeering. Last week, the U.S. Supreme Court heard arguments about whether to sanction a commercial trucker’s attempt to bring a racketeering claim against CBD companies, whose allegedly mislabeled products the trucker claims led to his firing.

As always, Sam Reisman at Law360 distills the issue nicely:

The case concerns an allegation that companies sold CBD products with detectable amounts of THC, purportedly costing plaintiff Douglas J. Horn his job as a commercial trucker after he tested positive on a drug test. Oral arguments on Tuesday hinged largely on whether Horn’s claims stemmed from a personal injury — which would be excluded from the Racketeer Influenced and Corrupt Organizations Act, or RICO — or whether his firing was an economic injury and therefore redressable under RICO.

In taking the case, the U.S. Supreme Court could resolve a 3-2 circuit split over whether the civil prongs of the RICO statute allow a plaintiff to seek damages for economic harms stemming from injuries to their person.

Again, from Reisman:

During oral arguments on Tuesday, the liberal wing of the high court expressed skepticism with the CBD companies’ rendering of the case, which they said foregrounded Horn’s ingestion of the product as the source of the injury, as opposed to his firing for a positive drug test.

Lisa Blatt, an attorney for the CBD companies, told the justices that agreeing with Horn’s interpretation of the statute would open the door for virtually limitless personal injury cases under civil RICO, as long as plaintiffs could allege some connection between their ingestion of a product and a loss to their business or property: “Respondent’s rule also leaves the personal exclusion [in civil RICO] toothless, since virtually all personal injuries result in monetary loss,” Blatt said. “It is utterly implausible that Congress federalized every slip-and-fall involving RICO predicates. Personal injuries are serious and may support state tort claims, but they are not the stuff of RICO.”

On the other side, conservative justices attempted to discern how to draw a line between bona fide economic claims and personal injury claims pleaded as economic claims.

Easha Anand, arguing on behalf of Horn, said the vast majority of personal injury claims, such as those alleging pain and suffering or emotional distress, would still be excluded even if Horn was permitted to pursue his RICO claim against the CBD companies: “In your average slip-and-fall case, you’re not going to be able to prove a predicate act, let alone a pattern of predicate acts, let alone a pattern carried on through a racketeering enterprise,” Anand said.

Justice Neil Gorsuch observed, “There’s a failure to warn that this product contains ingredients that your client didn’t know about and should have known about and had a right to know about. I would have thought that that would have been kind of a classic personal injury.”

The Takeaway

This is pretty scary stuff for CBD and other hemp operators. RICO is no joke and carries very serious penalties (both civil and criminal depending on who is bringing the suit).

From the perspective of a CBD manufacturer, it seems unfair to hold the manufacturer responsible to control how its products are used and, as in this case, the implications of that use (here, an alleged economic injury).

If the Court rules that CBD and other hemp manufacturers are subject to RICO charges simply by selling their products to people who do things outside of the manufacturers’ control, it could pose an existential crisis to the industry with potentially unlimited civil (and maybe even criminal) liability. We have warned about this before.

That said, while it’s always difficult to predict how the Supreme Court will vote on any issue, I do not believe the Court will push the hemp industry to the brink. I suspect the Court will either rule that the claims in the present case are personal injury claims excluded from RICO and/or provide guidance for how lower courts should examine such “mixed” claims.

We’ll of course provide additional information once we hear from the Court. Stay tuned.



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What ‘material’ about therapeutic goods is considered advertising?

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It is important to note that advertising health services is subject to different regulations than advertising therapeutic products. Consequently, advertisers, manufacturers and sponsors must evaluate whether their business name could be interpreted as an advertisement for therapeutic goods. If so, they should consider whether the business name, including company or trading names, could be viewed as a ‘reference’ that draws the audience’s attention to medicinal cannabis, as any mention or similar terms to ‘cannabis’ are likely to have that effect. It is essential to recognise that the impact of promoting the use or supply of medicinal cannabis does not depend on a single promotional element but rather on the overall promotion. This includes all components of the promotional information and materials that accompany the name or branding. Advertising can result from the combination of separate statements, images or designs that collectively promote the use or supply of therapeutic goods.

Advertising

The prohibition on advertising medicinal cannabis to the public is determined by the context in which the material is perceived. When evaluating whether information about therapeutic goods qualifies as advertising, it is essential to consider the broader context of the material’s presentation. This encompasses various factors that influence the conveyed message, including the context of the information or activity, the intended audience and their likely interpretation of the message, as well as the presence of non-verbal and unwritten cues, such as visual elements. These factors can significantly affect communication and may alter the message perceived by consumers. 

For example, if an advertisement for a health service, such as a pain treatment service, includes references to medicinal cannabis, even in the company name or trading name, a reasonable consumer may conclude that the advertisement seeks to promote both the use of medicinal cannabis for pain relief and the pain treatment service itself. Including a disclaimer, such as advising the consumer to consult a health professional regarding suitable treatment options, does not exempt the advertiser from complying with legislative requirements.

The distinction between promoting a health service and the therapeutic product utilised in its delivery can be nuanced. Therefore, it is crucial for advertisers to consider how a typical consumer might perceive their advertisement in relation to the promotion of the therapeutic product.

Legal Compliance

To ensure legal compliance in promoting a business or service, advertisers should focus on the health services they provide and avoid referencing medicinal cannabis. For instance, stating “Our clinic offers consultations related to pain management” is a more compliant approach. The Therapeutic Goods Administration’s interpretation of advertising for medicinal cannabis is broad, covering all methods of promoting its use or supply. This includes company names, product names, abbreviations such as CBD and THC, colloquial terms, and any imagery related to cannabis. Any combination of statements or images that implies medicinal cannabis can be considered advertising, even in the absence of explicit promotional language.

Summary

In summary, it is prohibited to mention prescription medications in advertisements for therapeutic goods. If content discusses health conditions and consumers can reasonably infer, either from the context or through direct or indirect references, that medicinal cannabis or any other prescription medication is intended for use concerning these conditions, the content may be deemed an unlawful advertisement for therapeutic goods. Not all information related to therapeutic goods is classified as advertising. However, if the content aligns with the definition of ‘advertise’ as outlined in the Therapeutic Goods Act 1989 (Cth)—which includes anything that is directly or indirectly intended to promote the use or supply of therapeutic goods—then the relevant legislative requirements for advertising such goods must be complied with.

“Indirect intent” in this context does not refer to the explicit intention of the party responsible for the content, but rather to what a reasonable consumer might infer as the intent behind the content. Terms such as “plant-based medicine,” “plant medicine,” “cannabidiol” and “CBD oil,” which relate to medical cannabis products, may be considered promotional if they suggest a connection to medicinal cannabis. Businesses promoting a health service must ensure they do not inadvertently advertise a prescription medicine in their marketing materials. If the consumer is encouraged to seek out a health service based on the therapeutic goods available, the content is likely to be regarded as an advertisement for those therapeutic goods.

For additional information, the Therapeutic Goods Administration has established the Medicinal Cannabis Hub, accessible at https://www.tga.gov.au/products/unapproved-therapeutic-goods/medicinal-cannabis-hub, and has also provided advertising guidance for businesses involved in the medicinal cannabis sector, which can be found at https://www.tga.gov.au/sites/default/files/advertising-guidance-businesses-involved-medicinal-cannabis-products.pdf. These resources are designed to assist both consumers and industry professionals in understanding their obligations.



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Federal Appeals Court: Pay That Man His Money, Unless That Money Is Illegal Marijuana Money

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Good news, bad news if you’re a cannabis operator that owes money to a creditor. But probably bad news for the rule of law.

A federal appellate court has ruled that a cannabis operator is obligated to repay his debts to an ex-business partner, but it raised questions about whether the money used to repay the debt could violate federal marijuana laws.

What does this mean for a cannabis operator and potential investors?

The Facts

As usual, our friends at Law360 set the stage:

A Tenth Circuit panel has rejected a cannabis entrepreneur’s attempt to undo a $6.4 million judgment in a dispute with an ex-business partner, but it ordered a district court to revisit an enforcement order that could require the entrepreneur to violate federal drug law to pay the damages.

A Maryland federal judge entered a $6.4 million damages award against Mackie A. Barch and his company Trellis Holdings Maryland Inc. for failing to restore David Joshua Bartch’s stake in a Maryland cannabis cultivation and dispensary business, Culta Inc.

When they failed to pay up, Bartch filed suit in the District of Colorado seeking an order that would require Barch and Trellis to sell off their equity in Culta to satisfy the judgment, which the court granted.

Barch and Trellis claimed that their ex-partner lacked standing to seek enforcement of the judgment because the order would require them to engage in conduct in violation of the Controlled Substances Act. Cultivating and selling marijuana is legal under Colorado and Maryland laws, but still prohibited under the federal Controlled Substances Act.

The Ruling

The three-judge panel sided, in a divided decision, against Barch and Trellis. According to the court, Barch and Trellis have no path for relief from the judgment because the law only allows a party to seek such relief for violations of due process.

The rift between the majority and the dissent came down to questions of enforceability and practicality. As Law360 wrote:

The dissent argued that Culta’s business practices – which are illegal under the Controlled Substances Act – should have doomed Bartch’s breach of contract suit from the start. By validating the parties’ contract, the majority has instead decided to “ignore the elephant in the room that is the federally illegitimate business enterprise known as Culta,” Judge Baldock wrote.

“Plaintiff’s cause of action is based entirely upon an illegal contract to establish Culta, notably an enterprise in which federal law recognizes no property interest. I simply do not understand why a federal court would lend legitimacy to any of this,” according to the dissent.

The majority recognized that the trial court’s order could potentially require the violation of federal law but were not willing to overturn the order based on that mere possibility. The majority reasoned that because the order did not specifically require Barch and Trellis to cultivate or sell marijuana, it was at least possible that the debt could be repaid without violating federal law. The case was remanded for further instructions and clarity from the trial court on this point.

The Takeaway

Let’s start with one really obvious point and one just regularly obvious point. First, investors should be extremely cautious when providing funds to marijuana companies. This case illustrates how difficult it can be to recover funds when the source of repayments may largely be the result of federally illegal activity. Second, the marijuana industry is replete with unsavory characters. Sure, many marijuana companies are operated by upstanding businesspeople, but the very nature of the industry and its legal status over the decades make it ripe for those who might not feel compelled to follow the strict letter of the law.

Should you choose to invest in a marijuana company, you should do so with the advice of competent, experienced counsel and you should insist that there are legal methods of recovering your funds should that prove necessary. Doing so may seem a tall task, but with a little diligence you may be able to ensure that your funds are secured by assets that are not subject to the same types of challenges in this case.

And, as with any investment, trust but verify.

Source:  https://www.buddingtrendsblog.com/2024/09/federal-appeals-court-pay-that-man-his-money-unless-that-money-is-illegal-marijuana-money/



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