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.

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