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AUTHOR: Jordan Zoot / aBIZinaBOXinc
PUBLISHER:  CANNABIS LAW REPORT

 

We have written a number of articles in our blog[1] relating to the representation of cannabis businesses. We have also written to the California Attorney General as well as the General Counsel for all three of the agencies in California that regulate the cannabis industry regarding this topic. These three agencies are:

 

  • Bureau of Cannabis Control “BCC” [Retail, Retail-Delivery, Distribution – Packaging],
  • California Dept. of Public Health “CDPH” Manufactured Cannabis Safety Board “MCSB” – [Manufacturing, Processing, Extraction],
  • California Dept. of Food and Agriculture “CDFA” CalCannabis [Cultivation]

 

We are again writing on the topic of representation because the failure the above referenced agencies to take into account the importance of qualified representation is one of the reasons California’s roll-out of the regulation of the cannabis industry has been described as maladroit. We are not qualified to make recommendations regarding the qualifications BCC, CDPH and CDFA should establish for representatives, although we note that duly licensed attorneys have the authority as a matter of law to represent clients before administrative agencies.

 

Each of the BCC, CDPH and the CDFA in our opinion were remiss in not addressing representation at an early date. Each of these agencies was also remiss in not looking to symbiotic relationship between the various taxing agencies and the representatives of taxpayers that are critical to the administration of tax laws at the federal, state and local levels. We are qualified to address the issue of representation with respect to financial and tax reporting issues.

 

Both the California Franchise Tax Board [“FTB”] which has jurisdiction over income and franchise taxes for individuals and businesses and the California Department of Tax and Fee Administration [‘CDTFA”] which has jurisdiction over sales tax, and cannabis cultivation [“CCT”] and excise taxes [“CET”] acknowledge the rights of taxpayers to representation. Both the FTB and the CDTFA have regulations and procedures that are track with the rules promulgated by the IRS. The skills are required to engage in representation before a tax agency are recognized at every level of government. Professional regulatory structures exist for attorneys and certified public accountants [“CPA’s] in every state in the United States and its Territories.

 

What is now known the Enrolled Agent program is a special representation arrangement run by the IRS that was originally established after the Civil War to provide for a minimum level of competence and integrity for agents representing individuals submitting claims under federal legislation known as the “Horse Act.” Under this Act individuals could recover compensation for horses appropriated by the army during the Civil War. The required level of education and experience for Enrolled Agents, of course, has evolved substantially since the period immediately after the Civil War, but the principles remain the same. Enrolled Agents are entitled to represent taxpayers in federal tax matters because they meet the requirements established by the IRS. The FTB and the CDTFA permit Enrolled Agents to represent taxpayers in connection with California tax matters.

 

The set of skills required to represent applicants and licensees before California’s cannabis regulatory agencies is a different set of skills from those skills required for representation before tax agencies. The need for qualified representation, however, is the same. As we mentioned above, each of the BCC, CDPH and CDFA was remiss in not establishing an arrangement for the representation of applicants and licensees. These agencies should have looked first to the FTB and CDTFA and then examined on a coordinated basis the specific needs for representation before each of the agencies. The three agencies, however, must not lose sight of the goal of arranging for qualified representation. The goal is not more regulation. The goal is to ease the burden of compliance with onerous regulations by having the assistance of qualified representation. We will now discuss representation regulation in other areas as a basis for comparison.

 

We will begin our comparison with the Social Security Administration [“SSA”]. The requirements to represent a claimant in a proceeding with the Social Security Administration [“SSA”] expressly permit attorneys and just about anyone else that isn’t mentally defective or a criminal[3] to represent a claimant. The standards of “professional qualifications[4] and standards of conduct” for SSA representation are minimal. They are set forth in CFR 404.1740.[6] It is a stretch to refer to CFR 404.1740 as establishing professional standards. The provisions of CFR 404.1740 are substantially less than the qualifications required to practice before the Internal Revenue Service [“IRS”] under Treasury Circular 230 [“Circ. 230”]. Circ. 230 contain the rules that govern professional conduct of Circular 230 Practitioners[7]. As the BCC, CDPH and CDFA a substantial number of “Consultants” saw California’s regulation of its cannabis industry as a business opportunity. Some were qualified; some were not. California’s regulatory agencies suffered as did many involved in the industry because the BCC, CDPH and CDFA did not recognize at the very beginning the need for qualified representation in connection with the licensing and regulation of this industry.

 

Cannabis regulation requires input from many specialized areas of expertise, including botany, water resource management, scientific measurement and analysis and a number of engineering disciplines. California’s cannabis regulatory agencies would be well served to follow the lead of the IRS with respect to actuaries, engineers and appraisers by creating specific standards that recognize other professions and other specialized bodies of knowledge. Individuals should be required to have some level of education and experience to represent before an agency. Each agency should set the requirements at a level that assures the agency the applicant or licensee is receiving effective and qualified assistance. Each agency should encourage representation by qualified individuals. Each agency should discourage undisclosed assistance and require disclosure of any assistance being received. Qualified representation before an administrative agency benefits both the agency and the applicant or licensee. Unqualified representation increases costs and causes damage.

 

There are numerous federal, state and local agencies that have their own sets of qualifications for individuals and firms to represent applicants, licensees and other parties subject to an agency’s jurisdiction. It is our opinion that the requirements for Circular 230 Tax Practitioners are sufficiently relevant to the cannabis regulatory agencies that such practitioners should be allowed to represent applicants and licensees before the BCC, CDPH and CDFA. We do NOT have the same view of the representation standards utilized by the SSA. The SSA professional standards described above are NOT professional standards.

 

We recommend that in some coordinated way the BCC, CDPH and CDFA establish their own recommended agency-specific additional qualifications the attorneys and Circular 230 practitioners and other groups of qualified advisors that the agencies deem suitable to applicants and licensees before the specific agencies. The California Tax Education Council [“CTEC”] program would be an excellent place for the BCC, CDPH and CDFA to start. The State of California has a long history as a leader in consumer protection. The CTEC program has been very effective in regulating tax preparers that lack the education and licensure of Circular 230 Tax Practitioners.

 

The BCC, CDPH and CDFA should act to protect applicants, licensees, and the people of California from the flood of self-designated “Consultants”, or “Licensing Consultants”, or “Certified Consultants” or other experts who have magically appeared in the landscape. Unfortunately, some otherwise competent people may be displaced by the imposition of rules relating to representation. However, in this situation, the “means appears to justify the end”.

Perhaps an organization like the Cannabis Trade Federation will decide to organize a national credential with state level augmentation.

[1] See Cannabis Regulatory Agency Representation and CA Cannabis Agencies Don’t Recognize Representatives?

 

 

[3] §404.1705. Who may be your representative?

(a) You may appoint as your representative in dealings with us, any attorney in good standing who—

(1) Has the right to practice law before a court of a State, Territory, District, or island possession of the United States, or before the Supreme Court or a lower Federal court of the United States;

(2) Is not disqualified or suspended from acting as a representative in dealings with us; and

(3) Is not prohibited by any law from acting as a representative.

(b) You may appoint any person who is not an attorney to be your representative in dealings with us if the person—

(1) Is generally known to have a good character and reputation;

(2) Is capable of giving valuable help to you in connection with your claim;

(3) Is not disqualified or suspended from acting as a representative in dealings with us; and

(4) Is not prohibited by any law from acting as a representative.

(c) We may refuse to recognize the person you choose to represent you if the person does not meet the requirements in this section. We will notify you and the person you attempted to appoint as your representative if we do not recognize the person as a representative.

[45 FR 52090, Aug. 5, 1980, as amended at 76 FR 80245, Dec. 23, 2011]

[4] The qualifications to practice as a Circular 230 Tax Practitioner are contained in Sec. 10.3

 

“(a) Attorneys. Any attorney who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service by filing with the Internal Revenue Service a written declaration that the attorney is currently qualified as an attorney and is authorized to represent the party or parties. Notwithstanding the preceding sentence, attorneys who are not currently under suspension or disbarment from practice before the Internal Revenue Service are not required to file a written declaration with the IRS before rendering written advice covered under §10.37, but their rendering of this advice is practice before the Internal Revenue Service.

 

(b) Certified public accountants. Any certified public accountant who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service by filing with the Internal Revenue Service a written declaration that the certified public accountant is currently qualified as a certified public accountant and is authorized to represent the party or parties. Notwithstanding the preceding sentence, certified public accountants who are not currently under suspension or disbarment from practice before the Internal Revenue Service are not required to file a written declaration with the IRS before rendering written advice covered under §10.37, but their rendering of this advice is practice before the Internal Revenue Service. (

 

  1. c) Enrolled agents. Any individual enrolled as an agent pursuant to this part who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service.”

 

 

[6] §404.1740. Rules of conduct and standards of responsibility for representatives.

(a) Purpose and scope. (1) All attorneys or other persons acting on behalf of a party seeking a statutory right or benefit must, in their dealings with us, faithfully execute their duties as agents and fiduciaries of a party. A representative must provide competent assistance to the claimant and recognize our authority to lawfully administer the process. The following provisions set forth certain affirmative duties and prohibited actions that will govern the relationship between the representative and us, including matters involving our administrative procedures and fee collections.

(2) All representatives must be forthright in their dealings with us and with the claimant and must comport themselves with due regard for the non-adversarial nature of the proceedings by complying with our rules and standards, which are intended to ensure orderly and fair presentation of evidence and argument.

(b) Affirmative duties. A representative must, in conformity with the regulations setting forth our existing duties and responsibilities and those of claimants (see §404.1512 in disability and blindness claims):

(1) Act with reasonable promptness to help obtain the information or evidence that the claimant must submit under our regulations and forward the information or evidence to us for consideration as soon as practicable.

(2) Assist the claimant in complying, as soon as practicable, with our requests for information or evidence at any stage of the administrative decision-making process in his or her claim. In disability and blindness claims, this includes the obligation pursuant to §404.1512(c) to assist the claimant in providing, upon our request, evidence about:

(i) The claimant’s medical source(s);

(ii) The claimant’s age;

(iii) The claimant’s education and training;

(iv) The claimant’s work experience;

(v) The claimant’s daily activities both before and after the date the claimant alleges that he or she became disabled;

(vi) The claimant’s efforts to work; and

(vii) Any other factors showing how the claimant’s impairment(s) affects his or her ability to work. In §§404.1560 through 404.1569a, we discuss in more detail the evidence we need when we consider vocational factors;

(3) Conduct his or her dealings in a manner that furthers the efficient, fair and orderly conduct of the administrative decision-making process, including duties to:

(i) Provide competent representation to a claimant. Competent representation requires the knowledge, skill, thoroughness and preparation reasonably necessary for the representation. This includes knowing the significant issue(s) in a claim and having a working knowledge of the applicable provisions of the Social Security Act, as amended, the regulations and the Rulings; and

(ii) Act with reasonable diligence and promptness in representing a claimant. This includes providing prompt and responsive answers to our requests for information pertinent to processing of the claim; and

(4) Conduct business with us electronically at the times and in the manner, we prescribe on matters for which the representative requests direct fee payment. (See §404.1713).

(c) Prohibited actions. A representative must not:

(1) In any manner or by any means threaten, coerce, intimidate, deceive or knowingly mislead a claimant, or prospective claimant or beneficiary, regarding benefits or other rights under the Act;

(2) Knowingly charge, collect or retain, or make any arrangement to charge, collect or retain, from any source, directly or indirectly, any fee for representational services in violation of applicable law or regulation;

(3) Knowingly make or present, or participate in the making or presentation of, false or misleading oral or written statements, assertions or representations about a material fact or law concerning a matter within our jurisdiction;

(4) Through his or her own actions or omissions, unreasonably delay or cause to be delayed, without good cause (see §404.911(b)), the processing of a claim at any stage of the administrative decision-making process;

(5) Divulge, without the claimant’s consent, except as may be authorized by regulations prescribed by us or as otherwise provided by Federal law, any information we furnish or disclose about a claim or prospective claim;

(6) Attempt to influence, directly or indirectly, the outcome of a decision, determination, or other administrative action by offering or granting a loan, gift, entertainment, or anything of value to a presiding official, agency employee, or witness who is or may reasonably be expected to be involved in the administrative decision-making process, except as reimbursement for legitimately incurred expenses or lawful compensation for the services of an expert witness retained on a non-contingency basis to provide evidence;

(7) Engage in actions or behavior prejudicial to the fair and orderly conduct of administrative proceedings, including but not limited to:

(i) Repeated absences from or persistent tardiness at scheduled proceedings without good cause (see §404.911(b));

(ii) Wilful behavior which has the effect of improperly disrupting proceedings or obstructing the adjudicative process; and

(iii) Threatening or intimidating language, gestures, or actions directed at a presiding official, witness, or agency employee that result in a disruption of the orderly presentation and reception of evidence;

(8) Violate any section of the Act for which a criminal or civil monetary penalty is prescribed;

(9) Refuse to comply with any of our rules or regulations;

(10) Suggest, assist, or direct another person to violate our rules or regulations;

(11) Advise any claimant or beneficiary not to comply with any of our rules or regulations;

(12) Knowingly assist a person whom we suspended or disqualified to provide representational services in a proceeding under title II of the Act, or to exercise the authority of a representative described in §404.1710; or

(13) Fail to comply with our sanction(s) decision.

 

[7] The authority for Circ. 230 is derived from

 

31 U.S.C. §330. Practice before the Department (a) Subject to section 500 of title 5, the Secretary of the Treasury may — (1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate — (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases.