If you wish to re-publish this story please do so with following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

DEAD – ALIVE – COMATOSE – Are medical cannabis collectives dead or alive?  What about medical cannabis cooperatives?  What about adult-use cannabis collectives and cooperatives?  Depending on who you ask the answers will be, Yes, No or Maybe.  All three of these answers may be correct answers to all of these questions.  The questions are not as simple as they appear to be.

Does it make a difference if you ask a cannabis industry expert?  Not at all!  We have concluded the phrase “cannabis industry expert” may be an oxymoron.  It appears to us that when it comes to the cannabis industry, there may be an inverse relationship between the amount you pay for advice and the value of the advice.  The more you pay the less valuable the advice relative to the cost.  We are writing this article to give free advice to California’s cannabis industry.

 

 

Free advice can be readily ignored by those who would rather pay than think.

First, we want to make a brief comment about the value of free advice.  The statement “Free advice is worth what you pay for it” is B.S.  The statement is false and misleading.  All advice is worth what you make of it not what you pay for it.  As a consequence, free advice is the best advice.  It costs you only a little time to listen or read the advice.  If you can apply the advice to improve your business or your life, you get a benefit that cost you solely a little time.

The amount you pay for advice does not establish the value of the advice.  The more you pay for advice, the greater the benefit you must secure in order to justify the cost of the advice.  If you take into account the indirect costs associated with advice that you pay for, your investment of time, effort and money based on the advice, free advice that is useful becomes relatively even more valuable.

DEAD – ALIVE – COMATOSE

Medical collectives and cooperatives were spawned by the passage of Proposition 215 in 1996.  Over a period of 20 years, the parameters for the operation of medical collectives and cooperatives in California acquired a semblance of definition through policies and practices, as well as legal and political pressures.  Many questions relating to medical collectives and cooperatives remained unanswered when Proposition 64 added an additional layer of confusion.

Proposition 64 preserved Proposition 215.  Proposition 64 added legal adult-use cannabis to legal medical cannabis, but with conditions and limitations.  There is, of course, a logical conflict between Proposition 215 and Proposition 64.  You cannot both preserve a right already granted by the California Constitution through Proposition 215, and at the same time add conditions and limitations through Proposition 64.  Proposition 215 collectives were preserved in Proposition 64 but subject to conditions and limitations that take away rights that were granted over 20 years ago.

A quick example will illustrate one of the conflicts between Proposition 215 and Proposition 64.  Proposition 64 imposes a Cannabis Cultivation Tax (“CCT”) and a Cannabis Excise Tax (“CET”).  Proposition 215 grants every resident of California the right to “safe and affordable” medical cannabis.  As we noted above, Proposition 64 preserved the rights granted California residents under Proposition 215.  CCT may be justified with respect to both medical and adult-use cannabis because growing either place the same burden on the land.  It is our opinion the imposition of CET on medical cannabis conflicts with the “safe and affordable” language of Proposition 215.

Our free advice regarding Proposition 215 medical collectives is that they are alive and well.  Proposition 215 medical collectives are entitled to distribute medical cannabis to patients on a nonprofit basis without being subject to licensing because Proposition 64 preserved all of the rights of California residents under Proposition 215.  Precisely how they must operate and what they can do is going to require at least ten years to sort out.  California has more than its fair share of lawyers.  The conflicts between Proposition 64 and Proposition 215 will eventually get sorted out, and California lawyers will make a lot of money in the meantime.

DEAD – ALIVE – COMATOSE

While theoretically, you could apply for a license for a Proposition 215 medical collective, there is absolutely no reason to do so.  A licensed medical cooperative is far easier to manage.  Of greater significance, a cooperative can do much more than a collective and it provides substantial tax advantages.  A licensed medical cannabis cooperative has substantial tax advantages over any other structure for the movement of cannabis from cultivator to consumer.  Anything a licensed medical cannabis collective can do a licensed medical cannabis cooperative can do better.

Anyone who plans to be involved in California’ cannabis industry in any capacity other than as an employee must have a working knowledge of cooperatives in order to succeed in the long-run.  Those organizations involved in the legal movement of cannabis from cultivator to consumer in California in the form of cooperatives must be divided into three different classifications.  The three classifications become six if you distinguish between medical and adult-use cannabis cooperatives which you must do to realize the tax advantage of medical over adult-use.

The three classifications are:

A Cannabis Cooperative Association (“CCA”) organized and operated in accordance with Title 10, Chapter 22, of the California Business and Professions Code (“B&P”).  (B&P §§26220-26231.2.)

A CCA organized pursuant to Title 10, Chapter 22, but not operated in accordance with the limitations imposed on a CCA by B&P §§26220-26231.2.

Corporations organized under other provisions of California corporate law, including Nonprofit Mutual Benefit Corporations, Nonprofit Public Benefit Corporations, General Stock Corporations, Close Corporations, Limited Liability Companies and Agricultural Cooperatives, that claim to be or believe they are cooperatives.

Solely those organizations that fall into the first category – CCAs – can secure the financial benefits of filing tax returns as cannabis cooperatives.  Why?  Solely CCAs can file federal income tax returns pursuant to Subchapter T of the Internal Revenue Code.  Most of the individuals involved in California cannabis industry are not even aware of Subchapter T.  In order to secure the financial benefits of a cooperative, an entity must file federal and California income tax returns as a cooperative.

DEAD – ALIVE – COMATOSE

All is not lost for those organizations that have were not organized or operated in accordance with B&P §§26220-26231.2.  In most instances, those organizations that are not organized and operated as CCAs will be able to make changes in their organizational and operational structures in order to secure the benefit of filing tax returns as cooperatives.  It may prove costly and difficult, but it can be done.

Readers will undoubtedly ask why do I have to change my organizational and operational structure.  I am doing fine at the moment.  Continuing to do things as you have to date rather than change to a structure that is more financially efficient is a risk management calculation.  It is a calculation that should be regularly made with a full understanding of the risks involved or in a miscalculation of the risks.  Various governmental agencies expect to receive almost ½ of the money that consumers pay for cannabis.  A miscalculation of an entity’s tax liabilities over a period of a year or more will very likely turn a profitable year into a substantial loss for the entity that miscalculates.  Many of our readers will recall the size of the hit that Harborside took for its income tax miscalculation.

There is one other aspect of CCAs that we must mention that may tip the scale for some in favor of a reevaluation of the significance of converting an existing entity into a CCA.  Business and Professions (“B&P”) §26222.2 provides:

“A person, firm, corporation, or association, that is hereafter organized or doing business in this state, may not use the word ‘cannabis cooperative’ as part of its corporate name or other business name or title for producers’ cooperative marketing activities, unless it has complied with this chapter.”

As a consequence of the express language of B&P §26222.2, an entity organized under some other provision of California corporate law could operate as a cannabis cooperative but it could not tell anyone it was a “cannabis cooperative” unless it was organized and operated pursuant to B&P §§26220-26231.2.  It defeats the purpose of being a cannabis cooperative if you cannot tell anyone you are a cannabis cooperative.