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Reporting rules worry marijuana dispensaries, growers

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Medical marijuana cultivators and sellers say the detailed documentation required by San Diego's regulations could impede legitimate business and open them to federal scrutiny.

As dispensaries work toward getting city permits, at least one operator, who asked not to be identified, has heard from growers who aren't inclined to identify themselves and risk searches by federal authorities. The city and a law professor who helped shape the requirements say there may not be much that can be done to alleviate the growers' and dispensary owners' concerns, except that openness in itself may be a deterrent to scrutiny.

A related concern with the dispensary owner is that the regulations could motivate some growers to stop supplying him once he has a permit. He told The Daily Transcript he might not be able to find enough growers willing to work with him to support the number of patients he has.

San Diego's municipal code was amended in 2011 to require that "responsible persons shall ensure that all transactions involving money, in-kind contributions, reimbursements, reasonable compensation, and marijuana are fully documented, including documenting each member’s contribution of labor, resources, or money to the medical marijuana consumer cooperative, and the source of their marijuana."

Section 42.1508 also requires that upon the city's request, responsible persons for the medical marijuana cooperative are to provide an audit, performed and certified by an independent certified public accountant, of its operations for the previous calendar year.

The dispensary operator reports having about 4,000 patients. If zoning regulations eliminate or reduce unpermitted dispensaries, he said he will have significantly less competition, possibly resulting in a quadrupling, if not quintupling, of his business. One of his product suppliers, a medical marijuana grower from North County who asked to be identified only as Steve, said he may have to consider other options, especially if he's required to not make a profit from his business.

"If that was the case, I wouldn't be able to do it," Steve said.

The dispensary operator said he sells out of Steve's product within three or four days, adding that growers need to keep to a 99-plant threshold because of the minimum five-year prison sentences that take effect with possession of 100 or more plants.

"I would have to have a vast network of growers like Steve that wanted to stay at 99 to support the patients that I have," the dispensary operator said. "They have to take this off the books, or the growers won't come to me that have the real supply that I'll need to continue operating correctly. He would have to have anonymity, still."

The documentation rules, as written, could undermine the city's attempts at regulation, in the store operator's view, and put him out of business at the same time. He said he hopes the San Diego City Council can make changes; the Public Safety and Livable Neighborhoods Committee may make recommendations for other sections of marijuana regulations at its meeting Wednesday.

"[A grower] is going to say, 'I don't need to deal with him,'" the dispensary operator said. "There are 50 illegal dispensary stores open or delivery services. He'll just go to them."

The concerns over documentation and reporting don't appear to be limited to cities such as San Diego in the infancy of regulating marijuana sales. In Colorado, a state pointed to by advocates of marijuana regulation as a success story, similar worries are brewing.

Colorado attorney and marijuana advocate Robert Corry recently filed a lawsuit in a Colorado district court on behalf of several individuals and one group challenging the legality of Colorado's taxes on marijuana sales. The complaint, served June 9, argues that the state licensing requirements force people to reveal a violation of federal law, which Corry said violates his clients’ Fifth Amendment right to not self-incriminate.

Dan Normandin, senior planner in San Diego's Development Services Department, said the city's "pretty much already determined" that it would request an audit from the businesses only if it was taking a code enforcement action against them. He said the city has no control over the federal government's actions, "whether or not we require them to keep books."

"[U.S. Attorney] Laura Duffy, at any point in time, even without this requirement, can go in and determine that they're operating illegally," Normandin said. "The city's interest is in making sure they operate in accordance with the requirements."

Among the requirements for cooperatives is that they operate as nonprofits.

"How would we know that if we don't have the ability to review their audits, their books?" Normandin asked, adding that he's not sure there's a way the city could ensure it has the ability to review a business' operations without the same information also being accessible to federal authorities. "I don't know that the federal government is going to use this against them, necessarily. They've closed other ones down that didn't have any of this information."

Alex Kreit, an attorney and professor at Thomas Jefferson School of Law, was chair of the city's Medical Marijuana Task Force, which largely contributed to Municipal Code Section 42.1508.

He said he is not convinced the documentation requirements place the growers or dispensaries at any greater risk for federal prosecution than they may already face. To the contrary, he said the federal government has more fervently prosecuted marijuana-related businesses in cities where there is no requirement for detailed records.

"It's a little bit of a Catch-22 because the federal government has said pretty clearly … that the more robust the regulations are, the more likely it is the federal government is going to allow these to go forward," Kreit said.

In Colorado, Kreit said, "the federal government hasn't done anything as far as interfering," despite how "incredibly open" its recreational marijuana sellers are in their documentation.

He understands the concern, though, and says it's one that will exist as long as federal law is what it is and U.S. Attorney Laura Duffy and San Diego County District Attorney Bonnie Dumanis stay in their respective posts.

"I don't believe either of those offices have done anything to give people a lot of confidence that they're operating in good faith when it comes to medical marijuana," Kreit said. "I think it's certainly a legitimate concern."

Thinking back to the task force, the hope was, and still is, Kreit said, that transparency would give more protection to dispensaries and growers. Without it, the government won't have confidence that a medical marijuana-related business is operating legally and not, for instance, buying its marijuana from drug cartels.

"Folks say that's unlikely … but the reality is that unless you have some way of tracking these things, you don't have that confidence," Kreit said.

On the possibility that the federal government's relaxed targeting of medical marijuana-related activity in well-regulated areas may change with future executive action, Kreit said neither the city or state can offer any confidence or legal protection that the businesses will be left alone. Under current law, regardless of the depth of recordkeeping, they're easy targets.

But in Colorado and now Washington, there are plenty of people taking that risk who have yet to be prosecuted, he said.

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1 UserComments
Bob Loomis 1:37pm July 12, 2014

All farmers have to report their income and pay federal and state taxes. All businesses have to issue a 1099 to individuals and businesses with whom they do substantial transactions. Many products are subject to sales tax. The real problem appears to be that proponents not only want to provide marijuana to all on demand under the guise of medical necessity but they want to do it totally free of all tax ramifications.

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