U.S. Attorney May Not be Out of Line

Dave Hodges operates A2C2 medical marijuana collective in San Jose. He wrote this column for San Jose Inside.—Editor

Harborside collectives in San Jose and Oakland were recently ordered to shut down by U.S. Attorney Melinda Haag. Many have called Harborside a model for other medical marijuana collectives.

To help everyone better understand what the complex California law states, I want to provide some direct quotes and key information:

Let’s start with what defines a “collective” under California law? The only definition comes from Health and Safety Code 11362.775, where it states: “[California Medical Cannabis patients are allowed] Collectively or Cooperatively to Cultivate Marijuana for Medical Purposes.” In simple terms, the entire definition of what a collective is and how it operates is defined only by the word “collectively.”

The “guidelines” most collectives operate under are the 2008 Attorney General (AG) “Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use.” One thing that must be understood is that the AG Guidelines are NOT the law. They are AG Jerry Brown’s legal opinion of the law. Although they are not the law, they do reference it. In the AG Guidelines Section IV. A. 2.“Collectives:” it states “California law does not define collectives… As such, a collective is not a statutory entity.”

So what is a “non-statutory entity”? It is any “entity” not defined under statutory law. A “non-statutory entity” is governed by “non-statutory law,” and includes structures such as churches, private associations, book clubs, etc. In the case of a “Collective”, the “non-statutory law” is defined in the “collective agreement” or “membership contract”. Thus a collective is a “non-statutory entity” who in effect defines it’s own “non-statutory law” in its “collective agreement.”

Next, let’s discuss what defines a “Sale.” California’s Sales And Use Tax Law RTC section 6006, defines a “Sale” to mean and include: “Any transfer of Title or Possession”. Also known as a change in ownership. If a collective is structured properly, every member “collectively” owns the “collective.” As such, no change of ownership takes place when a member of the collective contributes to and receives cannabis produced “collectively”.

The Board of Equalization’s legal opinion of a true collective is that within the collective no ownership changes and as such no “sale” of cannabis takes place, thus no sales tax liability is incurred. Thus a true collective does not pay “sales” tax. Over the past year, I have been undergoing an audit process with the BOE. The determination of the BOE auditor is that A2C2 is NOT a collective and, as such, I owe them $130k. The catch is, once the administrative remedies are exhausted, the court of appeals will have to decide if the Collective Agreement created by my attorney J David Nick defines a true collective. If it does, the BOE will owe me $12k for the sales tax I mistakenly paid them.

When it comes to the city of San Jose’s tax, Measure U, the fact that the city attorney is aware of Measure U’s violations of law is evidenced by the drafted Title 6 Ordinance, Section 6.88.440. “Collective Operations”, subsections C & D:

“C) No sale of any products, including medical marijuana… D) In-kind contributions, monetary contributions and property contributions provided by members towards the collective’s overhead expenses shall be in strict compliance with State law…” and is further supported by Measure U: 4.66.220 “Payment of tax does not authorize unlawful business.”

Although a “sale” inside a “collective” is protected in the state of California, Federally “sales” of cannabis are clearly illegal. In the case of Harborside, operators clearly state they “sell” marijuana and pay “sales tax” on it. Combine this with the fact that Harborside accepts medical cannabis patients who live outside the state of California, one might understand how a charge such as Federal Drug Sales/Trafficking might be filed.

There is no one in the medical cannabis industry who is “safe” from federal enforcement. All one can do is limit one’s exposure to activities that are clearly illegal and work within the exact letter of the law. I do not agree with the apparently indiscriminate crackdown on cannabis clubs, but in my opinion, “the worlds largest seller of marijuana” has made a mockery of the “collective” model. And based on the interstate “drug sales,” Harborside may have clearly overstepped California’s Medical Cannabis laws.

Dave Hodges is the operator of A2C2 collective in San Jose.

12 Comments

  1. Aaaaannnnd Since it seems Rich Robinson has a legal hold on moderating comments on articles he writes, lets see if that holds true here.

    The real reason Rich Robinson is attacking Dave Hodges in the other article is because Rich lobbied for the pot taxes.  If the CSJ suddenly becomes “on the hook” for all the taxes illegally collected guess what?

    Rich credibility as a lobbyist within the city of San Jose will become nil. 

    I hope you win Dave. It’s quite amusing to watch the desperate name calling attacks of Rich Robinson.

    • Robert, do you really think that marijuana collectives that don’t pay their mandated taxes should remain in business? Isn’t that not fair to the businesses who do things the fair way and pay their taxes? Whether you oppose taxing marijuana or not, the taxes are the law, and if you allow some to not pay that tax, they receive a competitive advantage over those who play the game fairly.

  2. Sophism. If all members of a marijuana collective posses collective ownership of the collective’s marijuana, then why can’t members just take however much they’d like without paying for it? Of course it’s a sale that’s occurring.

    • It’s simple.

      Some folks can work in the fields growing. Some folks can work at the counter dispensing.  Others can perform other tasks, such as IT, accounting, managerial, marketing.

      Internally it’s structured as a barter system.  Then there are those can’t can’t do the above (they don’t have the time/commitment, or are physically unable to)

      So instead of a barter/trade it’s money that goes to pay for services outside the scope of that barter trade system, essential to the operation of said collective.

      Example. You can’t pay AT&T weed for the phones.  You can’t pay PG&E weed for the electricity.  You can’t pay a “tax” in weed.  So in lieu of time/effort they can pay cash that goes towards these operational costs that couldn’t be paid any other way.

      So as long as Dave doesn’t give himself an outrageous salary (or have his buddies charge cash for subcontracted services, then take a kickback) it’s all within the letter and spirit of the law.

      Bonus points because he has a clean criminal record.

      • I’m sure you’re aware that the vast majority of collective members are not involved in any way with the physical cultivation of marijuana, nor do they volunteer to work the counters of collectives. It’s not like paying for marijuana is some rarely-used alternative to bartering physical labor.

        It’s like a restaurant trying to argue that they don’t actually sell their food to their customers because the patrons join a special Restaurant Club which states that they collectively posses the food of the restaurant. Customers can pay off their food by working in the kitchen, but that option is virtually never used. The restaurant operates almost identically to a normal restaurant, but does not pay sales tax.

        It seems like a dirty trick, to me. These collectives are making hundreds of “sales” a day and refusing to pay a city-mandated tax by way of some sophist argument that marijuana buyers already own the marijuana- and meanwhile, San Jose is so deep in debt that we’ve been forced to slash public workers pensions! This is the only city in America where something like this could happen.

        • 1.)Dakota>“I’m sure you’re aware that the vast majority of collective members are not involved in any way with the physical cultivation of marijuana, nor do they volunteer to work the counters of collectives”

          The vast majority of collective members are NOT required to be involved in the “physical cultivation of marijuana”. See the Colvin rulling:
          http://www.theweedblog.com/california-supreme-court-rejects-calls-from-law-enforcement-to-review-dispensary-case/

          “The landmark ruling in Colvin held that the Attorney General’s argument that member-patients must engage in unspecified “united action or participation” to qualify for protection under the state’s medical marijuana law would likely “limit drastically the size of medical marijuana establishments,” and provide “little direction or guidance to, among others, qualified patients, primary caregivers, law enforcement, and trial courts.” Furthermore, the Colvin Court held that the Attorney General’s requirement would “contravene the intent of [state law] by limiting patients’ access to medical marijuana.””

          2.) Dakota> “It’s like a restaurant trying to argue that they don’t actually sell their food to their customers because the patrons join a special Restaurant Club which states that they collectively posses the food of the restaurant.”

          The difference is CA law defines a restaurant as a statutory entity with strict rules and regulations. The activity of “Selling” food is both legal & permitted as long as the rules are followed. If cannabis were regulated like a restaurant, we would be required to pay sales tax on it. The problem is the letter of the law does not allow a cannabis collective to operate like a restaurant or any other statutory business.

          3.) Dakota> “refusing to pay a city-mandated tax”.

          I am paying the required city tax. Please read Measure U. It was designed to tax the Adult use of cannabis for Prop 19, NOT to tax Medical Cannabis. I file my MBT form’s ever month, and pay 100% of the taxes due on the activities covered by Measure U. You can find the full text here: http://bit.ly/SJTitle-4-66

          In an official response to my message below, the City of San Jose, sent A2C2 a letter telling us: “Businesses with no gross receipts from marijuana related transactions, as defined by the Code, are still required to file a MBT return […] indicating “zero” gross receipts, taxable gross receipts and taxes due, respectively.” Read it here:
          http://a2c2.us/City-of-SJ-to-A2C2.pdf

          Here is the message I sent to the city of San Jose regarding Measure U:
          ————-
          Wendy,

          This is in response to the letter I received Friday 5/27 regarding the MBT filing. I apologize for the delay. Attached is the MBT filing form for A2C2.

          We do no activities that fall under Section 4.66.140 “Sale” or Section 4.66.090 “Gross receipts”. No “sale, exchange, or barter” takes place at or through A2C2. Members of A2C2 contribute to the production of cannabis and facilitation of A2C2 in strict compliance with State law.

          As worded in measure U: 4.66.140 Sale. “Sale” means and includes any sale, exchange, or barter.

          The taxable activities that would be considered a “Sale” under title 4.66.140 violate state law. Evidence that the city attorney is aware of this is provided by the draft Title 6 Ordinance, Section 6.88.440 “Collective Operations”, subsections C & D:

          “C) No sale of any products, including medical marijuana and products containing medical marijuana, shall be allowed; nor shall the manufacture of medical marijuana products for sale be permitted.

          D) In-kind contributions, monetary contributions and property contributions provided by members towards the collective’s overhead expenses shall be in strict compliance with State law. All contributions (whether in-kind, monetary or property) shall be fully documented, in writing, at the time of their receipt by the collective and in accordance with Part 5 of this Chapter.”

          Until the city of San Jose issues a permit to A2C2 specifically allowing a “sale, exchange, or barter” under city law, we will continue to operate in strict compliance with State law.

          Best Regards,
          Dave Hodges
          Founder
          SJCBC LLC – San Jose Cannabis Buyers Collective
          A2C2 – The All American Cannabis Club

        • You are right. For the record marijuana should have been straight up legalized many years ago. I don’t do drugs or marijuana but I do drink alcohol. I know a lot of people who sell marijuana “legally”  and every one of them did it before there was medical marijuana. They make a lot of money, a ton of money. In fact they make so much money that a lot of them fought the legalization of it a few years ago because it would have cut into their “non profit” business. Shameful.

        • Dave, I’ve had quite a few disagreements on SJI, but never has someone responded like you have. While I still support taxation of marijuana, I am no longer convinced that you are in violation of the law. Depending on your court ruling, I may alter my opinion again, but you have responded with sound facts, and I am impressed.

  3. Doubtful since non-profit, collective or any of those terms never occur in the actual California medical marijuana laws. Those are terms from Brown’s guidelines, not law. Also the point is mute again because there’s been no mention of a state’s medical marijuana law ever allowed in federal court. Quit trying to guess the rational of the federal government.

  4. The federal law is out of line.  Schedule I Cannabis is a damned lie, and its enforcement a crime against humanity.

    All of the phantasy about whether exchanging cash for herb is a “sale” or not is beside the point.

    What we need is full legal recognition of Harborside AND A2C2 as benefactors of the ill.  And complete removal of Cannabis from the “Schedules”. 

    Dave and Steve are both heroes in my book.  It grieves me to see the conflict within our movement.

  5. California state law to the contrary, the Los Angeles City council voted 14-0 Tues to ban a whopping 762 medicinal marijuana shops from operation. Reason.com reports that state legislation allows such regulated businesses to operate. Take a look at this site.