4 Ways the Feds Are Attacking the Perfectly Legal Medical Marijuana Industry

At the moment 16 states and Washington DC have legalized medical cannabis, providing safe access to patients, creating thousands of jobs and pumping millions of dollars in tax revenue into struggling state and local economies. Some of those state and local governments are working with their medical cannabis providers to adopt common-sense regulations and to cut down the potential for abuse -- with varying degrees of success.

But under the federal Controlled Substance Act, cannabis is a Schedule I substance -- right along with heroin, ecstasy and LSD -- and still illegal. The feds are concerned that medical cannabis is making its way onto the black market, that dispensaries are generating obscene profits and that cannabis providers are targeting children in ads.

Deputy U.S. Attorney General David Ogden issued a memorandum in October 2009 saying the Justice Department was unlikely to go after cannabis patients, but that "prosecution of commercial enterprises that unlawfully market and sell marijuana for profit continues to be an enforcement priority of the department." But recent months have seen a strong push-back by the federal government. With storefront dispensaries popping up across the country, and medical cannabis expected to grow to a $1.7 billion industry, here are four ways the federal government is fighting the burgeoning industry.

1) Land seizure

The big announcement that has everyone hunkered down is that U.S. attorneys in California have threatened to seize land that is rented or leased to dispensaries.

Four U.S. attorneys have already sent letters threatening to seize land leased to cannabis clubs. Letters have so far gone out to landlords in Orange County, San Francisco, San Diego and Marin, giving them 45 days to kick out any medical marijuana operations. The feds seem to be targeting larger clubs and those operating within 1,000 feet of schools.

"Marijuana stores operating in proximity to schools, parks and other areas where children are present send the wrong message to those in our society who are the most impressionable," said Melinda Haag, attorney general for the Northern District of California. "In addition, the huge profits generated by these stores, and the value of their inventory, present a danger that the stores will become a magnet for crime, which jeopardizes the safety of nearby children."

The crackdown was the result of local officials asking the feds to step in after pot clubs fought back against attempts to shut them down. Eviction notices were sent to eight Lake Forest dispensaries and feds froze $130,000 in assets of the landlord who leased to them.

The tactic has had a chilling effect on the industry, even in jurisdictions where no eviction notices have been reported. In San Jose, some dispensaries have seen up to half of their business drop in the two weeks since the announcement.

2) Ads

Just days after feds announced the crackdown on California landowners, Laura Duffy, one of the four California U.S. attorneys, said she would next go after radio stations and newspapers that run ads for cannabis dispensaries "as part of the enforcement efforts in Southern California." Federal law prohibits advertising illegal substances.

"I'm not just seeing print advertising," Duffy is quoted as saying in California Watch. "I'm actually hearing radio and seeing TV advertising. It's gone mainstream. Not only is it inappropriate – one has to wonder what kind of message we're sending to our children – it's against the law."

Newspaper ad revenue has crashed with the tanking economy, forcing papers to lay off reporters. Cannabis ads have proved a lifeline for struggling newspapers, especially alternative newsweeklies. But even some mainstream dailies like the Sacramento Bee have started running cannabis ads.

So far, alt weeklies in the San Diego area that run cannabis ads for years have not received any warnings from the U.S. attorney office. Other California U.S. attorneys didn't say whether they would follow Duffy's lead.

3) Bank services

Cannabis dispensary owners say they're having trouble obtaining bank and credit card services and federal authorities in Northern California have ordered banks to spy on transactions of cannabis club accounts.

When it came to finding a bank, Denver-area Alpine Herbal Wellness owner Sue Harank told news service Thomson Reuters, "It was a nightmare."

Big banks like Bank of America were initially eager to provide services for cannabis dispensaries, but a warning from the DEA said banks could be open to legal liability for those services.

Under pressure from the DEA, banks are shutting down any accounts associated with medical cannabis dispensaries, making difficult for dispensaries to pay employees and payroll taxes, or to provide credit card processing equipment for transactions.

Earlier this year, the Santa Rosa Press Democrat reported that federal banking regulators would require banks on the Northern California coast to monitor accounts for medical cannabis because the area had been designated a "high-risk area" for money laundering, especially from those in the medical marijuana business.

4) IRS

In October, the IRS told Oakland, Calif.-based dispensary Harborside Health Center it owed $2.5 million in back taxes for 2007 and 2008 -- $2 million more than the dispensary had paid. The tax bill could shut down Harborside.

Because federal law prohibits cannabis dispensaries, the IRS said Harborside couldn't take standard deductions for payroll, workers' comp, rent and other business expenses. Federal tax code 280-E keeps "drug trafficking organizations" from deducting those expenses.

The IRS will also audit Harborside's 2009 and 2010 tax returns. At least a dozen California dispensaries are also being audited, according to a California attorney representing them.

A similar decision was handed to Marin Alliance for Medical Marijuana in Fairfax in March, with owner Lynette Shaw saying they now owed "millions and millions."

"This is not an effort to tax us. We're happy to pay our taxes," Harborside executive director Steve DeAngelo told the San Francisco Chronicle. "This is an effort to shut us down."

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