New Fed Cannabis Policy Hits California Local Government - Potential Fiscal Impacts and Confusion

Best Best & Krieger LLP

Best Best & Krieger LLP

Just days after the sale of recreational cannabis became legal in California, U.S. Attorney General Jeff Sessions issued a new policy regarding cannabis-related activities that is causing confusion for local governments — and will likely impact them financially, as well.
Many California municipalities have projected revenues from commercial cannabis taxes. The U.S. Department of Justice’s position that cannabis-related activities are still illegal as a federal matter, and not exempt from prosecution, will have a chilling effect on the cannabis industry, which will also harm local governments’ ability to capitalize on projected tax revenues.
In addition, the DOJ policy keeps states’ rights in question — furthering the confusion that arises from conflicting laws.
The DOJ's new policy rescinds a line of previous policy statements by former Justice Department officials regarding special prosecutorial considerations related to cannabis. Most notably, the rescission applies to the Obama-era policy statement issued by then-Deputy Attorney General James M. Cole. Widely known as the “Cole Memo,” it set forth a number of enforcement priorities that related primarily to preventing the diversion of cannabis grown in compliance with state regulations in states that allow such activities into the black market, and preventing violence associated with cannabis-related activities. While the Cole Memo was merely a policy statement that did not carry the force of law, it was the best indication of the federal government’s position on cannabis enforcement issues.
The DOJ's policy provides that the previous policy statements, including the Cole Memo, undermined the rule of law and references a number of federal statutes that criminalize cannabis-related activities.
Sessions’ position in the new policy is not entirely surprising, given that he has been vocal and committed to his position that cannabis is a dangerous substance that is comparable to heroin in potency and links to violence. However, the position differs from what President Trump indicated was his position while on the campaign trail.
This new policy statement signals the Justice Department’s commitment to enforcing federal statutes that currently criminalize cannabis-related activities and raises concerns about states’ rights.
Through Proposition 64 on the November 2016 ballot, California became one of eight states that legalized cannabis for recreational use. Hours after the issuance of the new policy statement, California officials, including California Attorney General Xavier Becerra and Bureau of Cannabis Control Chief Executive Lori Ajax, renewed their commitment to defend California’s decision to regulate rather than criminalize cannabis, and to protect the State’s regulatory framework that permits both medicinal and recreational cannabis.
Notably, the new policy statement provides no shelter for medical cannabis, which many think should be treated differently from adult-use cannabis. Medical cannabis appears to be more palpable to some states and communities, with legalization in 29 states.
Since 2014, the Rohrabacher-Farr amendment (now titled the Rohrabacher-Blumenauer amendment) has prevented the Justice Department from using federal funds to prosecute medical cannabis-related activities that were conducted in compliance with state regulations in states that allowed such activities. The amendment has been attached to budget bills and must be passed annually. Since the end of last year, a pair of stopgap spending bills has kept the amendment alive, but it is set to expire on Jan. 19. Unless Congress is able to pass the amendment again, the restriction on the use of federal funds to prosecute medical cannabis uses will end.
Specifically, the new policy statement allows U.S. attorneys to use their discretion to determine whether and how much federal resources to expend on anti-cannabis efforts.
This further underscores the conflict between federal and state law regarding the legality of cannabis. Confusion already exists due to the lack of uniformity in enforcement between states. The new policy statement may result in enforcement inconsistences within the State — adding another layer of confusion. For example, U.S. attorneys in the Central District of California could take a more or less lenient stance than U.S. attorneys in the Northern District of California.
The results of the new policy will affect both public entities and industry-side financial interests. As to public entities, California has projected $1 billion in taxes from retail cannabis and many local jurisdictions have similar tax revenue expectations related to the taxation of commercial cannabis-related activities. As for industry-side interests, since the announcement, some publicly traded cannabis companies’ stock have taken significant hits in value. Any chilling effects on the industry could reverberate and harm government authorities’ ability to capitalize on projected tax revenue expectations.
As noted above, this is a turbulent area of the law with many moving parts. This shift in the federal government’s stance will further complicate the legal landscape. BB&K attorneys and advocates in California and in Washington, D.C. are exploring advocacy avenues to protect municipalities as the DOJ policy changes are implemented.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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