Legal pot presents counties with potpourri of issues

Counties touch legal recreational marijuana through zoning, enforcement, public safety, taxation, assessment and more 

Across the street from the Deschutes County courthouse sits Oregrown, a sleek retail space, much like an Apple store, selling Oregon’s newest legal crop, cannabis, marijuana, weed, pot,  reefer or whatever you call it. The many nicknames for the drug are matched by the ways county governments overlap in their interactions with it, through zoning, enforcement, public safety, taxation and assessment and more. In legal recreational states, county tax offices are processing more cash payments than they ever expected to see. And throughout it all, a tenuous relationship with federal law threatens to upend the industry.

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Banks avoid  accepting deposits from legal cannibis vendors

Federal policy unclear

Legal pot poses public safety concerns

So far, eight states — Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington — and Washington, D.C. have legalized adult recreational use and 29 states have approved medical use. Within those states, you can legally buy for recreational use in 61 counties.

Nevada’s July 1 opening was marked with shortages that prompted the governor to declare a state of emergency. California’s legal recreational market opens Jan. 1, 2018. Maine and Massachusetts’ legal markets will open later in 2018.

“Colorado sold $1 billion in recreational marijuana in 2016,” said Eric Bergman, policy director for Colorado Counties, Inc. (CCI). “Think about California — will it be $20 billion? $30 billion?”

How much of that goes to counties is up in the air. While they benefit indirectly from increased employment and property taxes, states take a large bite — usually — and the cities where cannabis products are sold also stand to benefit. Counties have to get excise taxes through popular initiative.

Not that it’s a tall order.

“Even though Oregonians hate sales taxes, they’ve voted them down five times. Last year, they passed 111 marijuana taxes, so they don’t have a problem with that,” said Rob Bovett, legal counsel for the Oregon Association of Counties who has worked in state and national drug policy since the late ’80s.

“In a lot of conservative counties, pot is considered devil weed. It’s not what they want, it’s not what their constituents want, but yet they were dealing with the impacts of legalization but without the resources to be able to go after it,” Sonoma County, Calif. Supervisor James Gore said at a workshop at the NACo Annual Conference in July.

It was that realization that made Karl Rodefer an advocate.

Though he went to high school and college in the ’60s and ’70s, “the age of Aquarius,” Rodefer, now a Tuolumne County supervisor, wasn’t a marijuana user, and doesn’t plan to become one even as he helps his county shape its policy going forward with an eye to allowing sales in a year. The county put a hold on all cannabis businesses last year to study what legalization would mean locally.

“If we can control it the way we control alcohol, I think it can be managed,” he said.

Rodefer describes his conservative Sierra Nevada Range county as 50–50 on legalization, making his job difficult to navigate, but he has been making the case that legalization will keep the county from being at a disadvantage has been his argument.

“The saying is, ‘if you’re not at the table, you’re on the menu,’ and we don’t want to be responsible for dealing with the consequences of statewide legalization, but not able to reap any benefits. You’re leveraged into allowing it even if you don’t want it. If we had a choice we wouldn’t do it, but we live in California so we’ll do it and do it right.”

Rodefer doesn’t see it as a financial boon for the county, judging from conversations with colleagues in Colorado and Washington.

“I haven’t found anybody yet who is making enough money to pay for all of the unintended consequences,” he said. “You can tax (the industry) into oblivion, but the state is keeping all the money.

“It’s a lose-lose for local jurisdictions.”

Latah County Commissioner Tom Lemar acknowledges that his native Idaho may likely be among the last states to legalize recreational use, but he saw a lot of support in neighboring Whitman County, Wash., where he has visited two facilities.

“They have five growing seasons in a year, so they’re employing a lot of people,” he said during a NACo Annual Conference workshop. “We’re seeing an increase in employment among our residents, and they’re well paid, and they’re getting health insurance, which is something that we need in this country. The industry is being responsible that way. I don’t think that we can automatically say this is a terrible thing.”

Where does the money go?

Rodefer is correct that the largest share of tax revenue goes to states. In Colorado the revenue issue has been “huge,” in Bergman’s words. “There was no revenue being generated for counties at first.

The first taxing framework sent the state’s excise tax revenue to schools and the sales tax back to the jurisdiction in which products were sold, usually cities.

Colorado counties have gained local excise tax authority, which allows them to put taxes to the voters, and so far, 11 counties have gone for it.

After covering tax administration costs, Oregon gives counties 10 percent of state sales tax revenue for law enforcement, with an option to levy 3 percent taxes by initiative.

What counties do

In counties that have opted in for recreational production and sale, they determine where those businesses can locate through land use regulations.

“The big elements are sight, sound and smell,” said Nick Lelack, Deschutes County, Ore. planning director. “We have measures for sight and sound monitoring, but smell is what bothers people and why these businesses are in agricultural land or light industrial areas.”

Rodefer laments that in California, the only authority Tuolumne County has is zoning.

“So you tell a grower to correct a violation, we give them 30 days, then they file appeals and when we finally come to tear the plants out, they’ve been harvested,” he said.

Clark County, Nevada’s business licensing department has been cracking down on those businesses that risk their marijuana licenses to promote or sponsor public marijuana consumption.

Then, there are some questions about whether counties should be involved. In Colorado counties are responsible for health inspection in food production facilities, which include marijuana infusion businesses. If they haven’t opted in to legalizing cannabis use, some counties don’t want to get involved if the city is the one that legalizes it, Bergman said.

Bergman is also concerned about how the finite number of recreational licenses will be managed on a secondary market.

Sonoma County, Calif. Supervisor James Gore said there’s still a long way to go until laws and policies are finalized “There is no perfect way to do this, we are going to continue to write and rewrite these laws for the next five years, to figure out what drives compliance, what gives us the resources to address the problem operators and other things.”  

Banks avoid  accepting deposits from legal cannibis vendors

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) memo puts the onus on banks to ensure that the money they hold hasn’t resulted from illegal activity. Since the federal government still considers marijuana to be an illegal substance, cannabis businesses scare away many banks forcing the businesses to operate on a cash-only basis.

“Storage issues, auditing...it’s in everyone’s interest to get them checking accounts, let them deposit money, manage it electronically,” CCI’s Bergman said.

It can certainly be unwieldy. Judy Steele formerly worked as deputy director of the City and County of Denver’s excise and licenses office and now works as a cannabis regulatory specialist for Silver Lining Solutions. During a workshop at the 2017 NACo Annual Conference, she said that her office had prematurely gotten rid of bill counting machines.

“Nobody was paying their taxes by cash anymore,” she said. “Then this marijuana money started coming in, and we had to take the files out of the safe and start using it to store money again.”

During a NACo Annual Conference workshop, Humboldt County, Calif. Supervisor Rex Bohn said the amount of cash from the cannabis black market in his county could exceed $2 billion, according to graduate study by a local bank president.

“You can tell when that money comes into use because it can be moldy, or mildewy,” Bohn said. “It smells like it’s been buried.”

Josephine County, Ore. recently purchased new bill-counting machines to expedite transactions and detect counterfeit bills (which would become the county’s liability). Record keeping, the chance taxes and permit fees will be underpaid and the risk of having so much cash on county property all complicates county administration.

The longer a state has legalized recreational use, the more financial institutions adapt. Washington state has a two-year lead over Oregon, and in 2016 saw three-quarters of businesses paying their special taxes electronically by check, versus half in Oregon.

Matt Cate, executive director of the California State Association of Counties (CSAC), has been serving on the Cannabis Banking Working Group assembled by the California treasurer, and he says they are onto two solutions that should be working by January to ease counties’ troubles.

A special deposit slip for banks will allow members of the industry to deposit money that can pay their taxes, sidestepping the need to secure cash tax payments on county property.

CSAC will also collect information for and maintain a clearinghouse for all data a county would accumulate about cannabis businesses.

“That will help banks comply with both the Cole Memo and FinCEN memo and feel more comfortable,” he said. “It all comes down to how we can make sure taxes are paid and do what we can to put an end to this all-cash world.”

Credit unions have picked up some of the slack in Colorado and Washington. Because they are chartered by the states, without federal oversight like banks, credit unions are better able to accommodate state cannabis policy.

Federal policy unclear

The Obama Administration took a decidedly hands-off approach to cannabis enforcement despite the drug’s classification as a Schedule 1 substance on par with heroin in the DEA’s eyes. The Trump Administration has yet to formally announce a policy, though Attorney General Jeff Session’s office has made inquiries of states that have legalized recreational use.

“I swore an oath to two constitutions that seem to be at odds with each other,” said Tuolumne County Supervisor Karl Rodefer. “Since it’s still (a) Schedule I (narcotic) we can’t study it and its effect on young people’s brains. I don’t have anything but anecdotal evidence and a smattering of studies of dubious pedigree to base any decisions on about the benefits or drawbacks.”   

In 2013, then-U.S. Deputy Attorney General James Cole set priorities for federal prosecutors in states which had legalized adult uses of marijuana, shifting away from strict enforcement of federal cannabis prohibition and toward a more hands-off approach, so long as state and local laws prohibit access by minors, prevent leakage to non-legalized states (and transfer between states, even if both have legalized) and tracking revenues to cut down on illicit trade. Federal marijuana prosecutions have declined in such states. 

“Are we going to be continuing to live under the Cole Memo and its guiding principles, which is what every recreational state has been doing? Will we get new principles, or will the feds come in and shut it all down,” said Rob Bovett, legal counsel for the Oregon Association of Counties. “Sessions is a wild card there, and we have no idea, but it is nice to have a good close working relationship with the U.S. attorney (for Oregon, Billy J. Williams).”

Williams has called for information to be submitted to Sessions in writing about how Oregon is controlling its leakage, the term for surplus. 

In August, the Associated Press reported that Task Force on Crime Reduction and Public Safety did not form any new policy recommendations regarding cannabis, largely reiterating current Justice Department policy.

Nonetheless, Sessions has criticized the public health and safety issues resulting from marijuana legalization in Western states.

“The new administration has been doing a lot of sabre rattling so there’s a lot of back peddling,” CCI’s Bergman said.  

The chief federal concern is the black market, which includes any interstate transfer.  “You go to London and the most expensive product they sell is black market cannabis from southern Oregon,” Bovett said. “Leakage [excess marijuana] is a major problem.”

Humboldt County, Calif., a cannabis hotspot, has developed a Track and Trace smartphone app.

After a cultivator harvests and packages their crop, they apply a traceable, counterfeit-resistant stamp to the packaging. The stamp includes a QR code and unique stamp number that is coded with information about the product, including size, strain, grower and more. As the package goes through the supply chain—from cultivator to manufacturer to distributor to dispensary—the stamps are scanned by each licensee so they can be tracked until the product is sold to a patient. 

“Taking steps like controlling leakage is how a county proves it is serious about enforcing the laws,” Bovett said. 

Legal pot poses public safety concerns

On top of the logistical challenges for counties in processing cash payments, the portability of the crop and its street value have caused public safety concerns for counties.

The impairment that a cannabis high produces affects driving, adding new kinds of DUI enforcement to counties’ responsibilities.

John Bishop, executive director of the Oregon State Sheriffs’ Association, said his members have reported increases in cannabis-impaired driving at the same time as reports of opioid-impaired driving have increased.

“They drive sloppily, take wider turns, have slower reactions,” he said. “The state police are catching most of them, so far it’s just another part of county law enforcement’s day — a big factor but not number one.”

Blood and urine tests are the standard measures for impairment. Association of Oregon Counties Legal Counsel Rob Bovett said what he learned from Colorado and Washington is that it’s important to keep law enforcement engaged in the legislative process.

"There’s a temptation for law enforcement, in a new legalization state, to throw up their hands and walk away,” he said. “That’s an enormous mistake. If they’re not at the table, nobody will speak for them, they’ll get rolled over by the industry.”

The consensus among county officials in different states is that as more states legalize recreational use, the black market will dissipate eventually.

 “A lot of the concerns that I have right now will ameliorate themselves over time,” said Tuolumne County Supervisor Karl Rodefe, “because the legal industry will drive out the illegal.”