After 'Raich'

June 14, 2005

Ann Harrison, San Francisco Bay Guardian

The media frenzy surrounding last week's Supreme Court ruling on medical cannabis emphasized that the decision does not alter state medical cannabis laws and downplayed the possibility that law enforcement would launch retaliatory raids against patients and caregivers.

But local police and federal authorities continue to target the medical cannabis community – even right here in San Francisco, where the political leadership uniformly supports legal access to medical marijuana.

The favored tactics of the enforcers of federal drug laws are asset seizures and tax investigations, sometimes preceded by police raids.

On the same day justices ruled in Gonzalez v. Raich that the federal government has constitutional authority to prosecute cannabis patients under the Commerce Clause, California's largest operator of medical cannabis dispensaries had its bank accounts frozen by the Los Angeles Police Department. Police say the Drug Enforcement Agency (DEA) and the Internal Revenue Service (IRS) are both involved in the case.

The action was prompted by a May 13 raid carried out by the LAPD against a West Hollywood medical cannabis dispensary run by Compassionate Caregivers. The company operates dispensaries in Bakersfield, West Hollywood, Oakland, San Diego, San Leandro, Ukiah, and San Francisco (Mission Street Caregivers), all of which are now closed.

LAPD spokesperson Lt. Paul Vernon told the Bay Guardian the raid was prompted by information suggesting the dispensary was linked to street sales of marijuana and possible gang activity, not simply its role as a medical marijuana provider. But he also told us the LAPD's decision to freeze assets was based on the outcome of the Raich decision. 'The states cannot pass laws that supersede the federal government,' Vernon said.

San Francisco attorney Omar Figueroa said the opinion only interprets the scope of the Commerce Clause and the authority it grants to Congress. 'It doesn't interpret the Supremacy Clause. It doesn't say federal law trumps state law,' Figueroa said. 'We need to get a clear commitment from the state attorney general to direct the state cops to follow state law.'

Compassionate Caregivers manager Sparky Rose emphatically rejected the allegation that his dispensaries are connected to street crime and challenged the LAPD to produce the evidence. Rose said the business was already planning to temporarily cease all its dispensary operations after the Supreme Court ruling, when the LAPD seized its assets. 'They knew the money was there, and they knew that if they used federal seizure, we'd never get it back,' Rose said.

Rose acknowledged that the sheer size of his operation made it a target for law enforcement. A tour of Compassionate Caregivers' Oakland headquarters last month revealed an efficient corporate operation with purchasing, human resources, IT, and shipping departments that delivered medical cannabis to the company's cannabis clubs. According to Rose, the shutdown put approximately 225 employees out of work and impacted about 7,000 dispensary members and almost 15,000 other patients and caregivers across the state who purchased cannabis from the seven clubs.

Rose declined to say how much money Compassionate Caregivers was generating, but he said the business paid out almost $1 million in federal taxes and about $100,000 in state taxes last year plus generous wages and workers' compensation. Rose said the company bought cannabis wholesale for $3,200 to $3,800 a pound and had profit margins of only 5 to 10 percent after taxes. Given these margins and an average corporate tax rate of 30 percent, the business may have grossed $25 million annually and netted $3 million.

'If they do a deep investigation and seize all the patient records and records of expenditures, it could be very ugly because the federal government doesn't look at the costs and does not consider cannabis an expense,' said Rose, who noted that this logic is being applied to a federal tax audit of another dispensary in San Francisco.

During a symposium of local defense attorneys at the San Francisco Cannabis Cooperative dispensary June 11, attorney Bill Panzer agreed that one of the federal government's emerging weapons against the dispensaries is attempting to tax them out of existence.

Panzer said he is seeing cases in which the IRS is disallowing deductions for the price of cannabis by arguing that purchasing cannabis is against public policy. This means that if a dispensary grosses $100,000 and its net is $50,000, it would be forced to pay taxes on the entire $100,000. 'The clubs that are trying the hardest to comply are the ones most at risk, because those are the ones that have the records, and they are the ones that have filed taxes and declared how much they have taken in,' Panzer said.

Mayor Gavin Newsom has called for dispensaries to open their books to city regulators, and supervisors are considering this idea as they develop regulations for them. Many dispensary operators remain concerned these records could be subpoenaed by federal authorities and used to prosecute them.

Federal authorities are not focusing just on big-money operations in their financial probes. Mike and Valerie Corral, founders of the Wo/Men's Alliance for Medical Marijuana (WAMM) – which provides free medical cannabis to about 200 chronically sick and dying patients in Santa Cruz – are being audited by the IRS, which has referred the case to its criminal division for possible tax evasion charges.

'It is not like we have much money in the bank,' Mike Corral said. 'Coming after Val and I personally is not just about taxes but persecution.'

The Corrals said they are being audited for the year 2002, when 30 armed DEA agents raided the group's cannabis garden. In 2003 a federal court granted WAMM an injunction against federal prosecution. In the aftermath of the Raich decision, Corral said he expects federal authorities to petition the court to lift the injunction.

Patients and growers investigated by San Francisco police worry they too will be targeted by federal law enforcement. Capt. Tim Hettrich, head of the SFPD's vice department, said at a community meeting in April that he and his officers are 'bound by federal guidelines to turn over any marijuana grows over 1,000 plants to federal authorities.' Deputy District Attorney Russ Giuntini said he is not aware of any such guidelines.

'I'm very concerned about them seizing assets, but I'm mostly concerned about getting turned over to the feds,' said San Francisco artist Mario Martinez, who was arrested last October by SFPD Sgt. Marty Halloran for growing 98 plants for himself and eight other patients in a small collective.

Martinez is now facing a year in county jail if convicted of cultivation and possession for sale, despite a pledge from District Attorney Kamala Harris not to prosecute medical pot cases (see Opinion).

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