Medical marijuana industry rapidly grows mainstream

McClatchy NewspapersMarch 30, 2011 

WASHINGTON — The medical marijuana industry is beginning to show its age.

After humble California beginnings in 1996, 15 states and the District of Columbia now have legalized marijuana use for ill patients who have a doctor's recommendation.

Medical marijuana has been found to help with chronic pain, nausea and other symptoms of diseases including cancer, muscular dystrophy and AIDS. Nearly 25 million Americans are medically eligible to buy marijuana.

Sales are expected to hit $1.7 billion this year. Just last week, a San Francisco-based outfit, the ArcView Group, formed the industry's first investment network to link cannabis entrepreneurs to qualified investors with "seed" money.

"It doesn't take a rocket scientist to realize that this industry is growing and that there are untold riches to be made here," said Troy Dayton, the chief executive of the ArcView Group.

In coming months, Arizona, New Jersey, Rhode Island and the District of Columbia will launch programs, joining eight states where medical marijuana is sold legally. Those states are California, Colorado, Maine, Michigan, Montana, Oregon, Washington and New Mexico.

But around the country, some law enforcement officials have expressed concern that medical marijuana could be obtained by relatively healthy people who could get a recommendation from a physician by lying or overstating their pain and suffering.

They also worry that some dispensaries could grow more marijuana than their patients could consume, leaving an excess that could make its way to the illegal market.

While legal for medical purposes in many states, marijuana remains an illegal controlled substance under federal law, although since 2009, the Justice Department has said it won't prosecute medical marijuana use within the bounds of states' laws.

With more than 1,500 growing operations and dispensaries nationwide, the medical marijuana industry has defied the recession and prospered even as the broader economy stalled. This month, Maine became the first state east of Colorado to allow dispensaries to provide cannabis to seriously ill patients.

One of the new operators, Maine Organic Therapy, has been making home deliveries to more than 20 patients for about three weeks, said chief executive Derek Brock. Patients in Maine can purchase as much as 2.5 ounces every two weeks, or a maximum of 5 ounces a month.

Strong public support has helped fuel the industry's eastward expansion, but that growth has also brought growing pains.

Industry reps say section 280E of the Internal Revenue Code unfairly bars legal medical marijuana operations from deducting business expenses from their income taxes. Dispensaries nationwide are facing Internal Revenue Service audits over the measure.

Other dispensaries have found that banks won't maintain their business accounts, fearing federal scrutiny over reporting requirements for ties to businesses that violate federal law.

The National Cannabis Industry Association was formed late last year to help address these concerns. On Wednesday, the trade group held its first national lobby day, visiting lawmakers on Capitol Hill as part of a push for greater legislative clout.

"These kinds of days are necessary, because it puts a face on the industry," said Rep. Jared Polis, D-Colo., one of the industry's staunchest supporters.

While 76 percent of medical marijuana sales nationally are generated in California, Colorado has the nation's fastest-growing market. More than 131,000 Coloradans are registered marijuana patients, up from only 7,000 in 2008.

Colorado Dispensary Services, which operates three dispensaries and three commercial growing operations, has had five different bank accounts in three-and-a-half years, owing to state regulatory friction. Owner Jill Lamoureux said it's impossible to manage nearly 50 employees and $120,000 in monthly payroll without a bank account. State regulators have taken notice.

"These regulators need to see our bank accounts, and if we do not have access to banking, it makes it impossible for them to regulate," Lamoureux said. "Frustrating is an understatement to say how difficult it is to run a business" without banking services.

Last year, Polis and seven other Democratic lawmakers wrote a letter asking the U.S. Treasury to declare that it wouldn't target banks with account holders that operate in compliance with state medical marijuana laws. Federal regulators deferred, arguing that banks must make those calls themselves.

Polis said he'll introduce legislation soon that clarifies banks' responsibilities when dealing with marijuana dispensaries. He said support for the issue is bipartisan, citing Republican Reps. Ron Paul of Texas and Dana Rohrabacher of California as sympathetic to the industry's plight.

Harborside Health Center, a nonprofit dispensary in Oakland, Calif., serves 79,000 patients, pays more than $3 million in state, federal and local taxes and employs 80 people who get paid vacations and 401(k) retirement plans. Yet they've had their bank accounts closed three times and are facing an IRS audit.

Stephen DeAngelo, the executive director of Harborside, said the center is being treated like an illegal trafficker rather than a community service organization.

"We do not deserve to have our accounts frozen or to be taxed out of existence," DeAngelo said. "280E (of the IRS code) was intended for cocaine kingpins, international smugglers and crystal meth dealers. It wasn't intended for organizations like ours, and it shouldn't be applied to organizations like ours."

Last year, Polis and five other Democrats asked the IRS to allow legal medical marijuana operations to deduct their business expenses, but the agency said it couldn't do so. Only Congress could amend the Internal Revenue Code or the federal Controlled Substances Act.

Polis said that Democratic Rep. Pete Stark of California will soon offer legislation to do just that.

Recent history suggests that clearing up the industry's tax and banking concerns could boost its growth. In 2009, the Justice Department issued a directive that people won't face federal prosecution if they use or provide medical marijuana in compliance with state laws.

That proved to be a "major growth driver" for the industry, prompting hundreds of new marijuana businesses, while causing raids on marijuana operations to drop 58 percent, said David Guard, a researcher at See Change Strategy, an independent financial-analysis firm.

Becky DeKeuster realized medical marijuana's healing potential soon after she quit her high school teaching job to work in a dispensary in Berkeley, Calif., in 2002.

"On my first day there, I saw a patient in a wheelchair having (multiple sclerosis) seizures. And, literally, with two puffs off a joint, he stopped tremoring, and it was like, 'wow, this is amazing,'" said DeKeuster, now the executive director of Northeast Patients Group, which operates four dispensaries in Maine. "I'm grateful to be in this industry and I consider it a blessing to be able to do the work I do."

ON THE WEB

Executive summary of report on medical marijuana industry

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