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Money made by pot stores remains hazy

Originally published: 9/5/09

SETTING IT STRAIGHT (9/6/09): A story on page A1 of Saturday's Bee incorrectly listed prices for medical marijuana at a Sacramento dispensary. Canna Care of Sacramento buys pot for $1,500 to $3,000 a pound -- depending on the strain and quality -- and then sells it for $40 to $50 per eighth ounce.

State law bars medical marijuana from being a money-making industry. But is it?

It's impossible to tell.

Local governments, tasked with regulating the dispensaries sprouting up from Redding to Reseda, are scrambling just to figure out how many have opened.

Los Angeles is home to hundreds of dispensaries -- some of which opened after the City Council enacted a moratorium on new marijuana businesses. Towns such as Barstow and West Sacramento are banning dispensaries until they can outline regulations for them.

And Sacramento is considering how to handle those already operating, including some that have been open for years but described themselves as "wellness" or "dried flower" businesses in city paperwork.

Since mid-July, when the city asked medical marijuana distributors to register with the revenue department, 40 have come forward, to the surprise of city officials, said revenue manager Brad Wasson.

Given the rapid growth,officials are scurrying to figure out what regulations make sense in terms of zoning and permits, and exactly how dispensaries work.

For the most part, compliance with state medical marijuana laws has been left to the honor system -- including the clause that cultivation and distribution aren't supposed to be profitable.

"Unfortunately, it's far from perfect and there are a lot of gray zones," said Christine Gasparac, spokeswoman for the state attorney general's office.

Oakland has gone further than most cities in regulating medical cannabis, permitting only four dispensaries to operate within the city. Each pays a $30,000 annual fee and a 1.2 percent tax on gross revenue; voters agreed in July to raise the tax to 1.8 percent next year.

The Oakland dispensaries reported $21 million in sales last year, up from $18 million in 2007, said Barbara Killey, a city administrative hearing officer.

Although City Hall oversees the businesses, weighing in on the buildings they're in and charitable programs they operate, Oakland has not yet audited the dispensaries to see if they're making a profit.

Under state law, it's not even clear what constitutes a profit. The law simply states: "... nor shall anything in this section authorize any individual or group to cultivate or distribute marijuana for profit."

If dispensaries aren't making money, the question has to be raised as to why so many are jumping into the flower bed of this abundantly blossoming industry.

Caleb Counts said he opened his Fruitridge Health & Wellness Collective in February after an aunt suffering from cancer refused marijuana as a pain reliever because it is illegal under federal law.

"She just wasn't willing to risk (doing something illegal) and died two years ago in extreme pain and suffering," he said. "That hit home quite a bit and so I wanted to become part of the movement."

Counts said the dispensary has not yet broken even on the costs of opening -- new cabinets, copy machines and other business necessities. When the south Sacramento business hits black, he said, he plans to donate to charity and give marijuana to low-income patients. He said he already gives away $10,000 worth of pot to members each month.

Operators of Canna Care, a dispensary in a North Sacramento business park, said they sell about a pound of marijuana every two or three days. Lanette Davies, whose husband, Bryan, founded the cooperative in 2005, said they keep about three or four pounds of the dried buds on the premises and all of it comes from members who grow it.

Depending on the strain and quality, they buy the pot for $1,500 to $3,000 a pound and sell it for $40 to $50 per eight ounces, she said. Sales fluctuate depending on season: During the four-month outdoor harvest -- September through December -- many members use pot they grow themselves.

Business costs include salaries ranging from $30,000 to $100,000; $133,000 per year for 24-hour security; $20,000 for charity; and close to $4,000 a month to host meetings for the medical marijuana advocacy group Americans for Safe Access, in which Davies is active.

Canna Care is also Christian-based and gives away hundreds of Bibles each year.

"You'd be surprised how fast the money goes," Davies said. "I drive a 2005 Dodge Durango and have a home I've lived in for 30 years. I might have my bills paid, but I'm not rich."

State laws don't detail how dispensaries should be structured. Most function as members-only clubs. They open like any other business -- registering for business licenses in the cities and counties where they operate; becoming incorporated with the state; and registering as general corporations or limited liability companies with the Franchise Tax Board.

The California State Board of Equalization estimates it collects $18 million in sales tax each year from cannabis dispensaries, said spokeswoman Anita Gore.

Still, no agency tracks how much money operators make or ensures they are not profitable.

The incongruous state and federal laws mean dispensaries are not registering as federal nonprofits. Generally, nonprofits register for exemption from taxes as 501c companies. They file paperwork annually with the Internal Revenue Service outlining their finances.

Several marijuana dispensary operators interviewed by The Bee were vague about sales and expenses, except to say they invest profits back into the business or donate to charitable groups.

Since opening in 2005, Capitol Wellness Collective has grown to 4,500 active members with two locations in midtown.

Founder Aundre Speciale would not share specifics about the business numbers, but said the collective does not make a profit.

She said all employees and their families get health benefits and are paid salaries from $39,000 to $120,000 per year. She said 400 people receive free marijuana every week.

The collective also has used excess money to buy two fixer-upper properties in Oak Park. One cost the collective $20,000 and is to become a community garden. The other was purchased for $54,000 and will become a hospice or community center, Speciale said.

"That's something we really, really share -- a sense of family and a sense of community," she said.

Joel Marsall started Delta Health & Wellness, a medical marijuana delivery service in Sacramento, six months ago. A storefront along Broadway came two months later. And he recently applied to open a dispensary in West Sacramento after calls from patients west of the Sacramento River illuminated the need.

"I am not doing this for the money," Marsall said. "There's a rotten apple in every barrel, but the majority of people in this have no greed in their hearts."

WHAT THE LAW SAYSCalifornia law prohibits medical cannabis from being used to make a profit. Here's what the law says: 11362.765. ... nothing in this section shall authorize the individual to smoke or otherwise consume marijuana unless otherwise authorized by this article, nor shall anything in this section authorize any individual or group to cultivate or distribute marijuana for profit.-- From Senate Bill 420, which went into effect in 2004

Call The Bee's Gina Kim, (916) 321-1228.