How the IRS Cash-in on Cannabis Prohibition

CANNABIS CULTURE-  Last week, United States Senator Cory Booker (D-NJ) introduced legislation to federally regulate the $6.7 billion US cannabis industry.  In the bill, Booker details the combined injustice forcing the industry to operate in cash and making producers vulnerable to both criminal prosecution and tax rates as high as 70 percent.

Now, the hypocrisy of imprisoning people for a business the government takes massive windfalls from is explicit and the roots run deep.

Since 1982, Section 280E of the tax code has denied business tax deductions and credits to companies that traffic controlled substances. Penalized businesses find themselves barred from valuable asset deductions and other expenses. If in violation, companies increased their chances for intense IRS scrutiny in the years ahead. Such scrutiny includes meticulous questioning such as delving into how it arrived at pricing its products.

Over the years, legitimate companies in the marijuana space began to suffer due to its classification as a Schedule 1 narcotic by the U.S. government. Though allowed by states, the federal government still consider marijuana as a schedule 1 narcotic. Despite over half of the states participating in the marijuana market in one form or another, businesses continue to find themselves under the duress of stifling restrictions. Section 280E makes the marijuana business dangerous financially, and physically.

Section 280E stemmed from a 1981 case that barred a convicted cocaine dealer, Jeffrey Edmondson, from using deductions and write offs for his business. Today, experts argue over the validity of the rule and the government’s policy making process when it comes to narcotics. Those in opposition to Section 280E believe that political pressure gives drugs bills an easy pass through legislation. As North Carolina lawyer Pat Oglesby told The Daily Beast from his experiences working with Congress on tax policy, “The 280E provision was so politically bulletproof that no committee bothered to even hold hearings.”

Despite rumors of a reclassification in the final months of his term, President Obama opted to keep classification as is while allowing for more research into its medical benefits. In keeping the status quo, marijuana establishments found themselves under the same heavy tax burden for the foreseeable future. For a brief time, marijuana supporters held out hope under the wavering views of President Trump. Trump once said he that he supported further research, though he has also stated otherwise on occasion. However, those hopes were soon deflated with the appointment of Alabama then-Senator Jeff Sessions as the President’s Attorney General – who is already challenging the limits of key marijuana rulings like the 2013 Cole Memo.

Anti-marijuana talking heads favor AG Sessions stance on reinvigorated prohibition (Reefer Madness 2.0). Meanwhile, many states and legitimate businesses fret over their fates under stricter regulations. While this tax burden is nothing new, a booming industry now faces another setback on its road to transparent inclusion in the American marketplace. With the cannabis industry expected to become a $21 billion market by 2021, many are calling for a change. But it isn’t just the financial impact of Section 280E that causes so much distress in the industry.

Section 280E: Threatening Bottom Lines and Lives

Criminal targeting becomes an increased threat when dealing with large sums of cash on a daily basis. But daily operations can prove just as dangerous to cannabis establishments. Many banks won’t even touch the marijuana industry due to fears of violating federal law. Owners have reported instances where an account will be halted during the application process due to the bank’s concerns of running afoul of the federal government’s rules. Even opened accounts face arbitrary closings from the bank for the same reasons. In doing so, high revenue earning businesses are left optionless when it comes to processing growing revenues and tax payouts. This predicament forces thousands of legitimate companies to operate in risky cash only dealings that, at times, make the industry more dangerous than when it was an entirely illegal operation.

From processing transactions to storing cash to paying employees, virtually every aspect of business is impacted by the regulations. Cannabis entrepreneur Julia Gosnell told the Los Angeles Times of the advice she received on how to manage her million dollar business, “I was told by an accountant, who closed his door to tell me this, that you just keep your cash under the mattress. Stash it somewhere and find a way to get a big deposit into your account. I said that doesn’t sound legal, but I am told everyone operates this way.”

Like Gosnell, other owners and establishments are often left with little to maneuver around Section 280E’s tax burden. Facing a high percentage tax rate is frustrating enough. Yet, it can cause many more problems. When it comes to daily operations, companies undertake tedious and meticulous tasks to avoid any potential red flags that could incur more government scrutiny. This requires a higher level of attention to detail than other industries typically would. Cannabis businesses document everything. Job categories and expenses are carefully categorized. Every detail counts. With the IRS looming, experts emphasize owners maintain perfect books at all times. This may seem like a common practice that any organized business should take. However, with a much finer line to walk, marijuana establishments can face crippling effects for any mistake.

Paying the IRS becomes a problem as well due to conflicting laws on federal and state levels. With cash payments, companies must hand deliver its sums to the IRS and state tax officials. This requires hand counting large totals of money, sometimes reaching into the millions for just one business. This also becomes a daunting task on IRS and tax officials who then have to direct efforts toward hand counting each payment. In April of this year, the IRS increased its cash-counting bandwidth in Denver and Seattle to meet the influx of cash payments it was receiving for legalized businesses in each state.

Just getting to the tax office is an issue for marijuana companies. When transporting such large sums of money, every business and person involved in the payment could become targets of criminals. With such large payments, businesses turn to armored trucks to deliver payments. Hoeever, many armored trucks won’t touch the marijuana industry for similar fears that banks have. These could leave a business short on safe options. Without an armored truck service, these high sum payments are almost impossible to safely transport. As CNBC reported, this has led to some entrepreneurs opening armored trucking companies just for the marijuana industry.

In some cases, the cannabis industry has prevailed over some of 280E’s regulations. If structured properly, businesses can obtain concessions and workarounds. Otherwise, the rules appear to be relatively solid and by the books – leaving businesses in a high-tax, cash-only pinch that presents danger at several turns.

The Road Ahead

The turmoil of President Trump’s administration almost cost AG Jeff Sessions his job recently. Yet, those issues appear settled for now. As one of his first moves as new White House Chief of Staff, John Kelly assured the recently on-the-ropes Attorney General that his job was indeed secure. While a sigh of relief for America’s diminutive top lawmaker, marijuana certainly isn’t breathing any easier.

Under Sessions, reports suggest an impending crackdown if he gets his way. Some fear that a heavy tax burden and a operations frustrations may be the least of their concerns at this point.

While AG Sessions swore to uphold the law under the Obama-era Cole Memo, he did appear to indicate harsher enforcement of the law. In the July 24 letter obtained by the Huffington Post, he wrote, “the Department remains committed to enforcing the Controlled Substances Act in a manner that efficiently applies our resources to address the most significant threats to public health and safety.” As noted by The Washington Post, Sessions words come nearly verbatim from the Cole Memo. In short, the most common interpretation is that the Attorney General intends to thoroughly uphold marijuana to public health parameters established by the 2013 ruling. If a slip up occurs, it is almost guaranteed that Sessions and the Department of Justice will pursue the case.

While his intentions are relatively clear, lawmakers from both sides of the aisle are coming together to send a different message. Recently, Republicans and Democrats united on the Senate Appropriations Committee to oppose the AG’s power to get in the way of marijuana laws. After several memos stating his findings and intentions, action was taken. The bipartisan pushback was capped off a re-approval of the Rohrabacher-Blumenauer amendment.

Just a few days later saw Senator Booker’s (D-NJ) proposed legislation on a comprehensive marijuana bill that addresses legalization, descheduling, and addressing racial concerns. In his rollout, Booker cited unfair targeting of minorities that creates a “poverty trap.” He also tackled antiquated myths about cannabis. “The evidence that it’s a gateway drug just is not compelling, and the reality is, as I said with the challenges of opioid addiction, there’s some great medical studies that have come out that have shown that actually having the availability of marijuana actually lessens the chances you’re going to have overdose deaths,” Booker said. While Booker’s attempt likely won’t pass a Republican held government, the step is progressive nonetheless.Should a ruling ever pass, all woes from Section 280E would vanish. With similar proposed bipartisan legislation for industrial hemp’s exclusion from the Controlled Substance Act also arriving, the tide may be turning despite the current administration’s stance on taxing and policing marijuana.

While legal marijuana states tell the Attorney General that their programs are working, cannabis companies will continue to face steep taxation unless a complete overhaul to the system occurs. With a potential 70% tax rate hanging over their heads, no business can fully perform its duties as a growing entity. Cannabis is certainly a boom industry, but with hefty tax bills and a volatile White House, all bets are off as to where the market might be in a short span. As a clash in Washington between the Trump administration and policymakers looks imminent, Section 280E may continue to wreak havoc on business’s bottom lines, or it could become a thing of the past. At this stage, all sides appear to remain in a wait-and-see stance.