Aaron Smith, Executive Director, NCIABy Aaron Smith, Executive Director, National Cannabis Industry Association (NCIA)
With more than 20 states now legalizing access to medical marijuana, four states and the District of Columbia legalizing adult use, and several more considering major cannabis policy reforms in the near future, marijuana is having a moment.
Opinion polls show overwhelming approval for medical marijuana access nationwide, with support near or above 80 percent. Proposals to legalize, tax and regulate cannabis like alcohol garner majority support in many of those same polls.
But politicians and policymakers in Washington, D.C., have lagged far behind the rest of the country when it comes to marijuana policy. Because marijuana is still classified as a Schedule I controlled substance under federal law, state-compliant cannabis businesses are subject to a host of unfair and outdated policies that can cripple their ability to survive and prosper. The most critical of these come in the areas of banking access and taxation.
Because banks and other financial institutions are federally regulated, they routinely refuse to provide cannabis-related businesses with even basic services, such as checking accounts, because they fear running afoul of federal law that considers marijuana and its proceeds illegal. This results in many businesses being forced to operate entirely in cash, creating extreme safety and security risks, as well as logistical complications. (Imagine paying your rent, payroll, utility bills and taxes every month in grocery bags full of $20Â bills, and you’ll get the picture.)
In February 2014, the U.S. Departments of Justice and Treasury issued memos with guidance intended to create a road map for financial institutions to serve state-compliant cannabis businesses. While those memos appear to have been developed in a good faith effort to open up banking access for the industry, in reality they have had only a small impact. Many banks actually felt that the new reporting guidelines for serving the industry might even increase their legal vulnerabilities.
Despite other attempts at short-term solutions and work-arounds, a substantive, industry-wide solution remains in the hands of Congress. In May 2014, the U.S. House considered an amendment during the appropriations process that would have prohibited the Treasury Department from using any federal funds to prosecute or otherwise interfere with banks serving legal cannabis businesses. The amendment passed easily with bipartisan support in the House, but it was cut from the final legislation during negotiations in the Senate.
The recently introduced CARERS Act (S. 683 and H.R. 1538), which was originally sponsored by Sen. Rand Paul (R-KY), Sen. Cory Booker (D-NJ), and Sen. Kirsten Gillibrand (D-NY), and has since gained bipartisan co-sponsors in both the Senate and House, has received coverage largely for its medical-marijuana-related provisions. However, the bill also includes a provision that would make it explicitly legal for financial institutions to serve any “legitimate marijuana-related business,” whether it is a medical business, an adult-use business, or an ancillary service business.
The work of business owners, state government leaders, and advocates like NCIA have helped convince many lawmakers of the critical need to address the banking issue. The appropriations vote in May of last year made it clear that the majority of the Republican-led House is in favor of a banking solution, and bipartisan support for the solutions being proposed bodes well. However, the general dysfunction and lack of real action in Congress overall continues to pose the largest hurdle for achieving legislative change on banking.
Another Major Threat: Federal Tax Code Section 280E
The second policy most existentially threatening to cannabis businesses is a measure in the federal tax code known as Section 280E, which prohibits any business engaged in drug trafficking from deducting normal business expenses when filing their federal taxes.
The provision was added to the Internal Revenue Code in the 1980s after a convicted cocaine trafficker asserted his right to deduct business expenses from his federal tax filings. The provision was never intended to penalize cannabis businesses operating legally and in compliance with state law. However, because it applies to the sale of Schedule I and Schedule II substances under the Controlled Substances Act, cannabis cultivators and dispensaries are prohibited from deducting the common expenses every other legitimate business can deduct, including rent, payroll and state excise taxes. The result is effective tax rates that can range from 50 percent to 85 percent, absolutely crippling for a small business.
Even more infuriating is that these outrageous tax burdens fall on the businesses that are doing everything they can to play by the rules, including paying taxes to a federal government that treats them like criminals.
Although appeals have been made directly to the IRS and to the U.S. Tax Court for a solution, once again it is Congress that holds the power to make a substantive change.
The CARERS Act would provide partial relief through a section that exempts state-compliant medical marijuana businesses from the provisions of the Controlled Substances Act. If those businesses are no longer in violation of the Controlled Substances Act, then Section 280E would appear to no longer apply. (It’s important to note that merely rescheduling marijuana from Schedule I to Schedule II, as the CARERS Act also does, is not sufficient to fix the 280E problem, since the section also applies to Schedule II products.) However, the CARERS Act does not address 280E issues directly, nor does it provide any solution for non-medical cannabis businesses.
Rep. Earl Blumenauer (D-OR) and Sen. Ron Wyden (D-OR) have recently introduced The Small Business Tax Equity Act (H.R. 1855 and S. 987), which would create an exception to Section 280E allowing state-compliant cannabis businesses to take normal business expense deductions like any other legal business. Rep. Blumenauer has introduced a similar bill in the House before, but this is the first time such legislation has been proposed in the Senate.
Rep. Jared Polis (D-CO) has proposed a comprehensive solution that would address the banking crisis, the 280E fiasco, and other problematic federal cannabis policies. The “Regulate Marijuana Like Alcohol Act” (H.R. 1013) would remove marijuana from the Controlled Substances Act altogether, and allow states to set and enforce their own marijuana policies without federal interference. This would not only give each state the freedom to choose its approach, but also remove the many unintended consequences of the current conflict between state and federal marijuana laws.
All of these pieces of legislation face uphill battles, both because of many lawmakers’ outdated prejudices against cannabis and because Congress so often grinds to a dysfunctional halt over any issue. But a new coalition has emerged, combining traditional progressive allies with libertarian-leaning small government conservatives who believe states should be allowed to craft and implement their marijuana policies without federal interference.
This bipartisan coalition is fruitful ground for progress to be made on Capitol Hill, but it will take continued work and pressure from the industry, its advocates like NCIA, and the small business owners who are directly affected by these policies. As we grow our businesses, we must continue to raise our voices in a united front and demand the respect and fairness that a legitimate, responsible industry deserves.
Aaron Smith is co-founder and executive director of the National Cannabis Industry Association. Prior to launching NCIA, Smith distinguished himself as a public advocate for marijuana policy reform–first under the auspices of a California-based medical cannabis advocacy group, Safe Access Now, and more recently as the California state policy director for the Washington, D.C.-based Marijuana Policy Project.
