Banking solutions available despite difficulties due to the tax code for the cannabis industry
Cannabis banking has been a delicate subject to discuss in recent years. Although many financial institutions refuse to do business with the high-risk industry, the truth is that cannabis banks have been licensed since February 2014. This is when the Financial Crimes Enforcement Network, or FinCEN, released its guidelines on how credit unions and state-chartered banks could work with emerging industry.
I can speak with confidence because, in 2020 alone, my OSS business has helped our cannabis customers secure cash withdrawals and process and deposit their products. In total, the OSS team has helped legally transfer more than $ 1.6 billion to nearly a dozen financial institutions in the state of California. Today, the company is expanding its reach into the east coast market, hoping to bring proven banking and security solutions to newly legalized states.
Banking is legal, as long as you follow the rules. None of our protected clients or client families have experienced any disruption to their account services, and every penny has been counted.
The current state of the 280E and recent legal actions
The impact of the tax code Article 280E removes the ability of a marijuana-related business to claim tax breaks as a normal business, medical, or agricultural business. Indeed, 280E prohibits businesses from deducting business expenses, other than the cost of goods sold, from income if the taxpayer’s business or business is associated with trafficking in Schedule I or II substances, as defined by law. on controlled substances.
VIDEO: How States Legally Get Around the Federal Cannabis Ban, and What Unique Legal Challenges Do Lawyers and Companies in the Marijuana Industry Face?
The Permanent Akimbo LLC v. United States The Supreme Court case was one of the more notable legal actions taken recently against 280E. Supreme Court Justice Clarence Thomas issued an opinion that clarified the government’s position. Several weeks after the decision, then Acting Solicitor General Elizabeth Prelogar made it clear in a brief commentary on Speidell vs. United States, that the lower courts were correct in ruling that legal marijuana companies may be investigated by the Internal Revenue Service for potential violations of Section 280E.
As far as the cannabis industry is concerned, there are no exceptions regarding section 280E. There have been several cases in the past 12 months, even at the Supreme Court level, and in each case the position of the Justice and Treasury Ministries has been clarified that as long as a business involves a substance of Schedule I, nothing will change in the tax laws.
The path to follow
We have the MORE Act, the SAFE Banking Act and almost 47 states working on some form of legalization, with seven new markets opened in the past nine months. While the current administration is not making cannabis legalization a priority, it has confirmed that it will not allocate any resources from the Department of Justice to enforcement action for marijuana in a state where it is legal. Unless, of course, it’s issues of anti-money laundering or banking secrecy law (BSA) within the industry.
Ultimately, the federal government will take action to remove cannabis from the Schedule I list and leave it to the states to determine how they establish cannabis licenses, business operations, and banking programs.
Legalization won’t be a magic wand
We can assume that some form of federal legalization is likely to happen in a matter of months rather than years. However, it is also safe to assume that despite the removal of cannabis from the Schedule I list of narcotic drugs and the nationwide decriminalization of cannabis, accessibility and acceptance in all regions is still far from. several decades.
One of the biggest concerns from an industry perspective is – and we’ve seen this in virtually every emerging market at the state level – the “green rush mentality”. This is because individuals or entities who only see the revenue potential, most of the time, lead to bad business decisions that lead to regulatory actions. As the federal position on cannabis changes, regulatory and compliance activity for operators will increase. We’re very encouraged right now that the positive changes will also create the opportunity for the industry to step up and help guide the compliance framework as we move forward.
Just as states flexed their authority to legalize cannabis before federal laws changed, other states may continue to resist even afterwards. Currently, Idaho (House Bill 108, referred to committee), Wyoming (House Bill 209 passed March), Kansas (House medical program adopted), Alabama (Senate Bill 46 passed), South Carolina (limited medical marijuana program) and Tennessee (Limited Medical Program) have some form of medical marijuana legalization bill that has been introduced either in their home or in the legislative bodies of the Senate. It is possible, by the end of 2024, that every state will have adopted some form of medical marijuana legalization.
The political landscape is constantly changing as more and more people in our country signal their support for the legalization of cannabis. After the 2020 pandemic, many cities and counties are changing their minds about allowing cannabis operations, as they have seen the value of tax revenues from neighboring communities. With the many pieces of cannabis legalization and the definancing of enforcement or decriminalization activities, it is clear that our leaders are trying to solve the problems.
The future of the 280E
Once the federal government takes action that would remove marijuana from the Schedule I list, the basis for Section 280E of the Tax Code, which has been continuously clarified, would essentially disappear. The most significant impact would be the net increase in the profitability of licensed cannabis operators. The decisions that CEOs and CFOs face in the industry will become easier as a traditional method of business operations and accounting is implemented. Many industry players have said that they believe this kind of positive change will also increase the number of sophisticated operators and companies willing to enter the cannabis industry in new and emerging state markets. . The continued application of 280E, in conjunction with some of the high tax / fee structures that licensed operators are required to pay, make it extremely difficult to run a successful business. We have seen some operators lose over 70% based on what they cannot deduct in tax and what they have to pay in license.
If 280E were to go away, it would force the IRS to update its guidelines. We have already observed in the SAFE Banking Act that, if the law is passed, the Financial Crimes Enforcement Network (FinCEN) will be required to provide updated guidelines on cannabis banking. Specifically, the anti-money laundering / banking secrecy (AML / BSA) guidelines for financial institutions will be updated. The net result is that more banks will be able to enter the space, but again, everyone expects the level of compliance, auditing and transparency to only increase, not decrease.
So on the one hand, all of these changes are absolutely positive, but they will come with an increased burden of regulatory compliance and transparency for operators. The illegal market will not go away with these changes. Criminals and illicit organizations will always be diligent in looking for ways to get around the system. We fight against these threats on a daily basis for our clients and partner financial institutions. It will be essential for operators to pay close attention to how regulatory changes are implemented and the increased scrutiny that our industry will face. This is a tremendous growth opportunity for all involved in the industry, and we welcome the opportunity to help usher in a new era for the cannabis industry.
Without a doubt, the winds of change are blowing for the cannabis industry, but probably not as quickly as we had hoped. Our industry needs to ensure that we are working as transparently as possible at the community and state level, as well as with our peers to have collaborative conversations to ensure that regulations are properly implemented. The future is very exciting for the cannabis industry, and we are absolutely delighted to be able to participate in the growth of the East Coast market.
This column does not necessarily reflect the opinion of the Bureau of National Affairs Inc. or its owners.
Ryan R. Hale is the Director of Sales and a founding partner of Operational Security Solutions (OSS). Mr. Hale leads all revenue operations, business development, marketing, strategic alliances, product / service development and implementation.
Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at [email protected].