On November 16, 2022 the Senate passed by voice vote the Medical Marijuana and Cannabidiol Research Expansion Act, a bill introduced by Senators Dianne Feinstein (D-Calif.), Chuck Grassley (R-Iowa) and Brian Schatz (D-Hawaii) to expand research into marijuana-derived medications.

The goal of the bill – which passed the House of Representatives in July 2022 by a strong bipartisan vote of 325-95 under the leadership of Representatives Earl Blumenauer (D-Ore.) and Andy Harris (R-Md.) – is to facilitate research on marijuana and its potential health benefits. The bill will accomplish this by streamlining the application process for scientific marijuana studies and removing existing barriers for researchers that frequently slow the research process.  The bill also requires the Department of Health and Human Services and the National Institutes of Health to submit a report to Congress on the potential harms and benefits of marijuana use. 

Senator Feinstein said in a press release that “There is substantial evidence that marijuana-derived medications can and are providing major health benefits.  Our bill will make it easier to study how these medications can treat various conditions, resulting in more patients being able to easily access safe medications.  We know that cannabidiol-derived medications can be effective for conditions like epilepsy. This bill will help refine current medical CBD practices and develop important new applications. After years of negotiation, I’m delighted that we’re finally enacting this bill that will result in critical research that could help millions.”

The Growing Trend In Legalizing Cannabis:

Medical marijuana is legal in 37 states.

The medical use of cannabis is legal (with a doctor’s recommendation) in 37 states and Washington DC. Those 37 states being Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 21 states.

Twenty-one states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 21 states being Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

Conflict With Federal Law.

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.  Cannabis containing more than 0.3 percent delta-9 tetrahydrocannabinol (commonly known as THC) is currently classified as a Schedule I drug. As a result, medical research is subject to stringent regulations that has impeded progress.

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen whether the Federal government will respond favorably and when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  So it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down especially if you are growing cannabis on Federal lands.

Raid in Santa Ana, California

On January 27, 2022 the City Of Santa Ana Police Department issued a tweet that they assisted Code Enforcement Inspectors in raiding a suspected illegal cannabis cultivation in the area of 400 East Dyer Road.  Detectives obtained a search warrant, which was served by Metropolitan Detectives.  Detectives discovered an illegal large-scale commercial cannabis cultivation operation. Detectives located 11 grow rooms, 2 dry rooms & seized over 5,000 plants. Code Enforcement inspectors also red-tagged the building for several dangerous & illegal building modifications. There is no word of any arrests. The case remains under investigation.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

• Does the business allow minors to gain access to marijuana?
• Is revenue from the business funding criminal activities or gangs?
• Is the marijuana being diverted to other states?
• Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
• Are violence or firearms being used in the cultivation and distribution of marijuana?
• Does the business contribute to drugged driving or other adverse public health issues?
• Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
• Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, then Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

California State Penalties For Selling Cannabis Without A License.

But don’t think that just because cannabis is legal in California, you do not have to worry about the State.

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the BCC. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
2. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis;
3. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
4. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
2. Any people you give cannabis to are 21 years of age or older.

What Should You Do?

You can count on all level of government coordinating resources and making comprehensive strikes on unlicensed and illegal cannabis operations for the safety of the public or to enforce the Federal prohibition.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging a cannabis tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

In a hearing before the House Appropriations Financial Services and General Government Subcommittee on February 23, 2021, IRS Commissioner Charles Rettig told Congress that the federal agency would “prefer” for state-legal marijuana businesses to be able to pay taxes electronically, as the current largely cash-based system under federal cannabis prohibition is onerous and presents risks to workers.

Rep. David Joyce (R-OH), who serves as a co-chair of the Congressional Cannabis Caucus, said that barring marijuana companies from traditional financial services is “inefficient for business and the IRS alike, obviously, not to mention ample opportunity for fraud and abuse it creates, as well as potential for criminal acts as far as robbing and stealing from those.”

Getting Harder For Legal Cannabis To Find Banking

Even though more and more states are allowing the sale of cannabis at the medical and/or recreational level, it is still a business that deals essentially in cash only. Why? Because most traditional banks refuse to deal with any cannabis businesses.  This forces cannabis businesses to seek alternative financial institutions, smaller banks and credit unions that are willing to work with cannabis businesses so that these businesses can pay their expenses and even taxes in a manner more safe and secure than delivering stacks of $20 bills.

Nevertheless, cannabis companies still operate in a legal grey area because cannabis remains illegal under Federal law. Federal law classifies cannabis as a Schedule 1 drug, meaning it has “currently no accepted medical use”. Treating cannabis, no differently than heroin, the Federal government has entrusted the Treasury Department with the authority and responsibility to monitor bank activity to make sure that activities which are illegal under Federal law are not utilizing the banking channels and functions that are normally available.

Financial Crimes Enforcement Network (“FinCEN”)

FinCEN is a bureau of the U.S. Department of the Treasury. The Director of FinCEN is appointed by the Secretary of the Treasury and reports to the Treasury Under-Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies.

FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001. Under this authority the Secretary of the Treasury is to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs and the filing of reports that have been determined to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. This authority has been delegated to FinCEN.

The basic concept underlying FinCEN’s core activities is “follow the money.” As FinCEN believes that the primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN shares the information it receives and analyzes with other law enforcement agencies to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers. More recently, the techniques used to follow money trails also have been applied to investigating and disrupting terrorist groups, which often depend on financial and other support networks.

Reporting Of Cash Payments

The Bank Secrecy Act (“BSA”) enacted in 1970 requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records. 

Why Banks Are Reluctant To Deal With Cannabis Businesses

Under the Obama administration, then-Deputy Attorney General James Cole issued a memo, known as the Cole Memorandum that clarified the Justice Department’s stance on cannabis. The memo, from August 29, 2013, asserted that, for the most part, the Justice Department would not enforce the cannabis ban in states that had legalized it. Following that spirit, on February 14, 2014 the Treasury Department issued its own guidance through FinCEN on how banks could provide services to the cannabis industry without violating Federal Law.  As long as banks complied with this guidance, they could avoid the threat of federal prosecution and make themselves available to provide banking and financial services to cannabis businesses.

But under the Trump administration, the Justice Department led by former Attorney General Jeff Sessions rescinded the Cole memo, calling marijuana “a dangerous drug” and asserting that “marijuana activity is a serious crime”. The Treasury Department led by Treasury Secretary Steve Mnuchin has yet to revoke the FinCEN guidance which although that guidance referenced the Cole memo multiple times, the guidance still remains a part of the framework by which banks and other financial institutions can make themselves available to do business with the cannabis industry.

Now That We Are In The Biden Administration, Where Does Cannabis Banking Go?

During a confirmation hearing on February 23, 2021 for President Joe Biden’s pick for deputy secretary of the Treasury, Sen. Catherine Cortez Masto (D-NV) asked the nominee, Adewale Adeyemo, whether he feels 2014 FinCEN guidance should be updated to “set expectations for financial institutions that provide services to cannabis-related industries” and what steps he would take to that end.

Mr. Adeyemo replied: “I look forward, if confirmed, to talking to my colleagues at Treasury about this important issue and thinking through what changes may be needed and doing this in a way that’s consistent with the interagency with the president’s guidance.”

Today’s Banking Challenge

Despite more states legalizing cannabis, a tiny fraction of banks and alternative financial institutions are willing to work with cannabis companies.  As of September 30, 2020 FinCEN issued a report stating that there were 677 banks and credit unions that filed reports saying they were working with cannabis clients.  Unfortunately this number is down from 695 in the last fiscal quarter ending in June and 711 for the quarter preceding that.

What Should You Do?

It is best to be proactive and engage an experienced board certified tax attorney-CPA in your area who is highly skilled in the different legal, banking and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other California locations protect you and maximize your net profits.  Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.