Bloomberg Tax
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Tax
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Banking Solutions Available Despite Difficulty Tax Code Causes for Cannabis Industry

Sept. 10, 2021, 8:01 AM

Cannabis banking has been a tricky topic to tackle in recent years. Although many financial institutions refuse to do business with the high-risk industry, the truth is that cannabis banking has been allowed since February 2014. That was when the Financial Crimes Enforcement Network, or FinCEN, published their guidance on how credit unions and state-chartered banks could work with the emerging industry.

I can speak with confidence because, in 2020 alone, my firm OSS helped our cannabis clients secure cash pickups and process and deposit their proceeds. In all, the team at OSS assisted in moving over $1.6 billion into nearly a dozen financial institutions in the state of California, legally. Now the company is expanding its reach to 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 family of customers experienced any disruptions of their account services, and every cent was accounted for.

The Current State of 280E and Recent Legal Action

The impact of tax code Section 280E removes a marijuana-related business’s ability to claim tax breaks as normal commercial, medical, or agricultural businesses. Effectively, 280E forbids businesses from deducting business expenses, other than the cost of goods sold, from income if the taxpayer’s trade or business is associated with the trafficking of Schedule I or II substances, as defined by the Controlled Substances Act.

VIDEO: How do states legally get around the federal ban on cannabis, and what unique legal challenges do attorneys and businesses in the marijuana industry face?

The Standing Akimbo LLC v. United States case in the Supreme Court was one of the most notable recent legal actions taken against 280E. Supreme Court Justice Clarence Thomas rendered an opinion that clarified the government’s position. Several weeks after this decision, then acting Solicitor General Elizabeth Prelogar stated clearly in a brief commenting on Speidell v. United States, that lower courts have been correct in ruling that state-legal marijuana businesses can be investigated by the Internal Revenue Service for potential violations of Section 280E.

In terms of the cannabis industry, there are no exceptions when it comes to Section 280E. There have been multiple cases over the last 12 months, even at the Supreme Court level, and in each instance, the Departments of Justice’s and Treasury’s position has been clarified that as long as a business involves a Schedule I substance, nothing will change in the tax laws.

The Path Forward

We have the MORE Act, the SAFE Banking Act, and nearly 47 states working on some form of legalization, with seven new markets opening just within the last nine months. Although the current administration isn’t making cannabis legalization a priority, they have confirmed that they won’t allocate any Department of Justice resources to marijuana enforcement action in a state where it is legal. Unless, of course, it involves anti-money laundering or Bank Secrecy Act (BSA) issues inside the industry.

At the end of the day, the federal government is going to take some action to take cannabis off the Schedule I list and leave it to the states to determine how they set up cannabis licensing, business operations, and banking programs.

Legalization Won’t Be a Magic Wand

We can surmise that some form of federal legalization is likely to happen within months rather than years. However, it’s also safe to assume that despite removing cannabis from the Schedule I list of narcotics and decriminalizing cannabis nationwide, accessibility and acceptance in all regions are still decades away.

One of the greatest concerns from an industry perspective is—and we have seen this across virtually every emerging state-level market—the “green rush mentality.” Effectively individuals or entities just seeing the revenue potential, more times than not, lead to bad business decisions that result in regulatory actions. As the federal stance on cannabis changes, the regulatory and compliance activities for operators will increase. We are very encouraged at this point in time 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 have flexed their authority to legalize cannabis before federal laws change, other states may continue to resist even after they do. Currently, Idaho (House Bill 108, referred to committee), Wyoming (House Bill 209 passed in March), Kansas (medical program passed House), 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 in either their house or senate legislative bodies. It is possible, by the end of 2024, that every state will have enacted some form of medical marijuana legalization.

The political landscape is ever-evolving in that more and more of our country is letting it be known that they are pro-cannabis legalization. After the 2020 pandemic, many cities and counties are changing their opinions on allowing cannabis operations, because they’ve seen the value of the tax revenue from neighboring communities. With the numerous pieces of cannabis legalization and de-funding of enforcement activities or decriminalizing, it is clear that our leaders are trying to address the issues.

280E’s Future

Once the federal government takes an action that would remove marijuana from the Schedule I list, the basis of tax code Section 280E, which has been continually clarified, would essentially go away. The biggest impact would be the definite increase in profitability for licensed cannabis operators. Decisions that CEOs and CFOs face in the industry will become easier as a traditional method of business operations and accounting can be implemented. Many in the industry have related that they believe this type of positive change would also increase the number of operators and sophisticated enterprises that would be willing to enter the cannabis industry in the new and emerging state markets. The continued enforcement of 280E, in conjunction with some of the high tax/fee structures licensed operators are required to pay, make it extremely difficult to run a successful business. We have seen some operators losing over 70% based on what they can’t deduct in taxes and what they must pay in licensing.

If 280E were to go away, this would require the IRS to update its guidance. We have already observed in the SAFE Banking Act that—if the act passes—the Financial Crimes Enforcement Network (FinCEN) will be required to provide updated cannabis banking guidelines. Specifically, the Anti-Money Laundering/Bank Secrecy Act (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 are only going to increase, not decrease.

So, on the one hand, all of these changes are absolutely positive, but they will come with an increased burden of compliance and regulatory transparency for the operators. The illegal market will not go away with these changes. Criminals and illicit organizations will still be diligent in seeking ways around the system. We address these threats daily for our clients and partner financial institutions. It will be key for operators to pay close attention to how the changes in regulations are implemented, and the increased oversight that our industry will face. This is a tremendous growth opportunity for all industry participants, and we welcome the chance to help bring in a new era for the cannabis industry.

Without a doubt, the winds of change are blowing for the cannabis industry, but likely not as quickly as we’d 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 regulations are rolled out correctly. The future is very exciting for the cannabis industry, and we’re absolutely ecstatic to be able to help participate in the growth of the East Coast market.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Ryan R. Hale is the Chief Sales Officer and a Founding Partner for 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 experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.