Banking Solutions Available Despite Difficulty Tax Code Causes for Cannabis Industry

Cannabis banking has been a difficult topic in the past few 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. At that time, the Financial Crimes Enforcement Network (FinCEN) published its guidelines on how credit unions and government charter banks could work with the emerging industry.

I can speak with confidence because in 2020 alone, my company OSS helped our cannabis customers secure cash pickups and process and deposit their earnings. In total, the OSS team helped legally transfer over $ 1.6 billion to nearly a dozen financial institutions in the state of California. Now the company is expanding its reach to the east coast market in the hopes of bringing proven banking and security solutions to the newly legalized states.

Banking is legal as long as you stick to the rules. None of our protected customers or customer families experienced an interruption in their account services and every penny was billed.

The current status of 280E and the latest legal action

The effect of the Section 280E Tax Code removes the ability for a marijuana-related business to claim tax breaks as a normal commercial, medical, or agricultural business. Effectively, 280E prohibits companies from deducting business expenses, other than the cost of goods sold, from income when the taxpayer’s trading or business is related to trading in List I or List II substances for the purposes of the Controlled Substances Act.

The Standing Akimbo LLC v. United States case in the Supreme Court was one of the most notable lawsuits brought against 280E in recent times. Supreme Court Justice Clarence Thomas issued a statement specifying the government’s position. A few weeks after that ruling, then-acting Attorney General Elizabeth Prelogar made it clear in a brief comment on Speidell v. United States that the lower courts correctly ruled that state marijuana companies can be investigated by the Internal Revenue Service for potential violations of Section 280E .

There are no exceptions to Section 280E with respect to the cannabis industry. There have been several cases over the past 12 months, even at the Supreme Court level, and in each case the position of the Justice Department and the Treasury Department has been clarified that it does not affect the Tax Act.

The way forward

We have the MORE Act, the SAFE Banking Act, and nearly 47 states working on some form of legalization, with seven new markets opened in the past nine months. While the current government is not making cannabis legalization a priority, it has confirmed that it will not allocate Justice Department resources to measures to enforce marijuana in a state where it is legal. Unless it concerns questions of the fight against money laundering or the Banking Secrecy Act (BSA) within the industry.

Ultimately, the federal government will take some action to remove cannabis from List I, leaving it up to states to determine how to set up cannabis licenses, business processes, and banking programs.

Legalization won’t be a magic wand

We can surmise that some form of state legalization will come in months rather than years. However, it can also be assumed that despite the deletion of cannabis from the list of narcotics in List I and the nationwide decriminalization of cannabis, accessibility and acceptance in all regions are still decades away.

One of the biggest concerns from the point of view of the industry is – and we have seen this in practically every emerging market at the federal level – the “green rush mentality”. In fact, in most cases, individuals or companies who only see the revenue potential lead to bad business decisions that lead to regulatory action. As the federal government’s stance on cannabis changes, regulatory and compliance activities for operators will increase. At this point, we are very encouraged that the positive changes also provide the industry with an opportunity to reinforce and guide the compliance framework as we move forward.

Just as states changed their powers to legalize cannabis before the federal law was changed, other states can continue to resist afterward. Currently Idaho (House Bill 108, referred to committee), Wyoming (House Bill 209 passed 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 law that was introduced either in their home or in the Senate legislatures. It is possible that by the end of 2024 every state will have some form of medical marijuana legalization in place.

The political landscape is constantly evolving as more of our country announce that they are in favor of legalizing cannabis. After the 2020 pandemic, many cities and counties are changing their minds about licensing cannabis operations because they saw the value of neighboring communities’ tax revenues. With so many moves to legalize cannabis and de-finance enforcement or decriminalization, it is clear that our leaders are trying to address the issues.

The future of 280E

Once the federal government takes action that would remove marijuana from List I, the basis of Section 280E of the Tax Code, which has been constantly clarified, would be essentially removed. The biggest impact would be the definitive increase in profitability for licensed cannabis operators. Decisions faced by CEOs and CFOs in the industry become easier as a traditional method of doing business and accounting can be implemented. Many in the industry have reported that they believe that this type of positive change would also increase the number of operators and discerning companies willing to enter the cannabis industry in the new and emerging government markets. The continued enforcement of 280E coupled with some of the high tax / fee structures licensed operators have to pay make it extremely difficult to run a successful business. We saw that some operators lost over 70% based on what taxes they couldn’t deduct and what they had to pay for licenses.

If 280E were to go away, the IRS would need to update its guidelines. We already stated in the SAFE Banking Act that the Financial Crimes Enforcement Network (FinCEN) – if the law is passed – will be required to provide updated cannabis banking guidelines. In particular, the guidelines of the Anti-Money Laundering / Banking Secrecy Act (AML / BSA) for financial institutions are being updated. The net result is more banks can step into the area, but again, everyone expects the level of compliance, auditing and transparency to only increase, not decrease.

All these changes are on the one hand absolutely positive, but will result in increased compliance costs and regulatory transparency for the operator. The illegal market will not go away with these changes. Criminal and illegal organizations will continue to search diligently for ways to circumvent the system. We address these threats on a daily basis for our customers and partner financial institutions. It will be vital for operators to pay close attention to how the changes in regulations are implemented and the increased oversight our industry will face. This is a tremendous growth opportunity for all industry participants, and we welcome the opportunity to help usher in a new era for the cannabis industry.

The winds of change are undoubtedly blowing for the cannabis industry, but probably not as fast as we’d hoped. Our industry needs to ensure that we are working as transparently as possible at the community, state and our peers to have collaborative discussions to ensure that regulations are being implemented correctly. The future is very exciting for the cannabis industry and we are absolutely thrilled to be part of the growth of the east coast market.

This column does not necessarily represent the opinion of the Bureau of National Affairs Inc. or its owners.

Information about the author

Ryan R. Hale is Chief Sales Officer and founding partner for Operational Security Solutions (OSS). Mr. Hale leads all sales activities, 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 developments and current issues in the tax field. To make a contribution, please contact us at TaxInsights@bloombergindustry.com.