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Removing the Green Tax: Congress Can Bring Cannabis Tax Policy in Line with Cannabis Enforcement Policy



f you give me an opportunity to quote George Harrison, I’m going to do it. In “Taxman,” he wrote:

Should five percent appear too small

Be thankful I don’t take it all

‘Cause I’m the taxman

Yeah, I’m the taxman

I suspect “The Quiet One” would be appalled to know the taxes facing cannabis operators – specifically Internal Revenue Code at 26 USC § 280E. That provision, discussed more fully below, often subjects cannabis operators to effective tax rates far north of 50%, more than virtually any other businesses in the United States. Cannabis companies would be happy to pay George’s 5%.

Federal Obstacles to the Cannabis Industry

There are, of course, a number of federal policy headwinds facing cannabis operators. Three immediately come to mind. The first, naturally, being that cannabis remains a Schedule I substance in the Controlled Substances Act. The second, which flows from the first, is that federal law discourages most financial institutions from banking cannabis businesses. The third is 280E. IRC 280E provides:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Possible Solutions to These Obstacles

So, let’s examine whether the federal government will lessen those headwinds. First, there is a chance that cannabis will be rescheduled or de-scheduled from the Controlled Substances Act. As we wrote late last year, President Biden has ordered Secretary of Health and Human Services Xavier Becerra “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” This was a huge symbolic step, but we have expressed skepticism that it would lead to concrete changes in the short term.

The second could be alleviated almost entirely with passage of the SAFE Banking Act. That legislation, which essentially would allow financial institutions to bank proceeds of state-legal cannabis operations, has passed the House of Representatives on six separate occasions but has not received a vote in the full Senate. Although the blog’s editors are not unanimous on this point, I think SAFE is likely on the shelf for a while if not outright dead. This view is shared by our colleagues at Harris Bricken, who recently opined that the SAFE Banking Act is “dead and gone (for now).” The rationale was that “Dems had two years of control to get the SAFE Banking Act passed and politics basically kept it from going through.”

The third is if Congress amends 280E to exempt state-legal cannabis operations. IRC 280E provides:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

This provision is a killer for cannabis operators. Again from Harris Bricken:

Since cannabis is a Schedule I controlled substance, the IRS has used 280E to disallow cannabis businesses from deducting their ordinary and necessary business expenses. The result is that cannabis companies face much higher federal tax rates than similar companies in other industries. There are differing opinions on the level of tax rates imposed on marijuana companies – from 40% to 70% to as high as 90% – all of which are higher than the standard corporate tax rate paid by most other businesses in the United States.

. . .

The result of 280E is that normal business expenses such as rent, advertising, and employee salaries don’t reduce taxable cannabis income unless they can be allocated to Costs of Goods Sold (COGS). For cannabis growers, COGS typically includes expenses directly related to production of the plants, such as the seeds, electricity, and labor that went into growing and preparing the flowers for sale. For cannabis dispensaries and distributors, COGS is much more restrictive, and generally includes only the amount they paid for the cannabis products they sell plus a few additional allocations.

The 280E Fix

Congress can amend 280E to exempt state-legal cannabis operations. But this puts Congress in an interesting situation. On the one hand, Congress can keep in place a rule that prohibits credits and deductions for those who transact in all Schedule I products. On the other hand, Congress could make an exception for state-legal cannabis operations. While there is certainly some merit to inaction based on the fact that marijuana has not yet been rescheduled or de-scheduled, treating marijuana differently than other Schedule I drugs would be entirely consistent with long-standing federal policy. Specifically, the Treasury Department’s Financial Crimes Enforcement Network has provided guidance allowing for financial institutions to bank cannabis customers, Congress has defunded Department of Justice efforts to prosecute state-legal cannabis businesses, and the Department of Justice has previously issued a (since rescinded)  memorandum discouraging federal prosecutors from prosecuting state-legal cannabis operators. If Congress and the executive branch are willing to make these exceptions for marijuana companies, it does not seem a stretch for the IRS to make exceptions for state-legal cannabis companies.

*        *        *

For years, the focus of cannabis reform advocates in Congress has been the SAFE Banking Act. That still may become law, and it would certainly benefit the industry. But after at least six failed attempts to pass SAFE, maybe tweaking an obscure provision of the Internal Revenue Code is the best chance to give cannabis companies a fighting chance to succeed.

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One-Hit Wonders

New York Cannabis Co. Investor Suit Survives Motion To Dismiss




The District Court for the Western District of New York denied a motion on January 6, 2023, to dismiss claims alleging that a publicly traded company misled investors regarding an investigation by the U.S. Securities and Exchange Commission (SEC). The company, 22nd Century, engineers cannabis plants to regulate their levels of cannabinoids. The court’s denial of the motion to dismiss is an important reminder to companies, especially those in the cannabis space, about the importance of compliance and disclosure.

Noto v. 22nd Century Grp., Inc. is a class action alleging that the company and two former officers misled investors. Plaintiffs claim that the company issued a 10-K filing in 2016 noting that its internal controls regarding financial reporting had not been effective due to “material weaknesses” and, in later filings, that it was undertaking remediation efforts. According to a confidential witness cited in the complaint, the company had been cooperating with an SEC investigation since 2016, which was not terminated until at least 2019. In 2018, an online commentator allegedly posted a series of articles about this scheme, prompting the company’s share price to fall. In response, plaintiffs claim that the company issued statements saying it had no knowledge of any SEC enforcement proceedings and the commentator’s statements were untrue.

The court initially dismissed the claims of the putative class, reasoning that 22nd Century had no duty to disclose the SEC investigation and its officers could not, therefore, be held personally liable for its failure to disclose. But the United States Court of Appeals for the Second Circuit vacated and remanded, holding that 22nd Century’s alleged statements in SEC filings describing “material weaknesses” in its financial reporting created “a duty to tell the whole truth” and “defendants’ false public denial . . . amount[ed] to an admission of the materiality of its nondisclosure.” Noto et al. v. 22nd Century Grp., Inc. et al., 35 F.4th 95, 105-06 (2d Cir. 2022). On remand, the District Court allowed claims that the company had made material misrepresentations to survive, reasoning that the company’s alleged public statements satisfied the standard set by the Court of Appeals. See Noto et al., v. 22nd Century Grp., Inc. et al., 2023 WL 122305, at *5 (W.D.N.Y. Jan. 6, 2023).

Companies in highly regulated industries such as cannabis face complex regulatory landscapes, which can create challenges in compliance. Here, a federal court allowed claims of material misrepresentations to survive based on a company’s alleged repeated false public denials, highlighting the importance of timely and accurate disclosures.

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Cannabis: Goin’ to Carolina in My Mind




We have long suspected that North Carolina may be the next great cannabis market. In describing North Carolina as “the sleeping giant of the South,” we wrote recently:

From Murphy to Manteo, North Carolina is a state that will have a lot to offer the medical marijuana industry at some point in the future. The state has a tremendous agricultural industry; major population centers; a large, dynamic, and growing population; and world-class medical facilities and research universities.

And we’re not alone. We get calls every week from clients asking how they can participate in the imminent cannabis market in North Carolina.

So, what’s the political lay of the land in North Carolina?

As reported by Marijuana Moment, in the 2022 legislative session, medical cannabis cleared the state Senate in a strongly bipartisan vote. But the legislation, titled the North Carolina Compassionate Care Act, stalled due to inaction in the state House.

The Act would set up a limited license, vertical integration regime, under which 10 licenses would be issued to medical cannabis suppliers to cultivate and process cannabis. Those 10 suppliers could then obtain licenses for “medical cannabis centers” – the Act’s term for dispensaries. Only licensed suppliers would be able to obtain these dispensary licenses, and no supplier could hold more than eight dispensing licenses.

The Act also had the following features:

  • The majority owner of each licensee must be a North Carolina resident for at least two years.
  • Each applicant must submit a non-refundable license fee of $50,000, plus $5,000 for each production facility and medical cannabis center the applicant proposes to operate.
  • Patients suffering from a list of qualifying conditions could access cannabis by obtaining a physician-issued certification stating that the potential health benefits of medical cannabis would likely outweigh the risks for the patient, then applying for a registration card through the North Carolina Department of Health and Human Services.
  • Qualifying conditions are cancer, epilepsy, HIV/AIDS, ALS, Crohn’s disease, sickle cell anemia, Parkinson’s disease, PTSD (subject to evidence that an applicant experienced one or more traumatic events), multiple sclerosis, cachexia or wasting syndrome, severe or persistent nausea in a person who is not pregnant that is related to end of life or hospice care, or who is bedridden or homebound because of a condition, terminal illness when the patient’s remaining life expectancy is less than six months, and a condition resulting in the individual receiving hospice care.
  • Doctors would need to prescribe a specific method of delivery and dosages for patients. Options include smoking and vaping, as well as “cannabis-infused” products, which include “a tablet, a capsule, a concentrated liquid or viscous oil, a liquid suspension, a topical preparation, a transdermal preparation, a sublingual preparation, a gelatinous cube, gelatinous rectangular cuboid, lozenge in a cube or rectangular cuboid shape, a resin or wax.”
  • Patients could possess up to one and a half ounces of marijuana, but home cultivation would not be permitted.
  • A Compassionate Use Advisory Board would be established, and it could add new qualifying conditions.
  • A Medical Cannabis Production Commission would be created to ensure that there’s an adequate supply of cannabis for patients, oversee licensing, and generate enough revenue to regulate the program.
  • A North Carolina Cannabis Research Program would “undertake objective, scientific research regarding the administration of cannabis or cannabis-infused products as part of medical treatment.”
  • Limitations on where marijuana can be smoked or vaped, including restrictions on the locations and hours of operation for medical cannabis businesses.

How would the Act impact operators and patients?

The Act’s limited license regime would favor well-funded, experienced operators that can stomach the cost of preparing an application that attempts to stand out from the rest, with the understanding that many applicants wouldn’t receive one of the 10 limited licenses. With only 10 licensees allowed to serve the qualified patients among North Carolina’s large population (ninth largest in the country), each license would be extremely valuable. And that means the application process would be extremely competitive.

However, the Act’s qualifying conditions are more restrictive than many other states with medical cannabis programs, which would lessen the potential demand at the program’s outset. But the scope of qualifying conditions could broaden over time, as the Act authorizes the Compassionate Use Advisory Board to add specific qualifying conditions by majority vote of the Board’s members. In any event, the Act’s passage would provide numerous North Carolina citizens suffering from the qualifying conditions listed in the Act with the opportunity to benefit from medical cannabis.

What are the chances medical cannabis legislation passes in 2023?

As in most states, North Carolinians overwhelmingly support medical cannabis. A recent poll found that 82% of North Carolina voters favor legalizing medical cannabis — including 75% of Republicans, 87% of unaffiliated voters, and 86% of Democrats. Considering that it’s virtually impossible to get 82% of people to agree on anything, these are strong bipartisan support numbers.

The North Carolina State Legislature’s 2023 session started on January 11 and will end on July 28, 2023. We expect the Senate will file another bill that looks much like the Act that passed during the 2022 session. While such a bill is likely to pass in the Senate, its fate is less certain in the House, where Republicans are just one seat shy of a supermajority.

Governor Roy Cooper is optimistic, recently saying he thinks a medical marijuana legalization bill “has an opportunity to pass” in the upcoming legislative session, and reiterating his support for broader decriminalization of cannabis possession, noting racial disparities in enforcement. Cooper’s public support for decriminalization is a relatively recent development. He first openly backed the policy change in October, saying that it’s time to “end the stigma,” while separately announcing steps he’s taken to explore his options for independently granting relief to people with existing convictions.

To bring it back to where we started, we are convinced medical cannabis is coming to North Carolina, and we’re pretty sure it’ll be sooner rather than later. We stand ready to assist when you’re ready, and to paraphrase the great James Taylor:

The signs, it might be omens

Say I’m goin’, goin’

[Cannabis is] gone to Carolina in my mind.

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This Week At The Ninth: Cannabis Law




This week, the Court addresses whether plaintiffs may bring civil RICO claims that allege injury to a business that violates federal law.


The Court holds that plaintiffs do not have statutory standing under the Racketeer Influenced and Corrupt Organizations Act (RICO) to bring claims that allege injury to cannabis-related business or property.

The panel: Judges M. Smith, Nelson, and Drain (E.D. Mich.), with Judge M. Smith writing the opinion.

Key highlight: “This [case] presents us with the following question: do either the statutory purpose of RICO or the congressional intent animating its passage conflict with the California laws recognizing a business and property interest in cannabis? We conclude that they do.”

Background: Plaintiff Francine Shulman grows, markets, and sells cannabis in California. She formed an LLC and a corporation, both of which are also plaintiffs, to operate her business. Defendant Todd Kaplan was Shulman’s former business partner. The relationship went south, and Shulman sued Kaplan and other defendants, alleging that they engaged in fraudulent conduct that injured her business and property. Shulman sought damages under the civil RICO statute, which provides that it is “unlawful for any person through a pattern of racketeering activity . . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.” 18 U.S.C. § 1962(b), (d). The district court dismissed plaintiffs’ RICO claims for lack of standing.

Result: The Ninth Circuit affirmed. Because the district court had not specified whether it had dismissed plaintiffs’ RICO claims for lack of Article III standing-which goes to a court’s jurisdiction to hear a case-or for lack of statutory standing-which goes to the merits of a claim-the panel addressed both issues.

To establish Article III standing, a plaintiff must show that it “suffered an injury in fact that is concrete, particularized, and actual or imminent;” “that the injury was likely caused by the defendants;” and “that the injury would likely be redressed by judicial relief.” TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2203 (2021). The Court held that plaintiffs satisfied this standard. First, plaintiffs alleged injury to their property, which qualifies as an invasion of a legally protected interest and therefore as an injury in fact. Second, plaintiffs clearly pleaded that their injuries were caused by defendants’ conduct. And third, plaintiffs showed their injury was redressable. Defendants challenged redressability on the ground that plaintiffs’ cannabis business was illegal under federal law-meaning that any remedy would constitute an illegal mandate. The Court rejected this argument, explaining that redressability is a separation-of-powers inquiry that assumes the legal merit of a plaintiff’s claim and asks whether a “court has the power to right or to prevent the claimed injury.” Gonzales v. Gorsuch, 688 F.2d 1263, 1267 (9th Cir. 1982). Because money damages is a quintessential remedy for a RICO violation, plaintiffs had shown redressability. That plaintiffs sought “damages for economic harms related to cannabis is not relevant to whether a court could, theoretically, fashion a remedy to redress their injuries.”

The federal illegality of cannabis businesses did, however, mean that plaintiffs could not establish statutory standing. A RICO plaintiff must show, among other things, that “his alleged harm qualifies as injury to his business or property.” Canyon Cnty. v. Syngenta Seeds, Inc., 519 F.3d 969, 972 (9th Cir. 2008). The Court held that the term “business or property” does not encompass cannabis businesses. Although courts “usually look to state law to determine whether a particular interest amounts to property . . . state law does not control where RICO’s statutory purpose or congressional intent in enacting the statute conflicts with the relevant state law.” The Court determined that such a conflict was present here. RICO’s definition of “racketeering activity” encompasses cannabis dealing, suggesting that allowing businesses engaged in that same activity to recover under RICO would be “inconsistent” with the statute’s purpose. Moreover, the Controlled Substances Act-passed the same year as RICO-provides that no property right shall exist in controlled substances or money received in exchange for them. This evidence of statutory and congressional purpose precluded recognizing a business or property interest in cannabis. Otherwise, the Court reasoned, “RICO would serve to protect the same variety of conduct it was intended to combat.”

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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