While the marijuana industry’s attention has remained focused on
what the new Trump administration means for state-level cannabis legalization
– specifically on whether Attorney General Jeff Sessions, a vehement
anti-marijuana crusader, will instigate a federal crack-down against states
that have legalized marijuana and implemented regulatory models –
other federal agencies have been quietly taking their own steps to quash
the industry, using methods at their departments’ disposal to penalize
and tax business owners in a myriad of ways.
For example, in the first half of 2017 alone, the Securities and Exchange
Commission and the Internal Revenue Service have respectively suspended
or audited numerous cannabis businesses. The results for business owners
and investors have ranged from expensive setbacks to devastating financial
blows. Such actions have sent a forceful message from federal agencies:
even if the DEA and DOJ won’t enforce marijuana laws, other departments
can – and will.
On May 19, the SEC temporarily suspended trading for two marijuana stocks
on the OTC markets. Both of the SEC’s orders cited the companies
“neglecting to provide accurate and up-to-date information”
in press releases that each had recently issued.
One, Eco Science Solutions, Inc. (OTC: ESSI), had issued a press release
on May 5 relating to its announcement that it had signed a letter of intent
to acquire Ga-Du Bank, Inc., with the goal of the bank providing the cannabis
industry with various services. The other company, Holy Grail Company
(OTC: HGRL), was suspended by the SEC for “a lack of company information
made available to the public,” particularly regarding the company’s
controlling interests.
Both companies’ suspensions lasted from May 22 to June 5.
Meanwhile, the IRS has increasingly enforced a federal tax statute, 280-E,
against cannabis businesses. 280-E, enacted by Congress in the 1980’s,
denies standard deductions such as employee payroll, rent, and other expenses
to those who traffic in controlled substances and limits deductions to
“the cost of goods sold.” In other words, cannabis dispensaries
and other businesses can only deduct the amount they paid to purchase
marijuana, which essentially renders operating a cannabis business financially
unsustainable.
Furthermore, once the IRS determines that a business is operating illegally
in controlled substances and attempts to collect the back-owed taxes,
federal tax courts place the burden on the investigated business to prove
the IRS wrong – not on the IRS to prove its claim. If a business
owner is unable to show that the IRS erred in its determination –
which has overwhelmingly been the case thus far – the business must
pony up the tax difference, which can easily amount to tens of thousands
of dollars for each tax year alone.
Suspensions and audits can jeopardize business models, funding, and even
the personal finances of those involved or invested in the cannabis industry.
In addition to these concerns, business owners may also face the risk
of other federal enforcement, such as DEA raids, criminal liability, and
civil asset forfeiture. If the first half of the year is any indicator,
the number of federal agencies willing to enforce federal marijuana laws
may very well be on the rise. Ensuring that you know your rights can not
only help protect your business: it can protect your personal liability
and finances as well.
Charles Feldmann is the Managing Partner of Cantafio Nagel & Song PLLC a Denver
based international cannabis law firm and a leader of the firm’s
cannabis practice. Contact him at Feldmann-Nagel.com for assistance or
guidance in mitigating the ever-growing federal risk to the marijuana industry.