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IRS Rejects Watchdog Recommendation To Provide Marijuana Business Tax Guidance

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A new Treasury Department internal watchdog report criticizes the Internal Revenue Service (IRS) for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws.

In its review of IRS policy with respect to cannabis businesses, the Treasury Inspector General for Tax Administration (TIGTA) found that IRS is missing millions of dollars in tax assessments in state-legal markets and that taxpayers experience a significant impact due to an federal tax code known as 280E that prevents marijuana companies from making business deductions that are available to other industries.

Part of the solution, TIGTA said, should be for IRS to “develop and publicize guidance specific to the marijuana industry.”

“Such guidance would improve awareness of tax filing requirements for taxpayers in this industry, such as the correct application of” the policy, “which would reduce the burden of tracking inventory for certain small businesses,” the report, which was released on Monday, states.

280E has long been a source of intense hardship and frustration for the industry. First enacted in the 1980s as a way to block cartel kingpins from writing off yachts and fancy cars, it stipulates that businesses are ineligible for certain deductions if their income is derived from an illegal drug that falls under Schedule I or II of the Controlled Substances Act. While they may qualify for state-level deductions, the federal restriction ultimately means that marijuana businesses are subject to a significantly higher taxable income, increasing their effective tax rate up to around 70 percent.

“Guidance from the IRS would be greatly appreciated. For years, the vast majority of state-legal cannabis businesses have done their best to comply with Section 280E, consulting with tax professionals to get the best guidance possible,” Steve Fox, a strategic adviser with the Cannabis Trade Federation (CTF), told Marijuana Moment. “But the lack of guidance and consistency from the agency has made the process challenging.”

TIGTA’s audit considered the impact of this unique situation in three legal cannabis states in fiscal year 2016. About 60 percent of tax returns for cannabis businesses that were reviewed had likely had adjustments under 280E, which means IRS had about $48.5 million in unassessed taxes. That estimate, of course, is a notably smaller figure than the full impact of confusion surrounding 280E, as more than 30 states allow recreational and/or medical marijuana businesses and this report evaluated firms in only three of them.

Additionally for those three states, TIGTA estimated that the tax impact (i.e. costs associated with filing) for taxpayers to comply with 280E was $95 million, “or $475.1 million when forecasted over five years.”

Finally, the agency took a “statistically random sample of 90 marijuana businesses” that filed state tax returns in Washington State in 2016 to “determine whether these taxpayers were reporting all of their income.” Twenty-six percent of those companies likely had adjustments related to “underreported income or nonfiling of tax returns” for federal purposes.

“When projected over the population for Washington, the IRS missed the opportunity to address $3.9 million of potential assessments for Tax Year 2016, or $19.3 million when forecasted over five years,” the audit states.

“Given the transparency problems caused by lack of banking access—a fact which the IG recognizes—we should probably be a little skeptical of claims of widespread non-compliance,” Morgan Fox, media relations director of the National Cannabis Industry Association, told Marijuana Moment. “It is tough to say why the IRS would resist providing clarity, especially since that could theoretically result in more tax revenue in the short term.”

“However, the industry doesn’t need clarity on how to comply with unfair policies as much as it needs them to get fixed,” he added. “Cannabis banking and 280E reform would increase transparency and accountability, and greatly simplify the tax process for cannabis businesses. In short order, it would almost certainly result in more federal tax revenue as companies facing less onerous tax burdens become increasingly able to compete with the illicit market and drive more taxable sales.”

Fox of CTF said that the new report “is an acknowledgement that state-legal cannabis businesses are paying hundreds of millions of dollars in corporate taxes to the federal government every year.”

“While the focus of this report is on whether they are fully complying with the absurd 280E tax penalty, the real focus should be on the fact that they are legitimate tax-paying businesses,” he said. “It is time for Congress to fix 280E so that cannabis businesses are treated like every other business in this country.”

TIGTA made six recommendations to ensure compliance and provide needed clarity to taxpayers in the cannabis industry. IRS pushed back on several, including the agency’s request that it create specific guidance.

Recommendation 1: The IRS Small Business/Self-Employed (SB/SE) Division Commissioner should “develop a comprehensive compliance approach… for this industry and leverage State marijuana business lists to identify noncompliant taxpayers.”

IRS response: IRS said it depends on its available resources. It will continue to use its existing methods to identify noncompliance, and if it determines that additional measures are needed, it will “prioritize them based on resources available.”

Recommendation 2: The commissioner should “direct all examination areas to use Aging Reason Codes to track non-[compliance initiative project] marijuana business examination results.”

IRS response: The agency said it will “provide guidance to examiners to apply the appropriate code(s) to cases to track marijuana examinations.”

Recommendation 3: IRS should “develop guidance specific to the marijuana industry such as a Frequently Asked Questions document” and post it on the agency’s site to “improve awareness of the tax filing requirements for taxpayers in this industry, such as the application of 280E.”

IRS response: The agency said it already has an audit technique guide for cash-intensive businesses that could be useful to cannabis companies. However, it said it would “provide additional information” as needed.

Recommendation 4: TIGTA said the IRS chief counsel should work with the SB/SE commissioner to “develop and distribute, internally and externally, specific guidance on the application of” 280E compliance “for taxpayers that report Schedule I related activities on Federal tax returns.”

IRS response: The IRS chief counsel replied that it disagrees with the recommendation and stressed that it has other priorities it needs to fulfill before committing resources to developing that specific guidance.

Recommendation 5: The commissioner should “leverage publicly available State tax information and expand use of [federal/state] agreements to identify nonfilers and unreported income in the marijuana industry.”

IRS response: The agency said that “depends upon IRS priorities and availability of resources,” though it will review the current status of its agreements and use of publicly available state data.

Recommendation 6: The commissioner should “increase educational outreach towards unbanked taxpayers making cash deposits regarding the unbanked relief policies available.”

IRS response: IRS said it will “expand the penalty relief information currently available” on its website.

Although IRS said it doesn’t plan to issue guidance to the industry per the IG’s recommendation, that doesn’t necessarily mean it doesn’t appreciate the challenges that cannabis businesses and tax regulators face due to conflicting state and federal laws.

“Cash intensive businesses, particularly those that are illegal under federal law, create additional challenges for the IRS and the taxpayer,” IRS said in response to TIGTA’s findings. “The marijuana industry is largely unbanked due to the illegal status of marijuana at the federal level.”

“The taxpayer’s inability to utilize a bank for these businesses creates concerns of public safety, transparency, and accountability. It also hinders our enforcement efforts as it could minimize the types of third-party information documents available (e.g., Form 1099-K),” it continued. “The lack of available banking services creates an additional burden to the taxpayer, subjecting them to failure to deposit penalties. Legislative changes could address the challenges encountered with Internal Revenue Code (IRC) §280E, banking policies, and public safety.”

Though IRS officials didn’t cite specific legislation, it’s a point that TIGTA also picked up on, and the internal watchdog noted that the Secure and Fair Enforcement (SAFE) Banking Act or the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act are examples of bills that could help resolve the conflict and normalize the industry. The House passed the SAFE Banking Act along largely bipartisan lines last year but it has stalled in the Senate.

IRS emphasized that it’s stretched thin due to budget cuts and hiring freezes in recent years, and that accounts for why it said it must be deliberate in how it prioritizes objectives.

Treasury Secretary Steve Mnuchin has on several occasions recognized issues related to the lack of access to financial services among marijuana businesses. For example, he’s said, IRS has had to build “cash rooms” to store tax payments from these companies because so many are forced to conduct business exclusively in hard currency.

That said, Mnuchin stressed that it’s not a problem that can be solved administratively, and he’s agued that Congress should take up the issue legislatively.

Congresswoman Wants Recreational Marijuana Stores Open To Serve Veterans Amid Coronavirus Outbreak

Marijuana Moment is made possible with support from readers. If you rely on our cannabis advocacy journalism to stay informed, please consider a monthly Patreon pledge.

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Former GOP House Speaker John Boehner Says He’s Open To Using Marijuana

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Former Republican House Speaker John Boehner, who joined the marijuana industry in a consulting capacity after leaving office, says he’s not yet a cannabis consumer himself—but he’s open to changing that.

In a new behind-the-scenes book that he released on Tuesday and in an interview with CBS, Boehner briefly discussed his own recreational drug preferences. He told the news station that “I drink red wine” but “if somebody wants to smoke a joint or eat a gummy, that’s really none of my business.”

The former congressional leader isn’t a marijuana consumer, however, despite joining the board of the major cannabis company Acreage Holdings in 2018. That move drew sharp criticism from reform advocates who quickly pointed out that Boehner declined to push for any sort of policy change while in power but is now profiting off the industry.

CBS News reporter John Dickerson asked Boehner if he did any “first-hand research” to inform his shift in thinking about the medical potential of cannabis.

“No, I’m not a cannabis user,” he said.

“But you’re not ruling it out for yourself?” Dickerson asked.

“Hey, tomorrow is tomorrow,” Boehner joked. “Who knows?”

Watch Boehner discuss marijuana policy, around 7:50 into the video below: 

The former speaker more seriously expressed openness to smoking cannabis in the new book, “On The House: A Washington Memoir.”

In a chapter entitled “Smoke-Filled Rooms,” Boehner first discusses his well-known cigarette habit and then writes about how he ended up finding himself “in a very different sector of the smoking community when I joined the board of Acreage Holdings, a cannabis company.”

“But now, some people don’t believe me when I tell them I’ve never smoked a joint,” he said. “But I haven’t. I’m not ruling it out though.”

The former speaker’s entrance into the marijuana industry hasn’t been without controversy. Advocates have complained about his inaction on the issue while in office and opponents of legalization have accused him of being an opportunist who represents a profit-minded side of the market.

In 2019, social equity-focused cannabis advocates protested a keynote speech Boehner delivered at the festival South by Southwest.

The Equity First Alliance, a group that promotes racial and social justice in the cannabis industry, said that Boehner’s appearances at the event was a reflection of an ongoing trend where mostly white men are profiting off a market while people of color continue to disproportionately face criminalization for marijuana offenses.

On the flip side, Fox News personality Tucker Carlson said last year that “John Boehner is like a marijuana lobbyist now” and he takes “a paycheck getting your kids to smoke more weed.” The controversial host called the former speaker “disgusting” for his work in the cannabis space.

Illinois Gets More Tax Revenue From Marijuana Than Alcohol, State Says

Photo courtesy of Gage Skidmore.

Marijuana Moment is made possible with support from readers. If you rely on our cannabis advocacy journalism to stay informed, please consider a monthly Patreon pledge.
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Sixth Minnesota House Committee Approves Marijuana Legalization Bill On Its Path To The Floor

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A bill to legalize marijuana in Minnesota is going through a thorough vetting process, with a sixth House committee on Wednesday giving the reform proposal a green light following a hearing.

House Majority Leader Ryan Winkler (D), Speaker Melissa Hortman (D) and other lawmakers filed the measure in February. It would allow adults 21 and older to purchase and possess up to 1.5 ounces of cannabis and cultivate up to eight plants, four of which could be mature.

Days after a separate panel approved the legislation with amendments, the House Judiciary Finance and Civil Law Committee passed it in a 9-7 vote.

“The purpose of House File 600 is to eliminate the harm that cannabis has in our society,” Winkler said of the bill at the hearing. “The primary harm that cannabis poses in Minnesota is the prohibition and criminal enforcement of cannabis.”

“The goal of House File 600 is to shift in a legal marketplace that is policed and over-policed disproportionately and instead to create a policy of repair, an opportunity for those most adversely affected by the war on drugs,” he said.

The House Environment and Natural Resources Finance and Policy Committee was the last body to approve the bill, on Monday, and members there adopted a number of changes to the proposal. For example, it now stipulates that members of a cannabis advisory council established under the bill could not serve as lobbyists while on the panel and for two years after they end their service.

Before that hearing, the House Agriculture Finance and Policy Committee, the Workforce and Business Development Finance and Policy Committee, the Labor, Industry, Veterans and Military Affairs Finance and Policy Committee and the Commerce Finance and Policy Committee each advanced the measure.

Its next stop is the State Government Finance and Elections Committee.

Winkler recently said that he expects the legislation to go through any remaining panels by the end of April, with a floor vote anticipated in May.


Marijuana Moment is already tracking more than 900 cannabis, psychedelics and drug policy bills in state legislatures and Congress this year. Patreon supporters pledging at least $25/month get access to our interactive maps, charts and hearing calendar so they don’t miss any developments.

Learn more about our marijuana bill tracker and become a supporter on Patreon to get access.

Still, even if the legislation does make it all the way through the House, it’s expected to face a significant challenge in the Republican-controlled Senate, where lawmakers have signaled that they’re more interested in revising the state’s existing medical cannabis program than enacting legalization of adult use.

After the New York legislature approved a recreational cannabis legalization bill—which the governor promptly signed into law—Winkler said that Minnesota is “falling behind a national movement towards progress.”

“MN has some of the worst criminal justice disparities in the country, and legalizing cannabis & expunging convictions is a first step towards fixing that,” he tweeted.

The majority leader’s bill as introduced was identical to a proposal he filed last year, with some minor technical changes. Winkler, who led a statewide listening to gather public input ahead of the measure’s introduction, called it the “best legalization bill in the country” at the time. It did not advance in that session, however.

Under the legislation, social equity would be prioritized, in part by ensuring diverse licensing and preventing the market from being monopolized by corporate players. Prior marijuana records would also be automatically expunged.

On-site consumption and cannabis delivery services would be permitted under the bill. And unlike in many legal states, local municipalities would be banned from prohibiting marijuana businesses from operating in their areas.

Retail cannabis sales would be taxed at 10 percent. Part of that revenue would fund a grant program designed to promote economic development and community stability.

The bill calls for the establishment of a seven-person Cannabis Management Board, which would be responsible for regulating the market and issuing cannabis business licenses. It was amended in committee month to add members to that board who have a social justice background.

People living in low-income neighborhoods and military veterans who lost honorable status due to a cannabis-related offense would be considered social equity applicants eligible for priority licensing.

Cannabis retails sales would launch on December 31, 2022.

Gov. Tim Walz (D) is also in favor of ending marijuana prohibition, and in January he called on lawmakers to pursue the reform as a means to boost the economy and promote racial justice. He did not include a request to legalize through his budget proposal, however.

Walz did say in 2019 that he was directing state agencies to prepare to implement reform in anticipation of legalization passing.

Winkler, meanwhile, said in December that if Senate Republicans don’t go along with the policy change legislatively, he said he hopes they will at least let voters decide on cannabis as a 2022 ballot measure.

Heading into the 2020 election, Democrats believed they had a shot of taking control of the Senate, but that didn’t happen.

The result appears to be partly due to the fact that candidates from marijuana-focused parties in the state earned a sizable share of votes that may have otherwise gone to Democrats, perhaps inadvertently hurting the chances of reform passing.

In December, the Minnesota House Select Committee On Racial Justice adopted a report that broadly details race-based disparities in criminal enforcement and recommends a series of policy changes, including marijuana decriminalization and expungements.

Alabama Medical Marijuana Bill Moves Closer To Floor Vote With House Committee Action

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Alabama Medical Marijuana Bill Moves Closer To Floor Vote With House Committee Action

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An Alabama House committee on Wednesday amended a medical marijuana legalization bill that already passed the Senate. Members also took public testimony in advance of an expected Thursday vote to send the revised legislation to the House floor.

This hearing of the House Health Committee comes one week after a separate panel in the body amended and cleared the bill.

Sponsored by Sen. Tim Melson (R), the legislation would allow people with qualifying conditions to access cannabis for therapeutic purposes. The full Senate approved the bill last month.

“I just want to take [cannabis] to the patients that need it. I want to see people get relief,” the senator said at the meeting. He also made the case that allowing legal access can mitigate opioid overdose deaths.

Melson is the same lawmaker who sponsored similar legislation that was approved by the full Senate last year but which later died without any House votes amid the coronavirus pandemic.

This latest proposal would establish an Alabama Medical Cannabis Commission to implement regulations and oversee licensing.

To qualify for the program, patients would have to be diagnosed with one of about 20 conditions, including anxiety, sleep disorders, post-traumatic stress disorder and intractable pain. Regulators would not be able to independently add additional conditions, leaving that decision up to lawmakers.

The House Judiciary Committee approved 10 amendments to the legislation during last week’s hearing. For example, members agreed to scrap provisions providing reciprocity for out-of-state patients and reducing the percentage of marijuana tax revenue that would go to cannabis research from 30 to 15 percent.

Those amendments were integrated into a new substitute version of the bill adopted by the Health panel, with additional revisions such as removing anxiety and adding depression and Parkinson’s disease as qualifying conditions for medical cannabis. The committee voted to accept the substitute version for consideration before going into testimony.

Time was evenly divided between supporters and opponents. By and large, the conversation revolved around personal anecdotes about the medical benefits and risks of marijuana.

More amendments were added following the testimony. One change would add an annual registration fee for physicians who recommend cannabis. Another would give the state attorney general’s office access to a patient registry database.


Marijuana Moment is already tracking more than 900 cannabis, psychedelics and drug policy bills in state legislatures and Congress this year. Patreon supporters pledging at least $25/month get access to our interactive maps, charts and hearing calendar so they don’t miss any developments.

Learn more about our marijuana bill tracker and become a supporter on Patreon to get access.

Members further approved an amendment to remove fibromyalgia and menopause from the list of qualifying conditions and another to expand the number of institutions that are eligible for grants to research marijuana. A revision to develop a uniform flavor for all cannabis products was also accepted.

Additionally, an amendment was approved to require dispensaries to have 24-hour security cameras operating in their facilities. These changes are all being added to a new substitute that the panel will take up and vote on Thursday.

Because the proposal has been amended, it would go back to the Senate for final consideration if it’s passed in the House before being sent to the governor’s desk.

Advocates say they’re encouraged that medical cannabis reform is advancing in Alabama, but they’ve raised concerns about a number of aspects of the bill.

One problematic provision, advocates say, is that patients with chronic or intractable pain could only be recommended medical marijuana in cases where “conventional therapeutic intervention and opiate therapy is contraindicated or has proved ineffective.”

The bill also prohibits raw cannabis, smoking, vaping and candy or baked good products. Patients would instead be allowed to purchase capsules, lozenges, oils, suppositories and topical patches.

Patients would be allowed to purchase and possess up to “70 daily dosages of medical cannabis.” Under an amendment approved on the Senate floor, the maximum daily dose was reduced from 75 to 50 milligrams. However, the amendment’s sponsor said it could be increased to 75 milligrams in some circumstances.

The revision also calls for a label on marijuana products to indicate that cannabis can cause drowsiness.

It also calls for a nine percent gross proceeds tax on medical marijuana sales.

Patients, caregivers and and medical cannabis businesses would receive legal protections under the proposal, preventing them from being penalized for activities authorized by the state.

For physicians to be able to recommend cannabis to patients, they would have to complete a four-hour continuing education course and pass an exam. The course would cost upwards of $500 and doctors would also be required to take refresher classes every two years.

Under the bill, regulators would be tasked with developing restrictions on advertising and setting quality control standards. Seed-to-sale tracking and laboratory testing would be mandated.

Other changes approved in the Senate would add language to stipulate that gelatinous cannabis products cannot be sugar coated and insert provisions promoting good manufacturing practices and tamper-evident packaging.

Applications for cannabis business licenses would have to be accepted starting September 1, 2022 and then proceeded within 60 days.

The commission would be required to approve at least four cultivators, up to four processors, up to four dispensaries for the first year of implementation (more could be approved after that point depending on demand) and as many as five vertically integrated operators.

This bill’s reintroduction has been greatly anticipated by advocates. The Senate approved a separate medical cannabis bill in 2019, but the House later severely compromised it. The legislation as enacted would not have legalized patient access; rather, it set up a study commission to explore the issue and make recommendations.

The commission came back with its report in December 2019, with members recommending that medical marijuana be legalized.

There could be additional pressure on the legislature to enact legalization given that voters in neighboring Mississippi approved a medical cannabis reform initiative during the November election.

Separately, the Alabama Senate Judiciary Committee approved a bill last month to decriminalize possession of up to two ounces of cannabis, making it punishable by a $250 fine without the threat of jail time.

Majority Of Connecticut Residents Back Marijuana Legalization And Expungements, Poll Finds As Reform Bills Advance

Photo courtesy of Philip Steffan.

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