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.
DEA Seeks Contractor Capable Of Burning Four Tons of Marijuana Per Day
The Drug Enforcement Administration (DEA) recently reached out for help burning “at least” 1,000 pounds of marijuana per hour for eight hours straight.
Every year, DEA seizes millions of marijuana plants and literal tons of raw cannabis, which eventually end up being destroyed. The successful contractor in Arizona would be responsible for burning marijuana and other controlled substances seized as evidence in drug cases “to a point where there are no detectable levels, as measured by standard analytical methods, of byproduct from the destruction process.”
“DEA shall inspect the incinerator to ensure no drug residue remains,” the agency said.
DEA posted the work description earlier this month in what’s called a “sources sought notice,” an initial step before a formal request for proposals is sent.
“This is not a request for proposals and does not obligate the Government to award a contract,” the post says. “The Drug Enforcement Administration (DEA) is conducting market research, and is encouraging all businesses, including small businesses, to respond to this notice.”
An accompanying statement of work gives a behind-the-scenes look at the DEA’s process of destroying seized drugs. Typical boxes weigh between 40 and 60 pounds, for example, but can weigh up to 200 pounds. Contraband might come in on “semi-trucks, tractor trailers, cargo vans, fork lifts, etc.,” the work description says.
“The drugs are usually tightly compressed ‘bricks’ or ‘bales,’” it continues, and are packaged in all sorts of materials: cardboard, wrapping paper, plastic wrap, aluminum foil, packing tape, “duct tape and derivatives,” plastic evidence bags, “grease/oil” and others. Contractors will be expected to burn that stuff, too.
To avoid potential contact highs, there must be ”proper ventilation” and “no smoke buildup” will be allowed. Other mandates include closed-circuit cameras that capture the entire process, which DEA reserves the right to access, as well as background checks and regular drug tests of all personnel.
Armed DEA agents and contractors will be present during scheduled burns.
The work is also very hush-hush, so whoever gets the job shouldn’t expect to regale friends with stories of the latest large-scale federal weed burning sesh.
“The contractor and its personnel shall hold all information obtained under the DEA contract in the strictest confidence,” the work description says. “All information obtained shall be used only for performing this contract and shall not be divulged nor made known in any manner except as necessary to perform this contract.”
The work would start January 1 of next year and the contract would expire in 2026 unless terminated sooner. The deadline to send information for would-be contractors was Friday.
Photo courtesy of Chris Wallis // Side Pocket Images
Harris Will Give Biden ‘Honest’ Input On Legalizing Marijuana And Other Issues As Part Of ‘Deal’
Democratic vice presidential nominee Kamala Harris says she has a “deal” with Joe Biden to candidly share her perspective on a range of progressive policies he currently opposes, including legalizing marijuana. Separately, she also recently discussed cannabis reform in a private meeting with rapper Killer Mike.
During an interview on 60 Minutes that aired on Sunday, the senator was pressed on marijuana and numerous other issues where she and Biden disagree. In response, while she didn’t specifically commit to proactively advocating for comprehensive cannabis reform, she pledged in general that she would always share her views with the would-be president if the pair are elected next week.
“What I will do—and I promise you this and this is what Joe wants me to do, this was part of our deal—I will always share with him my lived experience as it relates to any issue that we confront,” she said after the interviewer listed cannabis legalization among a handful of issues on which she and Biden depart. “I promised Joe that I will give him that perspective and always be honest with him.”
If elected, would Kamala Harris advocate for Medicare for All, a plan Joe Biden doesn’t support?
— 60 Minutes (@60Minutes) October 26, 2020
Asked whether that perspective will be “socialist” and “progressive,” Harris laughed and said “no.”
“It is the perspective of a woman who grew up a black child in America, who was also a prosecutor, who also has a mother who arrived here at the age of 19 from India, who also, you know, likes hip hop,” she said.
The senator’s taste in music also came up during her own 2020 presidential bid, when she said in an interview that she listened to Snoop Dogg and Tupac while smoking marijuana during college despite graduating before those artists released their debut albums.
Music culture has played a key role in this election cycle, and one of the strongest voices for criminal justice reform in the industry is Killer Mike, who worked as a surrogate for Sen. Bernie Sanders (I-VT) when he was running for the Democratic presidential nomination. The artist said he met with Harris on Friday and the two discussed cannabis business opportunities for communities of color.
Just had a meeting with Sen. Harris.
My points *Dems Need to be heavy on the door Knox’N, HR40 tweek it better and have Biden Sign, Fed Trades Programs for worker class Americans so u can build, Black men exit prison and entrance to marijuana biz as a priority for biz and jobs
— Killer Mike (@KillerMike) October 23, 2020
As she’s done repeatedly since joining Biden’s campaign, Harris also reiterated at a rally in Pontiac, Michigan on Sunday that the administration would pursue marijuana decriminalization and expunging prior cannabis convictions.
She made similar comments during a campaign event in Atlanta last week, stating that the “war on drugs was, by every measure, a failure, and black men were hit the hardest.” That said, while the senator has come to embrace broad cannabis reform, she’s faced criticism over her past opposition to legalization and role in prosecuting people for marijuana offenses as a California prosecutor.
In another interview released last week, Harris said she and Biden “have a commitment to decriminalizing marijuana and expunging the records of people who have been convicted of marijuana offenses.”
“When you look at the awful war on drugs and the disproportionate impact it had on black men and creating then criminal records that have deprived people of access to jobs and housing and basic benefits,” she said.
There’s been some frustration among cannabis reform advocates that Harris has scaled back her reform push since joining the Democratic ticket as Biden’s running mate. During her own run for the presidential nomination, she called for comprehensive marijuana legalization but has in recent weeks focused her comments on the more modest reforms of decriminalization and expungement.
Harris, who is the lead Senate sponsor of a bill to federally deschedule marijuana, said last month that a Biden administration would not be “half-steppin’” cannabis reform or pursuing “incrementalism,” but that’s exactly how advocates would define simple decriminalization.
In any case, the senator has repeatedly discussed cannabis decriminalization on the trail. She similarly said during a vice presidential debate earlier this month that she and Biden “will decriminalize marijuana and we will expunge the records of those who have been convicted of marijuana.”
In addition to those policies, Biden backs modestly rescheduling the drug under federal law, letting states set their own policies and legalizing medical cannabis.
Photo element courtesy of California Attorney General’s Office.
GOP Tennessee Senator Calls For Medical Marijuana Legalization In New Campaign Ad
A Tennessee senator touted his support for legalizing medical marijuana in a campaign ad released on Friday.
In the 30-second spot, which has notably high production value for this kind of local race, state Sen. Steve Dickerson (R) talks about both the therapeutic benefits of cannabis and the consequences of broader marijuana criminalization.
“As your state senator, I’ve led the fight to legalize medical marijuana so our veterans and sickest Tennesseans can deal with chronic pain,” he said. “But this same life-saving plant has led to mass incarceration, with nonviolent marijuana possession resulting in lengthy prison sentences.”
It’s past time for Tennessee to legalize medical cannabis and give our sickest residents a smart, safe treatment to help with chronic pain. Legalization and securing criminal justice reform have been my top priorities, and I won’t stop fighting until we’ve changed the law. pic.twitter.com/28eFUy3loZ
— Steve Dickerson (@DickersonforS20) October 23, 2020
“I think that’s wrong. That’s why I’ve been pushing for criminal justice reform,” the senator added.
Dickerson, who sponsored a medical cannabis legalization bill that cleared a Senate committee in March, said in a Q&A published earlier this month that the policy change would be among his top three legislative priorities if he’s reelected.
His Democratic opponent, former Oak Hill Mayor Heidi Campbell, is in favor of “fully legalizing marijuana,” with her campaign site stating that cannabis crimes “disproportionately impact people of color and it’s time to end marijuana prohibition.”
But while Dickerson has earned a reputation as a moderate Republican given his positions on issues like cannabis reform, he’s faced backlash after declining to denounce an independent ad taken out on his behalf that some, including the LGBTQ rights organization Tennessee Equality Project (TEP), called racist.
The ad, which was paid for by Lt. Gov. Randy McNally’s (R) political action committee MCPAC, hits Campbell over her support for a nonprofit organization that is designed to keep young people out of prison, and it frames the group as “radical” and “extremist.” TEP rescinded their endorsement of Dickerson over his refusal to condemn the ad.
In the Tennessee legislature, marijuana reform has yet to pass—but there’s growing recognition that voters are in favor of the policy change. For example, former House Speaker Glen Casada (R) released the results of a constituent survey last year that showed 73 percent of those in his district back medical cannabis legalization.
Another former GOP House speaker, Beth Harwell, highlighted her support for the reform proposal during her unsuccessful bid for governor in 2018, and she referenced President Trump’s stated support for medical marijuana on the campaign trail.
In other Tennessee drug policy politics, a lawmaker in June blocked a resolution to honor murdered teen Ashanti Posey because she was allegedly involved in a low-level cannabis sale the day she was killed.
Photo courtesy of Philip Steffan.