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How Marijuana Businesses Can Win Tax Fairness Under Trump Plan

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Following the repeated failure of Congressional Republican plans to pass healthcare legislation, all eyes on Capitol Hill have turned to a tax reform agenda that President Trump and GOP lawmakers are now pushing.

Some marijuana policy observers believe the overhaul provides an opportunity for cannabis businesses to finally break free from a 1980s provision — known as 280E — that forces them to pay a much higher tax rate than companies in other industries.

WHAT IS 280E?

Enacted in 1982,  Section 280E of the Internal Revenue Code states:

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.

While it was initially intended to stop drug cartel leaders from writing off yachts and fancy cars, today its plain language means that that growers, processors and sellers of marijuana — which is still a Schedule I substance under federal law — can’t take business expense deductions that are available to operators in other sectors.

And it doesn’t matter if they are strictly in compliance with state or local policies. Federal law is federal law.

As a result, cannabis businesses often pay an effective tax rate upwards of 65-75 percent, compared with a normal rate of around 15-30 percent.

HOW 280E REFORM COULD HAPPEN THIS YEAR

Over the past several Congresses, standalone bills to amend the provision so that it doesn’t apply to state-legal businesses have earned increasing numbers of cosponsors, but haven’t received hearings or votes.

Now that a broader tax reform package is on the agenda with the support of Congressional leadership and the White House, advocates and industry operators are pushing to attach a 280E fix to the moving vehicle.

Restricted Analysis For Marijuana Moment Patreon Supporters Only

Learn which five GOP House members and three Democrats cannabis businesses need to target with advocacy efforts to win a key committee vote on 280E reform language. 

Plus: See which three GOP senators reformers could pick up key votes from.

(Analysis contains 1,200+ words and an embedded spreadsheet tracking lawmakers’ past marijuana votes).

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UPDATE: Neither the House nor the Senate voted on a 280E amendment as part of consideration of tax reform legislation.

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With support from the targeted House and Senate members named above, cannabis businesses would succeed in attaching 280E reform language to the tax plan at the committee level before the legislation reaches the floor.

THE LOBBYING PUSH

Marijuana business advocacy groups like the National Cannabis Industry Association and the New Federalism Fund are mounting lobbying campaigns to build support for 280E reform on Capitol Hill.

But they aren’t alone. Powerful conservative anti-tax crusader Grover Norquist is also working on the issue. In an interview earlier this year, he said he has “brought it up with leadership” but hadn’t yet gotten solid indications that House Speaker Paul Ryan or other members are on board with the plan.

But that could change if a significant number of GOP members make it clear that fixing 280E is important enough to them that they’d make their support for the overall bill contingent on it.

“Marijuana could get into that [tax reform] package if some of the libertarian Republicans made that a condition of voting for the whole package,” Norquist said.

Marijuana businesses that could stand to benefit from a 280E fix and want to bolster the campaign would likely do well to focus resources conducting grasstops and grassroots outreach in the districts of those House Ways and Means Committee and Senate Finance Committee members singled out in the section above.

COMPLICATIONS

In addition to the tough legislative math in House and Senate committees detailed previously, 280E reform advocates may encounter a bigger problem: The deficit.

While rescinding the provision’s application to state-legal cannabis providers is a matter of basic fairness, it would also, on its face, amount to a large tax cut from current rates for those businesses. And that could be a roadblock to success, as Republicans are already struggling to find ways to pay for broader tax cuts they are proposing in the plan.

While most legalization advocates would gladly agree to a federal sales tax on legal marijuana to make up for the 280E fix, the kinds of broader changes needed to existing drug laws seem far beyond the scope of the tax package.

An even simpler pitfall for 280E reform is that even if it is successfully attached to the broader tax legislation, there is no guarantee that the bill will be enacted. Healthcare reform efforts that GOP leaders put a lot of stake and effort into passing have fallen short on several occasions in recent months. Budget proposals necessary for clearing a legislative path for the tax bill to advance have only very narrowly been approved by the House and Senate, meaning that leadership has very few votes to spare when negotiating the finer points of the legislation.

COMPROMISE APPROACHES

If reformers aren’t able to earn enough support for a full 280E carveout for cannabis businesses, there are two potential compromise approaches they may consider.

One would be to push for a reform that only protects medical cannabis, and not recreational marijuana, businesses. While that would certainly leave a significant portion of the industry behind, it may be more palatable to certain lawmakers. GOP Sen. Susan Collins or Maine, for example, said during a 2014 committee debate on a marijuana banking amendment that she would have supported the measure if it only protected medical cannabis businesses. But, because of its broader reach, she voted against it.

Similar concerns led to the complete removal of banking language between last year’s version of the comprehensive Senate medical cannabis bill known as the CARERS Act and this year’s introduction of new legislation, according to marijuana lobbyists.

Another potential compromise, floated by former Joint Congressional Committee on Taxation staffer Pat Oglesby would enact a 280E fix but maintain the non-deductibility of marijuana businesses’ advertising expenses. NORML has signed off on the plan.

TIMING

This will all move fairly quickly. The House bill will be introduced this week, and the Ways and Means Committee is set to begin marking up the legislation on Monday. The Senate will move sometime after that. Lawmakers have said they plan to have a bill on President Trump’s desk by the new year.

OUTLOOK

The chances of attaching a 280E fix to the broader tax reform plan are non-zero, but broader political factors and whip count math mean that it will be far from an easy task.

A serious, targeted and well-funded lobbying effort aimed at four Republican House members, three Democratic House members and three Republican senators is needed to ensure any chance of success.

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.

Tom Angell is the editor of Marijuana Moment. A 15-year veteran in the cannabis law reform movement, he covers the policy and politics of marijuana. Separately, he founded the nonprofit Marijuana Majority. Previously he reported for Marijuana.com and MassRoots, and handled media relations and campaigns for Law Enforcement Against Prohibition and Students for Sensible Drug Policy. (Organization citations are for identification only and do not constitute an endorsement or partnership.)

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American Bankers Association Demands Answers About Hemp And CBD

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The American Bankers Association (ABA) recently sent a letter imploring top federal financial regulators to provide explicit guidance on how the banking sector can lawfully service hemp businesses.

The letter—sent to the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the Treasury’s Comptroller of the Currency and Financial Crimes Enforcement Network (FinCEN) last week—describes ongoing uncertainty among financial institutions since hemp and its derivatives were federally legalized under the 2018 Farm Bill.

ABA Executive Vice President Virginia O’Neill wrote that “banks remain uncertain about the degree to which they can serve hemp-related companies, and the compliance and reporting requirements that such relationships require.”

“Although other federal regulators have issued helpful clarifications regarding hemp production, banks are subject to a complex set of legal requirements and regulatory expectations and require specific guidance to ensure they are acting appropriately,” she wrote. “Furthermore, the unique nature of hemp as a low-THC strain of marijuana, which remains a Schedule I substance under the [Controlled Substances Act], means banks must have a reliable mechanism to distinguish legal hemp from federally illegal marijuana with extreme confidence.”

There have been other attempts to elicit clarification from federal regulators in the months since hemp was legalized.

Rep. Andy Barr (R-KY) asked FDIC Chair Jelena McWilliams about the issue in May, telling her that he has constituents who’ve told him their access to financial services has “actually deteriorated since we descheduled industrial hemp” and requesting further guidance.

In a similar letter to federal regulators this month, Sen. Michael Bennet (D-CO) also complained about the continued lack of access to banking services for hemp producers. The 2020 Democratic presidential candidate said he hopes the agencies “can work expeditiously and in a coordinated manner to issue guidance describing how financial institutions can offer financial products and services to hemp formers and processors.”

But so far, the closest the regulators have come to assuaging the concerns of banks is a statement from a top Federal Reserve official who said during a Senate hearing earlier this month that “hemp is not an illegal crop.”

ABA said it appreciated the comment but that “a formalized statement from the agencies is necessary to enable banking services for the hemp industry on a meaningful scale.” O’Neill requested confirmation of five specific areas of interest.

“Specifically, we ask that the agencies confirm that:

“—hemp is no longer a controlled substance, effective as of the enactment of the 2018 Farm Bill, and therefore proceeds derived from hemp businesses are not unlawful, and handling those proceeds does not constitute money laundering;

“—banks do not need to file suspicious activity reports solely because a transaction relates to hemp or hemp-derived products;

“—banks can rely on a license issued by a state department of agriculture or the U.S. Department of Agriculture to confirm that a hemp producer is operating in compliance with state and federal law, and that their product qualifies as ‘hemp’ as defined in the 2018 Farm Bill;

“—in accordance with United States Department of Agriculture (USDA) guidance, banks can serve hemp cultivators and processors operating subject to state pilot programs under the 2014 Farm Bill, effective immediately; and

“—as soon as USDA finalizes its regulations related to industrial hemp, banks will be able to serve hemp cultivators and processors operating under state approved plans or direct federal licenses.”

Further, ABA asked for specific guidance as it relates to hemp-derived CBD and information about “the appropriate procedures for sourcing those products back to legal cultivators and processors.”

While the association recognized that “this is an evolving area of law and regulation” and that questions remained among federal regulators about the implementation of hemp legalization, it said that “there are steps that can be taken now to help clarify legal and regulatory expectations for banks in the current environment.”

The letter focused exclusively on hemp and its derivatives, but there’s a simultaneous conversation going on nationally about how financial institutions can work with state-legal marijuana businesses. Bipartisan legislation that would protect banks that service such businesses has the support of all 50 individual state bankers associations.

Read the full ABA letter on hemp banking below:

Regulators Hemp 062119 by on Scribd

Senator Urges FDA To Speed Up CBD Regulations

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Congressional Committee Asks JUUL For Documents On Marijuana Partnerships

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Is the e-cigarette company JUUL planning on expanding its stake in the marijuana industry?

That’s one question the chair of a congressional subcommittee asked the company in a letter concerning JUUL’s role in the “youth e-cigarette epidemic” earlier this month.

Lawmakers have frequently criticized JUUL for making products—specifically flavored e-cigarette cartridges—that allegedly appeal to young people at a time when rates of cigarette use are steadily declining. But while JUUL was developed by the cannabis vaporizer company PAX, it hasn’t announced plans to further partner with marijuana companies.

Rep. Raja Krishnamoorthi (D-IL), who chairs the House Subcommittee on Economic and Consumer Policy, apparently sees the possibility on the horizon, though.

In a letter sent to JUUL on June 7, the congressman said his panel was investigating youth e-cigarette usage and, specifically, how the company’s marketing tactics might be exacerbating the issue. He requested documents on everything from clinical trials on how JUUL devices divert people away from traditional cigarettes to communications on the company’s rationale for the nicotine concentration of JUUL pods.

Tucked within the extensive request is a question about potential marijuana partnerships. Krishnamoorthi asked for:

“All documents, including memoranda and communications, referring or relating to proposals, plans, and/or intended partnerships or collaborations between JUUL and any cannabis-related companies, including but not limited to Cronos Group.”

It’s not clear where the Cronos-specific mention comes from, but the company has perviously caught the interest of the tobacco industry. The maker of Marlboro cigarettes, Altria Group, invested almost $2 billion in the Canada-based cannabis company in December. Two weeks later, Altria invested $13 billion in JUUL.

Marijuana Moment reached out to JUUL, Cronos and Krishnamoorthi’s office for comment, but representatives did not respond by the time of publication.

If a partnership does emerge, it would likely be met with some controversy, as opponents and proponents of marijuana reform alike have long expressed concern that the tobacco industry would take over the cannabis market and commercialize it in a way that mirrors how it peddled cigarettes.

Of course, given that tobacco use is declining and tobacco companies generally have the infrastructure that would make a pivot to cannabis relatively simple, such a partnership would not be especially surprising.

Senate Majority Leader Mitch McConnell (R-KY) has made the case several times that tobacco farmers in his state could leverage the federal legalization of industrial hemp and its derivatives by growing the crop to offset profit losses from declining tobacco sales.

Read Rep. Krishnamoorthi’s full letter to JUUL below:

2019-06-07.Krishnamoorthi t… by on Scribd

Americans Want CBD Available Over-The-Counter, Poll Finds

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Google Announces Ban On Marijuana Apps In Android Play Store

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Apps that help connect people with marijuana products are not welcome anymore in the Google Play store, the company announced in a policy update on Wednesday. That includes apps that facilitate cannabis transactions in states where it’s legal.

The updated policy section states that Google Play doesn’t “allow apps that facilitate the sale of marijuana or marijuana products, regardless of legality.” Previously the page didn’t include any specific mention of cannabis.

Via Google.

The revised guidelines go on to list descriptions of “common violations.” Apps can’t allow users “to order marijuana through an in-app shopping cart feature,” help users “in arranging delivery or pick up of marijuana” or facilitate the “sale of products containing THC.”

A google spokesperson explained the change in an email to Marijuana Moment, adding that affected companies can take advantage of a simple workaround.

“These apps simply need to move the shopping cart flow outside of the app itself to be compliant with this new policy,” the spokesperson said. “We’ve been in contact with many of the developers and are working with them to answer any technical questions and help them implement the changes without customer disruption.”

The spokesperson also said that the company recognizes the popularity of cannabis-related apps and hopes they will remain in the Play Store under the amended rules. Google is working directly with developers of affected apps, the spokesperson said.

Another new section of the policies stipulates that apps “that facilitate the sale of tobacco (including e-cigarettes)” are prohibited. Apps that help consumers purchase alcohol are apparently allowed, but not those that “encourage the irresponsible use of alcohol or tobacco.”

The update was first reported by Android Police, which also noted that Apple has previously banned marijuana-related apps such as the social networking platform MassRoots. But Apple lifted that ban in 2015 and has since taken a relatively hands-off approach to the issue.

Some of the best-known cannabis apps—Weedmaps and Eaze—are still available for download on Google Play as of the time of publication. But insiders believe that their essential functions (i.e. the ordering services) will have to be deactivated. Weedmaps alone has been installed more than one million times to date, and more than 50,000 users have downloaded Eaze.

Android Police reported that Google will be working with affected app developers to resolve any compliance issues over the next month.

In a blog post on Wednesday, Google said that it was generally making a series of policy changes to ensure that its app store serves as “a positive, safe environment for children and families.” As TechCrunch pointed out, this comes about five months after Google Play was the subject of an FTC complaint, which alleged that the company wasn’t doing enough to vet apps that appear in the kids section.

The tech industry has had a strained relationship with marijuana businesses, even as a growing number of states have decided to legalize and regulate the sale of cannabis.

Facebook, which recently showed off its artificial intelligence technology that’s capable of identifying images of marijuana, continues to prohibit the commercial advertising of cannabis products, regardless of the legality of the business under state law.

Noncommercial cannabis news sites such as Marijuana Moment and state regulatory bodies like the Massachusetts Cannabis Control Commission have also been caught up in the anti-marijuana policy despite the fact that they do not promote or sell cannabis products. In some cases, it appears these organizations have been hidden from appearing in search results—a practice known as “shadowbanning.”

The online shopping site eBay also gave cannabis consumers some bad news this week, clarifying that CBD products will continue to be banned globally regardless of individual country laws on the compound.

“Eaze connects adults only to licensed, regulated cannabis retailers,” Elizabeth Ashford, senior director of corporate communications for Eaze, said in an email. “Google’s decision is a disappointing development that only helps the illegal market thrive, but we are confident that Google, Apple and Facebook will eventually do the right thing and allow legal cannabis companies to do business on their platforms. We regret any inconvenience this may cause for customers and patients.”

“Prohibition is over,” she added. “Voters across the country have legalized cannabis.”

Marijuana Moment also reached out to Weedmaps for comment but the company has not yet provided a statement reacting to the Google policy change.

On the flip side, at least one major tech company is testing the regulatory waters after hemp and its derivatives were legalized under the 2018 Farm Bill. The payment processing service Square announced last week that has launched a pilot program designed to give businesses that sell hemp-derived CBD products access to credit card processing services as an alternative to traditional financial institutions that remain wary of working with the industry.

Marijuana might be banned from Google’s app market, but just last year it seemed the company’s executives were pretty bullish about loosening cannabis laws. Google co-founder Sergey Brin joked about supplying employees with joints at a post-election meeting in September.

“I was asking if we could serve joints outside on the patio, but apparently these things take a little while to take effect,” Brin said, referring to the implementation of California’s cannabis legalization measure. “It was a huge, huge disappointment. I’ve been bemoaning that all week, I’ll be honest with you.”

Disclosure: Weedmaps and Eaze are Marijuana Moment advertisers/sponsors.

This story was updated to include comment from Google and Eaze.

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Photo courtesy of Rick Proctor.

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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