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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.

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Trump Treasury Secretary Wants Marijuana Money In Banks

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The Trump administration’s top fiscal official appeared to voice support for letting marijuana businesses store their profits in banks.

“I assure you that we don’t want bags of cash,” Treasury Secretary Steven Mnuchin testified on Tuesday during an appearance before the House Financial Services Committee. “We want to make sure that we can collect our necessary taxes and other things.”

Mnuchin, in a series of responses to questions from lawmakers who raised concerns about the public safety implications of preventing cannabis businesses from accessing banks and forcing them to operate on an all-cash basis, said the Treasury Department is currently considering how to deal with the issue.

In 2014, under the Obama administration, the department’s Financial Crimes Enforcement Network (FinCEN) issued guidance that has allowed banks to open accounts for marijuana growers, processors and retailers without running afoul of federal regulators.

But last month, U.S. Attorney General Jeff Sessions rescinded a broader policy from the former administration that had generally cleared the way for states to implement their own cannabis laws without Justice Department interference. Sessions’ move has led to fears that the Trump administration may tear up the banking memo as well.

Last week, a top Treasury official wrote in a letter to lawmakers that the department is “consulting with law enforcement” about whether to maintain the guidance for depository institutions. Last month, a Mnuchin deputy testified at a Senate hearing that the banking document remains in effect while the administration weighs whether to revoke it.

At the Tuesday hearing, Mnuchin confirmed that the department is “reviewing the existing guidance.” But he clarified that he doesn’t want to rescind it without having an alternate policy in place to address public safety concerns.

“The intent is not to take it down without a replacement that can deal with the current situation,” he said.

Rep. Brad Sherman (D-CA) told Mnuchin that simply deleting the banking memo “would really make it better for armed robbers in my community, because there’d be huge amounts of cash at the local marijuana dispensary.”

Reps. Denny Heck (D-WA) and Ed Perlmutter (D-CO) also raised questions about the issue.

“We specifically haven’t taken it down,” Mnuchin said of the 2014 memo. “We are looking at what Justice has done. And again, as I said, we’re sensitive to the issue of dealing with the public safety issue and also making sure that the IRS and others have ways of collecting taxes without taking in cash.”

In response to comments about pending congressional legislation to address cannabis businesses’ access to financial services, Mnuchin pledged to consult with White House Office of Management and Budget Director Mick Mulvaney, who as a member of Congress previously sponsored a similar bill.

Perlmutter’s legislation on the issue currently has 78 co-sponsors, and a companion Senate version has 14 senators signed on. Bipartisan groups of House and Senate lawmakers have also sent letters to the administration urging that the banking guidance be maintained.

During the hearing, Mnuchin also appeared to confirm a Reuters report that FinCEN was not consulted in advance about Sessions’s decision to change federal marijuana enforcement policy.

“I did not participate in the attorney general’s decision and what he did, but we are consulting with them now,” he said. “We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”

The FinCEN policy, which requires financial institutions to regularly file reports on their cannabis customers, was intended to provide clarity and assurances to banks, but many have remained reluctant to work with marijuana businesses because of overarching federal prohibition.

Nonetheless, documents released by FinCEN late last year showed that the number of banks willing to work with the marijuana industry has steadily grown over time, though those figures were collected prior to Sessions’s move to revoke the broader Justice Department guidance.

Prior to his being confirmed by the Senate last year , Mnuchin said in response to written questions from a senator that marijuana businesses’ banking and tax issues are “very important.”

This piece was first published by Forbes.

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Feds May Remove Marijuana Banking Protections, Treasury Department Says

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The Trump administration is currently considering removing Obama-era guidance that has allowed banks to open accounts for marijuana businesses without fear of running afoul of federal regulators.

Last month, U.S. Attorney General Jeff Sessions rescinded a broader policy from the former administration that has generally cleared the way for states to implement their own cannabis laws without Justice Department interference.

Now, the federal government may move to make it harder for cannabis industry operators who comply with state laws to store their profits with financial institutions.

“We are reviewing the [banking] guidance in light of the Attorney General’s announcement and are consulting with law enforcement,” Drew Maloney, the U.S. Treasury Department’s assistant secretary for legislative affairs, wrote in a letter to members of Congress on Wednesday.

The letter is a response to a bipartisan group of 31 House members that had written the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) last month asking the agency to continue the cannabis banking guidance. Fifteen senators separately sent a similar letter.

The FinCEN document, issued in 2014, laid out a process for how banks can open accounts for marijuana businesses and avoid triggering federal enforcement actions.

“FinCEN’s stated priorities have allowed such businesses to conduct commerce more safely through financial institutions which reduces the use of all cash, improves public safety, and reduces fraud,” the House lawmakers wrote in their letter. “Leaving your guidance unchanged will continue to encourage small companies to make investments by freeing up access to capital. It will also further provide for well regulation and oversight through suspicious activity reports. Rescinding this guidance would inject uncertainty in the financial markets.”

Last month, Sigal Mandelker, the Treasury Department’s deputy secretary, testified at a Senate hearing that the banking memo is still in effect while the Trump administration weighs whether to revoke it.

Similarly, Maloney wrote on Wednesday that guidance “remains in place” for now, pledging to alert lawmakers to any changes.

The FinCEN policy, which requires financial institutions to regularly file reports on their cannabis customers, was intended to provide clarity and assurances to banks, but many have remained reluctant to work with marijuana businesses because of overarching federal prohibition laws.

Nonetheless, documents released by FinCEN late last year showed that the number of banks willing to work with the marijuana industry has steadily grown over time, though those figures were collected prior to Sessions’s move to revoke the broader Justice Department guidance.

This piece was first published by Forbes.

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More Banks Welcome Marijuana Businesses, Federal Data Shows

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A steadily growing number of banks are willing to open accounts for marijuana businesses, according to new federal data.

Even as a string of conflicting signals from the Trump administration surrounds the debate about legalization with uncertainty, the number of depository institutions that are actively banking the cannabis industry has increased roughly 18% since the beginning of 2017.

Last January, 340 financial services providers were banking marijuana businesses. That number rose to 400 by the end of September, according to a report released late last month by the Financial Crimes Enforcement Network (FinCEN).

The rise comes despite continued confusion about the federal government’s approach to marijuana as U.S. Attorney General Jeff Sessions — a longtime legalization opponent — has made clear he is considering potential changes to the former administration’s mostly hands-off cannabis enforcement policies.

In 2014, the Obama administration’s Treasury and Justice Departments issued guidance to banks about how to serve the marijuana industry without running afoul of federal regulators. The policy, which requires financial institutions to regularly file reports on their cannabis customers, was intended to provide clarity and assurances to banks. But many have remained reluctant to work with marijuana businesses because of overarching federal prohibition laws.

Under a separate document — the so-called “Cole Memo,” named after the then-deputy attorney general who authored it in 2013 — the federal government set out certain criteria that, if followed, would allow states to implement their own laws mostly without intervention. Those areas concern priorities like preventing youth use, impaired driving and interstate trafficking.

While Sessions testified before Congress in November that the Obama-era guidance is still in effect, he later said that the Department of Justice is actively reviewing potential changes to the policy. He also held a closed-door meeting with anti-legalization activists last month.

Those developments are just the latest in a series of anti-cannabis signals sent by the attorney general over the course of the past year. Meanwhile, a number of anecdotal reports have emerged in recent months about individual cannabis business bank accounts being closed.

Umpqua Bank, for example, reportedly shut down the account of Greenbridge Corporate Counsel this fall after the law firm refused to turn over information about its cannabis clients without their permission.

But the new federal data shows that overall there has been a steady increase in the number of banks and credit unions willing to open accounts for marijuana-related businesses, even as Sessions has hinted that a cannabis crackdown could be in the works.

The new FinCEN report is part of a set of periodic releases in response to frequently requested data under the Freedom of Information Act.

Because of banks’ reluctance to work with marijuana businesses, many growers, processors and retailers operate on a cash-only basis, which can make them targets for robberies.

A growing bipartisan group of members of Congress has sought a legislative solution to the problem. House and Senate bills to provide permanent clarity to the banking industry about working with marijuana businesses have earned increasing cosponsor numbers, but haven’t been scheduled for hearings or votes.

In 2014, the House voted 231 to 192 in favor of an amendment to prevent federal authorities from punishing banks for servicing the legal marijuana industry. But the language was not included in the final version of annual appropriations legislation that year and was not enacted into law. Congressional Republican leaders have since prevented similar measures from even being considered for attachment to subsequent spending bills.

In November, the chair of the House Financial Services Committee used a procedural ruling to block a vote on a cannabis banking amendment offered to a bill on stress testing for financial institutions.

Meanwhile, a congressional budget rider that prevents the Justice Department from interfering with state medical cannabis laws is set to expire on January 19, barring an extension through a still-unresolved Fiscal Year 2018 spending package.

Legalization advocates believe that several more states will enact laws allowing recreational or medical use in 2018.

This piece was first published by Forbes.

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