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3 Federal Loopholes and Hypocrisies That Create Problems for the Cannabis Industry

January 28, 2015

Cannabis legalization is spreading across the United States, but it remains on a state level as the federal government continues to both look the other way but refuse to reschedule or outright legalize the drug. This inaction has created a series of loopholes and hypocrisies that have created a number of problems for the cannabis industry. Here are three glaring examples:

1. Where Do the Seeds Come From?

Since January 1, 2015, llinois universities have been granted the right to grow hemp for research purposes with a license from the Illinois Department of Agriculture. As the schools gear up for hemp production, however, one loophole in particular has been highlighted: obtaining seeds to grow the hemp they intend to study.

As we all know, it is federally illegal to transport hemp or cannabis in any form across state lines, and it’s also illegal to send them through the mail. Kentucky even sued the federal government last year after a shipment of hemp seeds intended for legal research purposes was seized by the Drug Enforcement AgencyYet, those cannabis seeds must come from somewhere. And there is currently no stipulation in the law that indicates where the seeds may be procured or acquired, and no obvious legal alternatives.

The federal government has been largely silent on these issues, playing the cannabis game with a mostly laissez-faire attitude (or “hands-off,” for those of you who don’t speak French) but clearly taking action when they so choose.

2. Why Won’t Banks Work With Cannabis Businesses?

Last January, the federal government announced that legal cannabis businesses can now use the U.S. banking system. However, despite the feds’ “blessing,” most banks are unwilling to take on cannabusiness clients. In fact, the two largest American banks, Bank of America Corp. and J.P. Morgan Chase & Co., still refuse to work with cannabis companies due to the drug’s current Schedule I federal classification and illegality. Should the federal government be surprised that banks don’t trust their word until they can back up their assurance by reclassifying or outright legalizing cannabis?

3. Why Are Cannabis Business Being Penalized for Paying Their Taxes?

Dispensaries are also required to pay extremely high state and federal taxes, yet they are unable to process their payroll in a standardized fashion. They can’t generate pay stubs for employees as they are unable to open a business banking account for deposits, resulting in a lack of transparency for even the most basic accounting systems. On top of this, after being forced to run a completely cash-only business, dispensaries and recreational shops are then penalized for paying their taxes in cash.

If the federal government wants to financially benefit from the rapidly growing cannabis industry and its exponentially increasing sales, maybe they should take the recent recommendation from a respected medical organization and downgrade marijuana’s current classification.

  • Shoreline1

    Government intelligence factor: ZERO

  • Sitkajo

    Ironically a cash only business model is the easiest to scam by mobsters or others with a tax avoiding urge.

  • taylor_serenil

    Cash-only makes scamming the IRS easier by a long shot (for self-employed *people* working jobs that don’t necessarily have 1099-MISC contract employee forms or client invoices backing up at least some of the income/loss claimed it’s generally a red flag).

    Being forced to operate on a cash-only basis increases the risk to dispensary employees as well (any self-respecting thief knows a successful dispensary will have cash and product available). At least at one point NetSpend wouldn’t even allow dispensary employees to load up a NetSpend card, so I assume that’s probably still the case.

    It also leads to situations like Harborside’s, where they were attempting to take business expenses that were most likely legitimate (payroll, rent, utilities, etc.) and being denied because for IRS purposes they’re classified as “illegal drug trafficking” which means they’re not entitled to take even standard properly documented business expenses. (Audits are basically a fact of life for a dispensary that’s been around long enough, and *because* a lot of bills get paid in cash establishing the paper trail necessary to beat one or at least minimize tax liability can be difficult at best).

    Harborside (and presumably pretty much every other legally operating dispensary) usually end up having to send their tax bill as a giant roll of cash, which means dispensary employees had to count it before sending it and the IRS office receiving it had to count it as well, so a lot of time was basically wasted on both sides of that transaction plus again, security risk both to the dispensary sending the cash payment and to the IRS office receiving it. (Article details some of the headaches and includes that dispensaries are classified as “illegal drug trafficking” businesses, but not Harborside’s original “we’re a state-legal business we should get to take standard documented expenses out of our gross income the same way any other state-legal business does” IRS case.)