As discussed on this blog, cannabis remains unlawful under federal law. This has had a significant impact on the establishment of legitimate cannabis industry, even in those states where the drug’s use and sale is legal under state law. One major stumbling block effected by federal law is that money derived from cannabis sales typically cannot be deposited into FDIC-insured bank accounts. Indeed, under federal law, FDIC-insured banks cannot participate in illegal transactions—which, as far as the federal government is concerned, include cannabis sales—and a bank’s acceptance for deposit of moneys derived from cannabis can be deemed a form of money laundering in which bank officials are implicated. As a result, many banks will not accept a deposit from cannabis businesses.

The consequences of federal cannabis policy extend beyond banking and radiate throughout the business world. In particular, federal law has been faulted for causing, among other things, underpayment of taxes, robberies of cannabis businesses (which are all but forced to deal in cash), bribery of local officials for favorable treatment with respect to firearms licensing (for weapons necessary to secure cash proceeds), inefficiencies (e.g., in the need for cannabis firms to hire extra employees to handle cash; theft and embezzlement by employees), the practical need to pay business expenses (including accounts payable and employee salaries) in cash, and the potential of asset forfeiture of cannabis-derived money at the federal level. Thankfully for cannabis businesses, though, there are now a number of credit unions and regional banks in “legal” states that are potentially willing take on cannabis-affiliated accounts. These institutions, however, have complicated compliance procedures, and have expressed reluctance to increase the number of cannabis accounts they are handling in light of recent expressions of antagonism from the federal government, including, in particular, the internal revenue service.

On the taxation front, cannabis businesses must comply with federal, state, and local tax laws. With respect to taxation and accounting, however, compliance with Section 280E of the Internal Revenue Code is yet another hurdle for such businesses. This section apparently disallows, on the ground of illegal activity under federal law, cannabis businesses typical business deductions, such that federal taxes must be paid on gross profit as opposed to net profit (generally subject to expense deduction only for cost of goods sold). The risks are serious, because the failure to properly report taxes may constitute tax evasion. As previously mentioned, however, because of banking issues, cannabis businesses are practically required to pay their taxes in cash, potentially making it difficult to accurately account for all receipts.  

Possible Reforms and Potential Uncertainty

One potential development with respect to federal cannabis policy is the STATES Act, which has been introduced in both houses of Congress. If enacted, the STATES Act would essentially provide a safe harbor from federal drug laws for persons involved with cannabis at the state level who participate in the industry in good faith, pursuant to a given state’s law. Indeed, this Act would potentially codify a hands-off approach with respect to criminal penalties and other liabilities in connection with the drug, removing the hindrances that have interfered with dimensions of the industry such as securing proper banking facilities. As of mid-2019, the legislation in the House of Representatives has been referred to the Subcommittee on Crime, Terrorism, and Homeland Security, and the Senate legislation is in the Committee on the Judiciary, but it still appears to be far from enactment.

The Trump administration’s reversal of Obama-era policy has led to further uncertainty relating to the enforcement of federal law and increased calls for federal legislation to improve the cannabis environment and marketplace in those states where the drug has been legalized. In particular, former Attorney General Jeff Sessions’s decision to rescind the Cole Memorandum, which had articulated a hands-off approach to Department of Justice enforcement of federal law as to cannabis in those states that had legalized the drug, has raised the possibility that individual United States Attorneys may begin selectively enforcing federal cannabis law in states where the drug is legal.