Though about half of the states and the District of Columbia have legalized or decriminalized the use of marijuana for either medicinal or recreational use, marijuana remains illegal under federal law. Under the federal Controlled Substances Act, marijuana is a Schedule I drug, which means it is deemed to have a high potential for abuse with no accepted medical use.
Under the U.S. Constitution, federal law overrides state law when the two conflict. This means that its is still a federal crime to cultivate, manufacture, distribute, and possess any form of marijuana, regardless of any state law to the contrary. Or as our disclaimer (to the right) states:
Please be mindful that possessing, using, distributing and selling marijuana are all federal crimes and that this blog is not intended to give you any legal advice, much less lead you to believe that marijuana is legal under federal law. Please also note that even though marijuana is illegal under federal law, you will need to pay federal taxes just as though you are a legal entity. This is true even if you are a state law not-for-profit entity.
The federal versus state law conflict creates many business and financial issues for marijuana businesses. Even state-law-compliant marijuana business owners face the threat of arrest and prosecution by the federal government. And, with federal mandatory minimum sentences, some marijuana business owners face stiff penalties, including jail time and forfeiture of real and personal property, should the federal government take an interest in their activities.
On August 29, 2013, then U.S. Deputy Attorney General James M. Cole issued an enforcement policy memo to all U.S. attorneys detailing the priorities of the Department of Justice when enforcing federal drug laws in states that legalized or decriminalized marijuana. The Cole Memo indicates that the DOJ will continue to focus on the following eight enforcement priorities in marijuana-friendly states:
- Preventing distribution of marijuana to minors
- Preventing cannabis revenues from going to criminal enterprises, gangs, and cartels
- Preventing diversion of marijuana from states where it is legal to other states where it is not
- Preventing state-authorized activity from being a cover for illegal activity, including trafficking of other illegal drugs
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana
- Preventing drugged driving and exacerbation of other adverse public health consequences associated with marijuana use
- Preventing the growing of marijuana on public lands
- Preventing marijuana possession or use on federal property.
Reduced to its essence, the Cole Memo emphasizes the need for robust state regulation of marijuana. The memorandum “rests on its expectation that state and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.” In states with strict marijuana laws and ample regulation, one may reasonably expect that the federal government will stand down when it comes to going after law-abiding actors.
Federal prohibition coupled with the Bank Secrecy Act means that banks can be found to have aided in a federal crime or to have illegally laundered money by doing business with a marijuana entity. Though a February 2014 Department of Treasury Memorandum has led to the federal government slightly opening the door for banks to accommodate marijuana businesses, federal prohibition and the consequences of violating the Controlled Substances Act make most banks unwilling to issue bank accounts to marijuana businesses or to provide financing to landlords and other businesses in the marijuana industry.
Asset forfeiture not only applies to marijuana businesses; under federal law, it also applies to their landlords. The federal government has a long history of civil asset forfeiture, seizing properties used for cultivating, manufacturing, or distributing marijuana. The threat of asset forfeiture has made many landlords averse to renting their commercial properties to marijuana businesses.
Like landlords, cannabis investors can also be held criminally liable for financially contributing to marijuana businesses. They can be criminally prosecuted for giving a financial boost that enables an illegal entity to continue its illegal activity. The knowing receipt of profit from a marijuana business can also create criminal liability for an investor. The result has been that most institutional and many individual investors are not willing to contribute funds to marijuana businesses, which leaves those businesses in danger of undercapitalization.
Federal taxes also create significant issues for marijuana businesses. Pursuant to Internal Revenue Code 280(e), because marijuana businesses are illegal entities under federal law, they may not take traditional business deductions. Instead, marijuana businesses may only deduct their costs of goods sold. The Internal Revenue Service aggressively audits marijuana businesses to ensure that those businesses are deducting only their costs of goods sold and nothing else.
Federal law controls bankruptcy and this means that marijuana businesses may not file for bankruptcy in the federal courts. A recent Colorado bankruptcy case demonstrates that the federal courts are unwilling to oversee the bankruptcy of a state-licensed marijuana business or to allow the trustee to take into its possession for liquidation what amounts to federal contraband — the business’s marijuana and all monies derived from the sale of that marijuana. The inability to file for federal court bankruptcy also put investors and creditors on edge.
The states that have legalized and heavily regulated marijuana have sought to ensure that only responsible business people participate in those programs. Despite the hard work of those states, the federal government reigns supreme. And so long as marijuana remains a Schedule I drug, marijuana businesses will continue to experience difficulties stemming from conflict with federal laws. So long as marijuana remains federally illegal, true security will not be possible for anyone in the cannabis industry.
What are your thoughts on all of this? Please comment below.