Marijuana policy reform has been a steady baseline in the cacophony of U.S. politics over the past few years. This November, as voters rotated Republicans into a controlling share of the Senate, they also ended marijuana prohibition in Alaska, Oregon, and Washington D.C., the latest victories in the crusade to legalize pot. Including this win, four states as well as D.C. have legalized recreational marijuana and 23 states as well as D.C. have recognized legitimate medical uses for cannabis.
State-level pro-marijuana (or anti-prohibitionist, however you want to look at it) initiatives have been successful for a couple of reasons, most of which help inform each other. First, and probably foremost, a majority of Americans favor legalization. According to Gallup, 58% of Americans think that recreational marijuana should be legalized. This is the first time the “yeas” have had the majority since Gallup began tracking the issue in 1969, when just 12% of Americans supported legalization. If you believe in popular sovereignty, majority support alone is enough to tip the scales.
But in a massive bureaucracy like the U.S. the will of the people doesn’t always make it from Main Street up to K Street. A lot can get lost in translation, every government suffers some amount of institutional ineptitude, corruption, and general dysfunction. Case in point, cannabis is still a Schedule I drug in the eyes of the federal government, a status that puts it on par with drugs like heroin, acid, and meth. This severe classification makes it difficult for researchers to study the drug and often prohibits the chronically ill from using marijuana as a medicine. The attempt to enforce marijuana laws is enormously expensive, an often results in misguided police and judicial action against recreational users.
All this adds up to an idea that more and more Americans are getting behind: marijuana prohibition is indefensible; the social and economic costs are simply too high and the logic of regulated legalization is too attractive.
“We didn’t write the law, we just enforce it!”
But governments move slower than the people they represent, and the budding gray-white marijuana market has been forced to cope with this lag. States have been working to decriminalize marijuana since the 1970s, with serious medical marijuana initiatives beginning in the 1990s. These initiatives, of course, were in violation of federal law, and in 2005 the U.S. Supreme Court upheld the right of the federal government to shut down cannabusinesses.
Then, in 2013, the DoJ issued a memorandum that paved the way for the current quasi-legal marijuana industry. Although highlighting that “marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively enforce this statute”, the DoJ did strike a deal with the states. As long as they “establish strict regulatory schemes that protect the eight federal interests identified in the Department’s guidance”, then the federal government will defer “its right to challenge their legalization laws at this time.” Note that the DoJ leaves the door open for future action, and that it is only updating guidance, not setting policy.
The DoJ’s eight interests can be found in the memorandum, but they are nothing new. The DoJ points out that it was Congress that determined that marijuana is a “dangerous drug” and passed the Controlled Substances Act; the DoJ is simply “committed to enforcement of the CSA consistent with” that determination. In other words, we didn’t make the law, we just enforce it. The DoJ is going to focus its energy on going after serious criminals like drug cartels instead of harmless pot smokers like people with back pain.
The result has been what some consider de-facto legalization in states that decide to violate the federal ban. In a 2014 article (Banks, Marijuana, and Federalism), Julie Anderson Hill, an associate professor of law at the University of Alabama School of Law, noted that “many are willing to declare that, at least for practical purposes, the marijuana federalism battle has been won by the states.”
Why banks still don’t want to touch cannabusinesses
While the DoJ’s updated guidance is a step forward, it by no means establishes a cogent regulatory framework for cannabusinesses. Hill points out that the government still has substantial indirect enforcement power over business in general, and specifically banks. Hill notes that “It is well documented that marijuana-related entities in states where marijuana is legal have difficulty obtaining banking services,” and “When the marijuana industry asks federal and state financial institutions why they will not provide banking services, the institutions point to federal law.”
Federal law prevents banks or credit unions from doing business with or processing transactions for cannabusinesses. If a dollar is directly or even sometimes indirectly involved in the production or sale of marijuana, it’s probably toxic. Handling that money can land you in trouble with federal authorities for anything from aiding and abetting to money laundering. Banks, understandably, want nothing to do with this.
At first blush, this may seem like some kind of convoluted regulatory loop. The DoJ updates its guidance and says that it’s only going to go after the big-time criminals, like money launderers — but it turns out that providing basic banking services to cannabusinesses amounts to money laundering, leaving medical and recreational dispensaries in a lurch. Access to banking and finance is part of the core infrastructure of modern business, so without it the feds have effectively embargoed the cannabusiness industry.
But lack of access to banking creates problems — huge problems — not just for the industry but for the feds themselves. Speaking at the University of Virginia earlier this year, Attorney General Eric Holder said that “There’s a public safety component to this. Huge amounts of cash — substantial amounts of cash just kind of lying around with no place for it to be appropriately deposited is something that would worry me, just from a law enforcement perspective. You don’t want just huge amounts of cash in these places. They want to be able to use the banking system.”
Catch-22, or, “why won’t you let us give you money?”
Security isn’t the only thing that a business without access to banking has to worry about. Even though selling marijuana is a felony, the IRS isn’t going to leave money on the table — the government still wants to collect taxes on marijuana sales. Not paying your taxes, of course, is also a felony. To add insult to injury, the IRS actually penalizes businesses that pay the payroll tax in cash, and also prohibits cannabusinesses from deducting standard business expenses.
Here’s how ass-backwards the situation is. Earlier this year, Reason.com reported on a business called Allgreens, a marijuana dispensary in Denver, Colorado, a state that has legalized recreational marijuana. Because of the 10% penalty charged by the IRS for paying its payroll tax in cash, the dispensary ended up owing the government $20,000. The company filed a petition to address the issue, arguing that “due to federal banking regulations, the taxpayer, and all licensed marijuana businesses in Colorado are unable to openly hold and access bank accounts. Thus, many marijuana business taxpayers are forced to make 941 and 940 tax deposits and income tax payments in cash or through money orders directly to the IRS, rather than through the Electronic Federal Tax Payment System (EFTPS), which taxpayer would otherwise have utilized. The EFTPS system requires a bank account for its use.”
The IRS denied the company’s request for abatement, saying that “if the participant does not want to use EFTPS, they can arrange for their tax professional, financial institution, payroll service, or other trusted third party to make deposits on their behalf.” This dismissal seems to miss the point in two big ways. One, it’s not an issue of whether not the company wants to use the EFTPS, it’s an issue of whether or not it can; two, given existing federal law, the solution the IRS suggests could be construed as money laundering. Solid advice, Uncle Sam.
The Allgreens petition states plainly, “The IRS’s decision in this case is arbitrary and capricious.”
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