Operations Challenges for Marijuana Businesses Get Attention in Congress

Senate committee holds hearing on lack of access to banking

An 8th Circuit Court of Appeals ruling held up a lower court’s award of $106 million in a decades-long case involving bad actors and a bank's involvement in a Ponzi-like scheme.

Marijuana is still a Schedule I drug, but federal lawmakers are increasingly paying attention to the challenges the illegal classification creates for marijuana businesses that operate legally under state laws. The Senate Committee on Banking, Housing and Urban Affairs on July 23 held a hearing about the dearth of banking services available to marijuana businesses. 

Advocates of legal marijuana have decried the operational problems that marijauna’s federally illegal classification creates for state-legal businesses: A lack of access to banking forces them to often operate in cash, creating transparency and public safety issues. Possible consequences under money laundering laws and the Controlled Substances Act put organizations that do business with those in the marijuana industry at risk of legal exposure as well. And state-legal pot businesses can’t take tax deductions standard for other types of businesses.

Congress has drawn up the SAFE Banking Act as a fix to increase access to banking for state-legal marijuana businesses. It protects financial institutions from prosecution and civil actions just for serving businesses in the industry. The bill is popular with more than 200 sponsors in the House. It also has no shortage of support from Colorado politicians: Sen. Cory Gardner is a primary Republican sponsor of the bill, and Gov. Jared Polis and Attorney General Phil Weiser have expressed their support.

“It’s an important step forward, the first hearing we’ve had on this issue as the federal government wakes up to the reality that the cannabis issue is not going to go away,” Gardner said in his statement to the Senate committee. “There’s been a dramatic shift in Americans’ views of cannabis in recent years.”

Additionally, at the end of May, a draft spending bill from the House was released that contained a section preventing federal regulators from punishing financial institutions for keeping accounts with state-legal marijuana businesses.

Garrett Graff, managing attorney of the “cannabusiness”-focused Hoban Law Group, called legislation such as the SAFE Banking Act “bridge” fixes to make operating legal businesses easier as Congress avoides the larger debate of marijuana’s legal classification.

“Congress has taken the tact in the interim to propose and address some of these ‘bridges’ that are intentionally narrow in scope that fix some problems that the industry is experiencing,” he said.

A handful of federal and state cases in Colorado have shown courts haven’t so far been willing to go against marijuana’s federally illegal status. In a 2012 case where a supplier sued a marijuana dispensary for not paying him for product he delivered, the Arapahoe County District Court ruled the contract wasn’t enforceable because the drug is illegal federally. Colorado has passed a law saying that contracts aren’t void as against public policy if they involve legal activity in the marijuana industry.

In 2017, the 10th Circuit Court of Appeals dismissed a case against the Federal Reserve Bank of Kansas City for denying a master account to Colorado-based Fourth Corner Credit Union, because it sought to serve marijuana businesses. 

The credit union ultimately said it would not do that until marijuana is legal federally, and in 2018 the Federal Reserve granted Fourth Corner a master account to serve organizations that do business with marijuana industry players.

The 10th Circuit addressed access to tax deductions for marijuana businesses in a July 2018 ruling. The court said Section 280E of the federal tax code applies, which doesn’t allow deductions for businesses that traffic controlled substances. 

Graff said he’d expect to see legislation at some point that addresses this issue, saying it’s another bite-sized way to help state-legal marijuana businesses in addition to banking. But it may have a tough road. After the 2018 decision from the 10th Circuit, Center for New Revenue founder Pat Oglesby told Law Week addressing the 280E issue would be a challenging issue to get traction on in the legislature because it would decrease tax revenue. 

Graff said he’s not aware of circuit court splits on the banking and taxing issues. But he said some federal courts seem to have shown some sympathy toward state-legal marijuana businesses. In 2018, the U.S. Tax Court in California ruled 280E does apply to a medical marijuana dispensary and the business had to pay back business deductions it had taken over several years. But the court also found because the dispensary acted in good faith filing its taxes over the years, it did not have to pay penalties under 280E. Harborside has retained Greenspoon Marder to appeal the ruling to the 9th Circuit.

“You’re seeing little glimmers of hope like that … as a sort of sympathy extended by the federal court system while they’re hamstrung by federal law,” Graff said. He said banking and tax issues are probably the two most talked-about topics short of full federal legalization of marijuana.

“I do expect there to be bills and support for little incremental fixes like banking and [the] IRS.”

—Julia Cardi

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