The Republican tax reform bill currently being debated in the U.S. Senate may end up including a repeal of 280E for state-licensed marijuana companies if a last-minute bipartisan amendment makes it into the legislation.
The amendment – offered by Republican U.S. Sen. Cory Gardner of Colorado – would essentially exempt cannabis companies from 280E as long as they’re in full compliance with state laws.
It’s a version of the Small Business Tax Equity Act, which was originally sponsored in the House by Florida Republican Carlos Curbelo and in the Senate by Oregon Democrat Ron Wyden.
The 280E provision of the federal tax code has long been the financial bane of marijuana companies that have been trying to play by the rules while also turning a profit.
The provision prevents MJ companies from taking standard federal tax deductions that are allowed for every other legal industry, so cannabis businesses typically end up paying a 70%-90% federal tax rate.
A number of pro-marijuana industry groups were hard at work Thursday lobbying senators to support the amendment, as the upper chamber went into what will likely be the final days of debate on the tax bill before a final vote.
“To help this amendment succeed, senators need to hear from you!” the National Cannabis Industry Association (NCIA) wrote in an email blast to its members.
Neal Levine, chairman of the marijuana industry organization the New Federalism Fund – which has been working almost exclusively on a 280E repeal for the MJ industry – said the amendment “has a real chance to pass,” in large part because of bipartisan support from members of Congress.
By contrast, NCIA’s director of government relations, Michael Correia, said he was “hopeful” about the amendment’s chance and said it would be a heavy lift politically to get enough votes.
“It’ll be a challenge to see if we can get 51 senators to support this,” Correia said.
Americans for Tax Reform, headed by the conservative anti-tax crusader Grover Norquist, is also throwing its support behind Gardner’s amendment and is lobbying senators to back the measure, sources told Marijuana Business Daily.
Marijuana continues to be regulated by Congress as a dangerous drug, and as the Supreme Court has recognized, the federal prohibition of marijuana takes precedence over state laws to the contrary.
The primacy of federal law over state law is hardly a novel proposition and has been the rule since the ratification of the Constitution. Thus, whenever a marijuana business files for bankruptcy relief, a threshold question is whether the debtor can be granted relief consistent with the Bankruptcy Code and other federal law. If the answer to that question is no, the United States Trustee Program (USTP), in its role as the watchdog of the bankruptcy system, will move to dismiss.
Illegal enterprises simply do not come through the doors of the bankruptcy courthouse seeking help to further their criminal activities. To obtain bankruptcy relief, some may try to hide the nature of their business or income, but bankruptcy courts require full financial disclosure and are not a hospitable forum for continuing a fraudulent or criminal scheme.
Marijuana businesses are a unique and unprecedented exception to this rule because they often involve companies that openly propose to continue their illegal activity during and after the bankruptcy. Those cases present a challenge to the bankruptcy system because they generally involve assets that are illegal even to possess. In contrast to other types of cases involving illegal businesses, in which the criminal activity has already terminated and the principal concern of the bankruptcy court is to resolve competing claims by victims for compensation, a marijuana bankruptcy case may involve a company that not only is continuing in its business, but is even seeking the affirmative assistance of the bankruptcy court in order to reorganize its balance sheet and thereby facilitate its violations of the law going forward.
The USTP’s response to marijuana-related bankruptcy filings is guided by two straightforward and uncontroversial principles. First, the bankruptcy system may not be used as an instrument in the ongoing commission of a crime and reorganization plans that permit or require continued illegal activity may not be confirmed. Second, bankruptcy trustees and other estate fiduciaries should not be required to administer assets if doing so would cause them to violate federal criminal law.
The USTP’s policy of seeking dismissal of marijuana bankruptcy cases that cannot lawfully be administered is not a new one, but rather it is a policy that has been applied consistently over two presidential administrations and under three Attorneys General. Nor are these concerns unique to marijuana. These same principles would also guide the USTP’s response in a case involving any other type of ongoing criminal conduct or administration of illegal property.
Although a recent ABI Journal article2 takes the USTP to task for its marijuana enforcement efforts, it is noteworthy that the author fully agrees with the USTP’s position as to the first of the two principles described above and appears to agree to a significant extent with the second. As the author concedes, “it hardly needs explanation that a bankruptcy court should not supervise an ongoing criminal enterprise regardless of its status under state law.”3 As to the second principle, “[i]t would obviously violate federal law for the trustee to sell marijuana.”
Given these concessions, the author’s disagreement with the USTP’s position would appear to be limited to a fairly narrow range of cases – those where administration of the estate would not require the trustee to sell marijuana (but would require the trustee to administer other marijuana-derived property), or where the debtor is a “downstream” participant in a marijuana business, such as a lessor of a building used for a marijuana dispensary.
Yet under the CSA, there is no distinction between the seller or the grower of marijuana and the supposedly more “downstream” participants whom the article proposes to protect: all are in violation of federal criminal law. In particular,
section 856 of the CSA specifically prohibits knowingly renting, managing, or using property “for the purpose of manufacturing, distributing, or using any controlled substance;” section 863 of the CSA makes it a crime to sell or offer for sale any drug paraphernalia – which is defined to include, among other things, “equipment, product, or material of any kind which is primarily intended or designed for use” in manufacturing a controlled substance; and section 855 provides for a fine against a person “who derives profits or proceeds from an offense [of the CSA].”
Thus, not only would a trustee who offers marijuana for sale violate the law but so, too, would a trustee who liquidated the fertilizer or equipment used to grow marijuana, who collected rent from a marijuana business tenant, or who sought to collect the profits of a marijuana investment.
Although cases involving illicit proceeds of Ponzi schemes and other criminal activities – seen in such notorious cases as Enron, Dreier LLP, and Madoff – are administered in bankruptcy, they deal with the aftermath of fraud, usually after individual wrongdoers had been removed from the business.
Such cases are wholly inapposite analogies to a marijuana case where the illegal activity is still continuing through the bankruptcy administration process and where bankruptcy relief may allow the company to expand its violations of law in the future. Nor do any of those cases involve proposed chapter 11 and 13 plans where the feasibility of the plan itself is directly premised on the continued receipt of profits from an illegal enterprise. And none of them requires the courts or trustees to deal with property of the kind described in the CSA, for which mere possession is a federal crime.
Similarly, although the author cites two decades-old decisions in support of his claim that “courts have not always shied away from handling marijuana-related bankruptcies,”7 it is noteworthy that neither of those decisions involved active marijuana operations or would have required a bankruptcy trustee to administer any illegal marijuana assets.8 Both Chapman and Kurth Ranch involved bankruptcy cases that were filed after law enforcement had arrested and seized the assets of marijuana growers. The legal issues raised by the current wave of marijuana filings were simply not present in those cases – neither case involved an ongoing violation of law, and in neither case were there any marijuana assets to be administered, because all illegal assets had been seized and disposed of prepetition.
Finally, the article suggests that the “ongoing conflict over marijuana policy” is one that should take place outside the bankruptcy system. The USTP agrees. But that does not mean that the USTP or the courts should turn a blind eye to bankruptcy filings by marijuana businesses. Rather than make its own marijuana policy, the USTP will continue to enforce the legislative judgment of Congress by preventing the bankruptcy system from being used for purposes that Congress has determined are illegal.
Written by: Clifford J. White III Director, Executive Office for U.S. Trustees Washington, DC
John Sheahan Trial Attorney, Executive Office for U.S. Trustees Washington, DC
Higher education takes on new meaning in Pueblo County, Colorado.
In February, local officials announced that a first-of-its-kind scholarship program will create $475,000 in funding to help send the county’s graduating high school seniors to local colleges.
A majority of the fund – about $425,000 – came from taxing legal marijuana.
“A couple years ago, these are dollars that would have been going to the black market, drug cartels,” Pueblo County commissioner Sal Pace told KKTV in an interview. “Now money that’s used to fund drug cartels is now being used to fund college scholarships.”
Marijuana has been legal for recreational use in Colorado since 2012. Pueblo County, located about an hour’s drive south of resort town Colorado Springs, began collecting a 2% excise tax on all weed grown there in 2016. The tax will increase 1% annually until 2021.
Students who live in Pueblo County and graduate from high school this spring automatically qualify for a chunk of the fund. County officials expect a $1,000 payout for every applicant, which they can put toward tuition at Pueblo Community College or Colorado State University-Pueblo (which gets about 300 and 400 incoming freshmen from the county every year).
While $1,000 would not stretch far at a private university, in-state tuition costs about $3,000 a year at PCC and up to $6,000 annually at CSU-Pueblo, depending on the number of credit hours taken. The Pueblo County Scholarship could put a substantial dent in student debt.
The scholarship fund is expected to grow as the rate of taxation increases. Pace told The Huffington Post that only half of the marijuana cultivators licensed to grow were operational last year, and the county expects to generate extra revenue as more farms come online in 2017.
Colorado isn’t the only state to put legal marijuana revenues to good use.
In California, which legalized recreational marijuana in 2016 but won’t sell it in stores until 2018, residents will pay a 15% tax on sales of the drug, generating up to $1 billion in new tax revenue annually. Ten million dollars (increasing annually for five years until it reaches $50 million) will help support communities disproportionately harmed by the war on drugs.
SAN FRANCISCO — A federal ban on the sale of guns to medical marijuana card holders does not violate the Second Amendment, a federal appeals court said Wednesday.
The ruling by the 9th U.S. Circuit Court of Appeals applies to the nine Western states that fall under the court’s jurisdiction, including California, Washington and Oregon.
It came in a lawsuit filed by S. Rowan Wilson, a Nevada woman who said she tried to buy a firearm for self-defense in 2011 after obtaining a medical marijuana card. The gun store refused, citing the federal rule banning the sale of firearms to illegal drug users.
Marijuana remains illegal under federal law.
Wilson said she was not a marijuana user, but obtained the card in part as an expression of support for marijuana legalization.
She challenged guidance issued by the federal Bureau of Alcohol, Tobacco, Firearms and Explosives in 2011 that said gun sellers should assume people with medical marijuana cards use the drug and not sell them firearms.
It’s illegal for a licensed firearm dealer to sell a gun to an Oregon medical or recreational marijuana consumer, said Portland lawyer Leland Berger. He noted that the ruling is focused on sales and doesn’t affect medical marijuana consumers who already have guns.
The 9th Circuit in its 3-0 decision said it was reasonable for federal regulators to assume a medical marijuana card holder was more likely to use the drug.
The court also said Congress had reasonably concluded that marijuana and other drug use “raises the risk of irrational or unpredictable behavior with which gun use should not be associated.”
“The notion that cannabis consumers are violent people is absurd,” Berger said, calling the notion that classifying medical card holders who use marijuana to treat debilitating medical conditions as violent people is “even more absurd.”
Paul Armentano, deputy director of NORML, a nonprofit that works to reform marijuana laws, called on Congress to “amend cannabis’ criminal status in a way that comports with both public and scientific opinion, as well as its rapidly changing legal status under state laws.”
“Responsible adults who use cannabis in a manner that is compliant with the laws of their states ought to receive the same legal rights and protections as do other citizens,” he said in a statement published on the nonprofit’s website.
Wilson’s attorney, Chaz Rainey, said there needs to be more consistency in the application of the Second Amendment. He planned to appeal the decision and his options include submitting the appeal to the same panel of judges that issued the ruling, a larger panel of the circuit court or the U.S. Supreme Court.
“We live in a world where having a medical marijuana card is enough to say you don’t get a gun, but if you’re on the no fly list your constitutional right is still protected,” he said.
The 9th Circuit also rejected other constitutional challenges to the ban that were raised by Wilson, including her argument that her gun rights were being stripped without due process.
Armentano said the idea that marijuana users were more prone to violence is a fallacy.
“Responsible adults who use cannabis in a manner that is compliant with the laws of their states ought to receive the same legal rights and protections as other citizens,” he said.
Alex Kreit, a marijuana law expert at Thomas Jefferson School of Law in San Diego, said the ruling was significant — but may not be the last time the 9th Circuit addresses medical marijuana and gun rights.
“It seems like the court did not foreclose the possibility of a challenge by actual medical marijuana users that they shouldn’t be lumped with other drug users in terms of concerns about violence,” he said.
Canada to introduce legislation in 2017 to legalize marijuana
OTTAWA — The Canadian government announced Wednesday that it will introduce legislation next year to decriminalize and legalize the sale of marijuana, making Canada the first G7 country to permit widespread use of the substance.
The announcement was made by Canada’s health minister, Jane Philpott, at a U.N. drug conference in New York. It follows through on a promise made during Prime Minister Justin Trudeau’s successful election campaign last fall.
Philpott said details of the legislation are being worked out, but she vowed that the government “will keep marijuana out of the hands of children and profits out of the hands of criminals.”
With the Liberals holding a majority in the House of Commons, the marijuana legislation is likely to pass. The path toward the legalization of marijuana is the latest in a string of policy announcements from the 44-year-old Trudeau that have moved Canada to the left after a decade of Conservative Party rule, including last week’s unveiling of legislation to permit assisted suicide.
Trudeau, whose new government remains extremely popular, has long been associated with the marijuana legalization issue. While an opposition party member in Parliament, Trudeau admitted to occasional use of marijuana. “I think it’s five or six times that I’ve taken a puff. It’s not my thing,” he told reporters at the time.
The Conservative Party attempted to use that statement as proof that Trudeau was a political lightweight and a pothead. In the 2015 election, the Conservatives ran ads in ethnic newspapers falsely alleging that Trudeau backed the sale of marijuana to children.
The attack ads failed, in part because most Canadians no longer see the legalization of marijuana as a problem. A recent survey by Nanos Research, an Ottawa public opinion firm, showed that 68 percent of Canadians “support” or “somewhat support” legalizing marijuana and only 30 percent are opposed.
The population is more divided when it comes to allowing Canadians to grow marijuana at home, and about 50 percent of respondents said that they expect legalization to lead to more usage by those younger than 21.
Unlike in the United States, where marijuana regulation is shared by the states and the federal government, in Canada the issue falls almost solely under federal jurisdiction. Marijuana use has been expanding since a court ruling in 2000 allowed Canadians to possess and grow small amounts for medicinal reasons.
Full legalization will make pot available in a way similar to alcohol. That could encourage Americans, particularly those in border areas, to pop over for a puff or two.
Already, Ontario’s provincial premier, Kathleen Wynne, has volunteered that the provincially owned liquor monopoly would be happy to sell the drug. Canada’s major drugstore chains have said that they would like to get in on the business, too.
After several court rulings, commercial marijuana operations have sprouted across the country. Although currently limited to medicinal sales, the companies have been keenly anticipating legalization allowing for widespread use.
One study by a leading Canadian bank estimated that legalization could spark development of an annual marijuana trade worth about $10 billion Canadian (about $8 billion U.S.).
Brendan Kennedy, president of Privateer Holdings of Seattle, welcomed the Canadian announcement. His company owns Tilray, a medicinal marijuana facility in British Columbia, and he is looking to build a facility that would supply the market for recreational marijuana in Canada.
“The eyes of the world are on Canada as the medical marijuana program matures and the recreational program is being implemented,” he said in an interview. “Canada will be the first G7 country to have a national recreational program different from Alaska, Colorado, Oregon and Washington,” where state laws allowing marijuana use still bump up against U.S. federal prohibition.
There is still a series of negotiations required between the national government and the provinces to figure out regulation, taxation and distribution. Trudeau’s point man on the issue is Bill Blair, a former Toronto police chief.
Blair said marijuana should be treated like such intoxicants as alcohol. “We control who it’s sold to, when it’s sold and how it’s used. And organized crime doesn’t have the opportunity to profit from it.”
