August 30, 2013

Watershed Move by Feds Could Impact Funding, Banking, Taxes and Other Cannabis Business Issues

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This week’s earthshaking announcement by the Department of Justice paints a brighter picture of the industry’s future, opens the door for legalization in more states and increases the possibility of long-term, fundamental change.

But there are also some signs that near-term relief for the cannabis industry could be on the horizon.

The DOJ’s decision to let Colorado and Washington proceed with their recreational marijuana programs and issue new directives to federal prosecutors in regards to cannabis will ripple across the industry, potentially affecting everything from banking to funding and pending legislation.

While money laundering laws tied to marijuana remain in place, the DOJ reportedly has indicated that it might loosen up its policies for banks that want to service the industry.

If true, this could be an extremely important development that would help stabilize the industry. Most dispensaries and related companies can’t get bank accounts because of overt government pressure on financial institutions to block out the industry, meaning they have to store large amounts of cash themselves. These businesses also face difficulties paying employees, vendors and suppliers.

Removing some of these roadblocks and allowing banks to service the industry, even tacitly, would ease one of the biggest issues facing cannabis businesses.

The DOJ announcement also could improve the funding climate considerably, encouraging investors who have been waiting on the sidelines to get involved and possibly even lowering interest rates.

Many investors currently demand rates of about 25% when pumping money into cannabis companies. But that could fall to between 15-20%, said Scott Hawkins, who runs the MMJ consultancy Grun Strategic.

“This could lead to more moderate demands from investors since the specter of a federal takeover and associated risks is apparently lessened,” Hawkins said. “It could happen over time, but negotiations occur in the short-term, and this could recalibrate these relationships quickly.”

Some professionals say the latest development also could fuel several business-related legislative proposals that have been introduced at the federal level, including one dealing with a section of the tax code (280E) that prevents dispensaries from deducting certain types of deductions on their taxes.

“Maybe I’m just naively optimistic, but I think this is huge,” said Hank Levy, an accountant that services the medical marijuana industry. “I could even see this leading directly to congressional change on 280E.”

For all the excitement, though, there’s also a hefty does of skepticism and caution.

The federal government didn’t indicate it will actually change any laws tied to the cannabis industry’s main issues, after all. So the lack of access to banking and credit card services and the inability to claim standard tax deductions could continue to be significant issues for existing medical marijuana operations as well as those planning to tackle the recreational market in Colorado and Washington.

Businesses currently battling the feds – even those compliant with state laws – also might not see any relief for the time being.

“The DOJ announcement is long overdue … however, our joy is tempered in that the new policy does not specifically apply to current civil enforcement actions,” Steve DeAngelo – executive director of Harborside Health Center, a prominent dispensary that the government has attacked on several fronts – said in a statement. “That means we are still facing crippling tax assessments, seizure of the properties where we are located, and denial of banking, credit card, security and armored car services. We hope that these and other federal efforts to impede our ability to operate as a legitimate business will be also be ended in the near future.”

The DOJ’s announcement is also confusing, conflicting and – in some senses – hypocritical. In recent weeks, another arm of the government ordered armored truck companies to stop doing business with medical marijuana dispensaries, a significant safety and logistical issue for an industry that must move a great deal of cash around on a daily basis. There’s been no indication that the DOJ’s announcement will change that situation.

“The challenges of doing business in this environment have not gone away,” Hawkins said, adding the DOJ’s move also might not be enough to convince US Attorney Melinda Haag – who has aggressively targeted the industry in California – from backing down. “But I am optimistic.”

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