Week in Review: Cannabis banking confusion, medical marijuana vs. opioids in NY & MMJ defeat in US Tax Court

(This story has been updated from an earlier version to provide a link to an article reviewing the historic recreational legislation in Canada that lays the groundwork for a multibillion-dollar marijuana industry and to include information about U.S. senators voting to block an MJ banking amendment.)

Landmark news comes from Canada this week as it becomes the first G-20 nation to legalize recreational cannabis. Read more about that here.

In the United States, cannabis banking reform advocates get mixed signals, New York plans to allow the use of medical marijuana in lieu of opioids, and U.S. Tax Court denies a Colorado MMJ company’s business deductions.

Here’s a closer look at some notable developments in the cannabis industry over the past week.

One step back, two steps forward

Cannabis-related banking reform in Congress has moved farther into the political limelight with:

Despite the two legislative roadblocks, the support of banking institutions means that, in the political world, the momentum is shifting in the industry’s favor, said Drug Policy Alliance adviser Mike Liszewski.

“The takeaway is, even though there was a defeat last week, I think it was really a show of strength … that reform is being taken very seriously by opposition forces at this point,” he said.

“Based on what I see, things are moving in the direction that ultimately Congress is going to pass some sort of marijuana reform. Probably not this session, but things are looking good for the future.”

Work in Washington DC on behalf of the industry is far from finished, he noted, and there’s still a lot of education that needs to be done to help lawmakers understand the marijuana sector’s obstacles, as well as how those issues can be rectified.

But the backing of the American Bankers Association, the Independent Community Bankers of America and other finance industry organizations can only help with regard to getting some type of banking access legislation all the way through Congress, Liszewski said.

“Where I think it’s really going to be helpful is with the stand-alone pieces of legislation for banking reform,” he said, singling out H.R. 2215, a bill to protect financial institutions that serve MJ companies.

“The writing is on the wall in terms of what direction this is going in.”

MMJ versus opioids

New York’s hamstrung medical marijuana businesses could benefit from a plan to allow the state’s doctors to recommend medical cannabis in place of opioids.

Under a new proposal from the New York health department, patients who have been prescribed opioids would be given a choice to sign up for the state’s medical marijuana program.

“This is definitely a boost,” said Matt Karnes of New York-based GreenWave Advisors, a financial analysis firm that focuses on the MJ sector.

Karnes said New York MMJ companies are competing against:

  • A robust black market for cannabis in New York City.
  • A limited variety of products available to patients.
  • A lack of doctor participation in the MMJ program.

Doctors recommending MMJ in place of opioids could help to bolster these struggling businesses.

And it’s a trend that could spread across the industry. Illinois recently took similar action.

Gov. Andrew Cuomo recently commissioned a study into recreational cannabis and the health department came back with a favorable recommendation that the state legalize it.

Plus, it seems likely that neighboring New Jersey will legalize adult-use cannabis, so New York has an incentive to avoid missing out on a lot of business and tax revenue.

“People are investing in New York as a call option when the recreational market goes legal,” Karnes said. “It’s very, very challenging to make a profit in the market as it is today.”

Challenging 280E

A U.S. Tax Court judge rejected an argument that Altermeds, a Colorado MMJ business, appropriately took deductions for expenses in selling non-cannabis accessory merchandise.

That opinion, however, was particular to that case.

The more significant tax ruling to come for the industry – with millions of dollars at stake – involves Harborside, a prominent California-based medical marijuana dispensary.

There are important differences between the two cases, according to San Francisco attorney Henry Wykowski, who represented both Harborside and the defunct Altermeds:

  • Harborside is attacking all of Section 280E of the U.S. Tax Code, which bans individuals or companies from taking tax deductions if their business “consists of trafficking in controlled substances.” In the Harborside case, Wykowski said, a linguist with a legal background testified that 280E shouldn’t apply at all to the marijuana industry because while an MJ business may include cannabis sales, it doesn’t “consist of” just marijuana. Wykowski further argued that, based on CHAMP and other cases, Harborside is entitled to deduct expenses associated with its non-marijuana business lines such as T-shirts, mugs, books and wellness services. In the CHAMP case, the caregiving expenses of a California MMJ business were allowed to be deducted.
  • He also contrasted the Altermeds and Haborside cases by saying the latter had “excellent records” separating MJ and non-MJ expenses, while Altermeds did not and had only a minimal amount of non-cannabis sales.

It’s unclear when the Tax Court will rule on Harborside. But Wykowski expects the decision to be precedent-setting for the cannabis industry.

Either the court will determine 280E doesn’t apply at all to marijuana businesses in cannabis-legal states, Wykowski said, “or it will give us a more definite formula in determining what expenses are covered under 280E and which aren’t.

“Then it will be easier for everyone (in the industry) to come up with a path of conduct.”

John Schroyer can be reached at [email protected]

Bart Schaneman can be reached at [email protected]

Jeff Smith can be reached at [email protected]

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