Florida's Cannabis News Podcast

Florida's Cannabis News Podcast

Wednesday, November 25, 2020

Cannabis Taxation—Part V—Congress Can Deter Drug Use and Raise Revenue By Reforming Section 280E

This week, David wraps up Florida’s Cannabis News Podcast’s five part series on Section 280E. In this episode (Part V), we look at what the future holds for Section 280E. Cannabis businesses owners want to pay state and federal taxes. Maintaining a strong working relationship with the IRS legitimizes these businesses, and, in turn, the entire cannabis industry. The current tax regime forces cannabis businesses to either ignore Section 280E on their tax filings, or forego paying taxes altogether. The former forces these businesses to gamble on the IRS overlooking their filing, and the latter evaporates their revenues. Congress can solve this problem in one of two ways: amend the CSA or amend Section 280E.

Here are the highlights:

The primary reason why state-legal cannabis businesses are required to comply with Section 280E is because their product is a Schedule I substance under federal law. If Congress amended the CSA to include an exception for state legal cannabis businesses, that would alleviate the tax burden cannabis business owners face. This reform is the heart of the Tenth Amendment Through Entrusting States (STATES) Act. Proposed by Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA), the STATES Act amends the CSA so long as the cannabis business complies with state law, the CSA provisions no longer apply to that business. If enacted, the CSA would be rendered inapplicable to state-legal cannabis businesses, thus making Section 280E also inapplicable to these businesses. Under the STATES Act, selling cannabis will not trigger Section 280E because businesses in compliance with state cannabis laws will not be in violation of the CSA, and therefore would not be “trafficking in controlled substances.

The STATES Act does not make cannabis federally legal, or even re-schedule or decriminalize it, but the Act gives state-legal cannabis businesses a fair chance to compete, allow the full development of state markets, and give these businesses the freedom to avail themselves of tax benefits and modern accounting regulations currently denied to them. It allows states who want to move forward in this industry a chance to compete in the global market. With states like California having the sixth largest economy in the world, becoming a global player is a realistic goal. The drafters of the STATES Act understand that ambiguity is an obstacle to cannabis businesses when filing taxes.

The other solution is to amend Section 280E itself. This approach is the heart of the Small Business Tax Equity Act of 2017. The legislation, S. 777 and H.R. 1810, exempts cannabis businesses acting in compliance with state law from Section 280E, thereby allowing them to take the ordinary business deductions afforded to all other legal businesses. Under the Small Business Tax Act, Section 280E would read as normal, but include the language, unless such trade or business consists of cannabis sales conducted in compliance with State law, at the end of the rule. This reform more narrowly addresses the unfair impact Section 280E has on states with regulated cannabis markets, without doing an entire overhaul of United States cannabis policy, but the future is not certain for the Small Business Tax Equity Act of 2017, which has not moved since its introduction into Congress in 2017.

Tax neutrality is based on the primary goal to raise revenue, not discriminating against certain group of taxpayers. Section 280E is a non-neutral tax policy that punishes state legal businesses by denying them benefits that quite frankly are required for survival in the American economy. Non-neutral tax policy is effective when it halts or hinders activities that are in opposition to public policy, but such policies can be problematic if they are not narrowly tailored and out of date with current markets.

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Florida's Cannabis News Podcast

Saturday November 21, 2020

Cannabis Taxation—Part IV—How U.S. Cannabis Operators Live Alongside Section 280E.

This week, David continues Florida’s Cannabis News Podcast’s five part series on Section 280E. In this episode (Part IV), we break down the two legal arguments U.S. cannabis operators use to alleviate the burdens of Section 280E. First, the second-line-of-business argument, and second, using savvy accounting methods to put expenses into COGS (cost of goods sold).

Here are the highlights:

States recognize cannabis companies as legitimate businesses, and lawmakers are thwarting the United States’ ability to compete in the global market because they have not provided a level playing field for U.S. cannabis companies to develop. The most effective way to help business owners stay afloat and give patients and consumers access to safe cannabis is through legislative action. Lawmakers have taken inconsequential steps to address this problem, even though Congress did the most significant overhaul of the Tax Code since 1986 when they signed the 2017 Tax Cuts and Jobs Act into law. This bill did not repeal Section 280E, or even amend it. Despite these hurdles, the current legal landscape provides creative avenues for cannabis businesses to alleviate their tax burden. The two most successful methods cannabis businesses owners use to maneuver around Section 280E are the second-line-of-business argument, and accounting as many costs as possible into the COGS section of the business’s tax return.

Under the second-line-of-business argument, a cannabis business owner argues that it is engaged in two trades or businesses, thus Section 280E should only apply to the line of business where cannabis is trafficked. In 2007, Californians Helping to Alleviate Medical Problems, Inc. (“CHAMP”)  raised this argument.

Despite a victory in this case, the U.S. Tax Court rarely accepts the second-line of business argument. In contrast, in 2012, Martin Olive, an owner of a medical cannabis dispensary in California, unsuccessfully argued that his company operated two separate businesses. Similar to CHAMP, Olive argued that he should be allowed to deduct expenses associated with his business’s caregiving services. The Tax Court disagreed and held Olive could not deduct expenses from his caregiving services. The primary purpose of Olive’s medical cannabis dispensary was the retail sale of cannabis under California’s medical cannabis law. The business provided minimal activities and services.

CHAMP and Olive are the current templates in determining whether a business expense is deductible under Section 280E. A cannabis business can deduct expenses related to a separate trade or business that does not involve trafficking of cannabis, but the Tax Court has reaffirmed its strict standard when analyzing the second-line-of-business argument in numerous cannabis cases since Olive. Reading these holding together, good works or community involvement are not sufficient, by themselves, to support a tax deduction outside the application of Section 280E. In order to be deductible, such activity must be considered a separate trade or business entered into with a motive to realize profit. 

While on its face, Section 280E disallows cannabis businesses the deduction of all business expenses, cannabis businesses owners have used cost of goods sold (COGS) to their advantage. COGS are the costs of acquiring inventory through purchase or production, including shipping costs, and directly related expenses. Taxpayers, regardless of what business they are in, use this formula to calculate gross income—gross receipts minus COGS.

When calculating COGS, cannabis businesses are forced to use Section 471 of the Code. Section 471, in place when Congress enacted Section 280E, instructs retailers to calculate their COGS as any direct cost they pay for inventory, the invoice price of the goods, plus any “transportation or other necessary charges incurred in acquiring possession of the goods.” Cultivators, under Section 471, must include both direct and indirect costs of creating their inventory in their COGS calculation. Section 263A, enacted four years after Section 280E was enacted, expanded the application of Section 471. Section 263A broadened the definitions of indirect costs and gave retailers to ability include “indirect” inventory expenses in their COGS. Section 263A allows businesses to capitalize on indirect costs—such as administrative and inventory costs, as well as the amount paid in state excise taxes—and deduct them under COGS. The goal of this expansion was to treat taxpayers more fairly, but the U.S. Tax Court is not willing to allow cannabis businesses to use Section 263A. 

Will cannabis businesses be treated fairly one day? Maybe. There are arguments that have not been made, for example that the congressional intent behind Section 280E has not been met. It was not until 2015 when the Courts first considered the congressional intent of Section 280E and whether applying Section 280E to state legal businesses aligned with that intent. In an appeal of the 2012 Olive decision, Olive argued that the application of Section 280E to cannabis businesses did not align with the intent of Section 280E to deter illegal drug use. The Ninth Circuit Court of Appeal was not persuaded and affirmed the Tax Court’s decision. Written law governs tax enforcement, yet the U.S. Tax Court and United States Supreme Court always interpret the text of a statute to some degree of interpretation not included in the text.

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Florida's Cannabis News Podcast

Tuesday November 17, 2020

Cannabis Taxation—Part III—Why 280E is Outdated and How 280E Cripples Today's Cannabis Industry.

This week, David continues Florida’s Cannabis News Podcast’s five part series on Section 280E. In this episode (Part III), we give a short history on the United States legal cannabis markets, explain why 280E is outdated, and why 280E does not satisfy any of its War on Drugs policy goals.

Here are the highlights:

The Nixon and Regan administrations set the stage for such low support for cannabis reform going into Bill Clinton’s presidency in 1992. Vilifying and marketing cannabis to the American public as a threat successfully maintained the status quo ‘no tolerance’ drug policies, but support for legalization began to increase. The traditional War on Drugs advertisements started to evoke humor, rather than fear, and the generation that led the counterculture movement started to have children.

The cannabis industry is similar to any other traditional agricultural industry. Farmers grow the crop in greenhouses or outdoors, regularly tend to the crop, and develop irrigation systems to achieve the best yield. Farmers also research how best to prevent pests and disease, which pesticides are safe and effective, and how genes and environment affect the production of key plant chemicals, like tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”).

As states started to implement their cannabis programs, the federal government prosecuted violators of the CSA regardless if the violators complied with their state’s law.But, as public opinion about the plan continued to shift, and more states legalized the plant, the Department of Justice (“DOJ”) lowered their prosecution priority for state-legal cannabis businesses. In 2009, Deputy United States Attorney David W. Ogden issued the “Ogden Memorandum” which announced the DOJ would not focus their prosecutorial resources to pursue cannabis companies who are in “clear and unambiguous compliance” with their state’s cannabis laws.Section 280E punishes legitimate businesses. This is not the intent of Section 280E. The legislative record suggests Section 280E was enacted to punish illegal drug dealers, not legal businesses.

Today, the distinction between legal cannabis businesses and illegal drug trafficking is material. The former distributes lab tested medicine to patients, while the latter sells unregulated substances to consumers who could be underage. Since the enactment of Section 280E, the federal government’s opinion on cannabis businesses evolved to a more accepting perspective, and the opinion of cannabis changed globally. Countries such as Germany, Italy, Mexico, Switzerland, Australia, Argentina, and the United Kingdom have all legalized cannabis as a medicine.

When Congress passed Section 280E into law, no state had enacted legislation legalizing any form of cannabis. To Congress’ credit, in 1981, Congress did not suspect legal drug trafficking would one day be a viable businesses model. In 2019, with thirty-three states and the District of Columbia now hosting medicinal or adult-use cannabis markets, Section 280E is applied to state-legal cannabis businesses more often than it is to the types of illegal drug dealers the drafters intended to penalize.

As applied, Section 280E contradicts the intent of Section 280E itself—to punish illegal drug dealers—not legal businesses. While the legislative record points to illegal drug traffickers as the targets of Section 280E, the IRS applies Section 280E to cannabis businesses in states that have legalized cannabis in some form because cannabis is still a Schedule I substance under federal law.

In turn, state-legal cannabis businesses struggle to survive because they have virtually no ability to deduct business expenses, compared to other businesses, legal or illegal, who are able to deduct rent on business property, salaries and wages, advertising, licensing fees, repair, and legal fees. With state markets online and operating, and Congress allowing the markets to grow without worry of federal prosecution by the DOJ, Section 280E remains an obstacle for state cannabis businesses because it denies state-legal cannabis business owners any deduction for any business expense, except for COGS.

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Florida's Cannabis News Podcast

Wednesday November 11, 2020

Cannabis Taxation—Part II—President Nixon's War on Drugs Reshaped the Internal Revenue Code

This is Part II of Florida's Cannabis News Podcast's five-part series on cannabis taxation. Today we are continuing the story of 280E into the 1970s and 80s. We are talking about the War on Drugs, the controlled substances act, President Reagan’s attempt to regulate drug use through the tax code, and breaking down the text of 280E itself.

Part II is important to understanding how 280E came to be. I am looking forward to unpacking everything. So lets dive right into the highlights:

America and cannabis have a well-documented industrial and medicinal relationship. Around 1611, colonist farmers cultivated America’s first cannabis crop and used the plant as fiber for rope and clothing. Public concern about illegal drug use rose in the 1930s due to the FBN’s media campaign that warned Americans of the alleged perils of cannabis. The 1960s, almost thirty years after the passage of federal cannabis prohibition, brought dramatic social change to the United States, and in many ways, cannabis was at the center of it.

In 1971, with the goal to stop drug use in the United States, President Nixon declared a war on drugs. As part of his war on drugs, President Nixon enacted the Comprehensive Drug Abuse Prevention and Control Act of 1970, which has lasting effects on today’s United States cannabis market.

With the enactment of Section 280E, if a taxpayer trafficked a Schedule I or II substance, they lost the ability to deduct virtually all business expenses under Section 162, except for cost of goods sold. On its face, Section 280E contradicts the originally stated purpose of the Code—to tax all income regardless of the legality of the enterprise.

The desired result of Section 280E was to burden drug traffickers when they filed federal income tax for their business by disallowing virtually all business expense deductions of their illegal enterprise. Section 280E reaches further than Section 162 because Section 280E even disallows deductions for expenses that are not illegal per se (e.g., salaries, rent, telephone) to businesses who traffic Schedule I or II substances. In comparison, Section 162 only disallows deductions for illegal expenses.

Section 280E is outdated because trafficking cannabis is legal in thirty-three states and D.C. Section 280E does not satisfy the expectations for any of its goals: combatting the flow of drugs into the United States, significantly reducing drug use, or having an educational impact.

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Florida's Cannabis News Podcast

Tuesday November 10, 2020

Cannabis Taxation—Part I—Introducing 280E and The Evolution of the Pro Taxpayer Internal Revenue Code.

This week, David introduces Florida's Cannabis News Podcast's five part series on cannabis taxation. In this episode we give a 40,000 degree overview of what IRC Section 280E is and discuss the evolution of the United States' pro-taxpayer approach to the Internal Revenue Code. 

Here are the highlights:

Historically, the Internal Revenue Code (“Code”) and U.S. courts applied a taxpayer-friendly approach to determine the deductibility of business expenses. In determining deductibility, the legality of the income source was irrelevant.

But, with the rise of President Richard Nixon’s ‘War on Drugs’ and the enforcement of ‘no tolerance’ drug policies in the 1970s, Congress restricted their taxpayer-friendly approach. In 1981, Congress enacted Section 280E into the Internal Revenue Code, which forbids businesses who traffic Schedule I or II substances, as defined by the Controlled Substances Act, from deducting ordinary business expenses when filing their federal taxes.

Section 280E re-focused deductibility to hinge on the legality of the income source itself.

Section 280E reaches further than the drafters intended, does not satisfy any War on Drugs policy goals, and cripples the legal cannabis industry, one of the fastest growing industries in the United States.

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Florida's Cannabis News Podcast

Friday November 6, 2020

Highlights:

This week, the Florida Supreme Court hears a second round of oral arguments on the Florigrown case. Edibles hit the Florida medical marijuana market. Trulieve, popular in marijuana stocks and cannabis stocks and cannabis news, expanded operations into Pennsylvania.

For a high overview, an MMTC applicant is challenging Florida’s vertically integrated medical marijuana licensing structure. Vertical integration means in order to participate in Florida’s medical marijuana market, you must cultivate, process, and distribute the plant. Grow the plant, process the plant, and distribute the plant’s products and your dispensaries. There are no individual licenses for the different aspects of the industry (that would be a horizontally integrated model, which I think depending on the outcome of this case could be Florida’s fate years).

To me, based on the judge’s questions it seems like they could be agreeing with the state that it met its constitutional obligations in enacting a limited license, vertically integrated structure. The court did not set a time frame for a ruling one way or another.

If the Supreme Court court agrees vertically integrated businesses are unconstitutional, the state’s lucrative medical marijuana market would open up to additional, stand-alone licensing opportunities. It would flip the market on its head.

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The introduction of edibles is important because (1) MMTCs can expand their product selection, (2) customers have more options to medicate, (3) the opportunities for licensing deals skyrockets. Edibles also pave the way for cannabis companies to participate in interstate commerce without violating the federal prohibition on the sale and cultivation of cannabis.

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Our last top story comes out of Tallahassee, FL where Trulieve has announced they are expanding operations into Pennsylvania.

As we know Trulieve has a dominant presence in Florida, they have over 64 dispensaries, tremendous leadership with CEO Kim Rivers, and own the majority of Florida’s market share. expanding operations into Pennsylvania will be trulieve’s move into five states total.

There is a lot of room for growth in Penn, especially on the retail side because the state has allowed for 198 dispensary locations and only 87 of those locations are up and running. And as we’ve seen in Florida, it seems Trulieve is opening a new dispensary every other week, so I imagine they will continue their retail domination in Penn.

Top Stories:

// Florigrown Oral Arguments Round II

Source 1, Source 2

// Edibles Hit Florida’s Medical Marijuana Market

Source 1, Source 2, Source 3

// Trulieve Expands into Pennsylvania 

Source 1, Source 2, Source 3

** Latest Patient and Dispensary Count from Florida's Office of Medical Marijuana Use

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Florida's Cannabis News Podcast

Wednesday May 13, 2020

Top Stories:

// MedMen Closes Cannabis Dispensaries

Highlights:

Florida’s medical cannabis market is one of the nation’s fastest growing. Described as an oligopoly, and that’s because 13 out of 22 licensed vertically integrated operators actively operate over 200 dispensaries to over 300,000 registered patients.

Well known multistate operators have set up shop in Florida—Trulieve, Curaleaf, Surterra Wellness, Green Peak Innovations, MedMen are all license holders. Investment firms and multistate operators have paid millions to acquire a Florida medical cannabis license. MedMen paid $53 million to acquire their Florida license. Last month, Cresco Labs nearly struck a deal to acquire VidaCann—one of Florida’s active operators with 13 retail locations as well as a 70,000 square-foot cultivation and processing facility—for an all cash deal of $120 million.

These “super” licenses make Florida’s medical cannabis market unique. In 2017, during special session called by governor Rick Scott, the Florida legislature created “super” licenses by demanding a vertically integrated system where operators cultivate, process, and sell.

So Florigrown was an applicant for a license. And after being denied, they sued. Arguing not only is the DOH not acting properly by not taking applications, but the state enacted an unconstitutional law.

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A California-based medical marijuana dispensary has temporarily closed five of its eight Florida locations.

MedMen listed temporary closures on its website effective Sunday.

Locations are shuttered in Jacksonville Beach, Key West, Orlando, Sarasota and Tallahassee. Three stores in Pensacola, St. Petersburg and West Palm Beach remain open, according to the company’s website.

MedMen is in some trouble. Vaping crisis led to the cannabis capital crunch. Then covid-19 hit the United States. This virus is going to kill a bunch of companies. One of these could be MedMen. They’ve taken on a ton of debt and their operating cash flows are nearly gone (iAnthus). Both companies realized too late the challenges of too much debt. Their lender is the name (Gotham). Now, their only solution is to take on more debt. That’s not good.

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Florida medical cannabis licenses have become known as “super” licenses for three reasons.

• First, Florida’s licensing structure is vertically integrated. Licensees are required to oversee the entire supply chain, including cultivating, processing, dispensing, and delivering. Vertical integration provides licensees with significant control from seed to sale. Vertical integration is unique—most states with cannabis programs have a horizontal licensing structure, which means licenses are specific to certain segments of the supply chain. For example, in Illinois, you could apply for a cultivation license or a transportation license.
• Second, there is a limited number of licenses. In 2014, the Florida legislature created the “super” licenses, originally issuing only five. Over the course of the past five to six years, more licenses have been issued. Today, only 22 licenses have been issued, 13 of which are actively operational. Operators who acquired a license in 2014 got a substantial head start over operators who received their license in later rounds.
• Third, licensees can open an unlimited amount of retail dispensary locations. Most states with cannabis programs place a cap on the size and number of facilities for growing, processing, and dispensing. Until this month, Florida allowed each licensee to open 25 dispensaries and an additional 5 dispensaries for every 100,000 patients who register for Florida’s cannabis program.

**Latest Patient Count from Florida's Office of Medical Marijuana Use

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This week, Florigrown heads to the Florida Supreme Court. MedMen, popular in marijuana stocks and cannabis stocks and cannabis news, closed five dispensaries. A few were near the florida georgia line.

On Florida's Cannabis News Podcast we talk about products like cannabis oil, cannabis seeds, and cannabis sativa. 

Top Stories:

// HB 5 Breakdown

// Grandma Hester Intends to Sue Disney

// Green Peak Innovations Acquires FL MMTC License

** Florida's Office of Medical Marijuana Use Weekly Patient Count

Upcoming Events:

Curaleaf: Marijuana 101 (May 20)

Cannabis LAB Ticket Link (May 23)

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Top Stories:

// MMTCs Seek More Retail Locations

// Great Grandma Arrested at Disney World for CBD Oil

// 3-Year-Old's Battle Against Cancer

**Latest Patient Count from Florida’s Office of Medical Marijuana Use

Top Events:

// Healthcare Professional Cannabis Event (Davie)

// Florida Hemp Conference (November 3rd-5th)  

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In this week's episode, David discusses how Ray Rodrigues tried to sneak his 10% THC cap into SB 188, Florida's hemp program move to Governor DeSantis for signature, and the dispute between MedMen and its new neighbors.

Top Stories:

// THC Cap Sneaking its Way Into SB 188

// Florida’s Hemp Program Gets Closer to Reality

// Nikki Fried WLRN Interview

// MedMen and Neighbors Feud

**Latest Patient Count from Florida’s Office of Medical Marijuana Use

Top Events:

// Cannabis Physicians Symposium (Davie) 

// Curaleaf Hiring Event (Orlando)

// Cannabis LAB CEO Event (Fort Lauderdale)

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