Under Pressure By California, Weedmaps Boots Unlicensed Cannabis Businesses

According to reports from the Sacramento Bee and Marijuana Business Daily, Lori Ajax, chief of the California Bureau Of Cannabis Control, issued on February 16, 2018 a cease and desist order to Weedmaps.com, an internet company based in Irvine that maps marijuana dispensaries, to immediately stop promoting cannabis businesses that do not have state licenses. It is Ms. Ajax’s position that the business of Weedmaps allegedly is aiding and abetting in violation of state cannabis law (the California Medicinal and Adult-Use Cannabis Regulation and Safety Act) by advertising canna-businesses without proper state license numbers and if the company doesn’t immediately drop advertisements for unlicensed businesses, Weedmaps could face criminal and civil penalties, including civil fines for each illegal ad.

While Weedmaps does not sell cannabis but merely serves that industry by providing an advertising service, such action by the State to go after third parties providing ancillary services to the cannabis industry is very chilling. Despite California legalizing medical use and recreational use marijuana, cannabis businesses must still be licensed by the State. This license requirement started January 1, 2018. The California Bureau Of Cannabis Control has identified at least 900 cannabis businesses operating without the proper licenses and many of these businesses are listed on Weedmaps.

Under this pressure by California, Weedmaps finally agreed to pull all unlicensed businesses before the end of 2019. Weedmaps announced that U.S. retailers will be required to provide a state-issued license number on their listing, and Weedmaps is restricting the use of its point of sale, online orders, delivery logistics, and wholesale exchange software-as-a-service platforms exclusively to licensed operators.

Cannabis Is Illegal Under Federal Law.

It is enough that a cannabis businesses have to face the fact that under 21 U.S.C. § 812 (known as the Federal Controlled Substances Act), the Federal government classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically but the fact that a cannabis business is properly licensed by the State can be a mitigating factor decreasing these penalties.

Risk To Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real and for those cannabis businesses that are not licensed by the State, not only will they rise to the top of the Federal District Attorney’s list but also by State authorities. Criminal prosecution is also possible at both the Federal and State levels so it is important to have qualified legal counsel lined-up and available to intervene.

What Should You Do?

Considering the risks of cannabis you need to protect yourself and your investment, especially if you are not holding a valid license with the State. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

Temporary Cannabis Tax Reduction Bill California cannabis

California Cannabis Tax Relief Coming? Check Out Assembly Bill 286 – the Temporary Cannabis Tax Reduction Bill.

A bill was just re-introduced in the California legislature that would give legal cannabis businesses a tax break to help them thrive and level the playing field with cannabis businesses that continue to operate in the grey and black markets.

Assembly Bill 286 Was First Introduced February 16, 2018

The proposed legislation, which is sponsored by state Treasurer Fiona Ma, follows California’s tax revenue for the cannabis industry coming in $101 million below projections in the first six months of 2018.

This bill which has been kicked around Sacramento for almost a year would wind up reducing the state’s excise tax from 15% to 11% for a period of three years and remove the cultivation tax on growers until 2022. The full text of the Temporary Cannabis Tax Reduction Bill can be viewed here.

Even though 31 states have legalized cannabis for medical or adult use, banks and financial institutions are hesitant to provide services to cannabis businesses because federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act.

Higher Federal Taxes Still Remain

While the developments listed above are favorable for California cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Federal Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

cannabis-cafe

West Hollywood Approves Cannabis Cafes And Consumption Lounges To Open In 2019.

And you know that the IRS will surely be interested in auditing these businesses!

After spending more than seven months screening over 300 applicants, the city of West Hollywood, California released the names of businesses approved to have actual eateries, lounges, and cafes that allow smoking, vaping, and/or munching on edibles and weed-infused food.

There are five license categories, which brings the following new businesses into West Hollywood:

  • Eight edibles-only consumption area cafes
  • Eight consumption lounges where cannabis smoking, vaping, and edibles can be consumed on-site
  • Eight medical dispensary services
  • Eight new adult-use retail businesses
  • Eight cannabis delivery services

Each business must now secure a West Hollywood business license within the next 12 months, and find a physical location. To view the full list of approved cannabis applicants, click here for the City of West Hollywood website.

Cannabis Is Still Illegal Under Federal Law.

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

 

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Cannabis, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

IRS Guidance On Cannabis.

The IRS issued a memo to provide guidance to its agents on conducting audits of cannabis businesses addressing whether an IRS agent can require a taxpayer trafficking in a Schedule 1 controlled substance to change its tax accounting to conform to I.R.C. §280E.

Not surprisingly that the IRS ruled that IRS agents have the authority to change a cannabis business’ method of accounting so that pursuant to I.R.C. §280E costs which should not be included in inventory are not included in Costs Of Goods Sold (“COGS”) and remain non-deductible for income tax purposes.

Cannabis Tax Audits & Litigation.

It is no surprise that cannabis businesses are proliferating as more States legalize cannabis and make available licenses to grow, manufacture, distribute and sell cannabis. The IRS recognizes this and it is making these cannabis businesses face Federal income tax audits. IRC §280E is at the forefront of all IRS cannabis tax audits and enforcement of §280E could result in unbearable tax liabilities.

Proving deductions to the IRS is a two-step process:
• First, you must substantiate that you actually paid the expense you are claiming.
• Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense.

For example, if you claim a $5,000 purchase expense from a cannabis distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a cannabis business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

Step Two: Deductibility Of The Expense.

Next you must prove that an expense is actually tax deductible. For a cannabis businesses this is challenging because of the I.R.C. §280E limitation. Recall that under I.R.C. §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. What this means is that dispensaries and other businesses trafficking in cannabis have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

A cannabis business can still deduct its Cost Of Goods Sold (“COGS”). Cost of goods sold are the direct costs attributable to the production of goods. For a cannabis reseller this includes the cost of cannabis itself and transportation used in acquiring cannabis. To the extent greater costs of doing business can be legitimately included in COGS that will that result in lower taxable income. You can be sure the IRS agents in audits will be looking closely at what is included in COGS. Working with a cannabis tax attorney can ensure that you receive the proper treatment of COGS versus ordinary and necessary expenses resulting in the lowest possible income tax liability.

In addition to IRS audits, state cannabis audits are also complex and thorough and generally include all taxes specific and nonspecific to the cannabis business. Potentially at risk is the cannabis license that enables the business to operate. State audits will focus on records regarding sales and use tax, excise taxes, and seed-to-sale tracking records.

Now if your cannabis IRS tax audit is not resolved, the results may be challenged and litigated in the U.S. Tax Court or Federal District Court. The U.S. Tax Court has jurisdiction to hear disputes over federal income taxes before final assessment and collections while the Federal District Court generally requires taxpayers to first pay the liability then seek repayment through a refund request.

Tax Planning For Cannabis Cafes And Consumption Lounges.

For first-year businesses, tax planning usually starts with determining which entity type to select and operate. Common entities used are C-corporations, S-corporation and Limited Liability Companies (LLC). Determining which entity type to select and operate involves the type of business (i.e., cultivator, manufacturer, distributor, retailer) and the risk that if the business is selected for audit, a higher tax liability may be assessed. Cannabis Cafes And Consumption Lounges are in a unique category of being in an “end-user” business like a retailer but having a huge opportunity like a cultivator or manufacturer to leverage expenses into Cost Of Goods Sold. Accordingly, it is essential that any business involving cannabis seek tax counsel early on to make sure the proper entity is used and other tax saving measures are adopted.

What Should You Do?

Considering the tax risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles Metro Area (Long Beach) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.

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