Israel Is Dominating Global Medical Cannabis Research Despite An Anti-Federal U.S. Climate
Most people would be surprised to hear that Israel is the global leader in medical cannabis research. Not a surprise here considering that Israel is already known as an agricultural heavyweight and first allowed patients with qualifying conditions to use cannabis in the early 1990’s. Additionally, Israel does not have the federal law prohibition we have to endure. Israel’s embrace to allow for medical cannabis and medical cannabis research has opened the doors to allow scientists to conduct research without the fear of interruption by the government. The Israelis have been so successful in developing high quality cannabis strains that you cannot get anywhere else that they are posed to export this crop which some analysts believe could bring in as much as $4 billion in yearly revenue and improve the quality of ongoing medical research involving cannabis. Also, in 2020 its government authorized the exports of medical cannabis which the government figures will contribute to the growth of this industry.
Now You Can Invest In Israeli Cannabis Companies.
The Jerusalem Post reported that the Tel Aviv Stock Exchange launched on December 28, 2020 a new index for nine medical cannabis companies. The new index includes nine companies that are “primarily engaged in the fields of research, cultivation, sale or production and marketing of medical cannabis products”. The index has a relatively low market cap of 1.7 billion shekels ($529 million) and is expected to serve as a “benchmark for active mutual funds that offer exposure to this emerging and growing sector”.
In Contrast – Look At The Anti-Federal U.S. Climate
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. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.
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?
Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government. But on January 4, 2018, former Attorney General Jeff Sessions revoked the Cole Memo. Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.
Five states (Arizona, Mississippi, Montana, New Jersey and South Dakota) on November 3, 2020 passed new medical or recreational cannabis laws. South Dakota voters adopted legalization of both medical and recreational cannabis. Arizona, Montana and New Jersey voters adopted expansion of cannabis legalization to recreational use. Mississippi voters adopted legalization of medical cannabis use. This adds to an existing group of 11 states and Washington, D.C. that have legalized recreational cannabis, and adds to an existing group of 33 states that have legalized it for medical purposes.
Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.
The amendment states that:
NONE OF THE FUNDS MADE AVAILABLE UNDER THIS ACT TO THE DEPARTMENT OF JUSTICE MAY BE USED, WITH RESPECT TO ANY OF THE STATES OF ALABAMA, ALASKA, ARIZONA, ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, FLORIDA, GEORGIA, HAWAII, ILLINOIS, INDIANA, IOWA, KENTUCKY, LOUISIANA, MAINE, MARYLAND, MASSACHUSETTS, MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, MONTANA, NEVADA, NEW HAMPSHIRE, NEW JERSEY, NEW MEXICO, NEW YORK, NORTH CAROLINA, NORTH DAKOTA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH, VERMONT, VIRGINIA, WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING, OR WITH RESPECT TO THE DISTRICT OF COLUMBIA, GUAM, OR PUERTO RICO, TO PREVENT ANY OF THEM FROM IMPLEMENTING THEIR OWN LAWS THAT AUTHORIZE THE USE, DISTRIBUTION, POSSESSION, OR CULTIVATION OF MEDICAL MARIJUANA.
This action by the House is not impacted by the change of position by the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place. Fortunately, Congress has included this amendment but yet has changed any of the tax or banking laws that pose challenges to the cannabis industry.
Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.
U.S. Tax Law Unfavorable To Cannabis
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.
U.S. Banking Law Unfavorable To Cannabis
Cannabis-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. A tiny fraction of banks and alternative financial institutions are willing to work with cannabis companies. As of September 30, 2020 FinCEN issued a report stating that there were 677 banks and credit unions that filed reports saying they were working with cannabis clients. Unfortunately, this number is down from 695 in the last fiscal quarter ending in June and 711 for the quarter preceding that.
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.
What Should You Do?
Unlike the citizens of Israel, given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government. Although cannabis is legal in California, that is not enough to protect you. It is best to be proactive and engage an experienced board certified tax attorney-CPA in your area who is highly skilled in the different legal, banking and tax issues that cannabis businesses face. Let the cannabis tax attorneys of the Law Offices of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations protect you and maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.