One of the more frustrating aspects of the cannabis industry for business owners is the lack of available banking services. Many banks are hesitant to provide banking services to the cannabis industry because of the conflict between state legality and federal illegality, not to mention the obligation of banks to file Suspicious Activity Reports for transactions that may violate the Bank Secrecy Act. While the number of banks providing services to the cannabis industry is growing, obtaining banking services is still very challenging for cannabis entrepreneurs. The standoff between banks and the cannabis industry manifests in many frustrating ways, including but not limited to strictly cash businesses, banks who charge excessive services fees to cannabis business clients and the need to use credit unions in lieu of traditional banks (who themselves are fighting their own legal battles).
Recently, California proposed an idea that could very well reshape the entire cannabis industry: a state sponsored bank for cannabis businesses. California State Treasurer John Chiang and Attorney General Xavier Becerra are planning to conduct a feasibility study to test whether a California state bank would help California’s many cannabis businesses.
“We are contending with the emergence of a multi-billion dollar cannabis industry that needs banking services, and a private banking industry that is stymied by federal law in meeting the needs of the new industry,” Chiang said.
On January 4, 2018, Attorney General Sessions unveiled a new policy that effectively rescinds the Cole Memorandum, which set forth the Obama Administration’s position that the federal government would not generally not enforce cannabis laws in states where it is legal. This is an about-face from General Sessions’ recent testimony where he suggested he would maintain the Obama Administration’s position. General Sessions’ new policy comes at a time where support for legalization has never been higher, as a recent Gallup poll suggested 64% of Americans favor legalization. Unlike the Cole Memorandum, which discouraged enforcement of cannabis laws, Gen. Sessions’ policy allows US Attorneys to exercise their own judgment as to whether to enforce cannabis laws.
Clearly, General Sessions’ announcement has the potential to have a major impact on the legal cannabis industry. His new policy, though, has already started a political battle. Cory Gardner, the Republican Senator from Colorado, immediately took to Twitter to oppose General Sessions’ action, arguing that cannabis policy should be a states’ rights issue. Sen. Gardner stated that he was “prepared to take all steps necessary, including holding DOJ nominees, until the Attorney General lives up to the commitment he made to me prior to his confirmation.” Presumably, the commitment Sen. Gardner spoke of was adherence to the Cole Memorandum.
Senator Ron Wyden (D-Ore.) recently announced that he is co-sponsoring the Marijuana Justice Act of 2017 (“the Booker Bill”), a bill previously introduced by New Jersey Senator Cory Booker. The Booker Bill seeks to decriminalize marijuana across the nation and penalizes states with high arrest and incarceration rates with respect to marijuana related crimes. The Booker Bill also seeks to establish a “Community Reinvestment Fund”, a fund comprised of monies not provided to states in violation of the disproportionate arrest rates. The Community Reinvestment Fund will be used to provide funds to “reinvest in communities most affected by the war on drugs” and includes grants for job training, public libraries, community centers and other programs designed to enhance the community. The Booker Bill proposes spending at least $500,000,000 for each fiscal year.
Senator Corey Booker (D-NJ) and Senator Ron Wyden (D-Ore.)
Senator Wyden joined Senator Booker on a Facebook Live video to discuss the thrust of Bill and his co-sponsorship. His position echoed Senator Booker’s, which was that both Senators viewed the Booker Bill as a vehicle to combat the disproportionate impact of the war on drugs on minority communities.
The Booker Bill is not likely to succeed. Senator Wyden is only the second co-sponsor, after the Booker Bill was originally proposed in August of 2017. Similar bills seeking major marijuana reform have not gained much traction. Nevertheless, efforts such as those by Senators Booker and Wyden begin a national conversation on the issue of cannabis reform.
The Booker Bill will not likely have any material impact on New Jersey’s push to legalize recreational adult use cannabis. We will provide updates if the Booker Bill gains additional co-sponsors.
Understanding the role of local government is critical to the success of potential legal cannabis businesses. Not only will cannabis businesses need to obtain a license to operate from the Division of Marijuana Enforcement (“DME”), but cannabis businesses will also have to navigate regulations and ordinances set by local governments.
A provision of Senator Scutari’s Bill (“the Bill”) that will invariably cause headaches for legal cannabis entrepreneurs is the local governments section. The Bill, § 11. The most complicating aspect of this section of the Bill is that it allows a local government to decide whether it will allow legal cannabis businesses in its borders. In other words, even if cannabis businesses are deemed legal by the State of New Jersey, individual towns have the right to prohibit them. Towns are given one year from the date Governor-Elect Murphy signs the Bill into law to decide if legal cannabis businesses will be able to operate in their borders. If a town does not make a call one way or another, legal cannabis businesses are allowed to operate in the town for five years, and at the end of the five year period, the town is given the opportunity to prohibit the operation of a cannabis business.
Attorney General Jeff Sessions, the nation’s top law enforcement officer, is an outspoken critic of marijuana. How Attorney General Sessions approaches marijuana, both medical and recreational, has the power to shape, enhance or destroy the industry. One of the core issues for legal marijuana businesses is the federal illegality of marijuana: state legalization does not change the Controlled Substances Act, 21 U.S.C. 13, which still classifies marijuana as a Schedule I controlled substance. The conflict between states where marijuana is legal and the federal laws criminalizing marijuana creates a legitimate federalism concern.
Before Attorney General Sessions was appointed, marijuana businesses could rely on some limited federal guidance. Former Obama Administration Deputy Attorney General James M. Cole issued a memorandum to all U.S. Attorneys on August 29, 2013 (the “Cole Memorandum”) explaining the Department of Justice’s (“DOJ”) position on the limited scenarios where federal law enforcement should enforce federal marijuana laws, which primarily address the availability and/or provision of marijuana to children and the diversion of marijuana across state lines. Soon thereafter, the Department of the Treasury Financial Crimes Enforcement Network issued a memorandum to financial institutions about their role in marijuana businesses (the “FinCEN Memorandum”) which, for all intents and purposes, adopted the positions taken by the DOJ as set forth the Cole Memorandum.
The proposed legalization bill drafted by Sen. Scutari (the “Bill”) outlines the types of licenses that will be available to marijuana businesses, but is generally silent on how to actually obtain those licenses. The Bill intends to create a state agency called the Division of Marijuana Enforcement (the “DME”) and charge the DME with the task of promulgating legal cannabis regulations. It will be the DME who determines the nuances of licensure – in other words, when it comes to license application and issuance, the Bill essentially tells the DME to “figure it out.”
While this lack of guidance is understandably upsetting for aspiring recreational marijuana business entrepreneurs, the license application process in Colorado provides a possible preview for what the DME may look for when screening potential marijuana business owners in New Jersey. After all, it is fair to assume that New Jersey will use Colorado as a model in developing a regulatory framework for recreational marijuana businesses given that multiple New Jersey legislators traveled to Colorado to research its regulatory scheme, returning with favorable impressions. This article will look at the license application process as it presently functions in Colorado and highlight the key aspects of obtaining a license in Colorado that may eventually also be requirements in New Jersey.
§280(E) of the Internal Revenue Code poses one of the more frustrating challenges for the legal marijuana industry. §280(E) states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consist of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or any State in which such trade or business is conducted.
The impact of §280(E) is that marijuana businesses, even those that are in complete compliance with State regulations and laws, are not allowed to avail themselves of typical business tax deductions or credits. This means that while many legal marijuana businesses generate high revenues, high profits do not often follow after the taxman takes his share.
On September 27, 2017, Saiber attorneys attended the New Jersey CannaBusiness Association event at Galloping Hills Golf Course in Kenilworth, NJ. The event was a great opportunity for potential cannabis entrepreneurs to learn about the potential upcoming business opportunities in New Jersey from industry leaders. Over four hundred people were in attendance. The event was sponsored in part by Athletes for Care, an organization advocating for the careers of retired athletes, which in part advocates for medicinal cannabis. Former athletes Marvin Washington (New York Jets, Defensive End), Leonard Marshall (New York Giants, Defensive Lineman), Eugene Monroe (Baltimore Ravens, Offensive Tackle) and Riley Cote (Philadelphia Flyers, Left Winger) were present at the event and participated in panel discussions.
New Jersey State Senator Nicholas Scutari (D. Union) recently introduced Senate Bill 3195 (“the bill”) legislation to legalize the sale and consumption of recreational cannabis in the State of New Jersey. There are several reasons to believe that the Act will, after deliberation and modification, be enacted into law. First, polling data shows that the majority of New Jersey residents are in favor of legalization of cannabis. Second, not only does legalization have general bipartisan support, but it also has the support of New Jersey Senate President Stephen Sweeney, who traveled to Colorado in 2016 with Senator Scutari and several other New Jersey legislators to observe Colorado’s highly successful recreational cannabis industry and returned with very favorable impressions. Finally, Democratic gubernatorial candidate Phil Murphy has declared his support for legalization of cannabis in New Jersey. The Republican gubernatorial candidate, Kim Guadagno, has not specifically taken a position on legalization of cannabis, but instead recently equivocated during a primary debate that she both favors decriminalization and supports Attorney General Jeff Sessions’ views on cannabis. Some version of the bill will probably be enacted in 2018. It is entirely possible that if enacted, the bill will contain new or revised provisions that do not currently exist in the proposed legislation. This post addresses the bill as presently written.