Business
Opinion: Not paying federal taxes is a foolish form of marijuana financing
Close readers of cannabis company financial statements have realized that many marijuana enterprises are financing themselves through nonpayment of federal taxes.
Caught in the perfect storm of collapsing margins, oppressive taxes and vanishing access to debt and equity capital, they are buying time by not making estimated tax payments in hopes of a brighter future.
Some observers try to put a positive spin on nonpayment as “cheap financing,” claiming that the interest charged on federal unpaid taxes is lower than interest that would be charged on other kinds of debt.
This is folly, of course: Interest rates on underpayments when added to penalties that might apply result in costly financing, especially for large corporations that could be subject to higher underpayment interest rates (and underpayment interest isn’t deductible).
‘Grim reality’
More to the point, it’s a bargain with the devil because, when the IRS begins collection procedures, the marijuana taxpayer will have no choice but to pay the amount owed sooner or later.
While it might be true that recent IRS settlements with cannabis businesses have included compromises of the total amount due on the basis that the company would go under if it had to pay the full amount, underpayers are betting the farm on a risky proposition.
And underpayment for a single year of liability doesn’t solve the problem – more tax is due the next year, the year after that and so on.
The grim reality is that cannabis companies that are not making estimated tax payments are insolvent or on their way there in short order.
Ordinarily, businesses in that position would negotiate with creditors and, if needed, try to reorganize in a federal bankruptcy proceeding.
But marijuana businesses can’t go bankrupt – federal bankruptcy courts will not hear petitions from federally illegal enterprises.
Instead of bankruptcy, cannabis companies that can’t pay their bills can be put into receivership under state law.
Two lessons
Having participated in several cannabis receivership proceedings, two lessons are apparent:
1. Most receivers need better advice in dealing with the licensing and other regulatory issues faced by cannabis enterprises.
On at least one occasion, a California receiver sold a marijuana store separately from its license to operate, thus ruining the value of the business and eliminating any chance of winding up the receivership.
Other common mistakes include believing that a receiver, who most likely has never operated a marijuana company, can properly operate a cannabis operation without the need for additional capital.
2. Receivers are not being correctly guided with respect to the complex tax and accounting issues that are raised by operating a cannabis business.
One of the first tasks of a receiver should be to ascertain the tax liability of the cannabis company.
The tax due is often unclear because of incorrectly prepared returns for both current and open (still subject to audit) years as well as overzealous and mistaken enforcement of Section 280E by the IRS.
When combined with the unavailability of clear tax rules (there are special helpful tax code provisions that can’t be used outside of federal bankruptcy), state-level cannabis receiverships are often unpredictable and unfair.
Pay up, negotiate
As difficult as it is, struggling cannabis companies should both pay their taxes and avoid receivership by negotiating with creditors.
For cannabis companies that have not yet taken the foolish nonpayment approach, there are alternatives, but they are complicated and require excellent books and records as well as sophisticated and aggressive advisers.
The real answer, of course, is to reform the tax code by getting rid of Section 280E; even people engaged in every other form of illegal activity get ordinary tax deductions.
Why should criminals engaged in the illicit marijuana market, for example, get tax breaks that people operating state-legal cannabis businesses don’t?
Unfortunately, such tax reform is unlikely to occur any time soon, and until then, marijuana operators need to avoid wishful thinking and make intelligent decisions.
James Mann, a cannabis tax lawyer at New York-headquartered Lucosky Brookman, argued the Harborside case in the 9th Circuit.
John Yaeger, a principal of the San Diego-based public accounting firm Pham Yaeger, has a number of prominent cannabis enterprises as clients.
Source: https://mjbizdaily.com/not-paying-federal-taxes-is-a-foolish-form-of-cannabis-financing/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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