Most Congressman would likely deny having smoked marijuana. But in the past five months the House of Representatives has seen the introduction of three bills that aim to change the federal tax and legal treatment of marijuana sellers and users. Our typical member of Congress isn’t rushing out to swap his subscription of The Hill for High Times. But a group of mismatched congressmen and political figures are seeking to help the small businesses and individuals who are hoping to profit from the sale and distribution of marijuana in states where it is legal.
In mid September Rep. Earl Blumenauer (D-Oregon), along with a rather unlikely partner, Americans for Tax Reform president Grover Norquist, announced the drafting of the Small Business Tax Equity Act of 2013. The legislation aims to reduce the burden of taxation on marijuana businesses, which are often unable to claim deductions from federal taxes . “Small legal marijuana businesses are being victimized by the tax code,” said Rep. Blumenauer in a statement. “Only Congress can fix this problem by updating the federal tax law that forces these businesses to close their doors, or drives them underground, encouraging evasion.”
The Internal Revenue Code limits marijuana-based businesses from being able to deduct work expenses (rent, supplies, etc.) from their gross income before paying taxes. The language was inserted in 1980s after a drug dealer attempted to write off a yacht as a business expense. Studies show that the code effectively gives marijuana-based businesses a 87.5 percent tax rate while other businesses function at 35 percent.
“This is something that affects the honest and legitimate businesses that are just trying to be above board,” said Aaron Smith, executive director at the National Cannabis Industry Association, a federal marijuana lobby and supporter of the bill. “The last time I checked illegal drug dealers weren’t filing taxes on their sales so they could care less about whether they were getting deductions.”
The legalization of the sale of marijuana in Colorado and Washington State has created something of a conundrum for businesses. Come January 2014, the two states will consider marijuana a legal industry. But in the eyes of the federal government, pot is still an illicit drug under the Controlled Substances Act. The federal government may not prosecute a small business selling pot in Colorado. But neither will it let that company take full advantage of federal tax deductions and other benefits.
Marijuana businesses are also having problems with banking. A federal banking law limits banks from giving loans to businesses that deal with any illicit drugs, and that includes opening up checking accounts.
“On the banking side it’s been a scary situation. A lot of these businesses have been forced into cash only operations. They can’t use credit cards and in some cases don’t have active checking accounts,” said Aaron Smith of the National Cannabis Industry Association. “They pay their payroll in cash and their city and state licensing fees in cash. One of our members in Washington had to pay the licensing fee and had to go down to the office with $8,000 in cash.”
An effort to change that law is being pushed by Rep. Ed Perlmutter (D-Co) and Rep. Denny Heck (D-Wa). Their bill, the Marijuana Businesses Access to Banking Act, was introduced in July and has 24 cosponsors. Of the co-sponsors, 22 are Democrats and two are Republicans – Rep. Mike Coffman of Colorado and Rep. Dana Rohrabacher of California. “With twenty-one states and D.C. now allowing for some form of legal adult marijuana usage, federal law needs to be updated to reflect the reality of the situation in the states,” Rep. Heck said in a statement.
A third piece of legislation, introduced by Rohrabacher, deemed the Respect State Marijuana Laws Act, aims to protect marijuana smokers. It would keep the federal government from prosecuting residents who smoke marijuana in states where the drug is considered legal. The act has 19 co-sponsors, including 15 Democrats and four Republicans.
Congress addressed the contradictory federal and state laws regarding legal marijuana use at a hearing earlier this month. The hearing came on the heels of Attorney General Eric Holder’s announcement that the federal government would hold off on interfering with the states that have recently legalized marijuana for recreational purposes. Many viewed the announcement as a “wait and see” approach but marijuana activists see it as the chance for states to prove to the rest of the country, that prohibition of Marijuana doesn’t work and legalizing it as an industry can.
“Clearly federal law affects everybody and every state’s equally and that’s the end goal,” Smith said. “To have a policy at the federal level that allows states to enact their own laws in accordance with the rules of their voters and then treat those businesses equitably.”
The bills have a long way to go before passage. But the unlikely congressional support to mitigate the conflicts between federal and state legislation that affects marijuana businesses indicates an acceptance that a legal cannabis industry may be here to stay.