State of the State: U.S. Law Needs to Keep Pace with States on Marijuana

Mar 1, 2014

Jamey Dunn
Credit mattpenning.com 2014 / WUIS/Illinois Issues
On the federal level, marijuana is classified as a Schedule 1 controlled substance. Schedule 1 drugs are considered to have a high risk for causing dependency and no acceptable use as medication. Other drugs classified as Schedule 1 include LSD, heroin and ecstasy. 

The classification has not stopped 21 states, including Illinois, and the District of Columbia from allowing the medical use of cannabis. Maryland has not legalized medical marijuana statewide, but it does have a hospital-based research program that administers marijuana to patients. That state also allows those arrested for possession of the drug to use medical need as a part of their defense. Two of those 21 states, Colorado and Washington, have also legalized recreational use of marijuana. The state-level legalization of a drug that is still prohibited at the federal level has created a number of complications for those participating in state programs. 

The U.S. Department of Justice has indicated that it has a specific enforcement agenda when it comes to marijuana. The department is targeting eight enforcement areas. A memo from the department lists them as preventing the following:

  • The distribution of marijuana to minors.
  • Revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels.
  • The diversion of marijuana from states where it is legal under state law in some form to other states.
  • State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity. 
  • Violence and the use of firearms in the cultivation and distribution of marijuana.
  • Drugged driving and the exacerbation of other public health consequences associated with marijuana use.
  • The growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands.
  • Marijuana possession or use on federal property.

The department released a statement after voters in Colorado and Washington approved legalizing marijuana for recreational use. “For states such as Colorado and Washington that have enacted laws to authorize the production, distribution and possession of marijuana, the department expects these states to establish strict regulatory schemes that protect the eight federal interests identified in the department’s guidance. These schemes must be tough in practice, not just on paper, and include strong, state-based enforcement efforts, backed by adequate funding.”

The Justice Department opted not to challenge the law in either state. However, it cautioned: “If any of the stated harms do materialize — either despite a strict regulatory scheme or because of the lack of one — federal prosecutors will act aggressively to bring individual prosecutions focused on federal enforcement priorities, and the department may challenge the regulatory scheme themselves in these states.” Future administrations could easily decide to reverse course on this enforcement policy. 

Even though the feds have backed off enforcement in states that have legalized marijuana for some uses, federal law is making some of the basics of running a cannabis business difficult. For example, many dispensaries and growers in other states are conducting business in cash because banks will not give them accounts. And it’s a lot of cash. According to the National Cannabis Industry Association, a lobbying group, legal marijuana was a $1.5 billion industry last year. The group expects that number to increase to $2.7 billion. 

Banks fear that federal regulators might find them in violation of laws such as prohibitions on money laundering and slap them with fines or take away their Federal Deposit Insurance Corporation (FDIC) backing. Some in the business have been able to get bank accounts by setting up holding companies or using personal bank accounts, only to have the bank find out that they grow or sell marijuana and close out their accounts. Others have had some luck and found banks willing to take a chance on them. But those who operate on cash see serious security risks. They must keep large sums for taxes, fees and payroll. Many vary their hours of operation and how and when they move money around to try to deter robbery. 

Owners must purchase money orders to pay their utility bills and other costs. They also cannot accept credit cards from customers. Some dispensaries are turning to alternative options, such as the Internet-based currency used by customers on the now-defunct online black market known as the Silk Road, which the FBI shut down last year. Silk Road was an anonymous marketplace where customers could purchase illegal drugs. But those selling marijuana legally are now turning to bitcoin, which is a virtual currency with fluctuating values similar to a stock. Bitcoin has been volatile, with booms and busts in value, so dispensaries that take it from customers run the risk of losing money. Those who are opting to take bitcoin say it is worth the risk to cut down on security concerns. 

President Barack Obama’s administration is looking to improve the banking environment for those involved in the legal pot trade. Attorney General Eric Holder announced in January that the Justice Department is working on legal guidance for federal bank regulators. “You don’t want just huge amounts of cash in these places. They want to be able to use the banking system,” Holder said at an event at the University of Virginia's Miller Center. “There’s a public safety component to this. Huge amounts of cash — substantial amounts of cash just kind of lying around with no place for it to be appropriately deposited is something that would worry me, just from a law enforcement perspective.” 

But such a move would not create legal protections for banks. It would more likely be similar to the message the department has sent on enforcement of drug laws in states that have legalized marijuana, but this time directed at banking law. Something along the lines of: We will leave you alone for now if you follow the rules. But we reserve the right to step in down the road if we don’t like the way things are going. This will probably not be enough for many banks to be willing to risk fines and the loss of key federal support. 

Once medical marijuana businesses bring in all that cash, they have to pay taxes on it. This too works differently for a quasi-legal industry. If marijuana sellers want to avoid getting busted by the IRS for tax evasion, they had better pay up just like any other business. But unlike other businesses, they don’t get to write off business expenses such as rent, health insurance coverage for employees and marketing costs. “Section 280E of the Internal Revenue Code prohibits businesses involved in ‘drug trafficking’ from deducting normal business expenses from their net income. This policy is being unfairly applied to medical and adult-use cannabis dispensaries operating legally under state law, resulting in their federal tax burden being significantly higher than that imposed on any other business. In fact, some medical cannabis operations could be driven out of business on account of this provision,” said a written statement from the National Cannabis Industry Association.

While there is movement at the federal level to offer some kind of intervention on the banking issue, there seems to be little appetite to lower the tax bills of legal marijuana growers and sellers. “Why would we allow companies operating in violation of federal law to take federal tax breaks? It makes no sense,” Arkansas Republican Rep. Tim Griffin told Politico. Griffin sits on the House Ways and Means Committee, which considers tax policy proposals. Since state tax policies often mirror the federal law, decisions on how to handle cannabis businesses on the federal level could also have state implications. Lobbying groups such as the Cannabis Industry Association are seeking changes to the federal laws on both banking and taxes as they relate to legal marijuana operations. 

Federal law is also the basis of a proposed rule in Illinois that would bar medical marijuana patients from owning guns. The rules that the Illinois Department of Public Health has proposed for patients and caregivers would require them to surrender their Firearm Owner’s Identification Cards (FOID) to participate in the state’s medical marijuana program. The Justice Department’s Bureau of Alcohol, Tobacco, Firearms and Explosives wrote an open letter to all federal firearm licensees in 2011. “Any person who uses or is addicted to marijuana, regardless of whether his or her state has passed legislation authorizing marijuana use for medicinal purposes, is an unlawful user of or addicted to a controlled substance and is prohibited by federal law from possessing firearms or ammunition,” the letter said. 

The FOID card act disqualifies applicants who are “convicted of an offense involving the use or possession of cannabis, a controlled substance, or methamphetamine within the past year; or determined by the Department of State Police to be addicted to narcotics based upon federal law or federal guidelines.” But it makes an exception for those who are taking a narcotic substance as a medication. “‘Addicted to narcotics does not include possession or use of a prescribed controlled substance under the direction and authority of a physician or other person authorized to prescribe the controlled substance when the controlled substance is used in the prescribed manner.” It would seem that marijuana as prescribed by a doctor would fall under this category in the state law’s exemption. 

Some backlash has come from the proposed rule relating to FOID cards, but state officials are simply trying not to run afoul of federal law regulating guns, just as banks are trying to avoid breaking federal laws related to trafficking and money laundering. If marijuana is now medicine under Illinois law, then it should be treated as such. If growing and selling pot, under strictly regulated conditions is now legal, the owners of those businesses should have access to the same banking system and tax benefits as any other business. But as long as the laws of states that have legalized the use of marijuana and the federal government’s laws are contradictory, such situations that treat legal sellers and buyers of cannabis unfairly will continue to pop up. If changes don’t come at the federal level, patients, businesses and state regulators will be left holding the bag.

Illinois Issues, March 2014