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Legal Corner

Halted Movement




There’s no question that California cannabis remains a rocky, emerging industry even though entire countries and more than 30 U.S. states now have legalized medical and/or recreational cannabis. The reasons why though stem from a variety of sources—federal prohibition, the patchwork quilt of regulations across three regulatory agencies, the array of personalities coming into the California industry from black and grey markets, the bad behavior and fraud that abounds with the constant changes in state and local cannabis laws, etc. While there’s a lot of room for improvement that hinges on studying California’s cannabis market and its consumers, here are five negative sides of the California cannabis industry as an emerging market. Unfortunately, most of these are here to stay thanks to the U.S. Department of Justice (DOJ) and the Controlled Substances Act (CSA).

“To date, very little guidance has been made available from the IRS to help taxpayers make this determination.”


1. Irresponsible Federal Government

At least half of the reason California cannabis is so unpredictable as an industry is due to our federal government sticking its head in the sand over cannabis legalization. Instead of taking the reins and listening to the people to create a federal regulatory framework for uniform oversight and control, the federal government has let the horse out of the barn where states have 100 percent control over cannabis law and policy reform which, in the end, is probably a positive thing since states are better positioned anyway to know the needs and demands of their constituent citizens, and can better navigate specific local health impact issues. Still, the fact that states have to pay attention every time a new U.S. attorney general (this time, William Barr) takes the helm at the DOJ to ensure that its cannabis licensing regimes remain intact is not only annoying, but also a waste of time and resources in that states continually pivot to ensure that the DOJ is kept at bay in this area.


2. Volatile Access to Banking

Lack of access to banking in California’s industry is the current norm, and it ultimately helps keep cannabis in the shadows and out of reach of full legitimacy and transparency. Even though in 2014 FinCEN issued guidelines to financial institutions for banking in the cannabis industry (despite open violations of the Bank Secrecy Act and anti-money laundering laws), the participation under those guidelines by California banks and credit unions has been slow-going at best. The good news is that these guidelines still exist despite then-acting Attorney General Jeff Sessions rescinding all other DOJ cannabis guidance.


3. Oppressive Federal Taxation

The third biggest drag on California’s industry that keeps it in its murky, emerging state is the rules of the Internal Revenue Service (IRS), and those aren’t changing anytime soon. Internal Revenue Code Section 280E prevents cannabis businesses from deducting expenses from their income, except for those considered a Cost of Goods Sold (COGS). As a consequence, cannabis businesses are required to determine what expenses are included in COGS and, therefore, what expenses are deductible. To date, very little guidance has been made available from the IRS to help taxpayers make this determination. And all court cases on the topic (with the exception of C.H.A.M.P.) have not been helpful to cannabis businesses.


4. Constant Changes to “Robust Regulations” by the State

California cannabis will forever be a regulated commodity and that means that the rules around it will change indefinitely. The reason why “constant changes” makes this list is because these early days of licensing breed a lot of uncertainty among California regulators as industry issues crop up, so the frequency of these changes in the first few years of licensing help to render and keep cannabis an emerging market. The state’s prohibited products list, as one of the many regulatory issues in play, is a very good example of constant regulatory change as the state decides what products it’s going to allow in the marketplace.


5. Scammers

Fraudsters also help to keep California cannabis in the wild, wild west. And the bad behavior spans a range of areas in California from scamming investors to bank fraud to lying about entitlements from regulators. With the lack of federal oversight and enforcement, and California (right now) paying attention mainly to just licensing and regulation of actual cannabis businesses, no one is really keeping an eye on the myriad of cannabis charlatans in the “Golden State.”