Marijuana Entrepreneurs Face Special Business Burdens

Rep. Dana Rohrabacher, R-Calif., one of the most outspoken Republicans for federal marijuana reform.
Rep. Dana Rohrabacher, R-Calif., one of the most outspoken Republicans for federal marijuana reform.

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With the passage of Prop. 2 this month, Alaska joins Colorado, Washington, Oregon and the District of Columbia in legalizing marijuana. While the state figures out how to regulate marijuana commerce, several federal laws sit as roadblocks to the business of cannabis.

Alaskans who hope to operate marijuana businesses will have to defy U.S. drug law, of course. But they’ll also face other federal rules they’re likely to find severely inconvenient and perhaps crippling to their enterprise.

One problem is a bit of tax code called 280E. This provision, enacted in the 1980s, prevents narco-traffickers from deducting business expenses, and the IRS enforces it against state-licensed pot businesses, too. Taylor West, deputy director of the Denver-based National Cannabis Industry Association, says it means marijuana businesses can’t deduct costs like rent and payroll when they file their tax returns.

“What that results in is businesses paying an effective tax rate or somewhere around 70-75 even 80 percent on their net profit,” she said.

It’s crushing to small businesses, West says, even though a few legitimate deductions remain.

“So oddly enough,” she said, “one of the things that a cannabis dispensary, for instance, can deduct is the cost of buying the marijuana.”

Another big impediment for pot entrepreneurs is the banking rules.  Banks typically refuse to allow marijuana businesses to open accounts, out of fear that they’ll be implicated in money laundering or other federal crimes. West says some members of her industry trade association have found ways around it.

“But the majority at this point are still having to operate entirely in cash, without the benefit of any sort of safety or accounting ease that comes from having a checking account,”she said.

Earl Blumenauer, a congressman from Oregon says, regardless of how you feel about legalizing marijuana, it’s not a good idea to force these businesses out of the banking system.

“Restricting them from having bank accounts, is absolutely insane, unfair and unwise if you care about money laundering, tax evasion or just theft,” he said at a press conference last week at the Capitol.

Rep. Dana Rohrabacher, R-Calif., one of the most outspoken Republicans for federal marijuana reform.
Rep. Dana Rohrabacher, R-Calif., one of the most outspoken Republicans for federal marijuana reform.

Blumenauer, who represents part of Portland and its eastern suburbs, is pressing for a raft of bills that would ease federal restrictions on marijuana, but the most pressing are the tax code and the banking rules.

“We need congress to act on two serious problems, not just for those states that have legalized adult use but for 23 states and counting that have legalized medical marijuana,” he said.

Blumenauer says a coalition of about 180 House Democrats and 50 Republicans supports liberalizing federal marijuana law. One of the visible Republicans is Congressman Dana Rohrabacher of California.

“My message to my fellow Republicans is ‘Wake up and see where the American people are,’” Rohrabacher said.

Rohrabacher, from conservative Orange County, says Republicans should join him to support principles like personal liberty and limited government, or just raw politics.

Alaska Congressman Don Young is already on board. He co-sponsored a Rohrabacher bill to block federal prosecution of people who buy or sell marijuana in compliance with state laws. Spokesman Matt Shuckerow says Young supports a state’s right to determine the nature of criminal activity within its borders. But one of the biggest impediments to marijuana commerce may be congressional indifference. The leaders of both parties, in the House and the Senate, haven’t made federal marijuana reform a big priority.