A friend of mine posted that during these times the marijuana industry has done more to keep people safe, inside their homes than our leaders have. Without opining on the intelligence of our leaders or their decisions, it is clear that she is at least partly right. The cannabis industry is playing a large role in people’s decisions to remain inside. Many people have reported using cannabis to get through the long days, and that it is the only thing keeping them cooped up inside. The days of “Netflix and Chill” are truly upon us.
The numbers also confirm this notion. Dispensaries from Alaska to Colorado have reported lines around the block, similar to those seen at supermarkets and drugstores around the country. Some are seeing a spike in sales of 33%, while others are reporting a 159% jump from the same time last year. One San Francisco dispensary reported having the biggest day of business since recreational sales began there in January of 2018.
Most noteworthy, however, has been the official treatment of dispensaries in this time when nonessential businesses are being forced to close across the country. One state after another is announcing that cannabis businesses are to remain operational. Nevada and Colorado both issued advisories to dispensaries on how to observe social distancing. New York encouraged businesses to allow patients to schedule appointments in an effort to limit overcrowding. Illinois also exempted dispensaries from the list of non-essential businesses that must cease operations. In San Francisco, the city initially didn’t list cannabis businesses as essential, and its health department asked dispensaries to shut down. However, after an outcry from the community and patients across the city, they reversed course and allowed cannabis businesses to remain open. Ultimately California announced that cannabis business was deemed “essential”, allowing them to remain open statewide.
Because not all states have made similar moves, the Marijuana Policy Project, a cannabis legalization organization, penned a letter to all governors urging them to declare medical cannabis businesses “essential” and ensure that they remain open during this crisis. The letter is signed onto by several reputable organizations and can be found in its entirety here:
Think about what all of this means. States are not only declaring dispensaries to be essential businesses, but they are putting out guidelines as to how to expand remote services, maintain good business practices, and safely deliver cannabis to the consumer. Just a few years ago, this would have been unimaginable. The notion of deeming a dispensary to be an “essential business” would have seemed laughable from a governmental perspective. The thought of advising them on how to remain operational in a time of crisis seems even less likely.
In this time when everything seems chaotic, it is important that we take time to reflect on the good in our lives. It is important to remember the blessings we have and to appreciate the times we are living in. The cannabis industry remains young, but it seems to have established itself as a legitimate industry in the minds of our leaders. This is something that should not be taken for granted. I encourage all to take a moment to think about this and appreciate how far we’ve come.
Year 2019 was an up and down year for the cannabis industry. As the year comes to a close, let us take some time to reflect on what transpired during this transitional period for the cannabis industry. Hopefully, a detailed look at what happened may shed some light on what is ahead in 2020.
First, public opinion on cannabis has continued to rise. For the first time, poll results suggested that more than two-thirds of Americans support legalization. Such a pervasive, bipartisan, agreement for a fundamental change in the law is rare, and is a true reflection of the state of the industry now, and where the industry is headed.
Riding along with public opinion, Congress saw more movement towards full legalization than in any single year prior. The list of cannabis-related bills that were introduced in Congress this year tops 15, covering topics from banking to immigration. Most noteworthy among those bills are the MORE Act, a comprehensive legalization bill that passed its committee in the House, and the SAFE Banking Act, which passed the full House by a landmark 321-102 bipartisan vote. At the same time that these provide an optimistic outlook for the federal regime, no actual progress has been made in Congress, largely because the Republican-led Senate remains staunchly opposed to reform (google “Mitch marijuana machete” for an idea of Mitch McConnell’s recent activities relating to drug policy reform).
The executive branch has not been without movement either. President Trump does not have the traditional hard-lined anti-cannabis stance that some Republican leaders espouse. He campaigned on a platform of not interfering with states’ ability to manage their own medical and adult-use programs. He has publicly stated his support for the States’ Act, a bill that would essentially codify the same, leaving enforcement up to the states. Under Trump, the FinCEN continued its policy of allowing banks to do business with the cannabis industry, assuming that the Suspicious Activity Report (“SAR”) requirements were being followed. There are also no known examples of DEA or other federal law enforcement actions taken against operators lawfully operating under state law.
At the same time, the executive branch has made moves against the legalization movement. In 2018, then-AG Sessions rescinded the Cole Memorandum, signaling that the feds were looking into increasing enforcement against cannabis businesses (Thankfully Sessions is no longer a part of the administration, as his views are notoriously more anti-legalization than Trump’s). Just last week, as Trump signed the yearly spending bill into law, he attached a vague statement reserving the right to enforce federal law even in the face of full state-law compliance. Overall the federal government has progressed, albeit slowly, in the right direction.
Many states had significant progress towards legalization in 2019. Illinois became the 11th state to fully legalize adult-use, while Hawaii, New Mexico, and North Dakota decriminalized. We now stand with 33 states having passed a robust medical program, a full two-thirds of the union. Bills were proposed in more than two dozen states, some to expand existing frameworks, and others to create new ones. Just this week Alabama’s legislature’s commission recommended legalizing for medical purposes, a stark shift from the traditional views thought to be widely-held in the deep south. Overall the trend is clearly moving towards more states joining the legalization team, some quicker than others.
Though 2018 set a high bar for the hemp/CBD industry in terms of significant reform, Year 2019 arguably topped the significant progress of the 2018 Farm bill. In October, the USDA published its interim final rule, providing much-needed guidance to the hemp community. It created a federal framework for hemp farmers, creating registration, licensing, and testing requirements. It also allowed states to create their own systems, and many of the largest states for hemp farming are doing just that. FinCEN, the same treasury bureau that regulates banking for marijuana businesses, announced in December that banks may do business with the hemp industry without having to adhere to the SAR reporting requirements like those doing business with marijuana.
At the same time, the hemp/CBD industry skyrocketed in 2019. We saw an explosion of CBD products, and the industry is now estimated to be worth $4 billion. Tinctures, edibles, lotions, balms, you name it, someone has put CBD in it and made money this year. There remains so much uncertainty about the legalities of the market, and many have taken advantage of this “Wild West” atmosphere to quickly seize market shares, without guaranteed continuity once enforcement occurs. Year 2019 was not without foreshadowing of enforcement, however. In November, the FDA sent out warning labels to several companies that were selling CBD products. The letters go into detail regarding the various items being sold and analyzed how each company was violating various laws. Although the FDA hasn’t actually seized anyone’s assets or froze any bank accounts, they are clearly watching and thinking about doing it.
A really interesting piece of news swept the nation this year. At the beginning of November, the NYPD posted a picture of two officers posing with “106 pounds of marijuana that was destined for our city streets”, bragging about its success. Only one problem… it was all legal hemp, with certifying papers and all. The NYPD quickly dropped all the charges, and recently returned the hemp to the owner. This incident also highlights a significant issue with the hemp industry, in that it comes from and has all the outward appearance of marijuana, leading to confusion and enforcement problems. Until law enforcement agencies are properly trained, this type of incident is likely to repeat itself.
Year 2019 also took its toll on many cannabis companies. Large companies like Eaze and MedMen had to lay off many employees, as the actual returns were less than what their projections anticipated. Many stocks took big hits in 2019, for the same reasons. The projections for the industry have been huge, and are likely accurate, but are also likely skewed because of the nature of the industry. There is still a large “traditional” market in existence, which continues to dwarf the legal one. While some have come out of the shadows, progress remains slow because of the monumental taxes, regulations, and difficulties associated with being a fully-legal operating cannabis company.
WHAT ABOUT 2020?
The year 2020 is upon us. The cannabis industry is not going anywhere. It will continue to grow and mature as the year goes on. We aren’t going to see any reversal of the general trend towards legalization. At the federal level, I don’t believe that 2020 will see a single cannabis bill passed and enacted into law, and certainly nothing like full legalization. The country is not ready for it yet, as many of the industry leaders remain staunchly opposed for two reasons. First, there remains distrust and skepticism that is leftover from the reefer madness days. Many politicians still feel that marijuana is a gateway drug to other substances, and until they are convinced otherwise will stay opposed. Second, and more sinister perhaps, legalization denotes trouble for industries like alcohol, tobacco, and pharmaceuticals, all of whom stand to lose significant market shares once cannabis replaces these vices as people’s substance of choice. Lobbyists for these industries continue to work tirelessly to oppose legalization, and members of Congress are still forced to follow. Until these issues change, we must wait for full legalization.
At the state level, change will happen, and rapidly. Already several states seem poised to have recreational programs on the ballot, in states where it is almost certain to pass. These include New Jersey, New York, North Dakota, Minnesota, Vermont, and Pennsylvania, all of whom will pass legalization by years end. More states will join the medical bandwagon, leaving perhaps one or two states with absolutely no cannabis legalization framework.
Public opinion will continue to positively increase and have more of an impact on the industry. If in 2019 we finally hit 66%, I predict that Year 2020 will have us hit 75%. As the younger generation grows up, and as the older one retires and fades away, the numbers will continue to rise. At the same time, science continues to develop, as new studies are coming out nearly every week showing another beneficial use of the cannabis plant. At the same time, organizations like CED Foundation and The IJCA continue to run awareness campaigns and spread the word, adding to the number of people who are exposed to ideas and understanding of the plant’s many uses. More studies and more awareness, reaching even more people, means more backing for legalization.
Hemp is poised for a huge gain in 2020. With the federal regulations in place, the industry now has definitive guidance on the government’s position. While CBD as medicine remains a tricky subject, certainly hemp’s use as a tobacco alternative, a plastic alternative, textiles, fabric, and other industry uses will skyrocket. I also believe that 2020 will see the FDA, DEA and USDA will work out some of the kinks with using CBD as an active ingredient, providing helpful guidance to an industry running around like a headless chicken. Once that occurs, again, the industry will expand rapidly, as more certainty from the government will allow more companies to enter the market.
Lastly, I think 2019 brought some valuable lessons to the industry. The way the projections did not turn into reality, and the hits that many businesses had to take, give us some really important lessons. Caution is urged when investing in an industry plagued by burdensome regulations and strong financial incentives not to join the legal market. The “traditional” market remains the elephant in the room. The likelihood of real enforcement crackdown is low, because of limited resources, sheer numbers, and the probability that any enforcement would result in really bad press. Because investors have now been warned, the industry’s growth will slow. We will continue to see startups join the market, but perhaps on a smaller scale.
I hope that this discrepancy between projections and sales will also be a lesson for our legislatures. They need to come up with solutions that create subsidies for those coming out of the shadows so that states can see the actual revenues they hoped for. They may have to accept several billion in illegal sales as water under the bridge. They may have to lower tax rates to incentivize people to legitimize their operations. They may have to lessen the licensing requirements, making it easier and cheaper for those interested in joining to actually do so. The specific decisions are theirs to make, but they need to get creative about solving this problem.
Overall 2019 was a successful year for the industry. Even the downsizing and financial hits taken will prove to be valuable in the long run. Just like getting out of bed too fast can result in injury, an industry that expands too rapidly can result in harmful consequences.
Benjamin Caplan, MDWHAT 2019 HAS TAUGHT US ABOUT WHAT 2020 WILL LOOK LIKE: PROCEED WITH CAUTION
Starting with the 2014 Farm Bill, and continuing with the 2018 Farm Bill, we have seen a dramatic shift in the landscape governing hemp. Prior to 5 years ago, hemp production was entirely illegal, as the Federal government handled industrial hemp the same as it handled high-THC marijuana. It was an established Schedule 1 controlled substance, entirely illegal to grow, harvest, or possess.
As awareness has grown, and the true benefits of the hemp plant have become more widely understood, the federal government has passed legislation to decriminalize hemp. However, although it is no longer considered a controlled substance, the questions about the process and regulatory requirements abound. This is because all plants grown in the United States are highly regulated by the United States Department of Agriculture, or the USDA, which has a complex framework of licensing, reporting, and general requirements for every specific product grown in the country.
Last week, the USDA published the draft of its regulations
for the hemp industry. Since the 2018 farm bill, we have been living in the
“wild west” for hemp. As promised, the USDA released its rules in time for
farmers to get legal and licensed for the 2020 season. However, this
long-awaited release has been met with mixed results.
Many lawmakers and industry leaders are happy that the
federal government has finally put out regulations for hemp. First, they see
this as a dramatic shift from the era of prohibition, alone a cause for
celebration. Others see the certainty that we are going to have regulations put in place means that the industry will start to
grow and develop at a much faster pace. It is certainly true that the future is extremely
bright for hemp. But other farmers and individuals have expressed concerns with
some of the regulation’s details.
The “0.3% THC” limit, which delineates the difference
between legal “hemp” and illegal “marijuana”, may be too stringent for some
growers. They report that a mature hemp plant will have a THC content that will
vary from day to day, including some spikes over the 0.3% limit. The new
regulations require strict testing to be done prior to harvest, and if the
resulting THC content is too high, the entire crop must be destroyed. This may
cause farmers to harvest before true maturity, leading to a decrease in the
potency or effectiveness of the CBD derived from such a harvest.
The regulations also allow the states to develop their own plans
and submit them for approval. Some are concerned that some states may try to
infringe on the interstate commerce occurring there, which could cause all
kinds of problems and complications for the industry. Still others are worried that
the method for disposing of “hot crops” requires just a little too much DEA
involvement, which could also cause disruption or have a chilling effect on
It is clear that these regulations are a good step in the right direction. It’s also clear that this is just the beginning, and there is still plenty of room for improvement. The USDA announced a 60-day window for submitting public comments, and then they will consider any suggestions, and then publish a final rule in the future. I encourage you to read the regulations or a summary of them. I encourage you to think about how you would be affected by these rules, and what suggestions you may have. Speak to an expert about how you can do your part to improve the landscape of the industry for the future.
Last week, the Tax Court continued the line of cases denying tax deductions under Internal Revenue Code §280E. That section says that any business which is “trafficking in controlled substances” cannot receive many of the traditional deductions that a business may take. Otherwise put, this means that a company must pay taxes on all of its incoming revenue before it subtracts most of its expenses.
This law can be a severe punishment for a cannabis company
that may be operating entirely legally under state law. Unfortunately, the
federal government still considers them to be “drug-dealers” and holds this
punitive tax measure over their heads.
The case before the tax court involved a dispensary that filed taxes and took deductions for its business expenses. The IRS sent them a bill of $1.26 million, plus another 250K in fines. The company filed suit, asking the court to declare that it did not have to pay those bills.
A divided court rejected the company’s three arguments. In addition to the majority opinion, there were two concurring opinions and two dissenting opinions. Of particular interest is the Gustafson dissent, which opens up a new avenue for declaring §280E to be a Constitutional violation. Essentially, Gustafson argues, that the 16th Amendment allows Congress to tax income. Income is defined as “gain”, or net profits, minus costs, to get those profits. So for Congress to then disallow normal business expenses, it means that they are taxing more than actual income, which violates the 16th Amendment.
This argument was only agreed to by one other Judge on the
tax court, which ultimately ruled against the dispensary. However, in the
future, as the public opinion shifts, the policies behind these prohibitive
rules may fall away, and we may not be far away from a court coming to the
opposite conclusion. Legal Cannabis companies are working tirelessly to follow
the law, and they should be rewarded for doing so. Continuing the regime of
these prohibitive financial policies constitutes a “subsidy for the black market.”
The way to solve this problem is to shift the financial incentives in favor of
operating under a legal framework, and avoiding this severe tax problem is the
best way forward.
To explore related information, click the keywords below:
Benjamin Caplan, MDUS Tax Court denies deduction request under §280E, but leaves the door open for future challenges