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AUTHOR: Heather Allman
PUBLISHER: CANNABIS LAW REPORT
BACKGROUND & CONTEXT
The Biden administration has sided with the IRS on a Supreme Court cannabis petition, arguing that state-legal marijuana businesses can be investigated by the Internal Revenue Service for violations of the tax code’s Section 280E.
The entire cannabis industry was watching the landmark case out of Denver involving the dispensary Standing Akimbo, hoping it would cause a change in the federal tax code — but Biden’s DOJ lawyers shot that down. It’s believed to be one of the first times that Biden’s DOJ has weighed in on a marijuana court case.
James Thorburn, the lawyer who represented Standing Akimbo in the case, said to Colorado Politics that he was disappointed that the new administration’s cannabis approach didn’t show any break from the past:
“That is precisely the federal government’s position and has been for many years,” Thorburn said. “We were hoping that the Biden administration would soften that stance…. It, unfortunately, has not and is doubling down.”
According to a February 16, 2021 article in Colorado Politics,” Biden administration to Supreme Court: Marijuana still illegal in Denver dispensary case,” author Michael Karlik reported how “The Biden administration has responded to a Denver dispensary’s petition in the U.S. Supreme Court by arguing that federal law makes no exception for “state-legal marijuana,” and that states such as Colorado may not authorize businesses to violate that law.”
How big of a setback is the final ruling for the industry?
Cannabis Law Report is here to shed some light on the subject by getting an expert explanation and opinion on this case: Ryan Hale, the Chief Sales Officer of Operational Security Solutions (OSS), a company purposefully assembled almost five years ago by a team of former law enforcement, military and federal service professionals to directly support the security and banking needs of the legal cannabis industry.
OSS supports two dozen financial institutions and more than 100 Marijuana-Related Businesses through bi-coastal operations in the Central Valley of California and the Greater Philadelphia area.
On Wednesday, March 24, 2021, Cannabis Law Report talked in-depth with Ryan Hale, Chief Sales Officer of Operational Security Solutions about the decision by the Biden Administration’s Department of Justice to rule against Standing Akimbo, the defendant, and to uphold the 280E tax code. We discussed this DOJ ruling and possible future implications for the rest of the cannabis industry, along with realistic federal legalization expectations.
Cannabis Law Report: Please explain the basics of the Standing Akimbo, LLC v. U.S.A. case, the Supreme Court’s recent decision, and how it applies to the cannabis industry.
Ryan Hale: Yes, absolutely. The IRS situation, as specifically related to the cannabis industry, is very near and dear to our hearts and concerns as one of the largest risk management providers in the cannabis space in the Western United States and working with over 2000 financial institutions and providing critical account and financial banking services. So, this case is in our realm of trying to help the industry: Enable legal and compliant solutions.
The implications of the IRS to add a ruling, as it originated from 1981 through this current day, definitely has an impact on our industry. The cost of doing business and cannabis-related business is high enough as it is, when it comes for the licensing and application costs.
What a lot of people don’t understand about the original DOJ ruling is it was actually created as a result of a convicted drug trafficker back in 1981, Jeffrey Edmonson versus the Commissioner was the actual case, and the original Edmondson decision was that for a seller of cocaine, amphetamines and cannabis to deduct most business expenses, cost of goods sold, packaging, home, and other expenses relating to the sellers —ie., legal trade business trafficking and illicit substances— was illegal in itself.
Effectively, he was a convicted drug trafficker. Most stated that he should be able to deduct all these costs, because he was running a trade business, even though it was illegal.
The next year, the decision was actually reversed and denied the sellers, all sellers, who have a Schedule I or Schedule II controlled substance, the right to deduct business expenses is the current standing by the IRS and the Department of Justice.
According to the Senate report on 280 E, all deductions and credits for amounts paid or incurred in the illegal trafficking and drugs listed in the Controlled Substances Act are absolutely disallowed to preclude possible challenges on constitutional grounds. The agreements adjust to gross receipts with respect to the effective cost, but goods sold are not affected by that bill.
The primary difference between the Standing Akimbo case here out of Colorado reaching the Supreme Court, and this decision was that Standing Akimbo is a legally licensed business under Colorado State law.
However, the government has clearly indicated with a recent decision that regardless of state legalization, as long as marijuana is still viewed as a controlled substance by the federal government, it appears that the 280 E ruling is still very much in effect and it most definitely impacts the cannabis industry.
CLR: Was this decision a surprise, or was it expected? Because I find it so difficult to comprehend the “logic” here. Even as a journalist, it’s difficult to wrap your head around a business that is adding to the economy and monetary and employment, and yet, is not able to deduct their standard business deductions.
Ryan: I would tend to agree with the industry’s perception that they were somewhat surprised by this ruling, but in all reality, the decision wasn’t that surprising to us. Seeing a large percentage industry being surprised actually is somewhat still a bit concerning.
I mean, we’d all hoped for a different ruling; however, with the current understanding and ongoing interpretation of the IRS to add in that cannabis is still illegal at the federal level. This firmly falls in line with the original Edmondson case from the 1980s.
When we throw into the combination that recently, there’s been federal government employees that have had adverse employment decisions based on previous marijuana use, it kind of leads to some confusing indications on whether the current administration is fully supportive of legalization of marijuana, or if they’re just kind of dipping their toe in it.
You know, overall, we see ourselves as the sheep dogs for the industry. As with all our former careers, we are all protectors in some form or performance capacity or another, maybe to the law enforcement or military intelligence community. That’s our background from a regulatory environment. So we seem to see the problems from a holistic risk management perspective, focused on the key and core issues that are critical for our partners to ensure that they’re receiving the most transparent, discreet, and secure cash management, logistics, depository services, as well as compliance solutions, for our MRB clients.
CLR: That is an excellent view to take as far as a company having access to transparent, discreet and secure cash management —because those are words that are not always associated with the cannabis industry.
Ryan: You’re 100% correct in that, and we specifically formulated OSS to protect the legal cannabis industry in the state of California. That was our whole goal.
Originally we didn’t see ourselves expanding outside of the state of California because the market is so massive. What we learned from helping the state migrate from the Proposition 215, which was the medical marijuana laws, through to the passing and successful implementation of Proposition 64 and the relevant changes that have taken place —specifically in the California market since then— we understand that it’s absolutely key to ensure that the MRB operators understand how to collaborate with the regulatory environment, how to be the best partners for local law enforcement, and how to focus on the key aspects for bringing a positive service for the local communities.
CLR: That’s a complete synergy between the government and all of the parties that you just mentioned.
Ryan: Yes, complete synergy, and open, honest, transparent communication. Those are the bridges and those are the gaps that we help bridge in the industry. I mean, we even have some current clients that were providing cash logistics support for their bank accounts, as well as compliance support.
If you rewind the clock 15 years ago, we were on different sides of the table having different conversations. So honestly, it’s been really impressive for us to see how the industry has evolved in California, and how, specifically the key players, are focusing on helping the regulators make the right decisions to ensure that the listed products and goods are lab tested, they are safe, and they are secure —because once again, it’s all about delivering a good quality product or legal system to the consumers here in America.
CLR: As a legal consumer of cannabis here in Florida for my multiple sclerosis, I cannot thank you enough for looking out for patients, and not just for your company, because I think that in itself tells us a lot about what you’re trying to do at OSS.
Ryan: I’m really thankful that you’ve personally been able to benefit from this plant and are receiving help. Really.
We see so many people that have similar stories. One of the other interesting aspects that we’ve observed inside the industry is that there are a lot of people trying to open up marijuana related businesses from a production or cultivation or retail side.
More importantly, we see a lot of what are considered ancillary marijuana related businesses or ancillary MRBs. We would probably be considered an ancillary MRB because we support the space.
We see a lot of people jumping into the space because they see it’s a gold rush. They see an absolute “Profit Generation Center” for them. Experience says that it is very costly to run a successful cannabis business operation.
If people are doing it within the regulated market, then they’re paying the taxes according to 280 E, ensuring that they’re making their quarterly tax times, and making all their quarterly tax payments to the state and the local bodies. It is costly to run a legal cannabis business.
We see a lot of vendors coming in, cutting corners, just trying to make profits and not delivering services… they’re going to enable licence operations —like picking up cash in an armored cars or utilizing drivers that only have a high school diploma and a clean driving record.
Those organizations are interesting, those individuals, and I’m not being disrespectful to them as humans, but I don’t think those are the level of qualifications that most people feel comfortable with when protecting hundreds of thousands, if not millions, of dollars in cash.
CLR: I tend to agree with all of those statements.
Ryan: The key also for the industry is ensuring that as a whole, we’re protecting ourselves from those individuals that are trying to enter the cannabis space simply because they’re profit motivated. If you’re going to be in the cannabis industry, you need to be in it for the right reasons and be in it for the long haul.
CLR: On that note, I would like to ask about how you maintain that balance at OSS between people and profits, because it’s a tricky one in this industry.
Ryan: It is a very tricky one in this industry, and with our business practices, we don’t really see it as different from running any other traditional business. We’re just, in fact, handling the proceeds of the sale of a Schedule I narcotic. So, our rules for engagement are different.
We’ve worked very, very closely with the financial institutions that we support in enabling cash logistic and depository services. As you’re aware, because of the current federal stance on cannabis, the marijuana industry is still 90% cash intensive. As a result, there’s a high volume of cash in and logistics.
Because of our backgrounds in protecting facilities and people and assets in theatres in combat —where our lives were literally on the line. We’re very extreme, and we’re very flexible. We’re quite agile, and we know how to run smooth and efficient logistics operations.
We’re able to drive maximum efficiencies, based on our training and experience in running real world operations, as well as finding the best ways we can integrate and enhance and augment, specifically compliance services, from an anti-money laundering, or Bank Secrecy Act AML BSA, which are short extensions for their financial institution partners we serve, because the AML BSA guidelines are the keys to safe, effective legal cannabis banking.
One of the misnomers there is in the cannabis space now is that there’s not access to banking, there is. We have over 2000 financial institution partners that have valid bank accounts with depository services for marijuana related businesses in their business name across the United States.
Ultimately, it’s not so much that there’s not access to banking, there’s just not as much access to banking, and the rules for cannabis banking are a little bit tighter — because they have to be according to FinCEN 2014 guidelines; however, that enables everything to run smoothly and efficiently.
We’re always trying to find the best ways to where we can maximize what we do to ensure that we’re delivering a secure, professional, discreet service at a price point that isn’t a barrier for our clients and customers.
CLR: That sounds to me as if you’ve found a unique way to take your group of professional experiences and turn them into ways to add value and help the cannabis industry thrive.
How much of a setback is this case for the cannabis industry from your point of view? Tell me about the possible future implications of this decision for cannabis and what it means for individual brands.
Ryan: The biggest setbacks for the cannabis industry are really going to be the amount of money cannabis operators are going to be able to realize.
But the effective change is that there is no effective change right now, because the IRS ruling is what it is. Until federal legalization changes, we don’t see any tax burden relief for a cannabis business operator.
It’s really, once again, everyone continuing to do what the industry has been doing all along: trying to be creative and finding ways to maximize efficiencies in profits in a regulatory environment that’s ever shifting and ever changing.
CLR: This brings into sharp focus the need for regulation and quickly. Do you feel the MORE Act should be pushed through ASAP as a standalone act, or that financial regulation be written into a comprehensive omnibus act?
Ryan: One of the issues that seems to have really impacted effective change to the regulations, honestly, has been the attempts to attach a pro cannabis piece of legislation as part of a larger effort or a larger bill.
We really haven’t seen it affect cannabis law being able to be pushed through, as part of some larger activists on the state levels.
I would say specific legislation focus that’s addressing the issues, independently, rather than attaching it to a larger axis.
From my perspective, to be accomplished in a more effective manner and to move forward. Also, the MORE Act is not very precise regarding matters of regulation once cannabis is removed from the list of controlled substances. This means removing it from the list of controlled substances is the first step, ensuring access to a safe and secure product has to be the key going forward, but specific attention needs to be paid to how illicit homegrown, or commercial rural operations will still be prosecuted.
Market products are still available at a lower price point, We’re still considered a financial threat to the legal industry, as well as a public safety concern for unclean products, so out there on the market or on the streets, cannabis needs continued and improved guidance and regulation.
CLR: Yes, the problem with the MORE Act is that they’re trying to pile on too much legislation. I tend to agree with you that cannabis banking and tax relief needs to be first and foremost.
The Supreme Court has declined to take up similar cases, so what was different about the Standing Akimbo case? Why and how did this case end up all the way in Colorado’s Supreme Court?
Ryan: The biggest thing that’s different about the Standing Akimbo case is that Standing Akimbo was a current, legally licensed cannabis operation here in Colorado. The difference, once again, in the Standing Akimbo case that the industry is looking at is that Standing Akimbo is different from Edmondson in 1981, and Wilson was convicted for illicit drug trafficking.
Standing Akimbo is running a legally licensed cannabis company —that’s the primary difference, the hope that the IRS or the Supreme Court. would see it differently. Why?
On one hand, we had an operator, Edmondson, who was running an illegal business and he was convicted for doing so, and on the other hand, we have a legally licensed operator, Standing Akimbo, that has not been convicted of any criminal wrongdoing and is solely trying to see see tax relief for running a legally operated business according to his state law.
Again, according to the current DOJ, what we’re seeing from the Biden Administration and our rulings so far, it appears that until marijuana is removed from the Controlled Substances list, IRS 280 E will probably still remain in effect for the cannabis industry.
CLR: With that in mind, how soon do you hope to see that reasonable descheduling, versus how soon do you think it will realistically happen?
Ryan: Regulation is the key in that question and that is a benchmark that I believe we’re close to in some markets, from a product in safe access standpoint for the consumer.
However, there’s still a pretty big disparity between effective regulation to ensure that the risk from bad actors participating through the legal industry are justly addressed, while also providing a more traditional commerce model for the industry through some form of financial regulation change —whether that be through the IRS removing tax implications or through some form of legislation similar to that being passed.
Recently, we have observed such legislation in the states of Mississippi Montana, New Jersey, and South Dakota with the last election cycle, where some form of pro cannabis legalization was passed. Now we’re seeing, however, that those applications are being blocked through some form of administrative action or for other technical reasons.
As a result, those actual laws being implemented, or granting the citizens of those states the cannabis access that they’ve asked for, is not happening.
The industry still absolutely needs to maintain a collaborative approach, and focus on ensuring that as these new markets emerge, a collective not combative approach is taken when we see these different postural leaks from other political forces.
CLR: Right, it needs to be a collaborative approach because this industry is nascent compared to so many others. We absolutely have the ability to build this box the way that we see fit, and I think collaborative effort is going to be key here.
Ryan: If we didn’t have OSS with the services that we provide, we wouldn’t have been able to find our level of success.
If we didn’t take a 100% collaborative approach, trying to find the right solutions, and understanding that our way may not be the best way, we wouldn’t have found success.
Rather, we need to be open to being both flexible and agile, as long as we maintain our internal ethos and stay true to long term accomplices —within the regulatory framework.
So far, our track record of 100% success with no infractions, no fines, no claims, is indeed, I believe, a testimony to our collaborative approach being effective.
CLR: Hey, a 100% success rate in anything cannabis-related these days is phenomenal.
You were speaking earlier about the blatantly illegal goods market versus the legal cannabis market, regarding the Standing Akimbo case — Do you think there’s currently enough enforcement with regard to financial matters that are blatantly illegal, or do you think there’s too much enforcement when it comes to the cannabis industry?
Ryan: When it comes to accurate levels of enforcement and trying to understand what the balance of enforcement is, I have to draw back on my experiences early in my career when I was focused on electronic electronic and financial crimes.
One of the concepts, the seminal one concerning “Information Assurance” or “Information Security” is Mayfield’s paradox, which states that:
To keep everyone out of an information system, or in this case out of legal access to cannabis, requires a large amount of money or resources, and to get everyone into the system requires the same amount of money and resources.
So effectively, reported bodies are either leaning on the regulatory side, or they’re leaning on the open access side and not fully taking into consideration the implications of their overall, overarching strategy, specifically when it comes to financial regulation.
The financial impact that we’ve observed as a result is there hasn’t been enough, not at all. There has not been enough enforcement of the AML BSA guidelines for the cannabis space, more specifically, the FinCEN 2014 guidelines are all focused on ensuring that every cent for every gram of the sale of the Schedule I narcotic is part of the legal system. So, it was 100% about transparency.
Once again we have people that are entering the space. They’re financially motivated, not compliance motivated. If a financial institution is going to take all the steps necessary, and is following all the right AML BSA guidelines, which are both keys to ensuring that their bank stays open and that their marijuana-related business account and client accounts stay open.
It’s more costly for them to process those transactions, than if it was a non cash transaction, so the costs of cannabis banking are higher for the financial institutions to decide to take that on.
When we see financial institutions that aren’t applying the same level of controls and are offering account accounts and account opening fees that are much higher than financial institutions that have valid programs, we are really creating an unfair advantage for those that aren’t doing it right. The only way that we’ve seen those behaviors be corrected is through some form of enforcement action.
CLR: Do you think that regulatory enforcement action would or should be a collaborative effort between the industry and the government bodies?
Ryan: Yes, absolutely. I mean, we as industry participants need to be open and honest about what is right, as well as what is wrong with our industry. We need to have a clear understanding in working with our regulatory partners, how they’re viewing the industry, and finding the right solutions to bridge the gap.
Once again the bigger issue in addressing enforcement is ensuring that everyone is applying the rules the same, and in that regard, we have seen enough enforcement.
It’s going to take the industry itself to get everyone to follow the right behavior and to do the right things for the right reasons, for ongoing success and industry survivability to occur.
CLR: Yes, I do think there has to be self regulation within the industry in order for this industry to survive and thrive the way that it should. I believe you’re completely correct on the players that have gotten into the Green Rush for the wrong reasons; however, some of those players that didn’t want to be compliant have been weeded out. No pun intended.
Ryan: That’s a very good point.
CLR: We’ve seen the players that have come in solely for the money that have made their capital known, but have not used it correctly and compliantly, and they have literally been weeded out of the industry. Is that behavior something your company is trying to help your clients avoid?
Ryan: Yes, absolutely. Quite simply, in every industry, there are threats, but being that the genesis of the marijuana industry is all from illicit markets because of the background.
Specifically, one of the things that we observe in California is the transition from individuals that were in the licensed medical market or maybe in a grey market-type perception, begin to make the necessary changes not only in thought processes, but also in their attitudes, and how to work with regulatory bodies.
We found that when individuals focus on compliance, and they focus on staying in with the herd, the cannabis industry flourishes. These are the rules you must follow to be successful.
We found that when those organizations focus on how to play well within those rules, and then learn to drive the efficiencies, and work with the industry, and a regulatory body as a whole, we see a thriving cannabis industry in those scenarios.
Ultimately, we hope to see the federal government potentially take lessons learned from the states that have legalized both medical and recreational marijuana, leaning from what went right or what went wrong or what needs to be improved upon.
They need to take those lessons learned from the markets that are currently serving communities in a safe and effective manner, and try to employ that from a federal federal viewpoint.
CLR: Right, I do believe that the companies have to play within those rules to drive the efficiencies, work effectively within the industry, and have that synergy that we spoke about at the beginning — If they do get it descheduled when we don’t have any kind of framework set up for tax or regulation, what could that federal legalization mean for the industry as a whole?
Ryan: All the change we hope for positive, but there are still threats that we need to be sensitive to are concerned with. Right now, it appears that the current push for federal action would effectively end up enabling states to make the determinations on legalization and enforcement with the current MORE Act.
Our hope is that the federal government, as it looks to write the implementation rules specifically, will look to those states that have been successful in the past, both for positive and negative standpoint —because there’s a lot of the nuances that can be impacted, with the federal and state separation that we have currently in the existing industry.
There’s different forms of license types and classifications across states. Currently in Colorado in California, there are 17 different cannabis or marijuana license types available. We have other states like New York, and in their current medical marijuana program, they only have a single license type for vertically integrated businesses.
So trying to reconcile that type of disparity across markets while understanding the regulations.
CLR: I completely agree with that priority of reconciling disparities on a federal level! We appreciate your insight on 280 E and the Standing Akimbo case ruling and its possible implications for the cannabis industry. Thank you again for your time and your insightful commentary.