Journal:Accounting and the US cannabis industry: Federal financial regulations and the perspectives of certified public accountants and cannabis businesses owners

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Full article title Accounting and the US cannabis industry: Federal financial regulations and the perspectives
of certified public accountants and cannabis businesses owners
Journal Journal of Cannabis Research
Author(s) Owens-Ott, G. Suzanne
Author affiliation(s) Colorado Mesa University
Primary contact Email: Send online message
Year published 2020
Volume and issue 2
Article # 41
DOI 10.1186/s42238-020-00049-7
ISSN 2522-5782
Distribution license Creative Commons Attribution 4.0 International
Website https://jcannabisresearch.biomedcentral.com/articles/10.1186/s42238-020-00049-7
Download https://jcannabisresearch.biomedcentral.com/track/pdf/10.1186/s42238-020-00049-7.pdf (PDF)

Abstract

Background: Cannabis-related businesses (CRBs), in states where cannabis is legal, may be unable to obtain professional financial services such as banking, insurance, and accounting because of federal laws and regulations. This qualitative study investigated the following research questions.

1. Why are some certified public accountants (CPAs) unwilling to provide services to cannabis-related businesses?
2. How do CRBs compensate for lack of CPA services?
3. What does a CPA need to know about the cannabis industry prior to engaging to provide services to CRBs?

Methods: Data for this grounded-theory qualitative study was gathered from twenty-three semi-structured phone and face-to-face interviews. Ten cannabis-related business owners were recruited from a convenience sample after attempting a broad recruiting effort. Thirteen CPAs with active licenses in Colorado or Washington State participated from firms of varying size and willingness to serve the cannabis industry. The individual interviews, which lasted from twenty minutes to more than an hour, focused on the participants’ perceptions of the complexities of accounting and tax compliance for cannabis businesses.

Results: Eight of the thirteen CPAs interviewed would not provide services to the cannabis industry with the primary reason given that cannabis is federally illegal. All ten of the cannabis business owners interviewed indicated they engage a CPA to provide tax services. Seven out of ten CRB participants and ten of the thirteen CPA participants indicated that extensive industry knowledge is needed for an accountant to competently provide services to a CRB.

Conclusions: CRB owners need to carefully consider the industry knowledge and experience of a potential CPA prior to engaging them. This study shows that U.S. CPAs should weigh the risk of federal prosecution and potential loss of the CPA license when deciding whether to serve a CRB client. The study also found that a CPA must commit to acquiring and maintaining substantial specialized knowledge related to tax Code Section 280E, internal controls for a cash-only or cash-intensive business, and the workings of the cannabis industry under the current regulatory conditions.

Keywords: cannabis, marijuana, accounting, business, certified public accountants, financial regulation, Colorado, Washington State

Introduction

There are a growing number of cannabis-related businesses (CRBs) in the United States, as many states have legalized cannabis for medical and/or recreational use even though it remains illegal at the federal level under the Controlled Substances Act (CSA). Thirty-three states plus the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and Guam have legalized medical cannabis, while eleven states plus the District of Columbia and the Northern Mariana Islands have also legalized recreational cannabis usage as of September 2020.[1] Table 1 shows the legalized states by category. Cannabis has been listed as a Schedule I drug since 1970.[2] Regardless of state laws, cannabis is a Schedule I drug according to the federal government, and those found trafficking in cannabis could face criminal prosecution.[3] The Rohrabacher-Blumenauer amendment prohibits the use of federal funds to prosecute a cannabis-related business activity that operates within “States that have legalized the use of medical marijuana,” and was most recently extended to the 2019–2020 fiscal year in the 2020 Consolidated Appropriations Act.[4]

Table 1. States in which cannabis is legal for medical and/or recreational use. Abbreviations are standard US Postal Service abbreviations.[1]
States in which cannabis is legal only for medical use States in which cannabis is legal for medical and recreational use States in which only CBD (low THC) cannabis is allowed States in which cannabis remains illegal
AR, AZ, CT, DC, DE, FL, HI, LA, MD, MN, MO, MT, ND, NH, NJ, NM, NY, OH, OK, PA, RI, UT, and WV AK, CA, CO, IL, MA, ME, MI, NV, OR, VT, and WA AL, GA, IA, IN, KY, MS, NC, SC, TN, TX, VA, WI, and WY ID, KS, NE, SD

Cannabis and hemp are both varieties of the cannabis plant but with different tetrahydrocannabinol (THC) content. Hemp products became federally legal with the passage of the Agriculture Improvement Act of 2018.[5] The bill “removed hemp, defined as cannabis (Cannabis sativa L.) and derivatives of cannabis with extremely low concentrations of the psychoactive compound delta-9-tetrahydrocannabinol (THC) (no more than 0.3 percent THC on a dry weight basis), from the definition of marijuana in the Controlled Substances Act (CSA).”[6] Cannabis remains federally illegal and is the topic of this study.

This conflict between federal and state laws is problematic because cannabis-related businesses and ancillary businesses operating in legalized states and complying with all state laws are unable to fully comply with federal laws. Many cannabis businesses in states where cannabis is legal are facing difficulties in obtaining professional financial services because cannabis is still a controlled substance at the federal level.[7] For example, CRBs face difficulty obtaining banking services such as checking, credit cards, electronic transfers, and loans, which results in cash-only or cash-intensive business operation.[7] As such, many certified public accountants (CPAs) may be unwilling to provide their accounting and tax services to CRBs due to increased risks associated with the industry.[7][8][9]

Because cannabis is a Schedule I drug, a cannabis business is subject to Internal Revenue Service (IRS) Code Section 280E, which disallows the deduction of ordinary business expenses in arriving at taxable income.[10]


As such, Code Section 280E results in significantly higher effective tax rates for cannabis businesses than for other businesses.[11][12] The Racketeer Influenced and Corrupt Organizations Act (RICO) of 1970 provides for federal criminal prosecution of individuals involved with criminal activities, including drug trafficking.[13] One does not have to be directly involved with the criminal enterprise to be prosecuted under RICO, as it applies to others associated with the criminal enterprise, include those providing professional services such as accountants, lawyers, and bankers.[14][15]


References

  1. 1.0 1.1 National Conference on State Legislatures (September 2020). "State medical Marijuana Laws". https://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx. Retrieved 22 October 2020. 
  2. Campbell, G. (2012). Pot, Inc.: Inside Medical Marijuana, America's Most Outlaw Industry. Sterling. ISBN 9781402779251. 
  3. "Title 21 United States Code (USC) Controlled Substances Act". Diversion Control Division. U.S. Department of Justice. https://www.deadiversion.usdoj.gov/21cfr/21usc/811.htm. Retrieved 20 October 2020. 
  4. "H.R.1158 - Consolidated Appropriations Act, 2020". Congress.gov. Library of Congress. 20 December 2019. https://www.congress.gov/bill/116th-congress/house-bill/1158/text. Retrieved 23 October 2020. 
  5. "H.R.2 - Agriculture Improvement Act of 2018". Congress.gov. Library of Congress. 20 December 2018. https://www.congress.gov/bill/115th-congress/house-bill/2. Retrieved 23 October 2020. 
  6. Abernethy, A. (25 July 2019). "Testimony: Hemp Production and the 2018 Farm Bill". U.S. Food and Drug Administration. https://www.fda.gov/news-events/congressional-testimony/hemp-production-and-2018-farm-bill-07252019. Retrieved 05 September 2020. 
  7. 7.0 7.1 7.2 Taylor, K.; Bunker, R.B.; Johnson, L.R. et al. (2016). "An analysis of the accounting and financial effects of inconsistent state and federal laws in the recreational cannabis industry". Journal of Legal, Ethical and Regulatory Issues 19 (2): 11–25. https://www.abacademies.org/journals/month-november-year-2016-vol-19-issue-2-journal-jleri-past-issue.html. 
  8. AICPA (14 January 2019). "An issue brief on state marijuana laws and the CPA profession" (PDF). AICPA. https://www.aicpa.org/advocacy/state/downloadabledocuments/marijuanacpasissuebrief.pdf. 
  9. Gottlieb, L.; Munson, M. (2016). "Insurance Issues Raised by the Legalization of Recreational Marijuana" (PDF). The Brief 46 (1): 34–39. http://www.bpmlaw.com/wp-content/uploads/2012/04/BRF_v046n01_Fall2016_Gottlieb-Munson-2.pdf. 
  10. "26 USC 280E: Expenditures in connection with the illegal sale of drugs". House.gov. 3 September 1982. https://uscode.house.gov/view.xhtml?hl=false&edition=prelim&req=granuleid%3AUSC-prelim-title26-section280E. Retrieved 09 September 2020. 
  11. Alsharaiha, M.N. (2017). "Smoking Out the Criminals: How Federal Tax Policy Can Reduce Illegal Drug Crime by Supporting the Legal Marijuana Industry". University of Toledo Law Review 48 (2): 319–36. https://www.utoledo.edu/law/studentlife/lawreview/volumes/v48n2.html. 
  12. Taillon, B.; Cornelius, J. (2018). "280E and the Value of Experienced CPAs". 2018 Marijuana Business Symposium. https://www.cocpa.org/product/2018-marijuana-business-symposium/. 
  13. "956. RICO PROSECUTIONS—18 U.S.C. §§ 1961-68". U.S. Department of Justice Archives. U.S. Department of Justice. 21 January 2020. https://www.justice.gov/archives/jm/criminal-resource-manual-956-rico-prosecutions-18-usc-1961-68. Retrieved 23 October 2020. 
  14. Marine, F.J.; Crow, D.E.; Dalton, R.C. et al. (October 2009). "Criminal RICO: 18 U.S.C. §§ 1961-1968 - A Manual for Federal Prosecutors, Fifth Revised Edition" (PDF). U.S. Department of Justice. https://www.justice.gov/sites/default/files/usao/legacy/2014/10/17/rico.pdf. Retrieved 06 September 2020. 
  15. Reinhart, B.E. (2016). "Up in Smoke or Down in Flames? A Florida Lawyer's Legal and Ethical Risks in Advising a Marijuana Industry Client". Florida Bar Journal 90 (3): 20–28. https://www.floridabar.org/the-florida-bar-journal/up-in-smoke-or-down-in-flames-a-florida-lawyers-legal-and-ethical-risks-in-advising-a-marijuana-industry-client/. 

Notes

This presentation is faithful to the original, with only a few minor changes to presentation. Some grammar and punctuation was cleaned up to improve readability. In some cases important information was missing from the references, and that information was added. The original article lists references in alphabetical order; this version lists them in order of appearance, by design. The original reference for the AICPA CPA doc had a broken URL; what is presumed to be the same document was found elsewhere on the AICPA site and used for this version.