The chief problem with the marijuana industry boils down to a states’ rights issue. While numerous states have legalized marijuana, either for medical or recreational use, the drug remains illegal at the federal level, leaving many companies vulnerable to investigations.
The federal Controlled Substances Act classifies marijuana as a Schedule I drug, defined as a substance or chemical with no accepted medical use and a high potential for abuse. On the other hand though, four states have already legalized recreational marijuana — Colorado, Washington, Alaska, and Oregon— and almost half permit medical marijuana.
“If they say states can do this, the federal government just needs to get out of the way and let states do this. “But frankly, I don’t think it’s a priority for too many federal politicians.”
The Department of Justice “will continue to exercise its discretion in deciding where and how to enforce the Controlled Substances Act.
To start, federal law 280E on the Internal Revenue Code prevents both medical and recreational marijuana doctors in florida as well as businesses from certain benefits given to other legal businesses. Because of the law, The Daily Beast reported, marijuana businesses may pay as much as 70% in federal taxes.
Under 280E, any business that engages in the distribution of Schedule I or II controlled substances is barred from tax deductions, like for leasing property or paying salaries, that other legal businesses are allowed to take. The provision was originally set up as a punitive measure against cocaine and heroin dealers, according to Herzberg.
In addition to 280E, banks must comply with federal regulations and often won’t take on clients in the marijuana industry for fear of legal repercussions. A federal court even refused access to a master account for The Fourth Corner, a credit union set up by Colorado’s state government to help dispensaries access banks.
That shuts many marijuana business out of financial institutions and forces them to operate on an all-cash basis, which makes tasks like paying taxes and keeping track of revenue difficult.
Much of Poseidon’s investments come from high-net-worth individuals or family offices that have higher risk tolerance than institutional investors like banks, according to Paxhia.
“Partners at venture-capital or private-equity firms are using their own capital, rather than firm assets,” he said. “They’re not waiting for the federal government. They’re participating in any way they can.”
There are a lot of people — and there is a lot of money — waiting on the sidelines to jump into the burgeoning industry. But as long as these banking issues persist and health from marijuana remains classified as a Schedule I drug, the industry will face immense challenges from the federal government.
Now the country now looks to California as the next battleground. State residents will likely have a chance to vote on full legalization on November 8. What happens could serve as a model for other states.
The vote continues what started in September 2015 with California’s Medical Marijuana Regulatory Safety Act (MMRSA). MMRSA allows medical-marijuana businesses in California and florida medical marijauna to operate as for-profit businesses in the state and set up various requirements and systems for operation.
Prior to MMRSA, medical-marijuana businesses operated on legal foundations, leaving an open door for the DOJ to build a case against Harborside. While the Compassionate Use Act of 1996 allowed for medical-marijuana use, the law did not specifically permit medical-marijuana providers to profit from the sale of marijuana and marijuana products, like edibles and synthetics.