A top official with the Internal Revenue Service (IRS) is taking steps to help marijuana businesses stay compliant with their taxes under the umbrella of ongoing federal prohibition, and in a recent interview recognized that the legalization movement will potentially succeed in ending prohibition in “all states.”
In an informational webinar hosted by the PBC Conference, IRS Commissioner of the Small Business/Self Employed Division Eric Hylton gave candid insights on a variety of cannabis industry issues from the federal perspective. The overarching theme to his comments was that states are already legalizing marijuana regardless of federal policy, and that’s creating complications that need to be addressed.
“The challenge really there is, it’s still considered a Schedule I controlled substance under federal law,” he said. “However, when I’m talking with my employees and talking with them in our examination, we recognize that this is moving in a direction where potentially all states will have it legalized.”
In spite of the federal-state policy conflict, IRS wants cannabis business owners “to be educated” because there are tax obligations regardless of whether the federal government considers their source of income to be illegal.
To that end, IRS released updated tax compliance guidance for marijuana firms in September, and the new webinar appearance by Hylton is part of an ongoing education effort by the agency.
“There are thousands of people who are trying to jump into the marijuana business right now,” the IRS official said. “And as you become legalized throughout the country, we wanted to educate individuals.”
Hylton also acknowledged “the challenge the marijuana industry has in not having sometimes non-traditional banking relationships,” referencing the fact that, under federal prohibition, many cannabis businesses operate on a cash-only basis because financial institutions are reluctant to take on the risk of servicing a federally illicit companies.
The agency is “trying to kind of bridge that gap” in part by offering educational services, he said.
Another chief problem for the industry that came up in the interview is that while cannabis businesses are obligated to pay federal taxes, they’re unable to access tax benefits that are extended to other sectors under an IRS statute known as 280E. That policy “disallows all deductions or credits for any amount paid or incurred in carrying on any trade businesses that consist of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act.”
Regardless of the unique challenges the emerging market faces, Hylton said that, like other industries, the vast majority of those in the cannabis sector are compliant with tax requirements, adding that he believes the percentage of marijuana businesses following the rules is “the same” as in the general population of taxpayers.
“That’s why we’re doing this educational drive and using communication and articles and webinars to assist with that because a lot of individuals want to remain complaint,” he said. “This is just a new business.”
The educational drive also helps to resolve a problem identified by a Treasury Department internal watchdog in April. The Treasury Inspector General for Tax Administration criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. The release of the agency’s updated guidance for the industry followed five months later.
Joshua Radbod, CEO of the PBC Conference, which focuses on payments, banking and compliance challenges in the cannabis industry, conducted the new interview with the IRS official. He told Marijuana Moment that “it’s great that the IRS is not only proactively reaching out to educate the cannabis industry on cannabis specific IRS rules, but is also seeking questions and feedback.”
“This type of dialogue and interaction between government and private sector is important in any industry, and even more so for emerging, growing, and highly regulated industries such as the cannabis industry,” he said.
Radbod’s organization solicited marijuana industry questions for the IRS ahead of the webinar being recorded.
In the interview, Hylton also brought up the fact that the cash factor of the marijuana industry is onerous for the industry and for the government alike, requiring cannabis businesses to set up appointments to make in-person tax payments—something that has become even more complicated amid the coronavirus pandemic.
Treasury Secretary Steve Mnuchin has brought up the complications caused by the lack of financial services access for the cannabis industry in his calls for a bipartisan legislative fix to the banking issue, noting in congressional hearings that IRS has had to build “cash rooms” to store the deposits.
The cash complication has also led to a rise in people using cryptocurrency for marijuana transactions, Hylton said.
While legislation to resolve the issue—the Secure and Fair Enforcement (SAFE) Banking Act—has repeatedly advanced through the House as a standalone bill or as part of broader COVOD-19 relief measures, it has lingered in the GOP-controlled Senate.
In the meantime, the number of financial institutions reporting that they service state-legal marijuana businesses has declined, federal data released last month shows.
When the House approved its coronavirus legislation with the SAFE Banking Act attached, it attracted controversy, with multiple Republican lawmakers and White House officials criticizing its inclusion and arguing that it is not germane to the issue at hand.
Senate Majority Leader Mitch McConnell (R-KY) in particular has been a vocal opponent of the measure, though he’s largely focused his criticism on certain provisions of the SAFE Banking Act that require industry diversity reporting.
Democratic leaders in both chambers, however, have made clear that they’re willing to keep up the fight, and the House even highlighted the diversity component in a summary of its COVID legislation. House Speaker Nancy Pelosi (D-CA) said in July that she agrees that the banking measure is an appropriate component of the bill.
Also in July, bipartisan treasurers from 15 states and one territory sent a letter to congressional leadership, urging the inclusion of the SAFE Banking Act in any COVID-19 legislation that’s sent to the president’s desk. Following GOP attacks on the House proposal, a group of Democratic state treasurers renewed that call.
But based on Hylton’s discussion, the issue isn’t quite as partisan as it might be playing out in Congress. And there’s an eagerness on the part of the government to, at the very least, educate marijuana companies on how to stay compliant as these bigger issues and conversations unfold in the political arena.
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