Why the Tax Man Won’t Let Cannabis Go Legit

With the Democratic primaries underway, the candidates’ rhetoric has started to feel like a posturing contest. They all seem to think that voters want to back the candidate who’s most interested in raising taxes, so they try to outdo each other with talk about fantastical “wealth tax” constructs that will wipe out everyone’s debt.

As impressive as this showmanship is, a thriving economy and a balanced budget are already within our reach – no redistribution of wealth required. We just need to stop leaving money on the table. The legal and fiscal mess that currently surrounds legal marijuana proves this point.

The Left has characterized the War on Drugs as a racist project that perpetuates inequality and favors the privileged. This argument has, in part, propelled widespread cannabis legalization at the state level. But with federal law still enforcing marijuana’s Class I drug scheduling, the green economy remains largely grey. 

Despite generating hundreds of millions in revenue, banks won’t handle weed money, and thanks to Big Pharma’s heavy-handed lobbying against legalization, regulators are reluctant to get things moving.

The parallels between federal weed taxes and regulated cryptocurrency trading are at times uncanny. The message that the halls of centralized power seem to be broadcasting is, “If we can’t control it, then we can’t tax it, so we won’t even think about legitimizing it.”

And in both cases, the end result is billions in potential tax earnings being squandered. 

The Green States Are Winning Big

Ten states and the District of Columbia have legalized recreational marijuana, and they are making the big bucks now, and yet the feds can’t seem to grab a piece of the cake. 

These governments are rolling in green and using the proceeds to subsidize the Welfare State. So why go after the rich when pot profits can cover the costs? The move to regulate cannabis at the federal level is barely crawling along, leaving states to implement a hodgepodge of contradictory and complicated rules that, aside from being ridiculous, are actually pushing demand back to the black market. 

One example is California. With very restrictive requirements for individual and child-resistant packaging and the heaviest state-level taxation around, entrepreneurs who want to enter the market are finding legal cannabis to be far less lucrative. 

“The risk in seeing cannabis taxes as a cash cow for strapped governments is that if you increase them enough, you re-create the conditions for the black market that legalization hoped to kill,” says Professor Craig Reinarman, a UC Santa Cruz drug policy expert.

An added irony to California’s legalization is that while the state has been hailed as a first mover in the legal weed wave, this has actually put a lot of local growers out of business, as heavily financed Big Pot sweeps through with little regard for the cottage industry. Since federal regulators aren’t doing their jobs, some of the states are mucking up marijuana – and the longer it goes on unchecked, the worse it’s going to be. 

But even more troublesome is the failure of the feds to figure out how to let cannabis businesses get their finances above board. 

Lagging Legislation and Cannavan Banking

With all of the red tape and foot dragging, there is currently no way for a legitimate cannabis industry service provider to get their finances on the books or secure working capital. FDIC-insured banking institutions are banned from doing business with legal cannabis because of the bizarre federal law banning bud. 

This has made it extremely difficult to manage finances, and cannabis businesses are being forced to innovate new transactional pathways. The only real way to get paid or to pay for legal weed is in cash, making moving money a serious challenge and a black hole where unclaimed income disappears into forever. 

“I had no choice but to travel to the Internal Revenue Service office in Denver with more than $3 million in cash in order to send the federal government our taxes from our state-legal cannabis business,” John Lord, the CEO of the LivWell Enlightened Health dispensary, recently told Congress.

Cannabis cash in some legal states is transferred in unmarked, specially equipped fleets of cargo vans that roll the streets packed with bills for suppliers, distributors, employee payroll, and even taxes. These cannavans are just another sign of how far gone the situation has gotten.

Distributed Ledgers Filling the Void 

Nevada has been raking in the state tax revenue since legalizing in 2017. But because it’s so difficult to track transactions, the state has been struggling with some shady dealings in the legal weed market. Since most of these activities could be resolved with regulatory and financial allowances facilitating scalability, reporting, and oversight, state legislators have taken a novel approach that could emerge as a viable model. 

The state’s AB466 tax bill creates a pilot program to permit financial transactions for weed via a closed-loop payment processing system for legit purveyors only. This bill establishes a safe, secure and convenient method of paying state and local taxes, preventing the flow of cash into the criminal black market. 

A closed loop payment ecosystem integrates a blockchain so that the data of any transaction at every stage of the supply chain is recorded and available to everyone else in the ecosystem, making it impossible to cheat. 

It also resolves the cash-only pain point in the pot business, making it possible to move money around without needing unmarked vans. Multichain Ventures’s Tokes platform is one of the key drivers of AB466’s pilot program.

“Closed loop payments, logged on a blockchain-powered platform, and integrated with point-of-sale tech, could be the solution that bridges the gap between the IRS and the cannabis economy,” Michael Wagner, CEO of Multichain Ventures, told me via email. “I’ve been working closely with the Nevada Treasurer’s office to ensure that the AB466 pilot is unquestionably a success for all parties involved, and we’re hoping that it will serve as an attractive model on a national scale.”

Indeed, Nevada is not the only state looking to blockchain as a way out of the mess created by the feds. This emerging technology may well become the national standard for cannabis financial transactions, taxation, and reporting. 

What Are Federal Regulators and Banks Waiting For?

Section 280E of the US tax code bans businesses that traffic in illicit goods from taking advantage of corporate income tax deductions. This means that today, pot purveyors can be taxed at an astronomical rate – even up to 90%. So, although the legal marijuana industry could generate up to $7 billion in federal revenue in business taxes and income and payroll taxes, regulating weed at the federal level would actually be sacrificing a cash cow. 

As long as legal expansion is limited to the state level, the federal government can continue taxing legitimate weed businesses at a much higher rate than if it were legalized across the board. 

This is just penny smart and dollar stupid. Since cannabis businesses can’t bank their money and shifting regulations at the state level effectively motivate vendors to fudge the books, chances are solid that sizable chunks of legitimate cannabis money isn’t being declared for taxation. 

New Frontier Data predicts that by 2025, legal marijuana sales will earn as much as $25 billion. A federal tax on cannabis, similar to the tax on tobacco, could generate hundreds of millions per year. And with adequate tracking and reporting, this could offset the short gains of the federal ban on weed. 

High on Bipartisan Apathy

With Andrew Yang out of the 2020 presidential race, the chances of cryptocurrency trading becoming federally regulated in the years ahead took a big dive. 

Let’s hope that talk about an IRS excise tax on cannabis doesn’t die in parallel. The Man has quite the track record when it comes to earning a piece of things he doesn’t really understand. 

This article originally appeared at ZeroHedge.com: https://www.zerohedge.com/news/2020-02-19/why-tax-man-wont-let-cannabis-go-legit