What
the State Cannot Do
The states have made
remarkable strides toward marijuana law reform, but because of the
Constitution’s Supremacy Clause, many essential moves are beyond the states’
powers to change. Some of these
obstructive federal powers limit the states’ abilities to regulate the
marijuana industry, while others apply directly to individuals and corporations
involved in the marijuana trade. The
three most powerful of these are the federal income tax, federal regulation of
banking, and federal power to forfeit private property.
The federal taxing
power presents two hazards to the state-legal marijuana business. First, the business must report and pay
income taxes on all income, even if it is illegal. Second, the tax law forbids deduction of
business expenses related to illegal income.
Everyone must report
all income from any source, including illegal income (and under federal law any
income from marijuana sales is illegal).
Remember, Al Capone was never convicted of murder or bootlegging; he was
sent to Alcatraz for tax evasion (whatever happened to all of the Chicago cops
and politicians he bribed – did they pay income tax on the loot?). But if filing a return and paying were the
only problem, Joe’s Weed Works could simply become Joseph’s Herbal Boutique and
list its business as botanic specialties – at least until the audit. The real problem is the amount he would not
be allowed to deduct.
Illegal businesses
are not allowed to deduct the expenses of conducting an illegal business (John
Dillinger cannot claim his bullets as a cost of robbing banks) and the Internal
Revenue Code specifically disallows these deductions for anyone in the illegal
drug trade. A marijuana seller would
have to pay tax at the full rate on gross receipts without deductions for costs
of goods sold, lease payments, salaries, security, or any other business
cost. In a similar situation, a grocer
would be taxed on the $2.50 for which he sells a loaf of bread, not on the two
or three cent profit he earns. No
business could operate under these rules.
Federal regulation of
the banking system prevents a marijuana business from having a bank account or
using bank services to process financial transactions like transmitting or
redeeming payment documents. Under
current federal law, if a federally chartered or insured bank (which because of
the insurance provision, includes state banks, savings and loans, and credit
unions) accepts deposits or makes payments that further a criminal enterprise,
that bank will be guilty of money-laundering and subject to criminal fines or
even forfeiture of its banking charter.
In many instances, the bank could even be construed to be a co-conspirator
or part of a continuing criminal enterprise, which could subject all of the
bank’s assets to civil forfeiture.
As a result of these
pressures and threats, few, if any, banks, are allowing marijuana businesses to
open or maintain accounts. These businesses
are forced to revert to the seventeenth century methods of operating cash-only
businesses: cash for goods purchased and wages paid; cash for leases and
insurances; cash for taxes. With no bank
account and no credit history, these businesses cannot get credit or
loans. And handling all that cash makes
them prime targets for robbery. No
successful modern enterprise can operate this way.
The most pernicious
federal weapon is civil asset forfeiture.
Forfeiture is destructive in two ways: it lacks the protections provided
to defendants in criminal proceedings and it can attack outsiders who simply
have routine dealings with the marijuana businessman. A common target, as shown in many recent
California actions, is the property owner who leases commercial buildings to be
used for dispensaries.
The asset forfeiture
program was designed to combat organized crime bosses who were hard to convict
because they rarely got their hands dirty by personally actin in the crimes
they ordered. The idea was to remove the
profit motive from criminal enterprises.
The government can seize and forfeit any property that it has probable
cause to believe either was used in the commission of a crime or was acquired
with criminal proceeds. (Remember Don
Johnson's Ferrari from the old Miami Vice
television series?) Once the property
has been seized, the owner may only recover it by timely filing a civil lawsuit
to get it back. As plaintiff, the owner
has the burden of proof to show by a preponderance of the evidence that he is
an innocent owner. Being an innocent
owner means more than just showing that he did not commit a crime; the owner
must show that he did not even know that a crime had been committed and that he
had taken necessary steps to make sure his property was not being used
illegally. Innocent ownership is almost
impossible to prove, and the owner must bear (usually in advance) all the costs
of suit, including attorneys’ fees for a complex federal law suit. No wonder landlords get scared when they get
a letter from the U. S. Attorney informing them that the building in which they
had leased out one room could be subject to forfeiture.
Taxes, bank
regulation, and asset forfeiture are only three of the scores of non-criminal
actions the federal government can use against marijuana enterprises authorized
by state law. Even if a state is doing
its best to foster marijuana development, federal actors can reduce that
enterprise to a street-corner seller furtively trying to avoid The Man while
selling a small bag of indifferent product.
A state – and its residents – hoping to reform marijuana laws must focus
as much effort as possible on reforming Washington.