Saturday, June 29, 2013

What the State Cannot Do

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.  

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