Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Tension between federal law and state-legal recreational marijuana – #27

Photo courtesy of Adobe Stock.

Photo courtesy of Adobe Stock.

I am watching developments in Colorado and Oregon for the newly state-legal recreational use of marijuana. Just as a reminder, my interest is not in marijuana. My curiosity is focused on how much of a drag a burdensome and expensive regulatory structure will create for a newly legalized industry.

My hypothesis is the heavy-handed regulations will be crushing and the expected result will be to severely restrain a new industry.

A related tangent is the tension between recreational marijuana use being legal in certain states under state law yet still illegal at the federal level. Here are a few articles I’ve read on this tension.

7/22 – Slate, originally at Inc. – Why Colorado Marijuana Businesses Suddenly Have an IRS Problem – Tax attorneys and accountants are saying there may be something in the range of 30 marijuana businesses in Colorado under IRS audit for their 2014 and 2015 taxes.

Two issues are apparently present. First, some apparently failed to file form 8300, which is needed for deposits of currency over $10,000.  Second, code section 280e, which does not allow deduction of ordinary business expenses for illegal entities, but does allow a deduction for cost of goods sold.

Report says one company received an audit letter from the Criminal Investigation Division. The agent working on the audit told the taxpayer that the agent used the wrong letterhead when sending the letter. My suggestion? Make sure you have a criminal defense lawyer involved when you get a letter from CID.

An attorney working some of the audits says this indicates the IRS is taking a firm stand that marijuana businesses are still illegal.

11/14 – Wall Street Journal – Legal Marijuana Poses a Problem for Gun Buyers – Here’s an issue I never thought about – the intersection of marijuana consumption and purchasing a weapon.

ATF Form 4473 must be completed by every person wanting to buy a firearm. Article says question 11e asks whether a person is either using or addicted to marijuana. If the answer is yes, the purchase cannot go through. You may not buy a weapon if you are using marijuana. That would be either recreational or medicinal.

You can see Form 4473 here. Question 11e says:

Are you an unlawful user of, or addicted to, marijuana or any depressant, stimulant, narcotic drug, or any other controlled substance?

If the seller recognizes the potential buyer uses marijuana or believe that is the case, the seller is obligated to halt the transaction.

The challenge, as on other issues such as expenses which can be claimed as a tax deduction, is because marijuana is still a schedule 1 drug under federal law.

Oh, by the way, lying on Form 4473 is a felony. Check out the certification on page 2, which says in part

…making any false oral or written statement … is a crime punishable as a felony under Federal law…

9/8 – The Washington Post at The Cannabist – Why medical marijuana patients can’t buy guns – The 9th Circuit ruled that it is lawful to deny purchase of a weapon to a woman who was holding a medical marijuana card.

Federal law still bans weapons purchases by an

unlawful user and/or an addict of any controlled substance.

Under federal law, marijuana is still listed as a controlled substance.

Article says that back in 2011 BATF published a letter saying that prohibition applies even in the case of a person using medicinal marijuana.

The Form 4473 linked above is dated April 2012, so it was updated knowing some states had legalized recreational marijuana and after the BATF issued their reminder.

11/14 – Denver Post at The Cannabist – Colorado gov calls marijuana gray market “a clear and present danger” – Apparently there are people raising marijuana legally under Colorado law but then selling the product outside the legal distribution system, which is illegal under state law. This is called the “gray market.” This also involves the complication of some parties moving the product across state lines for sale in other states, which is illegal under both federal and state law.

Back in March a DEA task force rated a bunch of houses used by a team doing this. The feds seized 1,879 plants and 16 pounds of fully processed marijuana. The feds indicted seven guys on multiple counts of marijuana production and distribution.

The governor called for increased spending to combat the gray market.

One of the downsides of state legalization with heavy regulation and high excise taxes on the final product is that the prices will be far higher in the legal market which means the illegal market is not going away. End result is criminal enforcement is still needed, both at the federal and state level.

Again, one of the major arguments for legalization is the drug war against casual users and the supply system would end. The unresolved contradiction is the current patterns of legalization will not economically eliminate the illegal market. That issue will stay in play even if the federal government removes marijuana from the list of controlled substances on Schedule 1.

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