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Support for some form of legalization seems pretty broad, even if the coalition is strangely assembled of aging hippies, parents seeking medical treatment for desperately ill children and libertarians.  The laws of the 23 states (including the District of Columbia), that permit some legal use of marijuana also protect different activities.  Some states have decriminalized pot possession in small amounts, some permit medical use, and Colorado and Washington permit recreational use.  Only in Colorado have licenses for recreational sales been issued.

State Pot Law Conflicts with Federal Law

The problem is that marijuana remains a Schedule I controlled substance under the federal Controlled Substances Act. So, enterprises that are legal under state law may be illegal under federal law. What does this mean for taxation?  What about banking?  What kind of business can exist without banking?  More questions than answers.  What do we actually know about pot law?

Mishegas (n.) CrazinessThe state of pot law is total mishegas.

To get hold of something solid, though, let’s look at banking issues for pot businesses in Colorado because that may provide a template for solving other problems.

Federal Enforcement

The federal government has backed away from enforcement activity relating to marijuana.   In August 2013, the Department of Justice announced that it would narrow its enforcement focus to eight priorities, including preventing marijuana distribution to minors, preventing drugged driving, stopping drug trafficking by gangs and cartels and forbidding the cultivation of marijuana on public lands.There is nothing necessarily permanent about the focus of administrative priorities, however, and none of this changes federal money laundering laws.

In February 2014, the Financial Crimes Enforcement Network issued guidance to clarify customer due diligence expectations and reporting requirements under the Bank Secrecy Act for financial services provided to marijuana-related businesses. Although the guidance was intended to make it easier for banks to deal with pot businesses, the encouragement proved too thin.  Larger banks still generally decline to deal with any entity involved in the pot trade.  Some smaller banks and credit unions have been more willing to do so, although few make a public point of it.

Cash businesses are dangerous.  Without banking it is very difficult to track revenues for the purpose of taxation.  There is also no access to credit.  Without credit there is not much potential for expansion.  What is the point of giving legal status to an enterprise that has to finance in the shadows?

The Colorado Compromise

Earlier this month, the Colorado legislature passed the Marijuana Business Access to Banking Act of 2013, which will create a state-run financial cooperative for marijuana sellers. Governor John Hickenlooper is expected to sign it.  Importantly, the law is intended to give sellers access to financial services through the Federal Reserve, but the co-op arrangement has its limits.  There is no requirement for federal deposit insurance.  It is also not completely clear that Federal Reserve will allow the co-ops to function, since marijuana is still illegal under federal law.

A Template for Solving Other Pot Law Issues?

Solving the banking issue would go a long way toward solving the taxation issue, currently the source of some Washington litigation.  It would also seem to address the DoJ’s priority focus on trafficking by gangs and cartels.  It is tempting to draw analogies to historical legalization struggles, like those with gambling and alcohol sales, where a partnership between state and federal regulators was key.

As with early attempts at universal health insurance, it appears that states are the incubators of innovation. Whether the Colorado law proves to be a model depends on whether it succeeds,  Its success appears to depend on the cooperation of the Federal Reserve.   A somewhat passive federal enforcement approach may be a good  thing at this juncture.

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