SMITH BRAIN TRUST – After the U.S. House of Representatives passed new law in April that would allow banks to provide services to cannabis companies in states where the drug is legal, it sent a signal that it may be high time to get barriers for the business of the cannabis industry
The bill, known as the SAFE Banking Act, comes after a lot of lobbying by the American Bankers Association and is still around the corner in the Senate
Carissa Cartalemi, 15, owner and operator of the Star Buds Medical marijuana dispensary in Baltimore, says the bill is a step in the right direction to overcome some of the hurdles that pharmacies like yours face. But there is still a long way to go
“With medical cannabis still illegal nationwide, we couldn’t use credit and debit card processors, online ordering, or many of the financial services that most businesses take for granted,” says Cartalemi, who opened with partners Megan Rogers and Vincent Lidie Star Buds in 2018
Raising capital to start the company was also a challenge, she says. It was not possible to get a traditional business loan from a bank. Instead, she worked with a consultant to find a private equity investor who would accept cannabis deals, she says
“There are additional hurdles for us when it comes to funding because cannabis is still illegal at the federal level,” says Cartalemi. “We are forced to boot and get creative every day when we run our business.
Maryland Smith’s Samuel Craftsman, CPA and lecturer in accounting, says his clients in the cannabis industry have managed to use credit unions for banking and raising capital through private investors
While the latest bill gives cannabis companies financial respite, Craftsmen fail to address the biggest problem that plagues them – Section 280E’s tax code, which prevents companies from offsetting traditional business expenses from Schedule I or “trading” gross income II Substances within the meaning of the law on regulated substances.
“The industry needs to change this or the cost of buying legal cannabis will be forever above what should be assumed for these companies to absorb the tax on their profits,” he says. “The result is that they have to calculate accordingly to make a decent profit for these investors at the end of the day. That is really unfair for the entire market.”
It’s not an unrealistic goal, says Craftsman, especially given the growing public support for decriminalized or legal marijuana in recent years.
In a 2020 poll by Gallup, 68% of Americans were in favor of the idea of legalizing marijuana, up from 12% in 1969. Thirty-six states have legalized medical cannabis, and 17 states allow state legislation, according to the National Conference of State.
It is still controversial whether a state approach or extensive federal legislation is the best way to repeal Section 280E. States can take matters into their own hands and reduce the tax burden, says Handwerger, but state tax only regulates that at a rate that is usually only a fraction of the federal tax burden.
Handwerger says that since “most states use federal codes to define taxable income, you’ll solve the whole puzzle by getting Congress to change the tax code.” Activists will get more bang for their buck if they focus their efforts at the federal level and get to the bottom of the problem, he says.
Cartalemi agrees, saying that the recent banking reform, coupled with increased scrutiny of tax law, can help raise public awareness and gain more national support for the cannabis industry.
“I think federal law – it governs everything, including people’s opinions,” Cartalemi says. “We need to get this legislation through federally so everyone can see that our business is being treated like any other business.”
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