The U.S. House Judiciary Committee’s approval of the MORE Act last week created a buzz in the industry, but did little to move the dial on federal cannabis legalization in the U.S.
That’s according to U.S. cannabis lobbyist Saphira Galoob, CEO of The Liaison Group and executive director of the National Cannabis Roundtable, who spoke at an event in Toronto last Wednesday hosted by the law firm Greenspoon Marder LLP.
“The MORE Act, very practically speaking, is an approach for legalization that is led by progressives and criminal justice reform advocates. It is not led by moderate Democrats or Republicans,” she said.
The next steps for the legislation are not clear, and there is no timetable for a possible full vote in the Democrat-controlled U.S. House of Representatives. More importantly, the bill’s future in the Republican-led Senate is even more muddied.
"We saw that today when an amendment was proposed to replace the MORE Act with the STATES Act, and a party line said no to STATES Act, yes to the MORE Act. Which means, and I'm going to tell you top line here, as long as the House is Democrat and as long as the Senate is Republican you're going to have an impasse in Congress on what the approach for legalization is supposed to be."
Several other lawyers from Greenspoon Marder, a leading U.S. firm in the cannabis space, spoke at the event, on issues such as legislative reform, taxation and border issues.
Here are key takeaways about the state of the industry in the U.S.
At a federal level, medical marijuana access for veterans, research and banking reform are the most promising areas for legislative reform, Ms. Galoob said. In particular, there is a high likelihood that some form of legislation making it easier for banks to take deposits from cannabis businesses will pass in 2020, she said.
This change could come via the SAFE Banking Act, which has already been passed by the House, or it could be attached to another piece of legislation.
"We came out of the House with a two-thirds vote in approval [of the SAFE Act]. Ninety one Republicans said yes. On the Senate side, even though the Republicans are publicly reluctant to say they’re supporting it, the chairman of the committee of jurisdiction held a hearing, and he has made a commitment to advance the bill,” Ms. Galoob said.
“The reason the SAFE Banking Act is advancing, is not because of cannabis industry advocates,” she added. “It is because of non-cannabis industries: the American Bankers Association, the realtors, the insurance folks, the credit card transaction folks. They’re carrying our water; they’re putting pressure on lawmakers to make the change, because their industries are affected.”
The SAFE Act, or similar legislation, would not open up senior stock exchanges to U.S. cannabis companies, meaning the Canadian Securities Exchange and the NEO Exchange will remain the go-to place for U.S. companies wanting to go public, at least in the short term, Ms. Galoob said.
FDA Guidance on CBD
While the 2018 Farm Bill descheduled hemp-derived CBD, the U.S. Food and Drug Administration (FDA) has prohibited the use of CBD in foods and has come down on CBD-related health claims.
Ms. Galoob thinks that the FDA will come around to the idea of allowing CBD foods, but this will take longer than many people expect.
“The new FDA commissioner is going through his nomination hearings right now, so I think there's a timing issue on leadership there,” she said.
“The regulatory rule-making process will require a fairly lengthy comments period. So whether or not they do an interim [regulation], is yet to be seen.
“The one thing about the U.S. government that you can count on is that they will follow a process for their law making and their rule making that won’t necessarily be in coordination and conjunction with what’s happening commercially,” she said.
280E Tax issues
One of the biggest challenges U.S. cannabis companies face is a tax code provision, known as 280E, which prevents companies dealing with scheduled substances from taking business deductions. This can give cannabis companies an effective tax rate of 50, 70 or even 90 per cent said Rachel Gillette, a partner with Greenspoon Marder.
“It’s insane," said Ms. Gillette, adding that it’s a problem that Canadian companies investing in the U.S. often don’t fully appreciate.
“There’s this mad dash, especially in California, to acquire all these assets ... and you need to be thinking of these transactions in light of 280E.
"It’s not necessarily the parent company or the public company that has done anything wrong. It’s usually going to be the underlying business that’s been in operation for nine years, that’s sold out, and you just bought all their stock, and then all of a sudden the IRS [Internal Revenue Service] comes knocking and says, ‘guess what, they filed their tax returns completely wrong, or they didn’t address 280E.’ And then you’re looking at a significant adjustment in a lot of cases.”
Ms. Gillette said that the IRS has been emboldened in recent years to pursue 280E violations. Recent case law around 280E has also been negative for cannabis companies.
“The only good case we have on 280E and cannabis businesses is from 2008 or 2009, and it's called the CHAMP Case. But ever since then, we've had case after case, opinion after opinion come down, basically saying you just sell marijuana, you're subject to 280E… And unfortunately we've had a case come out, after the Harborside case last year, called Alternative Health Care, which actually found that an ancillary company, in this case it was a management company, was also subject to 280E.”
“So a totally separate entity that did not hold a license and was not plant touching, was actually found to be subject to 280E," she said.
Crossing the border
Crossing the border is still a risk for people in the cannabis industry, warned Patricia Gannon, a partner with Greenspoon Marder who focuses on immigration law.
Border guards have a huge amount of power, and there’s little you can do if they decide to stop you on the grounds that you’re part of the cannabis industry.
If you only operate in Canada and you’re not travelling to the U.S. for business reasons, the border guards may give you more leeway, she said.
A memo from the U.S. Customs and Border Protection agency last year said: “A Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S. however, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.”
"Just change the word cannabis to heroine, that’s how they’re going to look at it,” said Ms. Gannon.
“So if they start asking you questions and you’re really coming here for reasons that would not fall within what’s allowed with cannabis in the United States, you need to withdraw, you need to not sign a statement, you need to say, ‘I withdraw my admission to the United States.’ You don’t want to sign a statement that’s there, because.... it’s hard to get a waiver for you, if you have a statement basically admitting to an offense."