Dozens of Los Angeles marijuana businesses with permits that expired Dec. 31, 2020 will have until March to renew their licenses renewed, regulators announced. The news came days after the city’s Department of Cannabis Regulation informed licensees they would not be allowed to conduct commercial marijuana business after New Year’s Eve. Our Los Angeles marijuana business lawyers understand the about-face was based in large part to the widespread impact of the novel coronavirus on business owners’ abilities to pay renewal fees on time. COVID-19-related closures at the city’s finance office set things back even further.

The news impacts nearly 60 businesses with now-expired licenses.

The businesses faced a host of expensive consequences if the city chose to report them to the Los Angeles Police Department or other state agencies. Now, they will have until March 1st before such actions will be taken.

Any cannabis business struggling to comply with local or state licensing requirements or regulations should consult with an experienced Los Angeles cannabis business attorney who can help you work your way through the red tape.

In early December, a city councilman introduced a motion to give businesses until Feb. 28th to get their licenses renewed, something a DCR spokesperson said the agency supported.

L.A. Cannabis Businesses Cautiously Relieved

Response from local stakeholders in the industry was a mixed bag of relief but also trepidation. Some were quoted as saying they were grateful for the relief, but some unanswered questions remain. While the DCR has essentially said it’s going to look the other way for a few months, it’s unclear what exactly that means or whether there could still be penalties or other consequences for operating during that window unlicensed.

The DCR’s email expressly told those with expiring licenses that the agency’s decision was “in no way” meant it was abdicating its responsibilities or right to take action under local laws and regulations, and neither does it stop any other city or state agency from taking their own independent action.

Businesses that are technically operating on a local permit that is expired may be at risk of enforcement action from the California Bureau of Cannabis Control. If the agency initiated an inquiry into a certain operation, city regulators would have to be honest and say the business is operating without a license. That means these businesses are still potentially at risk of some enforcement action between now and March.

The hope is that the DCR and city council is acting in good faith, given that everyone realizes little good is going to come of it if these businesses are shuttered. If instead status quo can be maintained while cannabis businesses have a fair chance to catch up, there is less likely to be legal challenges and other costly action taken.

Some operators are considering relocating, considering the permit delays, confusion and other problems they’ve encountered operating in Los Angeles. They should make sure before they do that they’ve secured proper permitting in that locality. Our Los Angeles marijuana licensing attorneys are available to help answer your questions and be your advocate.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.

Additional Resources:

In reversal, L.A. says no enforcement against nearly 60 marijuana firms with expiring permits, Dec. 23, 2020, By John Schroyer, Marijuana Business Daily

One of the largest California cannabis businesses is accusing the federal government of weaponizing federal tax law and wrongly interpreting the U.S. Constitution when it comes to taxation of the marijuana industry.

As our Los Angeles cannabis business tax lawyers can explain, this is the latest development in a long-running legal battle over the much-derided IRS rule outlined in 280E, which curbs the deduction cannabis companies can take on their taxes.

Dispensary chain Harborside in Oakland is appealing in the U.S. Court of Appeals for the Ninth Circuit following a 2019 ruling by a U.S. Tax Court which ordered the company to pay $11 million in back taxes after wrongly claiming a host of business deductions. Such deductions are available to most businesses in the U.S., but cannabis companies don’t have that luxury, thanks to 280E.

What is Section 280E

The problem for the state-legal marijuana industry is the federal designation of marijuana as a Schedule I narcotic, in the same category as heroin – highly addictive and with no medicinal benefits. It’s an outdated classification, but one to which the federal government has held tight for decades.

Section 280E of the U.S. tax code holds that operations that profit from trafficking illegal drugs can’t turn around and deduct expenses incurred in the production, distribution and sale of those drugs. That means that even operations following their state law to the letter can’t deduct business operating expenses. The law was adopted in the 1980s – long before cannabis was state-legal – to prohibit illegal drug traffickers from claiming tax deductions.

There is an exception for the costs of goods sold, such as costs for seeds, water, nutrients, soil and expenses related to growing and harvesting the plant. Expenses racked up for distributing the product aren’t tax deductible. These include things like labor expenditures, overhead costs, shipping and rent.

What this all translates to are much higher tax bills for the cannabis industry because they are compelled to pay taxes on gross profit instead of their actual net income. For many operations, this can quickly make business unprofitable.

Let’s say a company brings in $2 million in revenue. If they deduct $600,000 in cost of goods sold, their gross profit is $1.4 million. A typical business can deduct expenses associated with sales, administration, etc. (let’s say $1.1 million). That business would have a net income of $300,000, and would be taxed on that amount. A cannabis business, however, would have to pay taxes on the gross profit of $1.4 million, ultimately paying more than $230,000 in additional taxes compared to other companies.

Legal Argument Against Section 280E

Harborside is appealing a tax court ruling that 280E was applicable. In a response filed last fall, the Internal Revenue Commissioner argued for dismissal on the grounds that the constitutional questions being raised by the dispensary chain weren’t previously raised with the lower court.

In a 35-page response, Harborside called the IRS’s position on exclusions “clever, but unconstitutional,” and that it forces companies operating at a loss, without income, to still pay substantial income taxes. Compelling the cannabis industry to acquiesce to a “new method of accounting” both oversteps the Constitution and misconstrues tax law.

The case is being closely monitored by those in the cannabis industry, including our Los Angeles marijuana business lawyers, because it could impact how businesses can deduct expenses on future tax bills.

Central to this dispute is how “income” is defined. The IRS argues that the 16th Amendment is applicable only to income derived from property (i.e., collecting rent) and doesn’t involve business income. Harborside argues this is an inappropriate interpretation of the Amendment, which allows Congress to tax income directly. Further, because the cannabis company was operating at a net loss for the years in question, there was no “income” to tax and the government is trying to impose a tax unlawfully.

So far, at least two amicus briefs have been filed by cannabis industry groups in favor of the dispensary’s position. Oral arguments are slated to begin next month.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.

Additional Resources:

Harborside Fires Back at IRS, Dec. 9, 2020, By Willis Jacobson, Weed Week

Trying to predict the California cannabis market was problematic even prior to an international pandemic that threw everything off course. Part of it is that this is the largest legal marijuana market in the world. Part of it is that it’s so new, being legalized for adult recreational use just three years ago. And part of it is the industry’s ongoing and fierce competition with a huge illegal market – all while the drug is considered illegal and highly addictive by the federal government.

That said, our Los Angeles marijuana business lawyers have been fierce defenders of those involved in cultivating, manufacturing, selling, using, prescribing and advertising marijuana for more than a decade. We have become deft at examining the trends as we advise our clients, many of whom were better off than some other businesses due to their designation by the state as “essential.”

In looking at the year ahead, our marijuana lawyers see a handful of factors that will likely impact the future of the industry and the clients we serve.