Once again, the federal government stands in the way of businesses in the marijuana industry that operate in states where marijuana is legalized. In January, the Internal Revenue Service (IRS) issued new policy updates totaling over 280 pages. In this extensive policy update, buried deep inside, there is a ban on future nonprofit organizations who lobby for the marijuana industry. For advocacy groups trying to change federal cannabis laws, life could get a lot harder.
The IRS hid inside the 280-page policy update a provision that declares that the agency will no longer acknowledge any tax-exempt applications for an organization “whose purpose is directed to the improvement of business condition…relating to an activity involving controlled substances…which is prohibited by federal law regardless of its legality in the state in which such activity is conducted.”
The Obama-era Department of Justice policies that protected the marijuana business have essentially destroyed. The IRS policy change can just two short days before U.S. Attorney General Jeff Sessions revoked the Cole Memorandum that protected marijuana industries from federal prosecution.
Rachel Gillette, a Colorado-based cannabis attorney, stated that the IRS’s new policy is not shocking. “It’s another example of the IRS’ punitive policies towards the cannabis industry.”
Another professional involved in the cannabis industry, California accountant Jerry Chin stated that the policy change is, “an interpretation of what the IRS sees in its own rules and regulations.”
Chin added, “What the IRS is saying is, if your trade association’s main purpose is the advocacy of a Schedule I substance, then we’re going to deny your application for that fact alone.”
Groups Affected by the IRS Change
There has already been one nascent marijuana trade group affected. The New Jersey Cannabis Industry Association (NJCIA), which celebrated its one-year creation in January, was denied an IRS determination letter for its application for tax-exempt status. The organizations president, Hugh O’Beirne, had fought back-and-forth with the IRS for months before the final decision came down.
It first appeared as if O’Beirne’s hard work was paying off as the conversation between the IRS and NJCIA was moving along with the IRS asking the organization for “further details on our application,” according to O’Beirne.
Then, at the “eleventh hour,” he was informed by the IRS of the procedural rule change and told that the IRS would not be issuing those types of letters to “your type of company.” All of this happened within 7 days of the procedural rule change announcement.
Whether other newly formed trade associations have been denied determination letters or tax-exempt status is unclear at this point. The IRS has not responded to requests from various publications. Additionally, since the policy change is so new, there is a great deal of confusion of how this change will affect the cannabis industry or organizations that are associated with the industry.
The Effect to Established Groups
There are no answers for current, long-standing marijuana advocacy groups wondering if their tax-exempt status will be revoked or whether the policy change applies only to organizations initially applying for tax-exempt status. Experts are not in agreement on that point.
The National Cannabis Industry Association (NCIA) has been registered as a 501(c)6 nonprofit organization since 2010. They feel as if they are a target for the IRS. For the NCIA, taxes owed to the IRS would total $210,000 for 2017 revenue received if not for the tax-exempt status.
Chin, who has been working with the cannabis industry since 2012, estimates that this type of cost could affect all marijuana nonprofit organizations under the new federal policy. His estimates for NCIA are based on their $3 million in revenue less $2 million in deductible business expenses for 2017.
He believes that there is the “distinct possibility” that the IRS may use the new policy to revoke the tax-exempt status previously granted to organizations like the NCIA. Unfortunately, the IRS has the ability to review the status of any organization and revoke it based on policy changes.
However, Henry Wykowski, a San Francisco based attorney, who serves as NCIA’s general counsel disagrees with Chin. He believes that the IRS does not have the power to remove an organization’s tax-exempt status except under limited circumstances and that the new policy is just another kick to the shins to the marijuana industry.
He believes that in order for the IRS to remove any tax-exempt status, an organization must “run afoul” of their tax-exempt obligations. He also believes that the new policy does not apply to any entity that may have already received a determination. He added that if the IRS revokes NCIA’s tax-exempt status that the organization could sue the IRS in U.S. Tax Court.
There is currently no clarity on whether the IRS will implement the new policy retroactively. Ed Bartlett, a Boston-based tax attorney stated, “The IRS would have to rule specifically that an organization no longer qualified for tax-exempt status. Until that happens, existing organizations should continue to function as tax-exempt entities.”
The IRS could potentially use the new policy to target groups already granted tax-exempt status. This could affect groups that work indirectly with the cannabis business and are not directly involved in the production aspect, such as Marijuana Policy Project (MPP) or Americans for Safe Access.
Hundreds of marijuana organizations that currently have tax-exempt status are potential targets if policy is interpreted to include state chapters of national nonprofits dedicated to reforming cannabis laws.
Companies such as NCIA are “prepared to fight” if the IRS tries to remove their tax-exempt status. Aaron Smith, executive director of NCIA, stated that he has not heard from the IRS about the policy change.
If nonprofit organizations lose their tax-exempt status, their profits will be tax, leaving fewer dollars to advocate for law changes. However, this is the worst potential outcome, according to industry insiders. Chin noted that a trade group that loses or is never issued tax-exempt status is subject to a 21% federal tax on any profits.
Even if the IRS decides to deny groups that have yet to receive tax-exempt status, it will still harm those particular groups’ effectiveness and credibility. With 21% less dollars to spend on advocacy, the groups will not be able to truly operate as nonprofits and complete the work expected of their members.