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Phillips Murrah Director addresses banking issues with medical marijuana industry

A Journal Record article published on August 30, 2019 features Phillips Murrah Director Jason M. Kreth’s participation on a recent panel discussing issues facing the banking industry with regards to the introduction of the medical marijuana industry in the market.


From left: Journal Record Editor Russell Ray, Phillips Murrah Director Jason Kreth, CRF Accounting Solutions owner Christina Ferguson and First Fidelity Senior Vice President Charles Griffin discuss challenges faced by medical marijuana businesses seeking to obtain basic banking services.

Imagine running a business, or even your personal life without a bank.

What would it be like to navigate the modern world without a checkbook, a bank card and a credit card? How would you pay bills, pay taxes, order products and supplies or even buy a plane ticket?

That’s not a problem most people face, but many businesses associated with Oklahoma’s fastest-growing industry have found themselves locked out.

The state’s burgeoning medical marijuana industry has generated tens of millions of dollars in local and state tax revenues since Oklahomans voted to legalize the industry last summer. But the federal government still considers marijuana a banned substance, which creates significant legal liabilities for banks, which have largely turned their backs on medical marijuana businesses.

While the rest of the state enjoys split-second financial transactions at the touch of button or the swipe of a smartphone, most businesses associated with medical marijuana operate on a cash basis, storing money in lockboxes, safes, bank bags and even shoe boxes. The most basic convenience of opening a bank account is off limits to them.

An attorney, banker and accountant came together Thursday to share their experiences with the medical marijuana industry. The discussion was part of an ongoing series of roundtables sponsored by The Journal Record and broadcast by KOSU radio.

The professionals work with clients within the legal marijuana industry and they shared their unique views and answered questions from a studio audience largely composed of people with medical marijuana businesses.

“Without a bank account, we’re dealing with cash, which is very difficult to track. It’s like having $100 in your purse, and you wonder where it all went a couple days later,” said Christina Ferguson, owner of CRF Accounting Solutions, which serves several clients in Oklahoma’s medical marijuana industry.

Ferguson said her clients keep cash logs, which require meticulous record keeping after each transfer and transaction. Some disburse cash among as many as four safes as well as bank bags that function as bank accounts.

“Where a bank account is taking out human error, a cash log is allowing human error to come back in, and people make mistakes, but that’s the best we we’ve found so far,” she said. “It is very time-consuming, and you must stay on top of it.”

While Oklahoma has a few financial institutions exploring the possibility of offering services to medical marijuana businesses, First Fidelity Bank may be the first in the state to welcome the industry, but even at that, its relationship with marijuana businesses is at arm’s distance.

The bank’s first experience with the marijuana industry came five years ago when Arizona legalized it, said Charles Griffin, director of retail banking for First Fidelity Bank in Oklahoma and Arizona.

In Arizona and in Oklahoma, serving marijuana businesses is the right thing to do, Griffin said.

“It’s very important to serve the community, and these are legitimate businesses with legitimate needs. They need to be able to do the same things that everyone else does.”

These businesses make a lot of money and providing banking services allows them to deposit their money into the Federal Reserve, where it should be and where it will not be vulnerable to crime and pose a danger to the businesses and their employees, Griffin said.

But Griffin said the banking industry takes on significant risk and liability by working with marijuana, and First Fidelity is painstaking in its approach to monitoring businesses through rigorous documentation requirements and background checks.

It is a labor-intensive service that requires significant staffing to look out for money laundering operations and bad actors, he said.

First Fidelity requires marijuana retailers, growers, labs and other businesses that directly handle marijuana to pay fees as high as $1,000 per month to maintain accounts. The bank also requires significant fees from other companies that don’t handle marijuana directly, but serve the industry, such as equipment suppliers, accounting firms and other vendors.

Because of federal laws against marijuana and the banking industry’s exposure to heavy federal regulation, there is significant risk involved in serving the medical marijuana industry, Griffin said.

“I equate opening a new account for a medical marijuana business to underwriting a commercial loan,” he said.

That doesn’t stop the bank from bringing in more clients, however. Griffin said First Fidelity has about 60 medical marijuana clients, and he expects that number to grow higher through the coming months.

Panelists are optimistic there is relief in the future, but there is no certainty when that might come.

The SAFE Banking Act is pending in Congress, and if it were to become law, it would prevent federal regulators from taking adverse action against banks, said attorney Jason Kreth of the law firm Phillips Murrah.

It appears the bill has enough votes to pass the U.S. House of Representatives, but there’s doubt it would pass the Republican controlled Senate and be signed by President Trump, Kreth said.

“It’s inevitable that some piece of legislation down the road will accomplish what the SAFE Banking Act is trying to do,” Kreth said. “There’s a sea change in public opinion in regard to the use of legal cannabis, so I think we will get something that clarifies these laws.”

“If I had to put odds on it, I would say it’s doubtful it would pass the Senate, but, at some point in the future, I expect something like this will pass.”

Meanwhile, Oklahoma’s medical marijuana businesses are searching a scarce landscape for the financial services they need to manage growing revenue streams.

“I have money in a shoebox in my closet,” said Peter Fulmer, owner of FulMed Labs.

Fulmer, who attended Thursday’s roundtable, said his business is likely to get much busier now that the Oklahoma Medical Marijuana and Patient Protection Act is now in effect. Among other things, the act requires all marijuana to be tested and graded for content by a certified lab before it can be sold to the public.

Fulmer said his lab will see more activity this fall, and he’s been looking for banking services to help manage the surge in cash flow.

“I’ve gone to 15 banks, and I’ve been turned down by all but one,” he said. “The one bank is charging $1,250 per month and they want 0.7% of every transaction.”

He said he’s still looking, and he’s open to ideas as he waited in line after the meeting to speak with Griffin about opening an account at First Fidelity.

“There’s a lot of variability in what everybody is doing,” he said. “It’s all over the board.”

Attorney Lauren Voth leads SmartTalks presentation on medical marijuana in the workplace

SmartTalks Virtual User Group Meeting:
Medical Marijuana in the Workplace

Thursday, Aug. 15
12 PM to 1 PM (CST)

Free to participate with registration

 

Employers can still enforce drug-free workplace policies and implement drug-testing policies even after their state legalizes Medical Marijuana.  However, you must ensure your policies comply with state law.

Phillips Murrah Attorney Lauren Symcox Voth will review what your company can do to ensure the safety and security of your workforce and organization even after the legalization of medical marijuana.

To register, click here.

Presenter:

Lauren Voth

Lauren Symcox Voth

Lauren Symcox Voth is a member of Phillip’s Murrah P.C. Labor and Employment Practice Group. She represents individuals and both privately-held and public companies in litigation, administrative matters, mediations and negotiations. Specifically, Lauren has experience representing large and small corporations in employment-related matters.

Federal income tax challenges for medical marijuana businesses in Oklahoma

On June 26, Oklahoma voters approved State Question 788, which legalizes the use, growth, and sale of marijuana in the state for medicinal purposes.  In addition to providing rules for individual use of medical marijuana, the approval of SQ 788 also created a number of opportunities for new related businesses, such as retailers or dispensaries, commercial growers and processors. However, although licensed medical marijuana businesses are now legal under Oklahoma state law, conflicting federal law creates a number of challenges for business owners, particularly with respect to federal income tax law.

Attorney Jessica N. Cory

Jessica N. Cory advises clients regarding corporate and general business matters, including choice of entity, formation, tax-free reorganizations, acquisitions and dispositions and tax planning.

Generally, the Internal Revenue Code allows a taxpayer to take a deduction for all “ordinary and necessary” business expenses paid or incurred during the taxable year.  Congress has created an exception to this rule in certain instances, however.  One such exception is Internal Revenue Code Section 280E, which prohibits a taxpayer engaged in the business of “trafficking in controlled substances” from taking a deduction for ordinary business expenses.  For purposes of this provision, a controlled substance is any Schedule I or Schedule II drug under the federal Controlled Substances Act, which includes marijuana.  Although taxpayers have argued that Code Section 280E should not apply to businesses operating legally under state law, courts have repeatedly rejected this argument, concluding that any business buying or selling marijuana regularly is subject to the restrictions of Code Section 280E until Congress chooses to amend the Internal Revenue Code.

Although Code Section 280E’s bar on deductions represents a significant obstacle for medical marijuana business owners, several exceptions help reduce the burden on these taxpayers.  For example, although a medical marijuana business cannot deduct expenses in the same way as other taxpayers, it is entitled to offset its gross receipts with its cost of goods sold (“COGS”), although the Internal Revenue Service has issued guidance strictly limiting what types of costs a taxpayer engaging in a marijuana business can allocate to COGS.  Caselaw supports this narrower interpretation of COGS, including prohibiting resellers of marijuana from including any indirect costs – costs other than the price paid for inventory plus any transportation or other necessary acquisition costs – in COGS.

Another important exception to Code Section 280E is the separate business rule recognized by the Tax Court in an early medical marijuana case.  Under this rule, although Section 280E may preclude a taxpayer from taking any deductions relating to its medical marijuana sales, it can still deduct its expenses for any separate, non-trafficking trade or business.  Accordingly, it is extremely important for a marijuana business to keep careful records of any other businesses it may also operate, unrelated to growing, processing, or selling marijuana.

Members of Congress have repeatedly introduced legislation to exempt marijuana businesses lawfully operating under state law from the parameters of Section 280E.  Until this type of legislation is enacted, however, federal tax law will remain a potential minefield for any unwary medical marijuana businesses.  It is therefore important for businesses opening under SQ 788 to seek out an experienced accountant or tax lawyer to discuss the best way to structure their business to comply with federal tax law while minimizing their tax burden.


If you would like to know more about how this affects your business, contact Jessica N. Cory at 405.552.2472 or jncory@phillipsmurrah.com.

Phillips Murrah attorneys present for Construction Financial Management Association

Attorney David Walls addresses construction industry professionals at September's CFMA meeting.

Attorney David Walls addresses construction industry professionals at September’s CFMA meeting.

David A. Walls, Construction Law Attorney, and Byrona J. Maule, Phillips Murrah Director and Employment Law Attorney, addressed construction industry professionals at a September meeting for Construction Financial Management Association.

Walls presented an update regarding American Institute of Architect changes to standard form construction industry contracts. Maule followed, speaking on the impact of Oklahoma’s medical marijuana laws on employment law.

Maule’s presentation focused on drug and alcohol testing, policy impacts on drug and alcohol testing and anti-discrimination, and preemption issues under the Controlled Substance Act, the Drug Free Workplace Act and the Federal Motor Carrier Safety Act.

As a result, she said, testing procedures need to be updated or changes, policies will have to be updated, and training will be needed for managers.

For more information about the Oklahoma chapter of CFMA, please click here.

Q&A: Medical Marijuana and the Construction Industry

This article discusses procedures the Oklahoma construction industry employers need to develop with the legalization of medical marijuana, including how to handle drug testing.

With the passage of State Question 788 and the decision by the Governor not to call a special session, many of the ancillary questions regarding the impact of medical marijuana will remain unanswered until the next legislative session in 2019. But, in jobs where safety is key, such as construction, employers will need to develop procedures now to ensure that they are complying with safety rules and regulations as well as not stepping on an employee’s rights.

Q: How does the passage of State Question 788, medical marijuana, affect my safe work site and drug free policies?

A: The provisions of State Question 788 provide that an employer can take action against an employee who uses or possesses medical marijuana at the place of employment or during work hours. Thus, a contractor’s safe work site policy that prohibits the use of drugs or alcohol on the job is allowable under the law. However, unless an employer can show an imminent risk of losing a monetary or licensing benefit under federal law or regulation, an employer cannot refuse to hire, terminate, or otherwise discriminate against an employee simply because the employee has a medical marijuana card.

Q: If one of my employees with a medical marijuana card is “high” on the job can I still terminate him or her?

A: Maybe. Contractors will need to carefully differentiate between being impaired at work (ie, under the influence of marijuana and its attendant effects) and drug testing positive for medical marijuana although the employee may not be impaired. Unlike alcohol, scientific research has not been able to put a specific number on the THC levels (the compound in marijuana that makes one “high”) that impairs a person’s ability to drive or work safely—and THC may appear in a blood or urine screen well after it is consumed. So, unless the legislature choses a legal level of THC, the key will likely be whether, based on an objective observation, the employee was able to safely function.

Q: My company is working on federal projects, how can I mesh the state law requirements and federal law requirements?

A: Federal law still considers marijuana to be a Schedule I Narcotic under the Controlled Substances Act. Thus it is against federal law to consume or possess marijuana, medical or not. Additionally, most, if not all, federal projects are subject to the federal Drug Free Workplace Act which requires employers to have a drug free work place policy prohibiting the unlawful possession or use of drugs in the workplace and make an ongoing good faith effort to maintain a drug free workplace. These policies include requiring the employee to report to the employer and the employer to report to the contracting agency any workplace criminal drug conviction. However, the distinctions are fine and the interplay between federal law and the imminent risk of losing federal contracts or licensing has yet to be defined by Oklahoma or Federal courts and not by the federal or state government.

NewsOK Q&A: SQ 788 also opens path for new medical marijuana businesses

In this article, Director Jason M. Kreth discusses requirements and allowances for medical marijuana distributors and businesses since Oklahoma voters approved State Question 788.

Jason M. Kreth

Jason M. Kreth is a Director and a commercial litigator who represents financial institutions, handling matters such as foreclosures, bankruptcy and lender liability litigation. He also represents clients in a range of real property disputes.

Q: What type of new business opportunities exist now that SQ 788 has passed?

A: The approval of SQ 788 enacted a series of new statutes that take effect July 26. Aside from provisions related to the acquisition of a medical marijuana license for individual use, the statutes also provide a framework for the approval of new medical marijuana businesses. These businesses are: retailers or dispensaries of medical marijuana; commercial growers of medical marijuana; processors of medical marijuana into concentrated, edible or other forms; and medical marijuana researchers. In addition, the Oklahoma State Department of Health has published its draft proposed Medical Marijuana Control Program regulations which, if implemented in their current form, would provide for the licensure of laboratories to test and approve various medical marijuana products. However, both the statutes implemented by SQ 788 and the regulations proposed by Department of Health are still subject to change.

Q: What are the main requirements that must be met in order to obtain a license as a dispensary, commercial grower, processor or researcher?

A: In each case, an individual or entity wishing to obtain a license to operate as a dispensary, commercial grower, or processor, must submit an application to the Oklahoma State Department of Health along with a $2,500 fee. The application must establish that the applicant: is 25 or older; is an Oklahoma resident, in the case of entities, that all members, managers and board members are Oklahoma residents and that no more than 25 percent of its ownership is out-of-state; is registered to conduct business in Oklahoma; and isn’t incarcerated and doesn’t have either a nonviolent felony conviction in the last two years or any other felony conviction in the last five years. In addition, the Department of Health’s proposed regulations also would require submission of a criminal background screening as well as proof of a $50,000 bond made payable to the Oklahoma State Department of Health.

Q: Where can these new medical marijuana businesses operate?

A: Virtually any location as other businesses. The only direct exception is a dispensary can’t operate within 1,000 feet of a school. To ensure this freedom to operate these businesses, the statutes specifically prohibit a city or municipality from restricting zoning for the purpose of preventing the opening of medical marijuana establishments, and landlords are prevented from refusing to execute a lease with such businesses unless, by doing so, they would lose a licensing or monetary benefit under federal law. However, the proposed regulations of the Department of Health would create several practical limitations on where these businesses could be located. For instance, a dispensary may not be housed in the same location as a physician who can prescribe medical marijuana and the location where medical marijuana may be grown or processed is subject to more exacting security and privacy standards than those of a simple dispensary, which may limit the options for potential locations.

Q: When can these businesses obtain their licenses?

A: The statutes set an ambitious timetable of applications being made available within 30 days of the passage of SQ 788 and the establishment of a regulatory office for processing these applications within 60 days of passage. Furthermore, the statutes require that all applications must be processed within two weeks. However, these timetables are subject to alteration by the legislature and may be extended.

 

Published: 7/3/18; by Paula Burkes
Original article: https://newsok.com/article/5600093/sq-788-also-opens-path-for-new-medical-marijuana-businesses