What Happens if Michigan Legalizes Recreational Marijuana: Now You’re Talkin’ Business?

[originally published by the Grand Rapids Bar Association Sept/Oct 2015 newsletter]

Michigan legalized medical marijuana in 2008, and recreational marijuana could be next.  Two ballot proposals recently approved by the state may put that issue before the voters in 2016.

Business clients may want to get involved.  However, legalization under Michigan law will not resolve all legal issues, especially prohibition of marijuana under federal law.  Here are some of the ways in which federal law can impact a marijuana business authorized under state law.

Real Estate.  Many clients will rent a place to operate.  Typical real estate leases require the tenant to disclose their commercial activities.  A landlord may refuse to rent to a marijuana business.  Even if the landlord doesn’t ask, the landlord’s banker may force the landlord to evict a tenant engaged in a marijuana trade.  There are similar challenges in ownership.  Know the issues and options.

Financing.  A client may need an investor to help get the business started.  Most investors want a detailed plan before they put up money.  That disclosure could make an investor a co-conspirator in a drug enterprise.  Investors may demand a substantial rate of return for this increased risk.

Banking.  Several federal laws prohibit banking relationships with marijuana customers.  Bank regulators have opened the door a crack in states where such activity is legal, but many bankers continue to refuse even a simple checking or depository account.  A customer who is not truthful with a bank in hopes of opening an account can be prosecuted for bank fraud.  A business lucky enough to get a bank may spend a lot more time doing paperwork, and perhaps pay higher fees, to maintain an account or get a loan.   

Federal Income Taxation.  Businesses which sell marijuana are prohibited by the IRS from deducting most expenses from gross receipts.   The federal income tax bill from marijuana sales activity will likely be much higher than other businesses.  It is not a solution to not report your income.  That’s why Al Capone went to jail.

Federal Enforcement.  If a client can get through the real estate issues, and can convince a bank to open an account, or can pay the bills and taxes and employees with cash, and doesn’t get robbed for all that cash, then remember that possession, use, and sale of marijuana still violates federal law.

The Department of Justice has outlined when federal law enforcement should or should not go after marijuana business.  However, that outline does not create any enforceable rights, and could be amended, or even withdrawn, at the discretion of the Attorney General or the President.

Are We Talkin’ Business?

Are your clients talkin’ marijuana business?  If so, then the above are just a few of the many issues that will face these new entrepreneurs.  These risks are just some of the factors to be considered.