By Allison Henry, vice president - professional and technical standards
As potential clients in the now-legal medical marijuana industry in Pennsylvania begin to call on CPAs for tax return assistance, financial consulting, financial statement preparation, or attestation services, a conflict arises as to whether or not CPAs can serve these clients under the profession’s Code of Professional Conduct. Gov. Tom Wolf signed Senate Bill 3, now Act 16 of 2016, on April 17, 2016, legalizing medical marijuana for patients who are under a physician’s care for the treatment of a serious medical condition, but it is still a Schedule 1 controlled substance under the Federal Controlled Substances Act of 1970. So, is it legal?
In the cases of United States v. Oakland Cannabis Buyers’ Coop and Gonzales v. Raich, the U.S. Supreme Court ruled that the federal government has the right to regulate and criminalize cannabis, even for medical purposes. At the same time, more states are adopting laws that are in direct conflict with the court’s decisions. The National Conference of State Legislatures provides an update of the state legislative activities related to cannabis, including a comprehensive listing of states that have approved versions of cannabis legalization. Their site also notes that the U.S. Department of Justice (DOJ) has indicated that it “reserves the right to challenge the states at any time they feel it’s necessary.”
The illegal status of cannabis at the federal level creates numerous challenges for CPAs who may be called upon to provide professional services to businesses operating in the cannabis industry. The American Institute of CPAs and the Colorado and Washington state CPA societies have issued a primer, An Issue Brief on State Marijuana Laws and the CPA Profession. The brief highlights many different industry risks and related practitioner considerations, such as the potential for future prosecution by the U.S. Drug Enforcement Administration (DEA) or DOJ actions. Here are a few additional examples of risks that stem from marijuana’s illegality:
- Capital Investment, Lending, and Depository – Banks, which operate in a highly regulated environment, are deterred from working with the cannabis industry due to Department of Treasury compliance requirements and the potential for prosecution from the DOJ. The inability to use traditional financial institutions for cash deposits and lending create heightened challenges for controls over cash. The Securities and Exchange Commission has also issued an investor alert on marijuana-related investments being susceptible to fraudsters and other illegal activity.
- Taxation and Business Model Uncertainty – Expenses for illegal businesses are not deductible for federal purposes. This creates business model uncertainty for particular segments of the cannabis industry and incentives to under-report cash.
- Inventory – Due to the product’s restricted nature, inventory safeguards and controls over dispensing, quality, valuation, and compliance with state regulatory agencies pose unique risks.
- Heightened Regulatory Environment – In addition to the DEA, DOJ, and the Pennsylvania Department of Health, there are many other regulators involved in various aspects of the cannabis business, including the Department of Agriculture, Department of Labor, and the Environmental Protection Agency. The Pennsylvania Department of Health will also be creating a Bureau of Medical Marijuana. CPAs working with this industry will need to understand the complex regulatory framework and how it affects the client’s business.
According to website Legallyrooted.org, fiscal reports from Pennsylvania legislators estimate the medical marijuana market to be over $300 million in revenue if 0.77 percent of Pennsylvania’s population qualify. So, can CPAs serve these clients?
The AICPA and PICPA Codes of Professional Conduct require members to exercise due professional care, obtain the appropriate competency before undertaking an engagement, and comply with applicable standards, laws, and regulations. CPAs must exercise caution in their client acceptance process, carefully considering the risks posed by the legal and regulatory uncertainty, the unique business risks and tax issues, and that they have the requisite competency before proceeding. CPAs who are prepared to take on work in this challenging industry, should also consider consulting with an attorney, reviewing their liability coverage for policy exclusions, and checking the state CPA statutes in all states where licensed for interpretations of their “good moral character” requirements and other restrictions. Also, client background checks are essential to ensure compliance with regulatory requirements, such as “good moral character requirements” and restrictions placed on individuals convicted of sale or possession of illegal drugs, narcotics, or controlled substances.
This is an evolving practitioner issue, so please feel free to reach out to me at firstname.lastname@example.org with questions or suggestions. Keep in mind our regulatory outreach efforts: you can contact our government relations team at email@example.com.
On May 24, 2016, Jason Skrinak, CPA, SALT practice leader with Reinsel Kuntz Lesher LLP and PICPA State Tax Committee member, conducted a webinar, Clearing the Smoke, which is available On-Demand. In the session he provides an overview of the recently enacted state laws dealing with medical marijuana and the related tax issues.