By: David Bronfein*

     In 2013, Maryland passed its initial medical cannabis law.[1]  Although seemingly a success in the medical cannabis reform movement, the law only allowed for “academic medical centers” to participate in the program.[2]  In essence, an academic medical center could dispense medical cannabis to patients who met the criteria for participation in their research program.[3]  The success of this type of program structure was a concern for medical cannabis advocates,[4] and the concerns were validated when no academic medical centers decided to participate.[5]  As a result of this lackluster program, the General Assembly responded by passing a bill[6] during the 2014 Regular Session to create a more inviting program, thereby making Maryland the 21st state to enact a comprehensive medical cannabis law.[7]  Under H.B. 881, the program was broadened to allow patients, physicians, growers, processors, and dispensaries to operate within a framework that would be set up by the Natalie M. LaPrade Medical Cannabis Commission (the “Commission”).[8]  The General Assembly further augmented Maryland’s medical cannabis law with the passage of H.B. 490.[9]   The purpose of this legislation, among other things, was to make access to the program easier for patients and physicians.[10]

     Maryland’s medical cannabis law tasks the Commission with the generation and promulgation of regulations that govern the medical cannabis program.[11]   When H.B. 881 was enacted, the law called for adoption of regulations by the Commission “on or before September 15, 2014,”[12] but, due to many administrative delays, the program’s regulations were not promulgated until September 14, 2015.[13]  After the governing regulations were completed, the Commission focused its energy on the creation of an application for which growers, processors, and dispensaries would apply for licensure into the program.[14]  These applications were released on September 28, 2015, and called for all interested parties to submit their applications no later than November 6, 2015.[15]  The fact that the Commission received 1,081 applications was a testament to the evolution of Maryland’s medical cannabis law and the inviting regulations promulgated by the Commission.[16]  More specifically, there were 146 applications for fifteen growers licenses,[17] 124 applications for fifteen processors licenses,[18] and 811 applications for 94 dispensary licenses.[19]

    So why is this chronological history of the enactment and incipiency of Maryland’s medical cannabis program important?  It is important because Maryland is on the precipice of introducing a brand new (operational) industry within its borders.  Although it is only speculation at this point, Maryland is slated to have one of the most inviting and fruitful medical cannabis programs to date, largely due to the enactment of H.B. 490.  If this speculation proves true (or even if it does not), there will be medical cannabis-related businesses that require banking solutions as a necessary tool to conduct their business, just like any other traditional business.  When operating within the medical cannabis industry, though, this concept is not so simple.  Unlike a traditional business, a medical cannabis-related business is greatly hindered from using traditional banking sources because cannabis is considered an illegal substance by the federal government.[20]

     This comment will draw a microscope on Maryland to determine if there are options that the state can present to alleviate these businesses from this hindrance and to assist in creating a sense of normalcy as it relates to banking solutions.  Part I explains the underlying language of the Controlled Substances Act that drives these banking obstacles.  To create an understanding of the heavy imposition that the Controlled Substances Act renders onto the medical cannabis industry, Part II provides a picture of the onerous landscape in which medical cannabis-related businesses currently operate.  Following this discussion, Part III will address certain legislative proposals to a solution that the State of Maryland should endeavor to alleviate cannabis-related businesses of the effects of federal laws.

  1. The Root of the Banking Problem for the Legal Cannabis Industry

     At the federal level, cannabis is currently categorized as an illegal substance.[21]  The Controlled Substances Act (“CSA”) dictates the legality of certain drugs or substances.[22]  Under the CSA, cannabis[23] is designated as a Schedule I substance.[24]  Substances under this category are believed to be highly addictive, have no medicinal value, and lack accepted safety protocols for use under medical supervision.[25]  This designation is distinctly at odds with the positions of twenty-five states and the District of Columbia that have passed laws creating a medical cannabis program, a recreational adult-use program, or both.[26]  Maryland, like the federal government, also maintains a controlled substances scheduling regime under its criminal law statute.[27]  But unlike the federal government, Maryland has exempted from criminal or civil prosecution those qualified or licensed participants who cultivate, process, distribute, and/or possess cannabis.[28]  In addition, Maryland has reduced its penalties for use or possession of less than ten grams of cannabis to a misdemeanor.[29]  This comment does not intend to speak broadly on the inherent conflict between the federal and state laws pertaining to cannabis; however, it is worth noting that states reserve the right to enact their own cannabis laws under the protection of the Ninth and Tenth Amendments.[30]  Although this remains a constitutional truism, the federal government utilizes other powers granted to it by the Constitution to circumvent these states’ rights and privileges.[31]  So how does the banking industry operate within this hostile and volatile environment?  To answer this question, an examination of other federal statutes and regulations needs to be conducted in order to understand the breadth of the CSA’s reach.

II. The Federal Government’s Indirect Enforcement of the CSA

  1. The IRS’s Use of a Rare Tax Provision to Burden State-Licensed Cannabis Operators [32]

     Imagine you run your own business.  In your first year of business, you make $25,000 in taxable (or net) income.  This figure is derived from your Income Statement, which represents that you made $100,000 in revenue, had $20,000 in cost of goods sold, and had $55,000 in ordinary and necessary business expenses.[33]  Assuming a 40% combined federal and state tax rate, your business would incur a tax liability of $10,000.  After you reduce this tax liability from your net income, a profit of $15,000 remains.[34]  Not bad for your first year of business!  A business that primarily or exclusively operates within the cannabis industry is barred from calculating its taxable income in this normal fashion.[35]

     Under section 280E of the Internal Revenue Code, a business that produces and/or distributes cannabis is precluded from taking ordinary business deductions.[36]  These deductions typically include those expenses that enable an owner to carry on the day-to-day operations of their business, i.e., rent, utilities, wages, marketing expenses, etc.[37]  If in the prior example that same business was a legally licensed cannabis business, it would be unable to deduct its ordinary and necessary business expenses in determining its taxable income.  Consequently, the business’s taxable income would shoot up from $25,000 to $80,000.[38]  This means now instead of the 40% tax rate being calculated against $25,000, it is calculated against $80,000, resulting in a tax liability of $32,000.  In its first year of operation, this business would now sustain a loss of $7,000.[39]

     This illustration shows the indirect effect the CSA can impose on a legitimate state operator or, on a larger level, on a legitimate state cannabis program.  The federal government, through the Internal Revenue Code, can flex its muscle against legitimate cannabis businesses by making their operations financially unsustainable.[40]  This onerous effect of section 280E is actually derived from a logical policy perspective.[41]  In 1981, Jeffrey Edmondson (“Edmondson”), a drug dealer from Minneapolis, Minnesota, was tried in U.S. Tax Court after the Commissioner found a deficiency in Edmondson’s 1974 tax return.[42]  Even though the court was acutely aware of Edmondson’s illegal business practices, they granted him the allowance to deduct his “ordinary and necessary” business expenses that he incurred to conduct his illegal operation.[43]  In 1982, Congress responded to this ruling by enacting section 280E, which was added through the Tax Equity and Responsibility Act of 1982.[44]  Since 1982, though, the U.S. Tax Court has only tried a few cases on the basis of this provision.[45]

Read the entire comment here.

* J.D. Candidate, 2017, University of Baltimore School of Law.  I would like to thank the staff of the University of Baltimore Law Forum for all their hard work in effort to refine my comment.  Also, I would like to give a special thanks to my faculty advisor, Professor Fred Brown, for his guidance, thoughtful critiques, and general support throughout the comment process.  Lastly, I would like to recognize my family for their unwavering support, encouragement, and confidence in me throughout law school.

[1] H.B. 1101, 2013 Leg., 433rd Sess. (Md. 2013).

[2] Id.; see also Maryland House approves bill to legalize medical marijuana, (March 26, 2013, 4:00 PM),

[3] Associated Press, Maryland lawmakers pass medical marijuana bill,,

[4] Id. (“Maryland has taken a small step in the right direction, but more steps are necessary for patients to actually obtain the medicine they need to alleviate their suffering.”).

[5] Mollie Reilly, Maryland Senate Passes Overhaul of State’s Medical Marijuana Law, (March 27, 2014, 1:57 PM), (“Maryland technically legalized medical pot last year. However, the law limited distribution of the drug to a number of “academic medical centers,” none of which have agreed to participate in the program.”). Proposed Medical Marijuana Legislation in 2013, (January 15, 2014, 1:59 PM), (“Editor’s Note: H.B. 1101 does not provide patient access to medical marijuana and therefore would not make Maryland a legal medical marijuana state. The program established by the bill would only function if a Maryland academic medical center participated; both the University of Maryland Medical System and Johns Hopkins University have indicated they will not participate.”).

[6] H.B. 881, 2014 Leg., 434th Sess. (Md. 2014); S.B. 923, 256th Cong. (2014).

[7] Bruce Leshan, Md. Governor Signs Marijuana Bills into Law, (April 14, 2014, 6:32 PM),

[8] H.B. 881, 2014 Leg., 434th Sess. (Md. 2014); Md. Code Ann., Health-Gen. § 13-3302 (2015) (“Purpose. – The purpose of the Commission is to develop policies, procedures, guidelines, and regulations to implement programs to make medical cannabis available to qualifying patients in a safe and effective manner.”). See also 2014: A year of reform, (November 5, 2015), (“The 2014 medical marijuana law empowered the Natalie M. LaPrade Medical Marijuana Commission to provide relief to patients without the participation of hospitals and to register dispensaries and growers to provide medical cannabis directly to registered patients whose certifying physicians recommend it.”).

[9] H.B. 490, 2015 Leg., 435th Sess. (Md. 2015).

[10] Id.

[11] Md. Code Ann., Health–Gen. § 13-3302(c) (2016).

[12] Id. at § 13-3316. (“On or before September 15, 2014, the Commission shall adopt regulations to implement the provisions of this subtitle.”).

[13] Md. Code Regs. § 10.62.01 (2016).

[14] Archives, Natalie M. LaPrade Maryland Medical Cannabis Commission, (last updated Nov. 9, 2015).

[15] Id.

[16] Press Release, Natalie M. LaPrade Maryland Medical Cannabis Commission Announces Senatorial District Breakdown of Dispensary License Applications (Nov. 24, 2015).

[17] Md. Code Ann., Health–Gen. § 13-3306(2)(i) (2016); see also Md. Code Regs. § (2016).

[18] Md. Code Ann., Health–Gen. § 13-3309 (2016); Md. Code Regs. § (2016); see also Omar Sacirbey, Potential for Large Patient Pool, Hefty Profit Offsets Onerous Fees in Maryland, Marijuana Business Daily (Nov. 10, 2015), of-large-potential-patient-pool-hefty-profits-offsets-onerous-fees-in- maryland/. See Applicants unhappy with MD marijuana commission,, (explaining how the amount of processing licenses to be pre-approved was narrowed down from “unlimited” to fifteen at the Commission’s May 2016 meeting).

[19] See supra note 16; Md. Code Regs. § (2016).

[20] Controlled Substance Act, 21 U.S.C. § 812 (c)(c)(10) (2015).

[21] 21 U.S.C. § 812.

[22] Id.

[23] Id. (The text of the Act spells marijuana as “marihuana.”  For purposes of this comment, though, the proper, scientific term, i.e. “cannabis,” will be used in most cases.).

[24] See infra note 25.

[25] 21 U.S.C. § 812 (b)(1)(A)-(C) (2015).

[26] 25 Legal Medical Marijuana States and DC, 28, 2016, 10:44:25 AM),; see also State Medical Marijuana Laws, NCSL (Jun. 20, 2016),

[27] Md. Code Ann., Crim. Law § 5-401 (2011).

[28] Md. Code Ann., Health-Gen. § 13-3313 (2015).

[29] Md. Code Ann., Crim. Law § 5-601(c)(2)(II)(1)-(3) ( 2016).

[30] U.S. Const. amend. IX. (“The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”); see also U.S. Const. amend. X. (“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”); see generally Andrew King, Comment, What the Supreme Court Isn’t Saying About Federalism, the Ninth Amendment, and Medical Marijuana, 59 Ark. L. Rev. 755 (2006) (discussing the limits of the Supremacy Clause and roles of the states as social laboratories for varying individual liberties).

[31] See, e.g., Gonzales v. Raich, 545 U.S. 1 (2005) (holding that the federal government’s power to regulate commerce, granted under the Commerce Clause of the U.S. Constitution, enabled the government, through the use of the CSA’s prohibition on the manufacture and possession of marijuana, to prosecute offenders in California, even though the marijuana was derived from intrastate manufacture and was possessed for medical purposes under California law); see also United States v. Oakland Cannabis Buyers’ Coop., 532 U.S. 483 (2001) (holding that the CSA is unambiguous and the medical necessity exception put forth by respondent is directly at odds with congressional intent).

[32] Joel S. Newman, Commentary, CHAMP: How the Tax Court Finessed a Bad Statute, 116 Tax Notes 10 (2007).

[33] Taxable income calculation: $100,000 – $20,000 = $80,000 – $55,000 = $25,000. See 26 U.S.C.S. § 162(a)(2015). See also Financial Ratios (Explanation): General Discussion of Income Statement, Accounting Coach (Sept. 7, 2016, 4:34 PM), (provides simple example of an Income Statement).

[34] Profit (Loss) calculation: $25,000 – ($25,000 x 40% [= $10,000]) = $15,000. See Financial Ratios (Explanation): General Discussion of Income Statement, Accounting Coach (Sept. 7, 2016, 4:34 PM), (provides simple example of an Income Statement).

[35] See infra note 38 and accompanying text.

[36] I.R.C. § 280E (2015). (“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”).

[37] See I.R.C. § 162 (2015).

[38] Taxable income calculation after applying 280E: $100,000 – $20,000 = $80,000; see Edward J. Roche, Jr., Federal Income Taxation of Medical Marijuana Businesses, 66 Tax Lawyer 429 (2013) (explaining, as a part of a greater tax analysis, the reason that cost of goods sold is always allowed to be deducted, even in the context of an illegal business enterprise); see also Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 182 (2007) (“[T]he adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.”(citing S. Rep. 97-494)).

[39] Profit (Loss) calculation: $80,000 – $55,000 = $25,000 – ($80,000 x 40% [= $32,000]) = ($7,000). See supra note 34.

[40] Elizabeth Dolan McErlean, Comment, The Real Green Issue Regarding Recreational Marijuana: Federal Tax and Banking Laws in Need of Reform, 64 Depaul L. Rev. 1079, 1080 (2015) (“[A]ccording to the marijuana industry’s principal publication, the inability to deduct business expenses from a seller’s federal income tax is the largest threat to the success of marijuana businesses and risks pushing the entire industry underground.”).

[41] Id. at 1097 (“This provision was enacted at the height of the Reagan administration’s “war on drugs” in 1982, and intended to stop drug kingpins and cartels from claiming tax deductions.”).

[42] Edmondson v. Comm’r, 42 T.C.M. (CCH) 1533 (1981).

[43] Id.

[44] Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324 (1982); see also supra note 32.

[45] See supra note 32 (“Section 280E has not been cited much since 1982.”).


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