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April 30, 2020

Q&A with Steve DeAngelo: Chairman Emeritus of Harborside Inc.

Conversations with the Cannabis 50

The Cannabis 50 highlights the pioneers and innovators helping push the cannabis, hemp and CBD industries forward. In addition to the 2019 Cannabis 50 Impact Review, we are also sharing interviews with our honorees to help spread their message of positivity and growth.

In 2019, Harborside Inc. made headlines with a favorable tax court ruling that lowered their alleged $36 million in owed taxes and penalties to $11 million. While the battle over 280E continues through the appeals process, we had a chance to discuss the case and the current state of 280E with Harborside co-founder and Chairman Emeritus, Steve DeAngelo. Nicknamed the “Father of Legal Cannabis” DeAngelo has spent decades working for cannabis reform through his business activities, education programs, and revolutionary not-for-profits, including the Last Prisoner Project. We discussed his on-going tax case with the IRS and how cannabis operators should be thinking about 280E today.

*MGO: Thank you for making the time to chat with us. When determining our 2019 nominations, the only discussion we had internally regarding you was deciding whether to nominate you for your 280E work with Harborside or the great things Last Prisoner Project is doing. *

Steve DeAngelo: (Laughs) I was really glad to see that I had been nominated for our 280E work. Honestly, very few people have realized how significant our ruling was for the industry. So I’m thrilled that MGO has recognized us for it.

*MGO: Well, it was impossible for us to miss. As an accounting firm we are guiding companies on 280E on a daily basis.

DeAngelo: Well, thank you, you can appreciate the gravity of the “good faith” exception that we won. Look, it’s just the way I am. I don’t go looking for fights with government entities, but I don’t shrink from them either.

MGO: I know you’re still in court contesting the Cost of Goods Sold (COGS) calculation. Can you provide an update on where you are now?

DeAngelo: Yes, we are contesting the COGS calculation and we are continuing to argue what I call the “consists of” argument. This is a very significant argument because if we win, it just eliminates 280E in relation to any cannabis business that does anything other than just sell cannabis.

MGO: Can you breakdown the “consists of” argument for us?

DeAngelo: At the (U.S. Tax) Trial Court, we argued that on the face of the language of 280E it should not apply to Harborside because, while our business includes activities that violate the Controlled Substances Act (CSA), our activities did not “consist of” things that violate the CSA. Meaning we do much more than activities that violate the CSA.

In the wording of 280E, it states that it applies to organizations with operations that “consist of” activities that violate the CSA. What we’ve done is say, “Look, there’s meaning to the word ‘consist.’” For example, would it be accurate to say the city of New York “consists” of the borough of Manhattan? No, it would be accurate to say the city of New York ‘includes’ the borough of Manhattan.

So by the plain language of 280E, it should not apply to Harborside because we do a vast range of activities that are completely legal and don’t violate the CSA in any way. We provide senior services, holistic healing services, veteran support services, and communication and education activities. Not to mention all the brand-building we do, all of which is perfectly legal.

So we argue that 280E should not apply to Harborside, and by extension if that argument is accepted, it should not apply to any other cannabis organization that does things that don’t violate the CSA. Which is almost everybody. Even the small dispensaries will sell things like t-shirts and books, which are obviously not against the CSA.

So that’s the argument. They didn’t buy it at the trial level, but the Trial Court did say in their ruling that reasonable people could differ on this interpretation of the language.

MGO: So what is the next step?

DeAngelo: We are at the Federal 9th Circuit Court of Appeals now. Both sides will make arguments in the appeal case, and our hope is that the 9th Circuit will rule that our interpretation of 280E is accurate, and the (Tax Court) judge’s interpretation was not. Which would overrule the previous decision, and end the government’s case against Harborside. And not only that, it would also the end every other pending 280E tax case they have against cannabis organizations… provided those organizations can show they engage in activities that do not violate the CSA.

MGO: So that then becomes the precedent on 280E?

DeAngelo: It would blow a hole as big as a Mack Truck in 280E. Very few organizations wouldn’t be able to get through. And I think that’s one of the reasons it is such a difficult ruling. The Tax Court has to work with the IRS all the time, as every case includes them. We are hoping the 9th Circuit will prove to be more independent.

And we also know that former U.S Rep. Pete Stark (D-CA), who was the original sponsor of the 280E, has repeatedly said that it absolutely should not apply to legal cannabis businesses that are getting licenses, paying taxes, and filing returns. It was not intended for people like us, and he’s the guy that wrote the measure.

We’ve pointed it out to the Court and I’ve learned with these things that you can never tell which way it is going to go. I’ve gone into court against the Federal Government and had people tell me there was absolutely no way that I was ever going to win… and I won. But I’ve also walked into other hearings where I was absolutely certain we’d come out with a victory, and to my amazement and dismay, the judge ruled against us.

So it can go either way. Our attitude is really simple: we stand up for what is right, we don’t look for fights, but if somebody starts one with us, we will fight until we win or we have exhausted every resource and opportunity.

MGO: No one has ever taken this path before. There is no existing precedent for challenging the wording of ‘consists of.’

DeAngelo: No, and that is the essence of our case. We have spent literally millions of dollars fighting the Federal Government on this. We think it is so important to the cannabis industry, and, as you know, it is almost impossible for cannabis retailers to get anywhere close to the profit margins you see in most retail businesses.

What that does is, at the end of the day, it impacts the cannabis consumer in the form of much higher prices, difficult access, and countless other issues. We think 280E is really bad for the industry, and for cannabis consumers, so we are happy to take up this fight.

MGO: What do you see as the most viable and/or likely way forward for changing 280E at the legislative level?

DeAngelo: Here’s the thing about 280E, it is a matter of ‘administrative interpretation.’ The only reason 280E is an issue for the legal cannabis industry is because the Commissioner of the Internal Revenue Service has chosen to make it an issue. The Commissioner could just as easily choose to go in the other direction and drop all the 280E prosecutions they have going on, and return all the money they’ve collected under, what I believe to be, an invalid legal argument.

Hopefully, what is going to happen is that somebody with a progressive approach toward cannabis gets into the presidency. It would take one phone call, from the President of the United States to the Commissioner of the IRS, to end the 280E issue for the cannabis industry.

That should have happened a long, long time ago and hopefully the next president we get will do the right thing.

MGO: What’s your level of optimism level that cannabis decriminalization will be addressed at the federal level?

DeAngelo: It is really a generational thing. There was a period of time in the late 1970s when we felt confident decriminalization was coming. But what we didn’t predict was Reagan, and it was under him that we saw more and more draconian drug laws put into place and we saw the expansion of federal law enforcement. And that continued all the way up into the Obama administration.
All of the cops, prosecutors, and legislators, everybody who came of age during that era was fed on this really toxic brew of drug war propaganda and pseudo-science demonizing cannabis. Because there was so much destruction happening in African-American communities from crack at that same period of time, a lot of folks who would normally have been allies of the cannabis movement were resistant as part of an anti-drug stance.

That’s a period we are coming out of now. The cops and prosecutors coming of age now are really of a different generation and have a different view on cannabis. They came of age not when Reagan-era policies dominated the debate on cannabis, but in a period of time when activists like me have dominated the debate. And they, like the rest of the country, have learned. Activists have been more effective presenting the real science, the real history, and the real facts about cannabis, and there has been an evolution in law enforcement, as well as the general population. That evolution hasn’t gone as far, or happened as rapidly, as it should. It is imperfect, but it is happening. And that’s why you’re seeing the kinds of changes you’re seeing.

I think we are in an era of transition. The last of that old guard that came up during the intensified drug war pushed by Reagan through the Obama years is getting replaced by a younger generation who came of age in a period with more rational and fact-based information around cannabis available. And that is reflected in attitudes that are beginning to change.

MGO: And finally, what advice would you give today’s cannabis operators navigating 280E?

DeAngelo: I think that the ruling at the trial court level in our case established the legal principle that as long as you (cannabis operators) are filing in good faith, and are consistent with available guidelines from the IRS, then if you make a mistake, you’ll have to correct it, but you will not be penalized.

That should provide some encouragement for people filing returns to push boundaries, but not so far that you can’t reasonably represent, in good faith, you were following guidelines as suggested.

From our experience, I will say there is a real smell-test component to all of this. As a guy with a high level of risk tolerance, I’ve always tended to push these things pretty far. But when it comes to cannabis laws and business situations, everyone will have their own risk calculations. I just think that if you had to stand up in a room full of people, could you say that you filed your return in ‘good faith’ and be persuasive? If not, take three steps back, but not ten steps back.

And remember, none of this should apply to us at all. If we had rational tax policies, taxes would be lower on cannabis than alcohol. We should incentivize something the makes people calm and relaxed. And dis-incentivize something that makes people reckless and violent. That’s the world we should live in. Armed with that sense of righteousness, we shouldn’t be dealing with all of this crap anyhow. There is simply no moral justification.

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