Cannabis Accounting

Understanding the Law: State vs Federal Cannabis Legalization

Understanding the Law: State vs Federal Cannabis Legalization

Click here to learn more about what the laws have to say about state vs federal cannabis legalization!

The state of marijuana legalization impacts the way cannabis entrepreneurs do business. If you’re up-to-date on current events, you know state after state is legalizing cannabis.

The good news is more states are likely to legalize marijuana in this upcoming year.  However, there is still a problem when it comes to federal legalization. On a federal level, cannabis is still wildly illegal.

This can make operating a cannabis business a bit difficult. You need to know how to navigate the differences between state and federal laws.

Here’s a quick guide on state vs federal cannabis legalization to help you and your business stay in the green.

State Laws Regarding Marijuana

A growing number of US states allow the sale, purchase, and consumption of recreational marijuana. A number of other states allow it for medical use only.

As of the 2018 midterm elections, 10 states allow recreational marijuana. Another 33 states allow medical marijuana, including the 10 that allow recreational marijuana.

By 2020, we may see a number of the remaining 17 states join the ranks.

These state laws are confusing and specific restrictions vary by state. For example, a consumer can only purchase up to an ounce of marijuana at a time in Colorado.

Still, banks cannot work directly with businesses within the cannabis industry. This has made it difficult for businesses to acquire loans and other forms of capital.

Federal Law Always Trumps

The United States federal government outlawed the sale and distribution of marijuana in the 1930s. The Controlled Substances Act (CSA) lists all drugs within a schedule according to its medical potential and risk abuse.

Under this law, the federal government classifies marijuana as a Schedule I drug. That means its considered to have a high risk of abuse and no medical value.

This is where operating a cannabis business can get tricky. Those federal laws are still in place.

Anyone growing, selling, or marketing cannabis products is in violation of federal law. This is true even if the business operated according to state marijuana laws.

State vs Federal Laws: A Losing Battle?

Federal laws place a lot of pressure on the cannabis industry. Here are some instances in which state and federal laws come into conflict.


Some states allow recreational use of marijuana. It stands to reason you should be able to smoke within the comfort of your own home.

This is true unless you rent. Landlords can prohibit illicit drug use on their properties. If you’re caught using marijuana on the property, the landlord can evict you.


Businesses in the cannabis industry can hardly catch a break. IRS Code Section 280E prohibits marijuana businesses from deducting certain expenses. These include marketing, transportation, and training.

This leaves businesses with a federal tax ranging from 30 to 90 percent. Businesses can, however, deduct the cost of goods sold.

If you operate a cannabis business, the best thing you can do is speak with a good accountant. They can help you navigate these tax codes. You may be able to claim more deductions than you might think.

However, you don’t want to attract unwanted attention from the IRS. You need to go with a tax service you’ll be able to trust.


Another huge issue for the cannabis industry is banking. Many cannabis businesses find it difficult to get a bank account. Many banks still don’t trust the cannabis industry.

They themselves don’t want to attract negative attention from the federal government. The federal government recently issued guidelines concerning this issue.

Still, banks aren’t willing to grant cannabis businesses accounts or loans. This makes it difficult for businesses to safely store money get credit cards.

Is It Industry Bias?

Federal restrictions make it difficult for the cannabis industry to operate. Business operators remain in constant fear of these laws.

Banks, accountants, and other service providers may be unwilling to work with your business. They may charge higher fees for their services.

This is to protect their businesses, but it makes operations seem impossible. You should shop around when you’re looking for services. There are people who genuinely want to see your business succeed.

Some people are more willing to take the risk because they see potential in the industry.

You may face problems with the IRS. The IRS tends to audit marijuana businesses frequently.

They may assume missing or incorrect information on your taxes is intentional. They view it as a threat to the greater good.

The IRS may force your business to pay back taxes and fines.

Various states have more lenient tax laws regarding the cannabis industry. Your state taxes may benefit from deductions you can’t take on your federal taxes.

Check your state laws and be sure you’re up to date.

Federal Cannabis Legalization on the Horizon

Perhaps federal cannabis legalization is a dream. However, indicators show a trend toward cannabis legalization across the board.

Our friendly neighbors to the north (Canada) legalized marijuana in October 2018.

For the next several years, US businesses will struggle against tough federal laws. In the coming years, we may Congress take on tougher, broader issues. One of these being the issue of cannabis legalization.

One of the biggest drivers of this trend is the potential for economic growth. The industry is projected to create more jobs than manufacturing by 2020 with more than $24 billion in revenue by 2025.

Cannabis has many investors’ interest. The coming years will definitely be interesting. Changes in the cannabis industry should rock the world.

Know the Law Before Diving In

The cannabis industry lies in somewhat of a legal gray area. No one is certain about what the right course of action is.

One thing is for sure. There is more pressure than ever on Congress to pass federal cannabis legalization.

Already, a more than half the states in the Union allow marijuana in some capacity. If you operate a marijuana business, know your rights and stay informed.

Our blog will give you great information about the cannabis industry. More importantly, check out our cannabis accounting services to stay compliant to get ahead of the competition.