Academic journal article Journal of Legal, Ethical and Regulatory Issues

An Analysis of the Accounting and Financial Effects of Inconsistent State and Federal Laws in the Recreational Marijuana Industry

Academic journal article Journal of Legal, Ethical and Regulatory Issues

An Analysis of the Accounting and Financial Effects of Inconsistent State and Federal Laws in the Recreational Marijuana Industry

Article excerpt


The recreational marijuana industry exists in an environment of legislative uncertainty resulting from states legalizing recreational marijuana while it is still considered illegal at the federal level. For the recreational marijuana industry, legalization did not occur until 2012 when Colorado first legalized it and has since been followed by three other states and Washington D.C. The dichotomy between state and federal laws has created interesting accounting and financial effects; including how financial institutions, CPAs, and the individual marijuana businesses themselves are affected by the inconsistencies in the laws from an accounting and finance perspective.

From a financial institution standpoint, one of the most important aspects that is influenced by the differing state and federal laws includes providing services to marijuana-related businesses while still adhering to federal banking regulations. Banks are subject to a number of federal regulations that they must follow regardless of states' stances on recreational marijuana. When considering the accounting and financial effects from a marijuana business owners perspective, there are a number of important aspects that can be considered. These include the tax rates applied to business owners, the environment in which the business operates, and the accounting methods used. From a CPAs perspective, there are numerous facets to consider such as following available guidance and providing services to marijuana businesses while remaining in accord with accounting standards.

The accounting and financial effects of the inconsistent laws from these perspectives are not mutually exclusive and often connect to each other so that an effect in one area often causes effects in the other areas as well. The purpose of this study is to identify and examine the accounting and financial effects of the inconsistencies between state and federal laws on the recreational marijuana industry.


Federal Legislation and Considerations

Past regulation-related research explores differences in societal opinions regarding the ethicality of the use and legalization of certain drugs. For example, although the use of performing-enhancing drugs (PEDs) by athletes is viewed as creating an unfair advantage and an un-level playing field by some, Osei-Hwere, et al. note that sports fans are equally divided as to whether PED use should be allowed in certain sports (2014). Likewise, much has been written regarding the morality of the use and legalization of marijuana. On the one hand, some argue that marijuana smoke is toxic and could lead to the use of more serious, dangerous drugs; however, others note that marijuana is an effective treatment for certain conditions, thereby reducing suffering (Clark, 2000), and that its legalization would reduce crime rates, save taxpayer money and generally benefit both individuals and communities (Cussen, 2000).

Recreational marijuana is an emerging industry in the United States due to four states and Washington, D.C. recently passing measures to legalize the recreational use of the drug. However, marijuana is still illegal federally because it is a Schedule I drug under the Controlled Substances Act (CSA) (CSA, 2012). Schedule I drugs are those that the federal government lists as having a high potential for abuse, no accepted medical use, and lack of safety even under medical supervision (CSA, 2012). The illegality of marijuana at the federal level allows for a number of civil and criminal penalties that can be assessed against people who cultivate, sell, or distribute marijuana even if legal by state standards (Gramlich and Houser, 2015), and the federal government has prosecuted individuals for the use and possession of marijuana even when such use and possession was permitted under state law (Barkacs, 2010). This creates a unique dichotomy between federal and state laws.

According to the Internal Revenue Code (IRC), gross income is defined as all income from whatever source derived (26 U. …

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