 Aloha and welcome to Business in Hawaii with Reg Baker. We broadcast live every Thursday from 2 to 2.30 from the Pioneer Plaza in downtown Hololulu in the Think Tech studios. We are a show about positive stories of business and business owners in Hawaii. We promote the success, successes of Business in Hawaii, how they did it, how they overcame the challenges that we all are familiar with. And that's generally our theme. Today we're going to break a little bit from that theme, and we're going to go into what I'm calling a quarterly commentary program. It's every quarter or thereabouts. We're going to talk about current topics that's in the news, both national and local, and how we see, or the guests and ICs, the impact on business here in Hawaii. So today we have a returning guest, Steve Pengre, who's an attorney, but he's been in business for a long time. He's represented a lot of different clients. He's got a very broad background. He's well traveled. He's got some good experience. And so today we're going to be talking a little bit about the medical marijuana situation and how things are going to maybe change a little bit under the new President-elect Trump. At least anybody missed it. We did have an election about 10 days ago, and we do have a new President-elect that not everybody's happy with, but it should make for a pretty interesting 2017. So Steve, welcome back to the show. It's good to have you back. Thanks, Reg. It's always good to be here. Pleasure. And you've been working in the medical marijuana industry and working with the people that are trying to put something together here locally. And you've also had some regional, maybe national exposure to this, because you go to the conventions and you hear, and I'm just wondering, how are things from your perspective, what's the possibility? How are things are going to change over the next year or so under the new President-elect Trump administration? Obviously, it's speculative at this point, but there's two major things that have taken place. In the election, seven states in some way legalized marijuana. Not just medical marijuana, but five states legalized medical marijuana. I mean, regular marijuana for full legalization use. So that recreational as well as medical. Recreational, right, exactly. And then there were three states that legalized medical marijuana. That means that the states will be moving forward with their state legal programs. The real issue continues to be that marijuana is illegal under federal law. That's a complication. That's a very big complication. So basically people who are dealing with medical marijuana or marijuana in states where it's legal, they're breaking the federal law because they're handling a controlled substance. Right, and that they can't open up bank accounts or it's very difficult to have a banking relationship. But that's nothing new. That's something that's been around, I guess, for quite a while. And do you see that changing at all under Trump? Yes, more than likely because of the policy of the Department of Justice that's been in place for the last almost three years, which, according to what they call the coal memo, laid out eight criteria that if state legal marijuana businesses follow the eight criteria, basically didn't sell to minors and didn't get involved with illegal drugs. And the Department of Justice would not prosecute them under the federal law and others would not pursue enforcement of the federal law against these state legal businesses. That's great, but it's not a federal law. It's what they call Department of Justice policy that was initiated by the federal attorney general. Right, so the policy was not to prosecute, but that policy was also implemented under the previous administration. That's correct. According to new administration, will follow that policy? Two statements have been made, one by Trump himself, who basically said, we think I should leave it up to the states, whether or not, how they want to deal with marijuana, that's the state's right issue. But then he appointed Senator Sessions to be his prospective new attorney general. And Sessions is on record as opposing the legalization of marijuana and opposing the lack of federal law enforcement in states that have legalized marijuana. The danger I see, and we really are going to have to wait and see, but is that the DOJ policy of non-prosecution is just a policy, and with the stroke of a pen, the new attorney general Sessions could change that. And then we would be right back to having the federal law enforcement going into dispensaries and raiding dispensaries, confiscating inventory, arresting people for possessing marijuana, filing injunctions against businesses, seizing assets and so on. I can see where that will become a very controversial course for them to take for a couple reasons. And just for the audience to know, you and I were meeting prior to the show, enduring the show. There was a little bit of a, I don't know if it was Fox News or CNN, but some television station cable had a little update on this, and they threw some numbers out there, and some of those numbers were over 60% of the population in surveys have favored decriminalizing medical marijuana and maybe medical marijuana in general. So I think the public perception or desire is to move more towards legalization than enforcement. I believe that's correct. Well, I know it's correct, quite frankly. I mean, the majority of the population wants some form of legalization of marijuana, even if they don't particularly want to use it themselves. And the five states that just voted to legalize marijuana, the California was overwhelming, and Nevada was pretty much overwhelming, was in the 60%. So, you know, it's a trend that's moving forward now over half the states in the union, including Washington DC, have legalized some form of marijuana. Well, and to your comment about Trump's comment and leaving it up to the state, and I believe I saw that same comment, that's kind of consistent with some of the other positions he's taken. For example, with the Affordable Care Act, or a.k.a. Obamacare, he has taken the position to also go through the process of maybe backing off on that a little bit, leaving it up to the states to figure out how to do it. And so, you know, he's got, I guess, a leaning toward state rights, maybe more than we've seen in the last eight years. I think that's correct. I mean, he, during the last year and a half while he's been campaigning, he's pretty much said that. I mean, he's not come out in favor of marijuana, for example, but he basically has said, I think it's up to the states, and they've kind of always thrown it back on the states. They're right. They're privileged to govern themselves. Here's where the big action in favor of marijuana, if you will, or to support marijuana, can be, and that's in the Congress. Every, first of all, there's a budget bill that comes up for renewal every December, and part of that budget bill for the last two years has contained a prohibition or a denial of funds to the Department of Justice so that they cannot use, DEA cannot use, and the Department of Justice cannot use money to interfere with state legal business. They defunded the enforcement capabilities. That's very well put. That's exactly what I'm being a little winded there. But the point is, Congress really has it within their power to continue that defunding program. Well, and dynamics are changing there, too, because there's not the majority that the Democrats have had before, and so there's a little bit of a bias more toward the Republican side now. However, Nancy Pelosi is still the speaker of the minority and a very vocal force from California, which just recently passed overwhelmingly recreational use. And so there is an interest in Congress to move in this direction, I would think. So who knows how this is going to play out? But switching gear a little bit, the potential in this industry, economically, and this is the business sense that I'm trying to bring here, can be significant. In general, in 2014, in general, what they call the cannabis business was $3 billion to $5 billion annually, with a B, right? Exactly. Last year, it was $7 billion. By 2020, it's expected to be in the teens, billions of dollars. I mean, it's just growing and growing and growing. And it also, for the local and the state and even the federal, to some extent, it provides jobs and it provides tax revenue. Colorado last year took in some $58 million in tax revenue, specifically from marijuana. And there was an increase of almost 100,000 jobs directly related to the marijuana industry in Colorado. Just in Colorado? Just in Colorado. Wow. So, you know, because there's a lot of jobs in the dispensaries, you know, there's the ancillary support companies that support that industry. Right. There's a couple, I represent a lab, a laboratory, a testing laboratory here in Hawaii, and they are going to be, well, the establishing themselves on Maui right now, but they're going to be on all islands. They're going to be hiring people to work in the labs. You know, they're going to be inputting revenue into the economy and paying state taxes and so on. That's one small example. Well, and that's one small example for Hawaii, but that can be replicated throughout the country. Oh, absolutely. You know, and so the potential for it has become huge at a national level. But even in Hawaii, I think the potential is pretty significant here, too. I mean, we all joke about it, but we all know that Bacololo is one of our bigger cash crops in the state. And it'd be nice to make that a formal part of the economy so that we can regulate it and tax it and control it a little bit more than it is now. Right. And actually, that was done in 2015 when the legislator passed Act 241, legalizing medical marijuana and establishing, not legalizing, but establishing the dispensary system. We legalized medical marijuana in 2000, but establishing the dispensary system and rules and regulations and the dispensaries, the eight of them are now underway in various stages, but getting ready to hopefully start opening for business around May, April, May of next year. And getting back to the federal regulation, that's still a hurdle that's going to have to be addressed in one way or another. Well, it is. And especially because we live obviously on islands rather than one central land and locale, there's a real problem of the marijuana going for one island to the other. Transportation, yeah. And the state legislature recently amended Act 2041 to allow for testing purposes, the labs to transfer marijuana back and forth between the islands. But it's still illegal under federal law. Technically, you can't take it on an airplane. Or maybe even on a US flag boat. That's true. So getting it from mail or airplane or boat from one island to the next, even for testing purposes, could be a federal crime, a felony. That's correct. The whole inconsistency or hypocrisy that comes up because of the federal law and then the non-enforcement in selected areas comes into play here. Because there are a lot of anecdotal stories about people who've taken their stash of marijuana, an ounce or two, or their vape pens or whatever. They put it in a plastic bag along with their patient card saying that they're an authorized user and possessor. And they run it through the TSA at the airport. And they don't say anything. I mean, TSA doesn't say anything. Let's hold that thought for me, because I find that fascinating. We need to take a quick break. We'll be back in 60 seconds. This is a business in Hawaii with Reg Baker. We're talking on a quarterly commentary session this week. And we're going to take a quick break, and we'll be right back. Aloha, everybody. My name is Mark Shklav. I'd like you to join me for my program, Law Across the Sea, on thinktechhawaii.com. Aloha. Aloha, Kako. I'm Marcia Joyner, inviting you to navigate the journey with us. We are here every Wednesday morning at 11 AM. And we really want you to be with us where we look at the options and choices of end of life care. Aloha. Aloha. My name is Richard Emory, host of Condo Insider. More than a third of Hawaii's population live in some form of association. And our show is all about educating board members and owners about the responsibilities and obligations and providing solutions for a great association. You can watch me live on Thursdays, 3 PM to 4 PM, each week. Aloha. Aloha, and welcome back to Business in Hawaii with Reg Baker. This episode is a quarterly commentary on some of the popular topics at both a local and national level. And it is a commentary, so we're expressing our own views and perspective on things. This week, I have Steve Penguin, who's an attorney in town and has got a very broad base of experience with different industries and companies. And so we're chatting a little bit about the medical marijuana and recreational marijuana rules and regulations and how they might change over the next year with the new president. And we're also going to talk a little bit about the IRS and tax reform, which has also been a pretty hot topic. So Steve, we were just finishing the first half of the show, and you made the comment about people being able to put their medical marijuana in a little baggy. How novel is that? And then have their health card or their prescription card inside there, and that it gets past TSA, and they don't seem to have a problem with it. Right. That's not official, but that's what's happening. I find that fascinating. Occasionally, I've been told that the TSA officers will pull the person aside. They'll call the local police department and say, is this person registered as a medical marijuana patient? If the answer is yes, they say, go on your way. So now somebody's got a backpack full of marijuana. They're not going to make it. Well, there's limitations, right? How much you can have. That's interesting. In general, just to wrap up, it's going to be an extremely interesting experience to watch President-elect Trump and what he really wants to happen with respect to marijuana. The Attorney General's sessions as to what action he's going to take, and then watch also the Congress, because they have several bills pending to assist banking, to help out with tax reform in the marijuana industry, and just generally legalize marijuana. It's going to be an interesting year, not only for that, but also for other topics like health care and some others as that moves forward in whatever form it ends up taking. But another topic that I wanted to touch on today that I think you have some particular experience with because you've done a lot of tax defense work and criminal and civil. But we've been talking about tax reform. Trump is one of his panels of his platform, has been tax reform, which we've been through that before. I think Reagan did some of that, but that was many years ago. And now we're going to go through it again. And so the question is, how is some of the tax reform issues that he's been talking about, how is that going to influence what's going to go on with this country as far as economics and being able to pay for some of these things he wants to do like this infrastructure he's talking about doing? And there's probably going to be an impact on collection efforts that the IRS is having because of the funding issues and all that. So what's your take on all of this? Well, to address the last part first, the IRS for several years now has been underfunded. And Congress has been cutting back the IRS funding. So they have been losing employees primarily because they're not hiring replacements. A lot of employees have retired, actually. And many have just quit. But so you've got less and less people doing more and more work. And therefore, less and less work is maybe getting done. I've seen the audit rates seem to have dropped quite a bit over the last few years. They have. It used to be for an individual, for example, who was making $100,000 to $200,000. They had the odds were 2% plus% or maybe 3% of being audited. Now they're less than 1% chance of being audited. So for guys like CPAs like you, that's encouraging. I don't make that much money. All my clients do, but I don't. OK, OK, OK. But the audit rate is dropping and it's continued to drop. And I think the IRS, in some respects, at least from my experience, continue to move more in an automation direction to have letters that automatically triggered field type of reviews or letter reviews and that sort of thing. And I think that's caused somewhat by the lack of funding. They can't spend a lot of money on that. That's very true. The IRS has moved towards the optimization of just about every function that they do, even audits. The majority of audits now are what they call correspondence audits. And that's just kicked out by a computer. They scan the income tax returns into a computer that has certain profiles and red flags that the computer looks for. And if the red flags pop up, it automatically sends out a letter with a certain. Well, and that was one of the benefits, I think, of the mandated electronic filing requirements. Is that any, and I'm not sure what the current requirement is now, but back when I was mandated to do all of my returns on electronic filing basis, if I did more than 10 returns, I had to file electronically. And I could only not file if the client specifically requested and I got it in writing and they have a form for that. Or there was some other reason and I had to ask for the exception. So all the returns now, I think the majority returns these days are electronically filed, which allow for a much faster review process. But one of the misconceptions, I think, and correct me if I'm wrong, there's not just one flag that tends to trigger an inquiry or an audit. Sometimes it's a combination of things that create suspicion that they wanna get an answer to. You're absolutely correct. And the big issue for the IRS today is identity theft. Yes, yeah. The stealing of people's identification information, interestingly enough, by a lot of unscrupulous tax preparers. Yes, they're only long enough to steal the information and they're done. Something like that. But what happens is, these false tax returns are prepared. And before a year or two ago, if one submitted a tax return, requesting that they were entitled to a refund, the automatic refund would be kicked out and they'd get a check within three weeks. Now the IRS is absolutely refusing to give refunds for anywhere from a month to three months. As a matter of fact, they've sent out notices, several notices, letting preparers know that anybody who has a childcare tax credit refund, those credits aren't gonna be issued until February. Normally, those are the first ones that get filed. The first week in January are thereabouts. All these people that have 16 kids with 16 social security numbers will come in and get five and six and $7,000 in refunds right in the first few days or week or so of January. They're not gonna allow that anymore because what they're gonna start doing, a lot of those social security numbers for those kids get reused two or three times. And so they're gonna be doing a lot better job of matching things up and making sure that they don't overpay these credits. And that's exactly what the computers can do. That's the kind of data crunching that the computers are really good at. But the Identity Theft is a huge program for the IRS. And the other one, from an audit point of view, my understanding is that they're now focusing on higher income people. If you earn, let's just say, more than $100, $150,000 a year, then you're more likely to get targeted for an audit than somebody with less. And if you're earning a half a million to a million dollars a year, you're probably gonna be more likely to go out. And that kind of makes sense because if you've got limited amount of dollars and labor that you can throw at something, you wanna get the most out of it as you can. And if you can focus those dollars and that labor at the bigger dollar tax returns, you're gonna get a better return than if you're focusing at the lower end. You can't completely ignore it, but you focus your efforts to get that return. That makes sense. That's true. And on the criminal side, from the enforcement point of view and what the Criminal Investigation Division of the IRS is looking for right now, they're focusing more, believe it or not, on offshore money. They have made a ton of money. How many billions were reported in the last year or two that they didn't capture before? I was seeing some reports that because of the new filing requirements for the Offshore Bank accounts, they have increased the amount of dollars that are being reported by 100% or something in the last two or three years. Right, it's in the several billions of dollars in additional tax revenue. Somewhere in the neighborhood of $8 to $10 billion, they've recovered in the last couple of years. It's huge. Not only from the reporting, people voluntarily paying, but also by criminally going after people who they have discovered have offshore tax accounts. And the cooperation of some of the foreign banks too in reporting some of these accounts. Well, that's the factor they call it. It's a requirement that all banks throughout the world have to report to the US IRS the names and identifying information of their account holders who are US citizens or resident aliens. Because resident aliens, green card holders in the US are taxed just like American citizens. Not too many resident aliens know that me. They become quite surprised. Right, that's a good point. And talking about the cybersecurity issues and the identity theft of what's going on, one of the more aggressive frauds that are going on right now. And I've received this. I get an email from my tax software telling me that my update is ready and I have to download the update for my tax system. Well, it never comes in that form. It never comes. But they have a link that you're supposed to go to to download and that's a piece of software that's executable that allows an outside party to get right into my tax software and get all of the tax information that I've got for all my clients. And so this scam is being done throughout the country to tax preparers trying to get access to those tax records. And so people have to be very careful. That's very scary. It is. The other scam that we did talk about a couple of weeks ago but that's going on now is all of these calls that are coming to its citizens and it's usually older people and so on. Threatening to sue them, well, identifying themselves as the IRS and threatening to sue them and threatening to lean their bank accounts and forcing these people to send them money. I heard of one that called a grandmother who is at home and they called her and said, do you have a grandchild that's going to school? She goes, yes, I do. Well, we have her in our principal's office and we can't let her go until you pay the taxes that are due. You know, there's a school tax and that hasn't been paid so you pay it, we're gonna let her go home. And so the grandmother goes, wait a minute, this doesn't smell right. So she didn't get caught up into it but think of all the different people that could have gotten fallen into that. No, it does happen and the one thing that I can say, we can say is the IRS never, never calls people to enforce the tax law. If you're in an audit process, the IRS might call you to set an appointment or talk about something but that's specific. The IRS does not make collection telephone calls, period. You know, it's a scary world out there and people are constantly trying to get their hands into your pockets and it's become an industry. They've gotten very aggressive at it and we've always got to have our guard up and if in doubt, just hang up and call your attorney or your CPA and have them check it out and see if this makes sense. The IRS has a website, irs.gov and they have a complaint section on that website that people can get on to and can report a scam. You made a comment about, how's the tax profile going to be? Well, we gotta wrap up, we got about 10 or 15 seconds so go ahead and finish that thought real quick. The prognosis as to what President Elect Trump's gonna do with tax reform is really up in the air. He's made several statements as to what he will do, whether or not he will follow through with it and keep in mind too, Congress is the one that actually has to cooperate. That's right, it's gonna take a corporation on all sides of the aisle for something like that to happen. Right, right. But Steve, it was very good to have you on the show today. Appreciate you coming back. Pleasure. Hopefully we'll be doing this on a quarterly basis and maybe we can get another panel going and we'll have more people and we'll talk about some current affairs and what it means to the business community. What calling? But this is Business in Hawaii with Reg Baker. We broadcast live every Thursday from two to two 30 from the downtown studios of Think Tech Hawaii and Pioneer Plaza. Looking forward to seeing you next week. Until then, aloha.