While the huge sales numbers in legal states make headlines, they don’t tell the real story about the cannabis industry. The macro numbers of gross profits and revenue demonstrate the potential of the industry, but hidden within record-breaking sales reports are the trials and tribulations facing small businesses and entrepreneurs. Regulatory hurdles and over taxation are extremely burdensome to the industry, but the biggest obstacle to unleashing the potential of the cannabis industry (save for prohibition) is the 280E IRS tax code that prohibits cannabis businesses from deducting normal business expenses from their federal taxes.
While giant corporations, especially multinational ones, may be able to weather their tax burden, mom and pops are surviving on very small profit margins after they pay their taxes. Rolling Stone reported on how the 280E tax code allows the United States federal government to reap billions of dollars because of cannabis’ illegality at the federal level:
Because of the discrepancy between state and federal law, legal marijuana businesses are often stuck paying twice as much as normal businesses – effective rates of up to 70 percent – in federal taxes. Exactly how much extra tax revenue makes it to the feds because of marijuana’s illegality is not entirely clear. But last December, the Congressional Joint Committee on Taxation responded to a request from Colorado Senator Cory Gardner with the projected additional amount that will be collected from legal cannabis businesses between 2018 and 2027 if the drug remains federally illegal: $5 billion.
The federal government’s legal weed windfall can be traced back to a little tax code provision called 280E, which says that anyone trafficking in Schedule I or Schedule II drugs cannot take deductions or receive credits on their taxes. It was written in the 1980s to prevent the Scarfaces of the world from writing off the cost of packaging for methamphetamine. But now that a majority of states have legalized the medical or recreational sale of marijuana, the 280E tax provision has become a key point of contention between the federal government and state-legal businesses.
So where did the Joint Committee on Taxation’s numbers come from? Several marijuana industry groups have done their own estimates of 280E’s impact, but the numbers that seem closest to what the JCT put out were developed by a Washington D.C. economic research firm hired by Tom Rodgers, a Native-American advocate and lobbyist. About 15 years ago, Rodgers was the whistleblower in the infamous Jack Abramoff case, helping authorities to uncover criminal lobbying and bribery activities that ultimately led to convictions for 21 people, including a congressman and two former Bush White House officials. These days, Rodgers has expanded his oeuvre to include some work on behalf of the cannabis industry. In 2016, in conjunction with a chain of Colorado marijuana dispensaries called the Green Solution, Rodgers commissioned the research firm to develop an analysis of 280E in the hopes of ultimately getting the provision repealed.
While we’ve seen cannabis legalization gain popularity, political support has also increased. We’ve seen Congress pass protections from federal arrest and prosecution for medical providers and the House has passed protections for adult-use businesses and banking services (but the Senate needs to catch up). Eventually, we’ll see some movement on the 280E tax code. Hopefully soon, Uncle Sam will stop profiting from keeping cannabis illegal and give the hard-working members of the cannabis industry, the same tax deductions that other businesses enjoy. If the cannabis community will make a point to support locally-owned cannabis boutiques like Kind Leaf, that money will flow back into local communities, where that green can do the most good.