Stop taxing Marijuana companies as illegal dealers

Stop taxing Marijuana companies as illegal dealers

Marijuana retailers end up paying corporate taxes that are much higher than those paid by retail businesses.

Congress should change the 280E tax law that puts them at a disadvantage.

Theory Wellness operates like any other Massachusetts business. It abides by state licensing regulations, building codes, and labor laws. But under federal tax law, because the business sells cannabis, Theory Wellness CEO Brandon Pollock is treated no differently than a heroin street dealer.

If Theory Wellness were selling vitamins, hemp, or the proverbial widget, it would have simply paid the tax rate of 21 percent in federal taxes in 2022. Because it sells cannabis, it effectively paid 40 percent, Pollock said.

The reason is an ill-applied tax law referred to as 280E, named for the relevant section in the US tax code that does not allow filers to take deductions and credits for a business that involves trafficking in a controlled substance. So Pollock can’t deduct the salaries he pays his retail employees or the money he spends on advertising as a business expense, making his profits appear far higher to the IRS than they actually are.

“It’s very frustrating, because we are legal businesses in our states, we’re employing people, we are regulating a product that’s being used by tens of millions of Americans across the country,” Pollock said.

The tax discrepancy is among the many absurdities created by having the federal government classify as illegal a drug that 40 states and Washington, D.C., allow in some form. The tax law was written in 1982 after a court case where a drug dealer who was caught selling cocaine, amphetamines, and marijuana and forced to pay back taxes tried to deduct as a business expense his costs for travel, phone calls, and packaging.

Along with federal restrictions on banking, which create a public safety hazard by forcing marijuana companies to deal largely in cash, 280E creates one of the most financially onerous problems for entrepreneurs trying to succeed in the legal market. These federal restrictions are nonsensical in today’s world and create needless conflict between state and federal laws. In Massachusetts, the state decoupled its state tax code from federal tax code in this area in 2022, so marijuana businesses pay the same state corporate tax rate as other companies, along with marijuana-specific taxes established in legislation.

Oddly, due to the language of the federal tax code, marijuana businesses can deduct the cost of goods sold, which includes the cost of inventory and of growing and manufacturing the product. They are only barred from deducting costs related to the actual sales to customers, such as marketing or wages for retail employees. So the burden of complying with 280E falls most heavily on stand-alone marijuana retailers, which are often smaller businesses than growers and already face other pressures like falling prices.

James Whitcomb, former CEO of multistate cannabis company Parallel and current CEO of cannabis-focused insurance company Frontier Risk, said effective tax rates can be as high as 70 percent for some marijuana businesses.

A 2022 analysis of financial filings of10 publicly traded multistate cannabis companies done by Green Market Report found that combined they owed the IRS $507 million in back taxes. In some cases, that represented a business strategy that counts on the cost of IRS interest and penalties being lower than the cost of borrowing private money. Some companies may also be trying to delay paying, anticipating that Congress will eventually change the law.

The tax treatment plays into broader financial challenges facing the marijuana industry, which can be lucrative but requires significant start-up capital. Whitcomb said there are already very few institutional investors willing to fund cannabis companies, and the unfair tax treatment “drives the nail in the coffin from a cash flow perspective.”

California marijuana dispensary Harborside sued to overturn the 280E law as applied to marijuana companies, but a US Appeals Court in 2021 ruled against it, leaving the issue for Congress to decide.

Representative Earl Blumenauer, an Oregon Democrat who founded the Congressional Cannabis Caucus, has been pushing to change the tax law since 2017. That year, the Joint Committee on Taxation estimated the change would cost the federal government $5 billion over 10 years, although that estimate is likely outdated.

While Congress has hesitated to act on broader reforms removing federal restrictions on marijuana, changing the tax code — and ideally the banking laws — to let state-licensed businesses operate in a safe and financially sustainable manner should be a bipartisan priority.

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Region: Massachusetts