Marijuana Businesses Are Being Taxed to Death
Distracted by the “green rush” mentality perpetuated in the media, aspiring cannabis entrepreneurs are sometimes unaware of the little tax code that has a major impact on the sustainability of their future business: Internal Revenue Code 280E. Similar to the way Al Capone was imprisoned for tax evasion, section 280E was introduced in the 1980’s to help take down cocaine distributors who were writing off business expenses like scales and firearms when filing their taxes.
Under this section of the Internal Revenue Code, any businesses involved in the “trafficking” of Schedule I <i>or Schedule II controlled substances are prohibited from deducting operating expenses, making it so their gross income is taxed at the astronomical rate of 70-85 percent (versus the average of 30-35%).
Lest we forget, cannabis is still federally categorized as a Schedule I controlled substance, placed alongside GHB and “bath salts” as a drug with no currently accepted medical use and a high potential for abuse. To keep things in perspective:
- OxyContin, cocaine, and methamphetamine and are all Schedule II substances, therefore implying they have greater medicinal value and lower potential for abuse than marijuana.
- OxyContin is a brand name for oxycodone, produced by Purdue Pharma. It’s not clear how much 280E impacts their business operations, if at all.
- One of the top-grossing enterprises on the planet legally purchases its coca leaves from Stepan Company; the only business in the United States that is authorized by the Drug Enforcement Administration (DEA) to process cocaine. The financial reports on Stepan Company’s website suggest that they are not at all affected by 280E, though it’s unclear why the tax code doesn’t seem to apply to them. It’s also of interest to note that their website happens to list Marinol (synthetic THC, Schedule III) as one of their products.
- Alcohol & tobacco aren’t even scheduled.
On top of the hefty tax burden created by 280E, financial institutions are still in violation of federal law for assisting cannabis businesses as long as marijuana is classified as a Schedule I substance. Despite guidelines released by the Treasury on working with legitimate cannabis businesses, despite the amendment to the Financial Services and General Government Appropriations Act of 2015 (which explicitly prohibits the Department of Justice from spending any funds to penalize a bank for working with a state-legal marijuana business), a change to the Controlled Substances Act (CSA) is still necessary. Because of this, legitimate marijuana businesses are unable to utilize the standard services and tax breaks that all other businesses currently benefit from; fundamental needs such as accounting, payroll, and access to basic banking services.
The CSA and Internal Revenue Code are both outdated, but they’re still considered the law of the land, and will remain that way until legislation is passed to specifically address these issues.
Thankfully, Rep. Blumenauer (D-OR) and Sen. Wyden (D-OR) have recently introduced initiatives to remedy the situation. Simply put, the Small Business Tax Equity Act of 2015 (S.987) would amend the section 280E of the Internal Revenue Code to make an exemption for cannabis businesses operating in compliance with their state laws. In late April, Rep. Perlmutter of Colorado sponsored H.R. 2076, which would create further protection for institutions that provide financial services to marijuana businesses.
Last but certainly not least, the Compassionate Access, Research Expansion, and Respect States Act (better known as CARERS, S.683) introduced by Rep. Booker (D-NJ) would cease 280E’s application to medical marijuana businesses (though it would still apply to recreational businesses). Additionally, CARERS would grant a safe harbor for financial institutions that deal with medical or recreational cannabis businesses that are in compliance with their state’s laws. So while it appears that the financial institutions would still be held to the cost-prohibitive reporting nightmare outlined in the Treasury’s guidelines, they could rest assured that the text of CARERS would make them immune from federal prosecution.