Cannabis Industry Seeks Relief from Unfair Tax Burden of 280E

In a nod to the historic Boston Tea Party of 1773, cannabis company MariMed recently held the ‘Boston 280E THC Party’ in Boston Harbor, a unique event designed to protest Tax Code 280E. CEO and President Jon Levine, donning colonial attire alongside other MariMed team members, symbolically threw cargo boxes labeled “WEED” overboard as a means to draw attention to the burden placed on the cannabis industry by this tax code.

According to Levine, Tax Code 280E imposes unjustly high taxes on cannabis companies, leading to reduced profitability and higher prices for consumers. However, most consumers remain unaware of the implications of this tax code on their cannabis consumption. In an exclusive interview on Trade To Black, Levine provided a comprehensive overview of how Tax Code 280E functions and explained why it is perceived as unfair.

Levine also stressed the importance of advocating for the correct scheduling of cannabis, as increased awareness and demand could push the issue forward. The question of whether the federal government would consider de-scheduling cannabis remains uncertain, but such a move could greatly benefit the struggling cannabis sector. If de-scheduling proves unattainable, the abolition of Tax Code 280E could be a viable alternative. Levine discussed the concept of triple negative revenues and the substantial savings that companies would experience without the burden of 280E.

Recent developments at the state level offer some relief for the U.S. cannabis industry, as an increasing number of states, including Connecticut, Illinois, New Jersey, and New York, have passed laws to exempt businesses from Tax Code 280E for state income tax purposes. These exemptions vary in impact, depending on the corporate tax rates of each state. While these state-level exemptions do not affect federal taxes, they allow cannabis companies to deduct business expenses similar to any other industry.

The Cannabis Policy Project (CPP), an advocacy group based in Washington, D.C., reports that 16 states where adult-use cannabis is legal have implemented legislation to decouple businesses from Tax Code 280E. However, several states, including Alaska, Arizona, Maine, Nevada, Washington state, and Rhode Island, have not exempted the adult-use cannabis industry from this tax code.

Karen O’Keefe, Director of State Policies at CPP, highlighted the challenges faced by cannabis businesses due to federal prohibition, overtaxation, and overregulation. Despite being well-capitalized, these businesses struggle to achieve profitability. Recognizing the unsustainability of high tax rates and the potential reduction in tax revenue if businesses were to close, legislators are passing exemptions to allow the sector to operate and deduct business expenses on par with other industries.

The benefits of state exemptions from 280E vary depending on the corporate tax rates of each state. For example, Nevada has no corporate tax, while Illinois, which decoupled from 280E in May, imposes a 9.5% corporate tax rate. As a result, the savings for cannabis businesses in different states can vary significantly.

However, the decoupling of states from Tax Code 280E presents complex bookkeeping challenges, as not all states apply the same rules. While New Jersey permits deductions for both corporate business tax and gross income tax, other states may not allow deductions for both. Joshua Hamlet, an associate in tax at New York-based law firm Akerman, emphasized the intricacies involved in navigating these varying rules.

Aaron Miles, Chief Investment Officer at Chicago-based cannabis multistate operator Verano Holdings, welcomes the shift toward tax relief at the state level. Miles highlighted the particular benefits for small businesses and social equity licensees, as they stand to gain the most from these tax exemptions. He further noted that Verano has been leveraging its cash flow for growth. However, overtaxation poses a significant hurdle for smaller players without access to banking and capital.

While state-level exemptions provide some relief, the cannabis industry continues to face substantial federal tax bills, primarily due to the burdensome Tax Code 280E. In 2022, the industry paid an estimated $1.8 billion more in federal taxes compared to non-cannabis businesses, a figure projected to reach $2.1 billion this year, according to an analysis by Oregon-based Whitney Economics. The industry eagerly awaits any signs of progress from President Joe Biden’s administration, which has announced a review of cannabis scheduling that could potentially lead to de-scheduling or rescheduling.

Advocates, including O’Keefe, assert that cannabis should be descheduled outright. However, if rescheduling occurs, it is crucial that cannabis is placed in Schedule 3 or lower, as rescheduling to Schedules 1 or 2 would not address the issues posed by Tax Code 280E. The industry remains hopeful for positive developments at the federal level that could alleviate the burdens faced by cannabis businesses and foster a more equitable and sustainable future.