280E isn’t a tax break for cannabis companies

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The No Deductions for Marijuana Companies Act, proposed by U.S. Sens. James Lankford and Pete Ricketts, would codify the applying of Part 280E of the Inside Income Code in opposition to hashish companies working in compliance with state legal guidelines – even when marijuana had been to be reclassified as a Schedule 3 drug beneath the Managed Substances Act.

A couple of weeks later, seven extra congressional Republicans doubled down on this effort, introducing related laws searching for to completely disallow any tax deduction or credit score for companies engaged in promoting marijuana.

In apply, 280E taxes hashish corporations at a lot greater charges than different sectors by disallowing “extraordinary and mandatory” enterprise deductions allowed beneath the federal tax code, thereby lowering taxable revenue.

280E applies solely to companies trafficking in Schedule 1 or Schedule 2 managed substances, so rescheduling marijuana to Schedule 3 would enable state-compliant hashish companies to be taxed the identical as mainstream corporations.

Elimination of the 280E tax burden is by far the most important affect a Schedule 3 classification would have on the hashish business.

Honest taxation not a tax ‘break,’ however 280E is a subsidy …

In asserting their effort to keep up 280E, Lankford and Ricketts stated that “the federal authorities shouldn’t be subsidizing an business that earnings from dependancy and undermines public security.

“This invoice ensures that marijuana companies don’t obtain tax breaks whereas they proceed to violate federal legislation,” they stated.

Sadly, Lankford and Ricketts bought two issues fallacious.

First, 280E truly subsidizes the illicit market, not state-regulated hashish markets.

These working illegally usually don’t file or pay taxes on their hashish gross sales – and unsurprisingly, the IRS virtually by no means applies 280E in opposition to unlicensed operators.

Due to this lack of enforcement, unlawful marijuana operators simply can undercut the costs of their licensed opponents, so 280E successfully subsidizes illicit-market sellers, not the opposite means round.

That is obviously obvious in California.

In a current report, the state’s Division of Hashish Management estimated that roughly 40% of the marijuana consumed in California is obtained from the licensed marijuana market.

The report notes that whereas the illicit market doesn’t look like increasing, one of the crucial efficient methods to remove unlawful operators in California could be to “lower prices for licensed companies.”

Like eliminating 280E maybe?

Second, disposing of 280E merely means state-licensed marijuana operators would pay the identical tax charges as mainstream retailers or producers, so the place is the tax “break?”

The parable of 280E’s federal tax ‘profit’

I typically hear that federal politicians don’t wish to finish 280E as a result of they imagine (wrongly) it generates vital federal tax income, and the U.S. authorities merely desires to proceed to gather.

This can be a false narrative.

As a result of 280E thwarts operational success, it enormously incentivizes folks to perpetuate the illicit marijuana market.

Consequently, the federal authorities is lacking out on a major quantity of tax income that could possibly be generated by a stage tax taking part in discipline.

For instance, Gov. Gavin Newsom just lately introduced California seized greater than $534 million in unlawful marijuana in 2024.

Since 2019, state officers seized and destroyed almost 800 tons of hashish with a retail worth of greater than $2.8 billion.

That’s proper, $2.8 billion in illicit marijuana – for which no native, state or federal taxes had been collected – in California alone.

If 280E had been eradicated, tax authorities would seize much more tax income as a result of authorized operators might legitimately compete with their illicit-market opponents.

The danger of working illegally is diminished when the financial incentive is now not worthwhile.

On this political local weather of presidency effectivity, proponents of 280E fail to acknowledge the prices related to 280E’s enforcement.

280E isn’t a tax on precise acquire, it’s a tax on enterprise bills paid.

As a tax legal professional, I can attest that the IRS struggles to gather past-due taxes from hashish companies.

Why? As a result of the so known as “revenue” being taxed by no means actually existed within the first place – these companies are being financially crippled by 280E.

And, as a result of 280E is so grossly unfair, it’s always challenged by hashish companies in IRS exams, appeals and in Tax Court docket.

This comes at an enforcement and income price for the federal government, all whereas the IRS turns a blind eye to unlawful operators.

Maybe that is by design, however the actuality is 280E places many hashish corporations out of enterprise, like a kind of back-door federal enforcement of the Managed Substances Act.

Federal, state and native tax authorities can not acquire tax {dollars} from shuttered or financially struggling taxpayers, however there are a variety of prices related to attempting.

Hashish assist bolsters native and state economies

Overtaxing hashish not solely encourages illicit-market participation, but it surely additionally:

Hinders enterprise progress.
Causes value inflation and elevated shopper prices.
Creates job losses – which, in flip, create instability in tax income for state governments.

Backside line: 280E, as it’s utilized to state-regulated marijuana companies, merely undermines the targets of legalization and state regulation – targets that concentrate on shopper security and discount of the harms brought on by failed drug insurance policies and the inequitable utility of drug legal guidelines.

As most Individuals are conscious – in contrast to some Congressional lawmakers – placing state-regulated marijuana corporations out of enterprise is not going to hold folks from consuming hashish.

Rachel Gillette is a company and tax accomplice at Holland & Hart in Denver and leads the legislation agency’s hashish and psychedelics business group. She will be reached at rkgillette@hollandhart.com.