A congressman has reintroduced a bill that would amend an Internal Revenue Service (IRS) code known as 280E to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.
Rep. Earl Blumenauer, founder of the Congressional Cannabis Caucus, refiled the Small Business Tax Equity Act on Monday. The measure been introduced several times over recent sessions but has never advanced to a hearing or vote.
“State-legal cannabis businesses are denied equal treatment under 280E,” Blumenauer said in a press release. “They cannot fully deduct the cost of doing business which means they pay two or three times as much as a similar non-cannabis business.”
“This grotesquely unfair treatment incentivizes people to cut corners,” he said. “If Congress wants to get serious about supporting small businesses and ending the illicit cannabis market, it is commonsense that we allow legal cannabis operations to deduct business expenses, just like any other industry.”
The IRS code that’s currently in place, 280E, makes it so businesses whose activities consist of “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act)” cannot make deduct most business expenses from their federal taxes or receive tax credits, even though they are still obligated to pay taxes like any other company.
The provision was enacted in 1982 as a way to prevent drug traffickers from writing expenses off their taxes, but it is widely applied today on state-licensed marijuana growers, processors and dispensaries, greatly increasing their effective tax rates as compared to businesses in other industries.
Rep. Nancy Mace (R-SC) filed the bill at the end of the last Congress, but there wasn’t enough time to take it up in committee.
National Cannabis Industry Association CEO Aaron Smith said on Monday that the “unfair application of the outdated 280E provision on state-licensed cannabis businesses is preventing our industry from reaching its full economic potential and our ability to successfully replace criminal markets in accordance with the will of the voters and state legislators that have implemented modern state marijuana programs across the country.”
For the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And as the Congressional Research Service (CRS) noted in a 2021 report, IRS “has offered little tax guidance about the application of Section 280E.”
IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”
Bipartisan and bicameral lawmakers have been working for years to pass legislation that would treat the cannabis sector like other legitimate enterprises, namely through the Secure and Fair Enforcement (SAFE) Banking Act that’s passed the House on a number of occasions only to stall out in the Senate.
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Advocates and stakeholders were hopeful that the reform would be enacted as part of a package of incremental cannabis proposals known as SAFE Plus that was being negotiated last session, but that didn’t materialize.
Senate Banking Committee Chairman Sherrod Brown (D-OH) said recently that lawmakers need to act on marijuana banking legislation “this year,” and his Republican counterpart on the panel agrees that the issue will “come to a conclusion likely in this Congress.”
Both Brown and the committee’s ranking member, Sen. Tim Scott (R-SC), spoke at the American Bankers Association (ABA) Washington Summit—one day after the lead GOP sponsor of the SAFE Banking Act urged the financial sector to put pressure on Congress to get the job done.
Importantly, Brown also said that he’s under the impression that the White House is supportive of the legislation.
Senate Majority Leader Chuck Schumer (D-NY) said last month that he’s still committed to moving the legislation with SAFE Banking sponsor Sen. Steve Daines (R-MT), even with a divided Congress where Republicans control the House.
With the House now controlled by Republicans, the general expectation is that comprehensive legalization will be set aside as lawmakers work to find areas of bipartisan compromise. The Small Business Tax Equity Act seems to be an example of such legislation.
“NORML commends the sponsors of this legislation for their efforts to end the unjust federal overtaxation of licensed, regulated cannabis businesses throughout the country,” NORML Political Director Morgan Fox said. “Allowing the deductions that most other legitimate businesses enjoy will facilitate new opportunities in the legal cannabis industry and make it more competitive with the unregulated market, which will directly benefit consumer health and public safety.”
Read the text of the Small Business Tax Equity Act below: