Forget the DEA, marijuana businesses are under attack by a much more subtle Federal enemy: the Internal Revenue Service (IRS). Affecting mom-and-pop and large-scale cannabusinesses alike, federal taxation may be what kills the weed industry in the long run.
Federal Tax Laws Cripple Cannabusinesses
The fact that legal cannabis states have been raking in the dough in terms of tax revenue has been making the headlines for some time now. In fact, Colorado was the first state that saw more tax revenue from weed than alcohol. They even gave weed businesses a tax holiday because they made so much money.
States may be enjoying a little extra cash, but marijuana business owners may be surprised when the find an unwanted hand in their back pocket. The IRS.
Get this: For a non-marijuana business, Federal tax rates in the U.S. run between 15-39%. Several large-scale multinational companies, however, have managed to somehow get away with paying a surprisingly low rate of around 12%.
These tax rates are some of the highest in the developed world, yet marijuana businesses will look forward a far heavier tax burden. Just how heavy? Expect to pay anywhere from 40-70% gross annual revenue.
For some large-scale marijuana businesses, federal tax rates have even jumped as high as 90%. No, we’re not joking. As many of you already know, production and distribution of the marijuana plant is illegal under federal law. Because of this, marijuana businesses are more or less the same as narcotics traffickers in the eyes of the IRS.
Weed businesses fall victim to Section 280E in U.S. tax code. 280E is a law that applies to expenditures in connection with the sale of illegal drugs. This law denies cannabusinesses the ability to write off common business-related expenses.
For Example, Marijuana Businesses Cannot Claim:
- Some employees salaries
- Advertising costs
- Security costs
- Cost of facility rental
- Cost of growing and packing materials
- General administrative costs
280E bars cannabuisnesses from deducting anything that a “normal” business would otherwise have access to.
Why is that important? Since no common deductions are allowed, weed businesses may be subject to federal taxation of up to 100% of their gross income. Marijuana businesses CAN claim deductions on the actual cannabis itself, but that amendment is only as recent as 2007.
The Story Behind 280E
280E was passed into a law in 1982. It was the beginning of the cocaine epidemic in America. The U.S. government needed a way to control the influx of narcotics-related cash. Adding 280E allowed the U.S. Federal Government to seize large sums of tax revenue from drug traffickers while preventing them from writing off any illicit business expenses. I.e. flights and scales to weigh their products.
One man in particular is responsible for 280E. Back in 1975, Jeffery Edmonson filed his federal taxes for the prior year like any other self-employed individual Ogden, Utah. When filing his taxes, Edmonson claimed $105, 300 in cost of goods sold. He also claimed his entire rent as a place of business, work-related flights, telephone charges, automobile expenses, and much more.
What goods was Edmonson selling, exactly? 1,100,000 amphetamine tablets, 100 pounds of marijuana, and 13 ounces of cocaine. Edmonson kept no record of inventory of these products, but by the end of 1974 all he had left was 8 ounces of cocaine.
Unsurprisingly, Edmonson went to tax court over claims. A trial which wasn’t resolved until 1981. He was ultimately awarded a $787 deduction for using his residence as a place a business (one-third the cost of his rent). He was also allowed to deduct:
- The cost of a small scale
- Transportation expenses accrued while driving to pick up his drugs from a contact in Minnesota
- The cost of packaging materials for his drugs
- Accrued telephone expenses
The IRS was happy to collect tax dollars from illicit narco-businesses like Edmonson’s, but the tax loophole that enabled him to write off any of his business expenses quickly came to an end. Congress passed Section 280E of the federal tax code.
Taxation Policy Lagging Behind
Thankfully, the eighties and the era of Miami Vice-style drug busting have come and gone. But, this 30-year-old tax law aims to put a bullet into what’s become a lucrative and sophisticated marijuana industry. A far cry from the once back-alley hand-offs of plastic baggies full of weed, the world of cannabusiness is now one of the most regulated and watched in the United States.
Regulations are a good thing. Stiff state sanctioned regulations keep product quality in check. They also help keep potent marijuana products out of the hands of children. On the production and wholesale end, comprehensive seed to sale tracking software has been developed to track every aspect of monetary and product flow.
Colorado dispensary chain Livwell, owned by John Lord, is an example of just how legitimate weed businesses have become. Lord currently employs a staff of over 500 and owns 20 dispensaries around the state. Other large-scale canna-companies include Dixie Elixirs, which now sells infused products in both Colorado and California. Even facing heavy taxation, Dixie has plans to expand.
Livwell and Dixie are just two of many canna-companies with broad visions and corporate intentions. Unfortunately, while voters and ganja-preneurs take 3 steps forward, archaic tax code acts like a ball and chain restricting what would otherwise be free-flowing capital.
How Do We End 280E?
Unfortunately, there have already been attempts to duke out unfair audits on cannabusinsses in tax court. The IRS response to these petitions was overwhelmingly negative. Last January, they issued a memo which further restricted what marijuana retailers can deduct. Though, there was some give for producers and cultivators. Mostly, the IRS stuck true to the literature of 280E.
Option 1: Lawsuit
The extremely heavy taxation and auditing is putting some smaller dispensaries out of business, but the unjust rates have caught the attention of at least one large New York Law firm. Michael Kosnitzky of Boies, Schiller & Flexner told Fortune that he found the limitations of 280E and the perpetual auditing of cannabis businesses “unconstitutional”. He hopes to find a group of businesses which have been audited and take legal action against the oppressive legislation.
Option 2: Voter Change
Apart from a tax court battle, there may be another way to get around 280E. Full on federal legalization or reclassification. 280E applies to reclassification. 280E applies to Schedule I and Schedule II drugs. While many bills have been put forth (and teetered out) to reclassify cannabis, marijuana businesses will not be able to escape the unconstitutional over-taxation unless the plant is either fully legalized federally or down classified below a Schedule III substance.
Downclassifying to at least a Schedule III would put marijuana on par with Ketamine. Ketamine is frequently used as a horse tranquilizer.
Let’s face it. Marijuana businesses have grown above and beyond 280E. While the Department of Justice has allowed state voters to do what they choose when it comes to marijuana, the IRS continues to stifle precious money-flow in a budding industry. One final concluding word of advice for anyone looking to go into the weed business? Hire a good accountant and an even better attorney.
Do you think 280E is ridiculous? Has your marijuana business been hurt by crippling taxation? Let out your frustration. Share your thoughts with us on our social media accounts or in the comments section below.