Oregon Representative Earl Blumenauer this week introduced legislation in the U.S. House of Representatives that would allow regulated cannabis companies to take tax deductions commonly enjoyed by businesses in other industries. The bill, known as the Small Business Tax Equity Act, was introduced by Blumenauer on Monday, with bipartisan co-sponsorship by fellow Democrat Representative Barbara Lee of California, as well as South Carolina’s Representative Nancy Mace and Representative David Joyce of Ohio, both Republicans.
Under Section 280E of the federal tax code, cannabis businesses are denied most tax deductions offered to companies in other industries. State-legal marijuana companies are permitted to deduct the cost of goods sold, while other expenses including rent, payroll and utilities are not deductible for most cannabis businesses.
“State-legal cannabis businesses are denied equal treatment under 280E. 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,” Blumenauer, the founder of the bipartisan Congressional Cannabis Caucus, said in a statement on Monday. “This grotesquely unfair treatment incentivizes people to cut corners. 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 Small Business Tax Equity Act would create an exception to Section 280E to allow marijuana businesses operating in compliance with state law to take deductions associated with the sale of marijuana like any other legal business.
“Absent this legislation, Section 280E of the federal tax code prevents cannabis businesses from deducting ordinary expenses associated with running a small business, including, rent, utilities, and payroll,” Blumenauer’s office wrote. “They cannot claim the Work Opportunity Tax Credit if they hire a veteran; they cannot depreciate their American made irrigation equipment; and they cannot take any credit or deduction relating to construction or operation costs if they want to revitalize a building for their operations.”
Cannabis businesses and reform groups including the National Organization for the Reform of Marijuana Laws (NORML) are hailing Blumenauer’s bill to grant standard business tax deductions to companies in the regulated marijuana industry, noting that many businesses are struggling under high taxes and regulatory fees, as well as competition from an entrenched underground cannabis market.
“NORML commends the sponsors of this legislation for their efforts to end the unjust federal over-taxation of licensed, state-regulated cannabis businesses throughout the country,” NORML political director Morgan Fox said in a statement from the group. “Allowing them to take the same federal tax deductions that most other 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.”
“The two greatest challenges cannabis entrepreneurs are currently faced with are the lack of access to capital and unfair tax burdens,” said Saphira Galoob, executive director of the National Cannabis Roundtable. “By eliminating the impact of 280E on state-legal cannabis operations, Congress would be giving these businesses, including small and minority operators, the opportunity to remain financially viable and to reinvest in their companies, communities, and workforce through tax credits and deductions that are routinely offered to other domestic industries. This relief is crucial for an industry that employs hundreds of thousands of American workers and generates billions of dollars in annual state and federal taxes – albeit without access to traditional financial resources.”
The push to eliminate the impact of 280E is also underway in cannabis-legal states, many of which use the federal tax code as the basis for state tax rules. So far, 19 states have decoupled their tax laws from 280E, with moves to continue in other states including Connecticut, where the legislature is currently considering such a measure. Lucas C. McCann, Ph.D., co-founder and chief scientific officer at cannabis business consulting firm CannDelta Inc., welcomed the effort to do away with the Section 280E rule at the state level.
“The decoupling of 280E would allow these cannabis-related businesses to claim fundamental operating expenses,” McCann wrote in an email to High Times. “A failure to do so will inevitably lead to the insolvency of many, which will likely assist the illicit market to continue to thrive as it has prior to legalization.”
