A leading marijuana industry association has released a report calling on Congress to treat cannabis businesses like other lawful industries by allowing them to take federal tax deductions—and also to apply that policy retroactively to provide relief for past payments.
According to a report by the National Cannabis Industry Association and a group of stakeholders, “no other industry feels the tax pain as keenly as state-regulated marijuana industry that pays high rates of taxes due to the unforeseeable consequences” of an Internal Revenue Service code (IRS), known as 280E.
This code prevents state-licensed cannabis businesses from claiming federal deductions because marijuana remains a Schedule I substance under the Controlled Substances Act.
The report states that “This provision constitutes a punitive, poisonous pill which threatens all businesses in state-regulated markets but is particularly harmful to small business owners who have acted on the wishes of the voters.” “Picture the medical dispensary serving veterans with an alternative to deadly opioids or providing comfort to cancer patients in your community: those businesses cannot survive without action to repeal §280E and, crucially, retroactive relief.”
NCIA states that costs associated with the IRS’s cannabis-related policy are “staggering”, as marijuana businesses face an effective rate of taxation of 70 percent or more. The rate was “economically prohibitive and unsustainable,” according to the report.
In a cruel irony, state-regulated cannabis business owners who are not eligible for retroactive compensation will primarily be two groups. These include small cannabis companies located in the early states of legalization and those businesses that were granted state licensing priority because of injury suffered by cannabis prohibition.
NCIA emphasized that the tax relief should apply retroactively to marijuana businesses. In the absence of this requirement, NCIA said that “taxes are likely to continue to cause the closure or consolidation of small state-regulated businesses.”
It said that inaction would not only have negative effects on the economy, but also hurt public health, as it would force consumers to return to an untaxed market, which is unregulated, untested and without any testing.
“Omitting retroactive relief from §280E reform would create an unequal playing field favoring illicit market actors and new entrants, while penalizing those entrepreneurs who responded to the will of the voters and led this movement. It is impossible to maintain this position, which becomes more and more so as operators continue to face these de facto sanctions.”
To address the issue, NCIA and other businesses that signed on to the report—including Weedmaps, FundCanna, Fox Rothschild and more—said Congress “must urgently amend the tax code to exempt state-licensed businesses from §280E but should also include a retroactive tax credit in order to preserve the legal cannabis market and foster the success of small businesses.”
“The solution is simple: Congress should provide retroactive relief in the form of a refundable tax credit on the next tax filing for state-regulated cannabis businesses equal to tax incurred as a result of §280E,” it said. This tax credit is primarily intended to support small businesses and independent entrepreneurs in an industry dominated by small operators.
“NCIA’s proposal would only carve out state-licensed and regulated cannabis activity from the penalty mechanism of §280E,” the report said. “Accordingly, it would not impact §280E’s application to other controlled substances or even illicit market sales of cannabis in the present.”
The American people have been increasingly rejecting the failed policy of marijuana prohibition. First through ballot initiatives and then state-level legislation reforms. Now, there is a growing movement at the federal government level. Congress needs to end taxing compliance as if it were a crime, and equalize the playing fields for cannabis operators.
In June, a U.S. District Court ruled that IRS 280E policies prevent state-legal marijuana companies from receiving refunds for employee retention credits. These ERCs helped the businesses to continue paying workers even during shutdowns in early COVID era.
Separately, late last year IRS warned the marijuana industry that some cannabis companies had, without a “reasonable basis,” filled out a supplementary form in an attempt to take federal tax deductions that they’re prohibited from receiving under 280E.
IRS stated in that notice certain companies were trying to circumvent federal restrictions by filling out Form 8275, a disclosure statement. This form “is used by taxpayers or tax return preparers in order to accurately disclose any items, positions, etc., which have not been disclosed otherwise on the tax return, to avoid specific penalties,” according to IRS.
The state-licensed marijuana businesses may be eligible to claim broader tax deductions from the federal government if efforts to place marijuana in Schedule III are successful. But IRS separately advised last June that just because that possibility is on the horizon doesn’t mean the industry can start claiming deductions in the interim.
The IRS 280E law still applies to marijuana businesses in multiple states, and the federal tax rule has not changed. Uncertain is the date of implementation for the new federal marijuana regulation. A hearing is being conducted by the administrative authority to discuss this rule.
In 2023, then-Rep. Earl Blumenauer (D-OR) reintroduced a congressional bill that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.
The latest notices come three years after the Congressional Research Service (CRS) noted in a 2021 report that the agency “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. IRS was criticized by the department’s Inspector General of Tax Administration for its failure to provide adequate advice on federal tax compliance for taxpayers working in marijuana industries. It also directed that the IRS “develop and make public guidance specifically for the marijuana industry.”