Rescheduling marijuana would liberate plant-touching firms from Section 280E

December 5, 2023 · mj-biz-daily

As the co-founder and CEO of Capitol Wellness Solutions in Baton Rouge, Louisiana, Randy Mire runs one of only 10 companies awarded a license to sell medical marijuana in the southern state.

A change in state law that went into effect last year means the number of dispensaries – or pharmacies, as Louisiana’s brick-and-mortar marijuana retail locations are called – allowed in the state might triple.

As for the ability to pay less in taxes to the federal government and retain more capital to scale his business, Mire might have President Joe Biden’s administration to thank.

On Aug. 29, the U.S. Department of Health and Human Services recommended that marijuana be removed from Schedule 1 of the Controlled Substances Act and instead be classified in Schedule 3.

That recommendation is currently under Drug Enforcement Administration review.

If and when rescheduling becomes law – a process that legal experts expect to unfold as early as the first half of 2024 – Mire and every other regulated marijuana business owner in the United States will enjoy an enormous tax cut, as the notorious IRS Section 280E would no longer apply.

Rescheduling “will allow us to scale a lot quicker,” Mire told MJBizMagazine in a recent phone interview.

“Historically, because of 280E, we can’t build out facilities,” he said. “We want to be able to give an experience to a patient that’s no different than any other pharmaceutical medication.

“This new rule will allow me to build nicer facilities.”

History of 280E

In 1981, a convicted cannabis and cocaine trafficker named Jeff Edmondson took the U.S. government to court – and won.

Edmondson was guilty of drug charges and sentenced to four years in prison. That much wasn’t in dispute.

Instead, Edmondson convinced a tax court to reverse an earlier IRS decision and allow him to take deductions for “business expenses” incurred while selling the drugs, including rent, phone bills and about $30,000 worth of illicit drugs.

That decision didn’t go over well in the “Just Say No” 1980s.

In response, Congress amended the tax code to specifically prohibit anyone “trafficking in Schedule 1 and Schedule 2 controlled substances from deducting the cost of payroll, advertising and most other normal business expenses from their federal tax returns. (In a twist, cost of goods sold – that is, the illegal drugs themselves – was and is still an allowable deduction.)

It’s highly unlikely that the authors of 280E had “making life difficult for a legal cannabis industry” in mind while rewriting the tax code.

But a generation later, 280E’s consequences have landed squarely on state-regulated marijuana dispensaries, according to economic analyst Beau Whitney, the co-founder of Oregon-based Whitney Economics, who has studied the issue at length.

“280E hits retailers the hardest,” he said. “It’s completely crazy.”

The nation’s cannabis retailers will collectively pay an extra $2 billion on their federal returns next spring, Whitney estimates.

These are expenses that would be deductible if 280E did not apply.

And they add up – depending on how much a retailer spends on services they cannot deduct – to an “effective” tax rate in excess of 70%, while mainstream businesses pay closer to 21% tax on corporate income.

Section 280E is slightly kinder to cultivators and manufacturers.

But since growers and extractors often don’t get paid until their products are sold to consumers – and since retailers who claim to be unprofitable might not be quick to pay their bills – it’s accepted that 280E negatively impacts the cannabis industry up and down the supply chain, hurting businesses big and small.

More cash available

Legal experts agree that rescheduling marijuana to Schedule 3 would solve the industry’s 280E problem.

That probably won’t happen overnight, but it could occur in time for the next tax cycle – as soon as the change in federal drug law becomes official – possibly in time to file 2024 or 2025 tax returns, Whitney predicted.

As long as rescheduling happens, tax relief happens, too.

“280E does not apply to Schedule 3,” said Jonathan Caulkins, a professor and drug-policy researcher at Carnegie Mellon University in Pittsburgh.

“That’s kind of a big deal. This will greatly reduce the cost structure of the industry, specifically the retailers.”

The lower tax burden also could lead to lower prices for retail customers, which could boost demand.

Alternatively, prices could stay stable as retailers seek to make up for years of low margins (or overdue accounts receivable or angry investors).

With a lower tax bill, there would be more liquidity available to plow back into the business.

And like Mire, the Louisiana dispensary owner keen to open another store, large multistate marijuana operators also view rescheduling – and, with it, 280E reform – as an unalloyed positive as well as the harbinger of more reform to come.

“The loss of 280E will bring new capital into the sector, for companies big and small,” said Adam Goers, senior vice president for corporate affairs at The Cannabist Co. (formerly Columbia Care) and a co-chair of the Coalition for Cannabis Scheduling Reform.

“Combined with SAFE Banking, it’s really the nexus of an actually sustainable industry that then can work toward federal legalization,” he added.

 Won’t save everyone

It remains to be seen whether cannabis businesses will be able to renegotiate or restructure past-due balances if 280E no longer applies.

It’s also far from certain whether tax reform will be enough to rescue struggling businesses.

“Will it save everybody? No,” said Whitney, who noted that marijuana businesses listed the federal tax burden among their top concerns during a recent survey he conducted.

“But will it save a bunch of people, or will it increase their abilities to turn a profit? Absolutely.”

That magic word – profit – might be more than enough to keep otherwise teetering businesses going, whether it’s in the form of tax cuts or more rope from hopeful investors.

Mire concluded: “It just gets everyone excited not to have 280E tax.” (Full Story)

In categories:Legalization Taxes
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