Marijuana Industry Group Pushes Congress For Tax Relief—And To Apply The Fix Retroactively For Past Payments

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.

The report from the National Cannabis Industry Association (NCIA) and a
coalition of stakeholders states that “no industry understands the pain of
taxes as acutely as the state-regulated cannabis industry which currently
pays draconian tax rates as a result of the unforeseen consequences of” an
Internal Revenue Service (IRS) code known as 280E.

That code precludes even state-licensed marijuana businesses from taking
federal deductions for their expenses because cannabis remains a Schedule I
drug under the Controlled Substances Act (CSA).

“This provision is a punitive poison pill that threatens every business in
these state-regulated markets, but poses a particular threat to small
businesses that have responded to the will of voters,” the report says.
“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 says the costs of the IRS policy for the cannabis sector are
“staggering,” with marijuana businesses paying an effective tax rate of
more than 70 percent. That rate “is economically prohibitive,
unsustainable, and counter-intuitive,” it says.

“In the cruelest of ironies, the failure to include retroactive relief for
state-regulated cannabis businesses will fall primarily on two groups:
small cannabis businesses located in early legalization states and
equity-owned businesses provided state-licensing priority specifically
because of injuries suffered as a result of cannabis prohibition.”

Notably, NCIA stressed that tax relief for the marijuana industry should be
applied retroactively. Without that stipulation, the association said
“taxes will continue to result in the closure and consolidation of many
state-regulated small businesses.”

“Beyond having negative economic impacts, inaction will also harm public
health by forcing consumers back to the untaxed, untested, and unregulated
illicit market,” it said.

“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. This position is impossible, and becomes increasingly so
the longer an operator faces these de facto penalties.”

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.
“In an industry composed mostly of independent entrepreneurs and small
operators, this tax credit would primarily support businesses meeting the
preexisting federal definition of a small business.”

“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.”

“Americans have increasingly rejected the failed policies of cannabis
prohibition, first through ballot initiatives, followed by state-level
legislative reforms, and now with growing momentum at the federal level.
It’s time for Congress to stop taxing compliance like crime and level the
playing field for cannabis operators; otherwise, the small businesses that
built this regulated industry will not survive.”

Meanwhile, in June a U.S. district court ruled that the IRS 280E policy prevents
state-legal cannabis companies from being eligible for refunds of employee
retention credits (ERCs), which helped businesses continue to pay workers
during early COVID-era shutdowns.

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.

In that notice, IRS said certain firms were attempting to circumvent the
federal ban by completing the disclosure statement Form 8275. That form is
“used by taxpayers and tax return preparers to disclose items or positions,
except those taken contrary to a regulation, that are not otherwise
correctly disclosed on a tax return in order to avoid certain penalties,”
the agency said.

State-licensed cannabis businesses could be able to start taking broader
federal tax deductions if the push to move marijuana to Schedule III is
ultimately 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.

Multiple states have taken steps to provide state-level tax relief to
marijuana businesses that are subject to the IRS 280E statute, but the
federal rule has not yet changed. And it’s unclear when the proposed
federal marijuana rescheduling rule might take effect. An administrative
hearing process concerning the rule is currently underway.

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. 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.”

The post Marijuana Industry Group Pushes Congress For Tax Relief—And To
Apply The Fix Retroactively For Past Payments appeared first on Marijuana
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