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Congressional Researchers Analyze 280E Marijuana Tax Penalty And Legislative Solutions

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In a new report published this month, Congressional researchers examine tax policies and restrictions for the marijuana industry—and how those could change if any number of federal reform bills are enacted.

The Congressional Research Service (CRS) analysis focuses on a section of Internal Revenue Services (IRS) code known as 280E, which precludes cannabis companies from taking certain federal tax deductions or credits that are available to other businesses, regardless of their state legality. But they are still obligated to pay taxes on their federally illegal income.

“The Schedule I status of marijuana means that marijuana businesses are treated differently from many other businesses for tax purposes,” CRS said. However, “Congress has broad authority to alter the tax treatment of marijuana businesses.”

“The legislative history of Section 280E indicates that Congress enacted the provision to codify a sharply defined public policy against drug dealing,” the report states.

The provision was enacted in 1982 as a way to prevent drug traffickers from writing expenses off their taxes, but it is widely applied today on state-licensed marijuana growers, processors and dispensaries, greatly increasing their effective tax rates as compared to businesses in other industries.

280E applies to substances in Schedules I and II of the Controlled Substances Act (CSA).

“Recent legislative proposals aim to relax federal restrictions on marijuana or to mitigate the disparity between federal and state marijuana regulation,” the new CRS report states. “Many of these proposals would alter the tax treatment of marijuana businesses by re-scheduling or descheduling marijuana under the CSA or by making marijuana-specific exceptions.”

“Under these proposals, Section 280E would no longer prohibit marijuana businesses from taking deductions and credits,” it says.

While several bills were introduced last session to federally legalize cannabis—including the House-passed Marijuana Opportunity, Reinvestment and Expungement (MORE) Act—they have not been refiled so far this year.

Senate Majority Leader Chuck Schumer (D-NY), Senate Finance Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ) are in the process of developing legislation to end cannabis criminalization and promote social equity, and they’ve met with advocates about how best to draft that proposal.

Meanwhile, House Judiciary Chairman Jerrold Nadler (D-NY) recently said he will soon be reintroducing the MORE Act.

A number of standalone bills to remove the 280E penalty’s application on marijuana businesses have also been filed over the years in Congress, but none has ever been given a hearing or a vote.

But for the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And CRS noted that IRS “has offered little tax guidance about the application of Section 280E.”

It did provide some guidance in an update last year, 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 last year. 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.”

One note that IRS especially wants to make clear to cannabis firms is that they still have to pay income tax. And CRS articulated that in its report as well.

“Like non-marijuana businesses, marijuana businesses are subject to tax on all of their income,” it said. “Under federal law, all income is taxable, including income from unlawful activities. In contrast, not all expenses are deductible from a taxpayer’s gross income.”

But paying those taxes has proved onerous—both for cannabis businesses and the IRS itself. The head of the agency told Congress last month that it would “prefer” for state-legal marijuana firms to be able to pay taxes electronically, as the current largely cash-based system is complex and inefficient.

Former Treasury Secretary Steven Mnuchin said in 2019 that he’d like to see Congress approve legislation resolving the cannabis banking issue and he pointed to the fact that IRS has had to build “cash rooms” to deposit taxes from those businesses as an example of the problem.

CRS also discussed legislation that’s “attempted to increase marijuana businesses’ access to banking and financial service” like the Secure and Fair Enforcement (SAFE) Act, which passed the House in 2019 and also as part of two COVID-19 relief packages. “Many financial institutions are unwilling to provide state-sanctioned marijuana businesses with common banking products and financial services due to federal laws that impose civil and criminal liability on financial institutions handling money tied to marijuana.”

While there may be that reluctance, federal data released earlier this month shows that the number of banks and credit unions that report servicing marijuana businesses seems to be stabilizing.

For three quarters in a row, those numbers were consistently declining—due partly to revised reporting requirements from the Financial Crimes Enforcement Network (FinCEN) and also because of the coronavirus pandemic. But the latest report signals that the trend is lifting.

Lawmakers in the Senate and House filed new bills to address the marijuana banking issue in recent days.

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New House Bills Would Make Cannabis Businesses Eligible For Federal Small-Business Aid

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Lawmakers in the U.S. House of Representatives have introduced three new bills to make state-legal marijuana businesses eligible for federal small business services, including loans, disaster relief and grant programs.

The package of legislation is aimed at establishing parity for cannabis businesses, which are currently prohibited from receiving federal aid due to marijuana still being classified as a Schedule I controlled substance. The country’s legal cannabis industry nevertheless now supports nearly 320,000 full-time jobs in the U.S., according to industry estimates.

The measures are largely similar to legislation introduced by the lawmakers in 2019, with some small changes.

One bill, sponsored by House Small Business Committee Chairwoman Nydia Velázquez (D-NY), would allow marijuana businesses to access resources from the federal Small Business Administration (SBA). The Ensuring Safe Capital Access for All Small Businesses Act of 2021, which had not been assigned a bill number as of Tuesday afternoon, would expand access to services such as microloans, disaster assistance and the agency’s loan guaranty program.

“With more and more states pursuing legalization, including my home state of New York, there are a growing number of legitimate small businesses that are excluded from critical SBA programs,” Velázquez said in a statement, noting that much of the cannabis industry consists of small businesses.

Compared to Velázquez’s 2019 bill, the new version adds clauses meant to expand the availability of services. While the 2019 bill applied to SBA itself, provisions in the new legislation also prevent SBA intermediaries, private lenders and state and local development companies from declining to work with businesses simply because of their marijuana-related work.

Another new section deals with debentures—certain unsecured loan certificates—and clarifies that SBA may not decline to purchase or guarantee a debenture just because of a business’s involvement in cannabis. Nor can other small business investment companies decline to provide assistance to the cannabis sector.

“This legislation will spark growth by extending affordable capital to small firms in the cannabis space,” she continued. “Simultaneously, the bill acknowledges the structural disadvantages facing entrepreneurs of color and seeks to level the playing field.”

Another newly refiled measure, H.R. 2649, sponsored by Rep. Dwight Evans (D-PA), would establish a U.S. Small Business Administration (SBA) grant program to provide funding to state and local governments to help them navigate the licensing process for cannabis businesses. The bill, which also removes marijuana from the Controlled Substances Act, specifies that the grant money should be used to benefit communities disproportionately impacted by the drug war.

“My bill would act as a poverty-buster and help homegrown small businesses, which are the backbone of our economy and our neighborhoods. We need to make sure that the booming legal cannabis industry does not become consolidated in the hands of a few big companies,” Evans said.


Marijuana Moment is already tracking more than 1,000 cannabis, psychedelics and drug policy bills in state legislatures and Congress this year. Patreon supporters pledging at least $25/month get access to our interactive maps, charts and hearing calendar so they don’t miss any developments.

Learn more about our marijuana bill tracker and become a supporter on Patreon to get access.

A third bill, H.R. 2649, from Rep. Jared Golden (D-ME), would prohibit SBA partners that provide guidance and training services from denying help to businesses solely because of involvement in cannabis. The changes would affect providers such as SBA’s Small Business Development Centers, Women’s Business Centers and the Veterans Business Outreach Centers, among others.

“Our continued economic recovery depends on the health of American small businesses of all kinds. Especially in this environment, no Maine small business owner should be turned away from crucial SBA programs that could help them create jobs and lift up the economy,” said Rep. Golden. “My bill would help address this problem by providing small business owners directly or indirectly associated with the cannabis industry with access to the services and resources they need to get their small businesses off the ground and grow.”

Meanwhile, federal lawmakers have been making headway on other cannabis-related proposals. The House passed a cannabis banking bill on Monday, and broader legislation to legalize cannabis at the federal level is expected to be introduced soon.

The banking legislation would ensure that financial institutions can take on cannabis business clients without facing federal penalties. Fear of sanctions has kept many banks and credit unions from working with the industry, forcing marijuana firms to operate on a cash basis that makes them targets of crime and creates complications for financial regulators. The full House passed the bill on a 321–101 vote.

“Even if you are opposed to the legalization of cannabis, you should support this bill,” sponsor Rep. Ed Perlmutter (D-CO) said on the House floor. “The fact is that people in states and localities across the country are voting to approve some level of cannabis use, and we need these cannabis businesses and employees to have access to checking accounts, payroll accounts, lines of credit, credit cards and more.

Other Democrats, including Senate Majority Leader Chuck Schumer (D-NY), Senate Finance Committee Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ) are working on legislation that would end federal cannabis prohibition completely.

Schumer said last week that the long-awaited proposal would be introduced “shortly” and placed on the floor “soon.” Schumer has so far declined to discuss the bill’s specifics, though he’s stressed that it will prioritize small businesses and people most historically impacted by the drug war.

In an interview with Marijuana Moment this week, Schumer worried that passage of the House banking bill could actually undermine broader congressional cannabis reform this year.

On the House side, Judiciary Chairman Jerrold Nadler (D-NY) said recently that he plans to reintroduced his own legalization bill, the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which cleared the House in a landmark vote last year but did not advance in GOP-controlled the Senate.

Meanwhile, support for legalization among U.S. voters continues to grow. More than 9 in 10 Americans (91 percent) now support legalizing cannabis for either medical or adult use, according to a Pew Research Center poll released on Friday. Sixty percent of respondents said that cannabis should be legal for both medical and adult use. Thirty-one percent said it should be legalized for therapeutic purposes only, while just eight percent said it should continue to be criminalized across the board.

A majority of those in every age, race and political demographic included in the poll said they feel marijuana should be legal in some form, although many Republicans remain wary of adult-use legalization. Seventy-two percent of Democrats favored both medical and adult-use legalization compared to only 47 percent of Republicans.

Among the minority in opposition to federal legalization: President Joe Biden (D). White House Press Secretary Jen Psaki said last month that the president’s position on the issue “has not changed,” meaning he still opposes the reform. on Tuesday, Psaki refused to say whether Biden would sign or veto a cannabis legalization bill if passed by Congress.

The president instead backs modestly rescheduling the plant, decriminalizing possession, legalizing medical cannabis, expunging prior marijuana records and letting states set their own policies.

Read the full text of the new legislation below:

Ensuring Safe Capital Access for All Small Businesses Act of 2021 by Marijuana Moment on Scribd

Ensuring Access to Counseli… by Marijuana Moment

Homegrown Act by Marijuana Moment on Scribd

Schumer Worries Senate Marijuana Banking Vote Could Undermine Broader Legalization Push

 

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Illinois Gets More Tax Revenue From Marijuana Than Alcohol, State Says

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Illinois took in more tax dollars from marijuana than alcohol for the first time last quarter, according to the state Department of Revenue.

From January to March, Illinois generated about $86,537,000 in adult-use marijuana tax revenue, compared to $72,281,000 from liquor sales.

Those following the cannabis market in Illinois might not be entirely surprised, as the state has consistently been reporting record-breaking sales, even amid the pandemic. In March alone, adults spent $109,149,355 on recreational cannabis products—the largest single month of sales since retailers opened shop.

Via Illinois Department of Revenue.

It was in February that monthly cannabis revenues first overtook those from alcohol, a trend that continued into March.

If the trend keeps up, Illinois could see more than $1 billion in adult-use marijuana sales in 2021. Last year, the state sold about $670 million in cannabis and took in $205.4 million in tax revenue.

Officials have emphasized that the tax dollars from all of these sales are being put to good use. For example, the state announced in January that it is distributing $31.5 million in grants funded by marijuana tax dollars to communities that have been disproportionately impacted by the war on drugs.

The funds are part of the state’s Restore, Reinvest, and Renew (R3) program, which was established under Illinois’s adult-use cannabis legalization law. It requires 25 percent of marijuana tax dollars to be put in that fund and used to provide disadvantaged people with services such as legal aid, youth development, community reentry and financial support.

Awarding the new grant money is not all that Illinois is doing to promote social equity and repair the harms of cannabis criminalization. Gov. J.B. Pritzker (D) announced in December that his office had processed more than 500,000 expungements and pardons for people with low-level cannabis convictions on their records.

Relatedly, a state-funded initiative was recently established to help residents with marijuana convictions get legal aid and other services to have their records expunged.

But promoting social equity in the state’s cannabis industry hasn’t been smooth sailing. The state has faced criticism from advocates and lawsuits from marijuana business applicants who feel officials haven’t done enough to ensure diversity among business owners in the industry.

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Colorado Marijuana Sales Reached $167 Million In February

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Colorado’s overall cannabis sales for the first two months of 2021 are $78 million higher than those for January and February of 2020.

By Robert Davis, The Center Square

Total marijuana sales in Colorado reached $167 million in February, the state’s revenue department announced on Friday.

The total represents a $20 million decline in sales from the previous month. However, Colorado’s overall sales for the first two months of 2021 remain $78 million above the pace set between January and February of 2020.

Marijuana sales are calculated by adding the total sales for both medical and recreational marijuana sales in Colorado’s 64 counties.

Denver County led all others in total recreational sales with over $38 million. Arapahoe and Adams counties followed suit with $13 million and $11 million in recreational sales, respectively.

Denver also led the way in medical marijuana sales, bringing in a total of $14 million. El Paso County was a close second, reaping over $10 million in medical sales.

Sales are not automatically accounted for in the state’s accounting system. This means the Department of Revenue (CDOR) relies on each county to report their sales before reporting the total. In effect, marijuana sales are reported one month behind tax and fee revenue totals.

Meanwhile, Colorado collected over $33 million in tax revenue in March. This total represents both taxes levied from medical and recreational marijuana sales, as well as license and application fees.

Between February and March, state tax revenue from marijuana sales declined 4 percent, according to CDOR data.

Tax revenue comes from a 2.9 percent state sales tax on marijuana sold in stores, a 15 percent state retail marijuana sales tax, and a 15 percent state retail marijuana excise tax on wholesale sales or transfers of retail marijuana.

This piece was first published by The Center Square.

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