Following the repeated failure of Congressional Republican plans to pass healthcare legislation, all eyes on Capitol Hill have turned to a tax reform agenda that President Trump and GOP lawmakers are now pushing.
Some marijuana policy observers believe the overhaul provides an opportunity for cannabis businesses to finally break free from a 1980s provision — known as 280E — that forces them to pay a much higher tax rate than companies in other industries.
WHAT IS 280E?
Enacted in 1982, Section 280E of the Internal Revenue Code states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
While it was initially intended to stop drug cartel leaders from writing off yachts and fancy cars, today its plain language means that that growers, processors and sellers of marijuana — which is still a Schedule I substance under federal law — can’t take business expense deductions that are available to operators in other sectors.
And it doesn’t matter if they are strictly in compliance with state or local policies. Federal law is federal law.
As a result, cannabis businesses often pay an effective tax rate upwards of 65-75 percent, compared with a normal rate of around 15-30 percent.
HOW 280E REFORM COULD HAPPEN THIS YEAR
Over the past several Congresses, standalone bills to amend the provision so that it doesn’t apply to state-legal businesses have earned increasing numbers of cosponsors, but haven’t received hearings or votes.
Now that a broader tax reform package is on the agenda with the support of Congressional leadership and the White House, advocates and industry operators are pushing to attach a 280E fix to the moving vehicle.
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Learn which five GOP House members and three Democrats cannabis businesses need to target with advocacy efforts to win a key committee vote on 280E reform language.
Plus: See which three GOP senators reformers could pick up key votes from.
(Analysis contains 1,200+ words and an embedded spreadsheet tracking lawmakers’ past marijuana votes).
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UPDATE: Neither the House nor the Senate voted on a 280E amendment as part of consideration of tax reform legislation.
With support from the targeted House and Senate members named above, cannabis businesses would succeed in attaching 280E reform language to the tax plan at the committee level before the legislation reaches the floor.
THE LOBBYING PUSH
But they aren’t alone. Powerful conservative anti-tax crusader Grover Norquist is also working on the issue. In an interview earlier this year, he said he has “brought it up with leadership” but hadn’t yet gotten solid indications that House Speaker Paul Ryan or other members are on board with the plan.
But that could change if a significant number of GOP members make it clear that fixing 280E is important enough to them that they’d make their support for the overall bill contingent on it.
“Marijuana could get into that [tax reform] package if some of the libertarian Republicans made that a condition of voting for the whole package,” Norquist said.
Marijuana businesses that could stand to benefit from a 280E fix and want to bolster the campaign would likely do well to focus resources conducting grasstops and grassroots outreach in the districts of those House Ways and Means Committee and Senate Finance Committee members singled out in the section above.
In addition to the tough legislative math in House and Senate committees detailed previously, 280E reform advocates may encounter a bigger problem: The deficit.
While rescinding the provision’s application to state-legal cannabis providers is a matter of basic fairness, it would also, on its face, amount to a large tax cut from current rates for those businesses. And that could be a roadblock to success, as Republicans are already struggling to find ways to pay for broader tax cuts they are proposing in the plan.
While most legalization advocates would gladly agree to a federal sales tax on legal marijuana to make up for the 280E fix, the kinds of broader changes needed to existing drug laws seem far beyond the scope of the tax package.
An even simpler pitfall for 280E reform is that even if it is successfully attached to the broader tax legislation, there is no guarantee that the bill will be enacted. Healthcare reform efforts that GOP leaders put a lot of stake and effort into passing have fallen short on several occasions in recent months. Budget proposals necessary for clearing a legislative path for the tax bill to advance have only very narrowly been approved by the House and Senate, meaning that leadership has very few votes to spare when negotiating the finer points of the legislation.
If reformers aren’t able to earn enough support for a full 280E carveout for cannabis businesses, there are two potential compromise approaches they may consider.
One would be to push for a reform that only protects medical cannabis, and not recreational marijuana, businesses. While that would certainly leave a significant portion of the industry behind, it may be more palatable to certain lawmakers. GOP Sen. Susan Collins or Maine, for example, said during a 2014 committee debate on a marijuana banking amendment that she would have supported the measure if it only protected medical cannabis businesses. But, because of its broader reach, she voted against it.
Similar concerns led to the complete removal of banking language between last year’s version of the comprehensive Senate medical cannabis bill known as the CARERS Act and this year’s introduction of new legislation, according to marijuana lobbyists.
Another potential compromise, floated by former Joint Congressional Committee on Taxation staffer Pat Oglesby would enact a 280E fix but maintain the non-deductibility of marijuana businesses’ advertising expenses. NORML has signed off on the plan.
This will all move fairly quickly. The House bill will be introduced this week, and the Ways and Means Committee is set to begin marking up the legislation on Monday. The Senate will move sometime after that. Lawmakers have said they plan to have a bill on President Trump’s desk by the new year.
The chances of attaching a 280E fix to the broader tax reform plan are non-zero, but broader political factors and whip count math mean that it will be far from an easy task.
A serious, targeted and well-funded lobbying effort aimed at four Republican House members, three Democratic House members and three Republican senators is needed to ensure any chance of success.
Banking Lobby Surveys Members On Problems Serving Marijuana Businesses
The largest group representing U.S. banks is asking its members to share stories demonstrating problems caused by the growing gap between marijuana’s ongoing federally prohibited status and its legalization in an increasing number of states.
In an email announcing the cannabis survey last week, the American Bankers Association (ABA) said that responses will be used by the national organization and its affiliated state bankers associations “to help illustrate to regulators and legislators the need for greater clarity” on the issue.
“[B]anks face significant risks in serving this industry, including criminal and civil penalties as well as bank regulatory action,” the email said, adding that the group wants to “learn more from bankers about how the lack of legal clarity regarding cannabis and banking is impacting banks and their communities.”
While the Treasury Department under the Obama administration released guidance to banks on serving marijuana businesses in 2014—and a steadily growing number of institutions are opening accounts for cannabis growers, processors, retailers and related operations—many financial services providers have remained wary about working with the industry in light of continuing federal criminalization.
“Can you provide an example of a situation where you had to close an existing account, terminate a banking relationship or turn away a potential customer due to their association with marijuana?” the new ABA survey asks. “This could include relationships with mainstream businesses that are not directly related to marijuana, but may generate a portion of their income from marijuana-related businesses (e.g., landlords, security companies, etc.).”
Concerns about federal prohibition have caused a number of banks close accounts for ancillary service providers such as law firms that work with marijuana businesses but don’t actually touch the plant themselves.
ABA, a trade association founded in 1875, is also querying members on whether they have ever seen a customer try to “disguise their affiliation with a marijuana business” and if state or local officials have ever initiated contact “urging you to bank marijuana businesses.”
And the organization wants to know about communications from federal regulators as well, particularly whether their feedback “on how to manage marijuana related accounts” has been “consistent.”
While ABA hasn’t endorsed cannabis reform—the group “takes no position on the moral issues raised by legalizing marijuana,” its website says—it has increasingly focused attention on highlighting financial services issues caused by federal prohibition.
For example, last month the group’s vice president and associate chief counsel for regulatory compliance published a lengthy report outlining what he called the “cannabis conundrum” that bankers in an increasing number of states now face.
And over the summer, the ABA Banking Journal’s podcast featured an interview on the topic with the head of the Colorado Bankers Association.
The banking trade group also asked in the survey whether respondents would offer services to marijuana businesses if the “state/federal conflict is resolved,” and if they are willing to allow their responses to be attributed to them, suggesting that the organization may be preparing public advocacy materials featuring the stories of members that could be used as part of an increased push to amend federal policy.
Legalization advocates say that ABA’s effort to build support for cannabis reform on Capitol Hill will be welcome.
“As more and more states implement regulated markets for the medical or personal use of cannabis, no industry can operate safely, transparently, or effectively without access to banks or other financial institutions,” NORML Political Director Justin Strekal said in an interview. “If the ABA is able to hasten congressional change in federal policy so that these growing number of state-compliant businesses, and their consumers, may operate in a manner that is similar to other legal commercial entities, then it is yet another sign that the end of prohibition is near.”
A number of key Trump administration officials have indicated they want to see a clarity on cannabis banking issues.
For example, Steven Mnuchin, the treasury secretary, has hinted in congressional testimony that he wants state-legal marijuana businesses to be able to store their profits in banks.
“I assure you that we don’t want bags of cash,” he said during an appearance before a House committee in February. “We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”
In a separate hearing he said that resolving the marijuana banking issue is at the “top of the list” of his concerns.
Federal Reserve Chairman Jerome Powell said in June that the disparity between local and national marijuana laws “puts federally chartered banks in a very difficult situation.”
“It would great if that could be clarified,” he said.
And that same month, Federal Deposit Insurance Corporation Chairwoman Jelena McWilliams said that while she directed her staff to consider ways to address the issue, the agency’s hands are “somewhat tied” until federal law changes.
Pressure is also coming from the states. In August, a coalition of the top financial regulators in 13 states sent a letter demanding Congress take action to protect banks that work with marijuana businesses.
Despite the growing call for clarity on the issue, key committees in the House and Senate rejected amendments this summer that would have prevented federal banking regulators from punishing financial institutions for serving the marijuana industry.
Standalone legislation to provide permanent protections to banks that work with cannabis businesses have garnered increasing numbers of cosponsors in both chambers, but haven’t been scheduled for hearings or votes.
Canada’s Liquor Stores Will Heavily Outnumber Marijuana Stores On Legalization’s Launch
In case you missed it, Canada’s legal marijuana system goes into effect next week. But new data reveals that access to liquor stores is going to be far greater than planned cannabis store—at least for the time being.
Statistics Canada, a government agency, released the report, which compares the prevalence of liquor stores and planned cannabis stores in each Canadian province, on Wednesday. The team behind the report notes that information about pending private or government-run marijuana shops is incomplete—excepting online retailers, for example.
“Using the agency’s geographic databases, the location of each Canadian household is identified, and the distance from that location to the nearest legal retail outlet is calculated. Averages of these distances are then calculated to determine how generally accessible these products are to Canadians.”
The top-level takeaway is pretty straightforward. Ninety percent of Canadians currently live within 10km (or about six miles) of a liquor store. Only 35 percent of the Canadian population lives within the same distance of a planned cannabis store. Visualized, here’s a look at the access to cannabis and liquor stores based on population density in each province:
Access to liquor stores by province
Population of Canadians with access to a liquor store based on distance.
|1 km||2 km||5 km||10 km||More than 10 km|
|Newfoundland and Labrador||84,776||158,242||265,484||321,357|
|Prince Edward Island||20,498||38,328||77,954||107,592|
Access to planned cannabis stores by province
Population of Canadians with access to a planned cannabis store based on distance.
|1 km||2 km||5 km||10 km||More than 10 km|
|Newfoundland and Labrador||51,424||141,076||274,922||336,714|
|Prince Edward Island||6,907||29,616||59,576||82,626|
“Canadians have remarkably good access to liquor stores all across the country with 90 percent living within 10 kilometers of a store,” the report states. “Not surprisingly, their access to cannabis stores immediately after legalization on October 17, 2018 is likely to be much more restricted with only 35 percent of the population dwelling within 10 kilometers of a store.”
“It is emphasized this is a preliminary estimate based on less-than-full information about the number of stores expected to open and their locations. Cannabis accessibility will undoubtedly increase substantially in 2019 and 2020.”
For a comprehensive breakdown on the differences in marijuana legalization implementation for each province, check out this Marijuana Moment analysis.
Photo courtesy of Brian Shamblen.
Marijuana Stores Will Be Hard To Find For Most Canadians On Day One Of Legalization
One week from today, Canadian adults will be able to purchase marijuana legally across the country. But the number of stores per province and per capita at this point varies widely, an analysis Marijuana Moment conducted shows.
For residents of Canada’s most and least populous provinces, Ontario and Nunavut, respectively, online ordering will be their only means of legal purchase for the foreseeable future. British Columbia, the third-biggest province in the country with 4.8 million residents, has licensed only one store. Meanwhile, Northwest Territories, with only 44,520 residents, will open six government-run stores, or one per 7,420 residents.
(Note: British Columbia omitted for scale, as it has only one store for 4.8 million residents. Ontario and Nunavut will be online sales only on October 17. Population 2017 per Statistics Canada)
While many of even these preliminary licensed locations will not be operational October 17, by federal law, each province must provide an online purchasing system.
And the provinces have committed to opening more physical stores. Manitoba has set a goal that 90 percent of Manitobans have a 30-minute drive or less to a cannabis store. Ontario was supposed to have 40 stores run through the province by now, but when the new provincial government came into power in June, they decided that cannabis stores will be privately owned, so legislators had to go back to the drawing board on regulations.
Alberta hasn’t set a limit for the overall number of private stores in the province, but each locality will be allowed to set a limit for their area. Hundreds of companies have applied to be retailers.
Each province has set up its own rules and regulations regarding minimum age for sales, possession limits and whether residents can grow plants at home.
As with alcohol, the age at which Canadians can purchase cannabis is lower than in the United States. In Quebec and Alberta, 18 year-olds will be able to purchase adult-use marijuana. In every other province, the legal age will be 19. By contrast, in the U.S., every state that has legalized recreational marijuana to date has set the legal age at 21, which is also the legal drinking age in the states.
In most provinces, four plants can be grown in a household. Quebec and Manitoba are prohibiting home growing; Nunavut is not prohibiting personal growing, but has not defined a limit. New Brunswick has specified conditions to allow plants to be grown outdoors (a locked enclosure 1.52 meters high). British Columbia has specified that home plants must not be visible to the public, and won’t be allowed in day-care homes.
The national standard for purchase and public possession for adults is 30 grams of product of any kind. Quebec has set a limit on household possession at 150 grams, but other provinces have not set limits on how much cannabis can be kept in a private home.
What will make up those 30 grams? Flower, oils and, in provinces that are allowing home growing, seeds and plants. The federal legislation prohibits edibles and concentrates at this time.
Public use of cannabis is the policy that varies the most widely from province to province. Most provinces have adopted the stance that smoking or vaping marijuana will be illegal anywhere smoking or vaping tobacco is not allowed. Saskatchewan, Manitoba, New Brunswick and Yukon have banned public use (the regulations of the latter two specify backyard use as well as homes). Alberta and Nunavut have left it up to local governments to set regulations. Ontario and Quebec have set specific locations where it will be illegal to consume, including parks, public spaces and bus shelters.
Every province has passed legislation of some form banning cannabis for drivers in vehicles, but legal limits will differ from province to province. Quebec has adopted a “zero tolerance” policy for all drivers, while Ontario is setting zero tolerance for drivers under 21 years of age as well as commercial drivers. Other provinces are developing systems for how driving while impaired will be determined.
With retail stores spare in Ontario and British Columbia, perhaps Regina, Saskatchewan will become the tourist destination of choice for Americans thinking about crossing the border to experience legalization in their northern backyard. Those tourists should be sure to empty their pockets and car before returning to the United States, as the U.S. Customs and Border Protection has promised to crack down on Canadians and U.S. citizens alike.
Photo courtesy of Christopher Policarpio.