mattmccarthy78
- Aug 16, 2022
- 3 min read

Understanding the tax system

For the government to run, it needs money, and we can all agree on that. So the government taxes its people and pays for all the jobs within the government. The federal taxes help pay for the president, congress, federal judges, and the military.

Meanwhile, state taxes help pay for local roads and governors. County and city taxes pay for schools, fire trucks, and the police. Then there are payroll taxes; payroll withholdings are taken out of an employee's paycheck every time payroll is run. Within these, there are federal, state, and even local taxes. So the withholding taxes are the employer withholds of a percentage of the employee's income for federal, state, and local taxes.

However, as much as we see the cannabis businesses bloom, it is only their leaves that are blooming because the cannabis businesses are being taxed an insane amount. Cannabis businesses are paying 3.5 times higher tax rates on average than non-cannabis businesses because cannabis businesses are

not allowed to take "normal" tax deductions

such as payroll, rent, and other costs (utilities). The cannabis business re paying an effective tax rate of 70% or higher compared to the neighboring company next door that pays 20%.

The effects are that licensed cannabis businesses can't invest as much in capital improvements or employee raises & benefits, hiring more employees, expanding operations, or giving back to the community. These are only a few of the disadvantages of being a cannabis business. A higher turnover to higher prices. So, how come this unfair tax section was created?

Section 280E of the IRS code reads as following: no deduction shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business (or the activities comprise such trade of business) consists of trafficking's in controlled substances (within the meaning of schedule I and II of the controlled substance act) which is prohibited by federal law or the law of any State in which such trade or business is conducted.

The story began in 1982 when in a tax court case where a dealer reasoned and was able to write off unbelievable expenses (including his telephone, car mileage, and personal entertainment). Shortly after that case, congress then invented a tax code to bar tax deductions for businesses connected to the sale of any schedule I or II substances. The code was supposed to penalize criminal market operators, not state-legal cannabis businesses. However, marijuana still falls under Schedule I Substance, along with heroin, LSD, MDMA, and GHB. So even for licensed cannabis companies, the tax code 280E applies to businesses that comply with state laws and regulations.

There is hope

Reforming section 280E would result in a net increase over the next ten years over federal tax receipts meaning everybody could benefit by reducing the tax percentage on cannabis businesses, including the federal government. The reason is that the green industry is growing in many ways. However, there is a long way to go for cannabis businesses to be treated fairly in the US.