Business
More states reduce 280E tax burden on cannabis industry
The U.S. cannabis industry is benefiting from long-desired tax relief now that an increasing number of states – 20 so far – have approved laws that exempt, or “decouple,” businesses from Section 280E of the federal tax code.
This spring, legislators in Connecticut, Illinois, New Jersey and New York passed legislation that will allow cannabis companies to deduct business expenses from their state income taxes, despite those companies remaining illegal under federal law.
The savings could be in the millions for some larger operators, depending on the state’s corporate tax rate.
The state-level exemption does not affect the federal taxes owed by marijuana companies, however, and businesses will still not be allowed to deduct expenses toward those federal income taxes.
Section 280E of the IRS tax code prohibits marijuana businesses from taking traditional business deductions because the plant is listed as a Schedule 1 drug under the federal Controlled Substances Act.
According to the Marijuana Policy Project (MPP), a Washington DC-based advocacy group, 16 states where adult-use cannabis is legal have now passed some type of legislation that decouples companies from 280E.
By contrast, Alaska, Arizona, Maine, Nevada and Washington state haven’t exempted the adult-use cannabis industry from 280E, and Rhode Island’s efforts appear to have stalled in a legislative committee, according to Karen O’Keefe, director of state policies at MPP.
Medical marijuana operators in Arkansas, Hawaii, Louisiana, Maine and Washington DC are also exempt from 280E under state tax law.
O’Keefe told MJBizDaily that when states first started implementing licensed marijuana programs, the industry was perceived as a potential cash cow for tax revenue.
But for the first time ever in 2022, states brought in less total tax revenue than they did the previous year, she said.
“There’s been a wake-up call in the last couple of years,” she said, “as it’s become clear in California and some other states that because of the myriad of issues that are largely due to federal prohibition, and in some cases overtaxation and overregulation, that it can actually be really challenging for cannabis businesses – even well-capitalized ones – to be profitable at all.”
Realizing that tax rates were unsustainable and that tax revenue could be reduced even further if companies close, legislators are passing exemptions that allow the sector to operate and deduct business expenses just like any other industry.
Benefits vary from state to state
Corporate tax rates are different in each state.
So depending on where companies are operating, they’ll see different benefits from state exemptions from 280E, Matthew Bergman, a Chicago-based certified public accountant and senior partner at accounting and consulting firm CJBS, told MJBizDaily.
In Nevada, for example, there is no corporate tax.
But in Illinois, which decoupled from 280E in May, the corporate tax rate is 9.5% across the board.
“So if you were now allowed to operate under normal circumstances, you could be saving like a third of your tax burden,” he said.
Joshua Hamlet, an associate in tax at New York-based law firm Akerman, warned in an interview with MJBizDaily that states decoupling from 280E present complicated bookkeeping issues because not all states will apply the same rules.
New Jersey, for example, will allow deductions for both corporate business tax and gross income tax. But other states might not allow deductions for both.
Aaron Miles, the chief investment officer at Chicago-based marijuana multistate operator Verano Holdings, told MJBizDaily he welcomes the shift at the state level.
But he said t’s small businesses and social equity licensees that will benefit the most from tax relief.
Verano has been able to leverage its cash flow for growth, Miles said.
But the chances of success for smaller players without access to banking and capital are hurt even further by overtaxation, he noted.
Ballooning federal tax bills
With operations in 13 states, Verano is also paying a high price in both state and federal income taxes, particularly because of 280E.
But part of the MSO’s strategy is to pay its state income taxes on time but pay its federal income taxes late because the penalty for doing so is at a lower cost than borrowing money.
Miles said the first credit facility he did with Verano came with a 15.25% interest rate – far more expensive than it would have been in other industries.
“When you defer your taxes and you can keep that balance within 12 to 18 months, the penalties and fees that actually accrue are less than what we’d be able to borrow,” he noted.
This year, Verano will pay roughly $100 million in taxes and will not continue to defer, but the company will be carrying a balance of $250 million in taxes owed.
“While you have this kind of glaring income tax payable line item,” Miles said, in reality we’re saving money by going down this path.”
If the prime lending rate – currently at 8.25% – came down, the strategy could change, he added.
But the bigger change industry watchers are hoping for is at the federal level.
The cannabis industry paid an estimated $1.8 billion more in federal taxes than non-cannabis businesses in 2022, according to an analysis by Oregon-based Whitney Economics.
That number is expected to grow to $2.1 billion this year.
Industry insiders and investors are closely watching for any sign of progress from President Joe Biden’s administration, which announced it would review and possibly deschedule or reschedule marijuana.
“We certainly think that cannabis should just be descheduled,” O’Keefe said.
“But if he is going to reschedule, it’s very important that he does it to (Schedule) 3 or lower – not 1 or 2 – because if it was just rescheduled to 2, it wouldn’t fix 280E.”
Source: https://mjbizdaily.com/more-states-reduce-280e-tax-burden-on-marijuana-industry/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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