Growing Marijuana Industry Gets a Big Hello from Federal Tax Code 280E

The old aphorism that nothing is certain but birth, death and the federal income tax is striking home in the legal marijuana industry in Colorado and a growing number of other states.

First off, the federal government doesn’t recognize the “legal” aspect of the cannabis trade. Selling marijuana is still very much a federal crime. But the U.S. Supreme Court ruled more than 50 years ago that everyone has to pay income tax – even those who make their money illegally. Same thing the feds told Al Capone.

Then, in 1982, at the height of the “war on drugs,” Congress amended U.S. tax law to include code 280E, which says businesses selling a Schedule I or II drug – including marijuana, heroin, methamphetamine and cocaine – cannot deduct many routine cost-of-sales business expenses, including building rents, utilities, even employee salaries.

All of which means that most marijuana business pay an effective tax rate averaging 70 percent, industry insiders and independent analysts told Rocky Mountain PBS I-News. The I-News report was carried nationally by USA Today and picked up from there by The Washington Post.

Strangely enough, the IRS does allow pot growers to deduct certain cultivation costs, like soil and fertilizer.

“If it made sense, I would feel better about following it,” said Rob Corry, Denver attorney and marijuana advocate. “I don’t see why production is deductible – they are still producing marijuana!”

Up until Oct. 1, however, Colorado shops were required to grow their own product, meaning that the allowable cultivation deductions provided just enough daylight to at least say in business.

However, that requirement went away and nearly 100 new state cannabis companies have since been licensed. Some of those operators will likely be in for a big surprise next April 15, when the first tax bill comes due on the recreational marijuana industry.

 

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