Marijuana advocates in the U.S. House of Representatives believe that the punitive federal tax code that treats state-legalized cannabis stores as criminal enterprise can be reformed, perhaps within the next couple of months.
Internal Revenue Code 280E disallows any business selling Schedule I or II illegal drugs, including marijuana, from deducting routine expenses associated with sales, including advertising, employee salaries and building leases. The result is that many marijuana businesses, legal in Colorado and in a growing number of others states, pay an effective tax rate of more than 70 percent to the federal government.
Rep. Earl Blumenauer, D-Ore., is the sponsor of the Small Business Tax Equity Act, which would exempt state-licensed marijuana businesses from 280E. Congress approved 280E in 1982 as a tactic in the government’s war on drugs.
“Now, with Oregon, Alaska and Washington, D.C., all approving adult use, and momentum increasing around the country for medical marijuana, I think we are in a position to get this enacted,” Blumenauer told Rocky Mountain PBS I-News.
The two states and the District of Columbia on Election Day joined Colorado and Washington state in approving recreational use of marijuana for adults.
Another 23 states also allow the sale of medical marijuana.
In 2014, nine more states, Wisconsin, Utah, North Carolina, Missouri, Mississippi, Minnesota, Kentucky, Iowa and Alabama, passed bills that allow the limited use of cannabis-extract oil for individuals with severe epilepsy, though many of those states do not allow the manufacturing of the product.
But the nationwide movement toward some form of marijuana legalization has not been reflected by Congress. Selling marijuana remains a federal crime.
“Clearly the voters in various states are deciding on this issue and there is a need to resolve the disparity between state and federal law,” said Rep. Ed Perlmutter, D-Colo., in an email to I-News. Perlmutter is a co-sponsor of Blumenauer’s bill and has also proposed his own legislation that would allow marijuana businesses full legal access to banking services.
“As more states vote to legalize some form of marijuana there will be a tipping point,” Perlmutter wrote.
But that tipping point has not yet arrived.
“Certainly, our biggest challenge is the resistance from Congress to doing anything, not just marijuana legislation, but doing anything at all,” said Taylor West, deputy director of the National Cannabis Industry Association. “So it’s hard to say what the odds are, whether it’s likely or not. Blumenauer is a strong advocate, so while we are certainly hopeful, it’s a complicated process.”
Pat Oglesby, tax lawyer and a former chief tax counsel for the Senate Finance Committee, said that a marijuana tax reform bill would need to be a part of a larger piece of legislation in order to get the support needed to pass.
“Let me just say that I used to work for Congress, and anything can happen up there,” Oglesby said. “But they would need two things to make this work: First, a package to move and second, a consensus about marijuana.”
Blumenauer and another co-sponsor, Rep. Dana Rohrabacher, R-Calif., hope the larger piece of legislation might be the Senate Finance Committee’s so-called tax extender package, expected to pass within the next few weeks.
“I think now is the time, the chair of the Senate Finance Committee, his state just overwhelmingly voted to legalize adult use,” Blumenauer said. “If it is included in the extenders package, it would be effective as soon as it is signed into law.”
The “extenders package” is a broad set of tax provisions that apply to individuals and businesses, and it could pass before Jan. 1. However, the outgoing committee chairman isn’t said to favor amending the bill to include marijuana tax reform.
“Our preference is our bill,” said Lindsey Held Bolton, a spokesperson for Sen. Ron Wyden, D-Ore., in an email.
Industry analysts say that if the code doesn’t change many marijuana businesses will face such high taxes on April 2015 that some will be forced to close.
But Blumenauer remains optimistic.
“It’s been literally my entire elected career we have been working on these policies and this has taken a very dramatic turn,” Blumenauer said. “We will have a complete reform of marijuana laws in five years and individual states will be able to treat it like alcohol.”