The most critical tax issue facing the cannabis industry relates to the deductions of business expenses. Code Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances. Marijuana remains a Schedule I controlled substance under federal law. The result is to effectively make the income tax on a marijuana business a tax on gross income rather than net income, a considerable burden to a marijuana business.
There is an exception under the legislative history of Code Sec. 280E for cost of goods sold. Some marijuana businesses could try to allocate as much expense as possible to inventory to preserve their deduction. For example, the expenses related to producing and storing marijuana could be allocated to inventory. Since for most businesses there is an interest in deducting expenses, rather than allocating them to inventory, most of the IRS guidance is focused on restricting expenses. There are relatively few restrictions on voluntarily allocating more expenses to inventory than are required.
The reality is that, although there may be areas of the tax code that can potentially be challenged in court, because of the increased degree of scrutiny the cannabis industry is subjected to, few business owners will be willing to mount such legal challenges.
Therefore, NCDA encourages Congress to modify the tax code to allow business participating in the cannabis industry deductions like any other business. The domestic cannabis industry is poised to develop into a forty-plus billion dollar market. Comprehensively reducing the tax rate would level the playing field for all U.S. businesses, regardless of how they are structured.
Federal Excise Taxes
NCDA supports the concept for a federal excise tax for qualified cannabis activities. A federal excise tax on cannabis industry activity would level the playing field for cannabis distributors and ancillary parts of the industry. The excise tax rate must be thoughtfully established, taking into consideration the varied production volumes and sector activities. While much of this is constantly changing because the industry is still developing, the tax code must be flexible enough to accommodate every aspect of the rapidly changing cannabis industry.
Concurrent with the excise tax should be a change in the tax code that allows for regular business deductions for cannabis related businesses.
Medical Expense Deduction
For the individual utilizing marijuana for medical purposes, the federal law treatment of marijuana also creates problems for the medical expense deduction. Revenue Ruling 97-9 determined that amounts paid for marijuana for medicinal use are not deductible, even if permitted under state law, since they were not legally procured under federal law. A similar analysis would probably apply to health flexible spending accounts, health savings accounts, health reimbursement accounts, and Archer Medical Savings Accounts.
Alcohol Tax and Trade Bureau (TTB)
NCDA supports (with provisions) full funding of the Alcohol and Tobacco Tax and Trade Bureau (TTB), which is part of the U.S. Department of Treasury. Full funding of the proposed budget will ensure that TTB can effectively regulate the cannabis industry in conjunction with the states.
The TTB is the most efficient tax collection agency in the federal government. It collects $487 for every $1 spent. By comparison, the Internal Revenue Service collects $244 for every $1 spent.