A commonly romanticized year in American history and pop culture is 1969, but there is one interesting event from that year that history has mostly forgotten. Just one month before the U.S. made history by landing a man on the Moon, the Supreme Court of the United States unanimously ruled the Marihuana Tax Act of 1937 was unconstitutional.
You read that correctly. In 1969, the United States Supreme Court ruled that marijuana prohibition was unconstitutional. Predictably, and regrettably, the U.S. Congress and Nixon administration responded with a constitutionally defensible prohibition scheme. Congress passed the Controlled Substances Act of 1970 (CSA), which established schedules for ranking substances based on their danger and potential for abuse. Although the two most widely used drugs in the country (alcohol and tobacco) were exempted from the CSA entirely, cannabis was “temporarily” placed in Schedule 1, the most restrictive category reserved for those substances deemed to have no medical value and a high potential for abuse.
This was a purely political decision, and the Nixon administration needed scientific cover to justify the move. This cover was supposed to come in the findings of the president’s hand-picked National Commission on Marihuana and Drug Abuse, otherwise known as the Shafer Commission. However, the Shafer Commission threw a wrench into Nixon’s plans in 1972 by releasing results that unambiguously called for the decriminalization of marijuana possession in the United States. Apparently no longer feeling the need for scientific justification, the administration chose to ignore these findings and left cannabis in Schedule 1, where it remains to this day.
Which leads to an interesting question: why on earth would the President of the United States go so far out of his way to criminalize the possession of a plant? A 1994 interview for Harper’s Magazine with John Ehrlichman, Nixon’s Assistant to the President for Domestic Affairs and one of the architects of modern federal cannabis prohibition, provided an equally interesting (and infuriating) answer:
“The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.”
Placement of cannabis in Schedule 1 was meant to demonize and criminalize an otherwise law-abiding segment of the American population for purely political reasons. But “Nixonian” dirty tricks are only one leg of the three-legged stool that props up our modern federal cannabis prohibition.
The second leg came in 1982, when Congress enacted tax code 280E to close the “Edmondson loophole.” Back in the seventies, an industrious Minneapolis drug dealer named Jeffrey Edmondson deducted expenses associated with his business selling marijuana and cocaine from his taxable income, and then successfully defended a portion of the deductions in tax court. Congress responded by drafting Internal Revenue Code 280E, which disallows standard business deductions related to the sale of Schedule 1 (marijuana) or Schedule 2 (cocaine) narcotics.
On the face of it, 280E seems like a reasonable response to a criminal exposing a loophole in our tax code that allowed him to protect ill-gotten gains. However, Congress did not envision that within 14 years of 280E’s passage the individual states would begin to slowly opt-out of cannabis prohibition. Of course, with the passage of California’s Proposition 215 in 1996 that allowed cannabis possession and use with a recommendation from a doctor, the states began to do exactly that.
In another predictable yet regrettable response, President Bill Clinton asked his “drug czar” General Barry McCaffrey to defend the Nixonian federal marijuana policy by putting together a plan “for swift and focused Federal action to preserve the National Drug Control Strategy”. This led directly to a December 20, 1996 memo drafted by the Office of National Drug Control Policy (ONDCP), in which the “drug czar” unveiled his plans to crush the nascent cannabis industry. It is within this memo that the use of 280E as a weapon against the cannabis industry is explicitly spelled out (among many other detestable policy decisions, like the now infamous DEA raids targeting medical providers in California). Here is the relevant section of the memo that relates to 280E:
- Treasury and the Internal Revenue Service will continue the enforcement of existing Federal tax laws which discourage illegal drug activities.
- IRS will continue to enforce existing Federal tax law as it relates to the requirement to report gross income from whatever source derived, including income from activities prohibited under Federal or state law.
- Treasury will recommend that the IRS issue a revenue ruling, to the extent permissible under existing law, that would deny a medical expense deduction from amounts expended for illegal operations or treatments and for drugs, including Schedule I controlled substances, that are illegally procured under Federal or state law.
- IRS will continue to enforce existing Federal tax law as it relates to the disallowance of expenditures in connection with the illegal sale of drugs. To the extent that state laws result in efforts to conduct sales of controlled substances prohibited by Federal law, the IRS will disallow expenditures in connection with such sales to the fullest extent permissible under existing Federal tax law.
And just like that, state-legal and compliant cannabis businesses were not allowed to take any standard business deductions, which remains the case to this day. This saddles any business in the cannabis industry that touches the plant with an effective tax burden of anywhere from 70 – 90% or more. On top of that, seemingly every cannabis business must face continuous 280E audits by the IRS, and any deductions the IRS disapproves of is met with a 20% penalty on top of our already enormous tax burden. Then on top of that, the intense level of state and local compliance that is required of regulated cannabis businesses is costly, ever-shifting, and comes in addition to our enormous tax burden. And that is why cannabis businesses are simply not swimming in the profits that we are often accused of greedily hoarding. Revenue is not profit, and almost all of our revenue goes to the IRS.
But there is this stubborn misperception that legal and compliant cannabis companies are flush with cash. One of more disturbing impacts of this myth is that many of my friends in the cannabis legalization movement have been telling me and anyone else who will listen in the industry that the philanthropists who have traditionally funded the cannabis legalization movement are pulling back. The primary reason that I have heard is they want to focus their giving on other areas of social justice reform, since they feel their generosity helped to create a new group of “cannabis tycoons” that can now fund the legalization efforts moving forward. And that is why I can unequivocally state that the number one obstacle to the end of federal cannabis prohibition is Internal Revenue Code 280E.
To put it simply, there are many cannabis companies that would contribute financially in much more substantial ways to the movement to end cannabis prohibition if we had the funds to do so. The IRS is being used as a weapon to maintain a draconian and failed Nixon-era policy, utilizing tax-code weaponized by the Clinton administration. We in the cannabis industry are intentionally being kept small and poor, it has been going on for 20 years, and it is long past time for this to stop.
When considering the history of modern federal cannabis prohibition and how to untangle the numerous obstacles intentionally placed in our path, there is simply no issue more important for the cannabis industry to devote our efforts and resources to than ending the application of 280E to state-legal cannabis businesses. Cannabis needs to be removed from the CSA entirely, where it was never meant to be in the first place. Once that happens, federal cannabis prohibition will quickly be relegated to the dustbin of history. Where it belongs.