By Erik Knutson
Mention the price of cannabis at a legal, regulated dispensary to a consumer and be prepared to get an impassioned earful. Mention 280E to a licensed cannabis business operator and also be prepared to get an impassioned earful – and rightfully so! Business owners get it and don’t want customers to pay premium prices. But it is important to understand the implications that are 280E, and more importantly, potential solutions.
These provisions of this federal tax code bar businesses from deducting expenses from income originating from the sale of Schedule 1 and 2 drugs, as defined by the Controlled Substances Act. Cannabis is still considered a Schedule 1 drug at the federal level, so even in states with full legalization, regulated and compliant cannabis companies face outrageously high taxes (typically a rate of 3.5 times higher than other businesses), making it extremely difficult for startups to stay afloat, for established companies to turn a consistent profit and for the legal market as a whole to ensure long term stabilization. More often than not business owners’ struggles with high taxes are passed down to the consumer, with product prices being driven up to luxury item status. Most cannabis products have been designed to be quality yet affordable complements to everyday life and fair prices set by a reasonably taxed business should reflect that.
So, is the federal government any closer to exempting cannabis businesses from 280E or reclassifying cannabis under the Controlled Substances Act? Realistically, not anytime soon. We were dealt a blow over this summer when the Supreme Court opted to not even hear the case challenging the IRS on 280E. In terms of rescheduling cannabis derived from the marijuana plant, that’s a whole other ballgame. The push for rescheduling goes back decades, but remains in a stalemate because there have been no large-scale clinical trials on cannabis, which are typically required to prove to the national government that a drug has medical value. And the paradox is that large-scale clinical trials are difficult to legally implement when a drug is classified as Schedule 1.
But, there is hope that things will get better for the legal medical and adult-use markets; and that may come in the form of the STATES Act. The bipartisan Strengthening the Tenth Amendment Through Entrusting States (STATES) Act introduced by U.S. Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA) would undo 280E in states with legal cannabis markets. These states would be exempted from the Controlled Substances Act and the threat of federal intervention. It’s an essential protective measure for an industry that must constantly navigate the conflicts and contradictions of being illegal on the national level, but highly regulated on state and local levels.
The bill is still idling in the House and being reviewed by a subcommittee. Even if or when the House does pass the STATES Act, it faces a strong challenge in the Republican-controlled Senate. But this crucial legislation can potentially have an increased likelihood of passing if it’s attached to another package of must-pass legislation. And that can happen if industry leaders focus our advocacy on STATES and championing it as a very reasonable, moderate piece of legislation with wide reaching benefits.
We as an industry need to continue our lobbying efforts, staying active and vocal about both passing the STATES Act and about how vicious 280E is for the legal market. We need to continue to make trips to Washington and speak with Congress about the issues. More politicians are coming out in favor of these changes than ever before and I’m confident we will see positive, tangible results on a national level.
There has been some promising news that the tides are turning, specifically in California, where the current personal income tax law is similar to 280E in that it bars cannabis businesses from deducting typical business expenses on their state income taxes. A new bill, Assembly Bill 37, aims to correct that unfair stipulation and was already passed by the California State Senate. The bill being signed into law by the governor would set a strong example – and could pave the way for the passage of other progressive bills on the federal level like the STATES Act.
I’m confident that if we as an industry continue to band together and advocate, things will change and before long, licensed cannabis businesses will not be subjected to 280E. The country is gradually moving towards adopting more measures to legitimize and destigmatize cannabis companies, which will eventually pay off for both producers and consumers.