Everyone needs to pay their fair share of taxes, including the cannabis industry. But there is nothing fair about how the federal government treats cannabis under an outdated provision put into the Internal Revenue Service tax code decades ago. It’s fueling the underground market for weed and reducing the tax revenues the federal government should collect.

Under Section 280E of the code, cannabis businesses are not allowed to take tax deductions on normal business expenses like employee salaries, rent and utility bills because the federal government considers their trade illegal drug trafficking — even where cannabis sales are legal under state law. As a result, the effective federal tax rate for legal cannabis businesses can reach 70% to 90%. No other industry has to operate with this very high tax rate.

Section 280E came into effect during the height of the drug war in the 1980s. A California cocaine dealer was gutsy enough to file his federal tax return with his drug income and expenses listed on it. When the IRS challenged the deductions for his illegal venture, the Tax Court sided with the dealer: There was nothing on the books to prevent him from doing so at the time. Congress and the IRS were outraged and swiftly passed 280E to make sure it would never happen again.

Published: July 15, 2019