Marijuana Taxation Needs Policies That Add Up

Curated by Daniel Xu

Marijuana businesses face a unique challenge due to the interplay between state legalization and federal tax law. Under Section 280E, businesses that traffic in controlled substances are ineligible for any deductions or credits for amounts paid or incurred in carrying on their trade or business.

Despite widespread state legalization, marijuana remains a federal “controlled substance,” meaning Section 280E applies to businesses that traffic in marijuana. (Though the Drug Enforcement Administration has recommended marijuana be reclassified as a less dangerous drug, the move will take time to implement.)

This denial of deductions alters the income tax into something closer to a gross receipts tax—a tax levied on the total gross revenue of a company, regardless of source, without deductions for expenses or costs. One consequence of this is that an enterprise may owe taxes despite an absence of net profit, placing marijuana businesses in a precarious position.

If Section 280E does convert a tax on income into a tax on gross receipts, there also may be constitutional issues. Although the federal government can tax income without apportionment among the states, that power to tax is limited to “incomes.” Taxes that aren’t on income are subject to apportionment, at least in theory.

Apportionment requires that each state’s share of the tax burden corresponds to its share of the total US population—regardless of the wealth or income of its residents. An apportioned tax would require Congress to set the amount to be raised and divide the burden across the states, based on population. The federal income tax system doesn’t meet this requirement, so the denial of deductions to marijuana businesses could render the tax unconstitutional as applied to those businesses.

Besides that, resolving the inconsistency between state and federal laws is key to principles of federalism and economic fairness—not just the sustainability of the legal marijuana industry. To ensure coherence in tax policy, either Section 280E must be amended or marijuana’s classification must be reconsidered.

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State Insights

AB FinWright’s Abraham Finberg and Simon Menkes review the cannabis excise state tax elimination in Washington, saying medical cardholders and dispensaries have the opportunity to benefit.

Federal Insights

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Stout’s Joel Cohen and Jeffrey Granell share tips for stakeholders to predict insolvency, noting that red flags include credit downgrades and a decrease in cash flow.

Eide Bailly’s Shannon Smith explores risks of moving a foreign business to the US, saying a lack of tax planning can be costly and prevent a successful entry.

Global Insights

Puente Sur’s Ignacio Gepp explains how global tax challenges and opportunities are tying tax pros together, as new technology and a global tax framework require deep common understanding.

Business Development Insights

Goulston & Storrs’s Brian Carrozza, Baker Donelson’s Courtney Hudson, and stage’s Megan Senese explain that lateral partner integration requires firms to provide a business development liaison who will help the new partner with a first-year road map.

Career coach Deb Feder examines business development for women and says that building trust with strong, smaller networks can lead to success.

Consultant David Wood explains law firm succession plans, saying clients are flexing their muscles to influence next-in-line choices.

Career Moves

Elizabeth Atkinson joined Baker Donelson as shareholder in the firm’s offices in Baltimore and Falls Church, Va.

If you’re changing jobs or being promoted, email your submission to TaxMoves@bloombergindustry.com for consideration.

News Roundup

It’s been another busy week in tax news from state capitals to Washington. Here are some stories you might have missed from our Bloomberg Tax news team.

• California would collect nearly $16 billion in additional revenue from corporations under a new plan limiting the use of net operating loss deductions that was folded into Gov. Gavin Newsom’s revised budget proposal.
• Strict education requirements and stagnant pay deter aspiring accountants from joining the profession and staying in it. An industry proposal calls for big changes to fix these problems.
• The Treasury Department and IRS on issued guidance aimed at providing certainty for green energy developers seeking domestic content bonus credits for certain renewable energy projects, removing one of the biggest challenges facing taxpayers seeking the add-ons.
• Apple Inc. received at least $13 million, and probably much more, in tax forgiveness from the city of Chicago after settling a lawsuit that claimed the city’s “Netflix tax” on streaming entertainment violated federal law, newly released documents reveal.

Tax Journals

Tax Management Memorandum

In providing its views regarding a pharmaceutical company’s costs to purchase a “front of the line” FDA voucher, the IRS Chief Counsel’s Office provided insights into the treatment of other non-tax government incentives as well, BDO’s Connie Cunningham and James Atkinson say.

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