Blumenauer, Lee Urge Treasury to Allow State Legal Cannabis Businesses to Deduct Business Expenses

June 3, 2016
Press Release

Washington, DC – Today, Representatives Earl Blumenauer (OR-03) and Barbara Lee (CA-13) sent a letter to Treasury Secretary Jacob Lew urging the agency to end the application of the Internal Revenue Code Section 280E on marijuana businesses operating in compliance with state law and allow them to take deductions associated with the sale of marijuana like any other legal business.

“Conceived and enacted at the height of the War on Drugs in 1982, § 280E was designed to thwart large drug trafficking organizations by preventing them from taking deductions for ordinary business expenses. Congress did not envision its future application to marijuana businesses caught in between state and federal laws,” the lawmakers wrote. “Yet, because it was written to disallow deductions for anyone trafficking Schedule I or II substances, marijuana dispensaries operating in accordance with state law in 24 states are subject to this provision, and to significantly higher tax rates than other businesses, threatening their financial viability.”

Currently, the federal tax code prohibits anyone selling Schedule I or Schedule II substances from deducting business expenses associated with the sale of marijuana from their taxes. Marijuana is a Schedule I substance. Therefore, even businesses operating in compliance with state law are not allowed to deduct the common expenses of running a small business, such as rent, most utilities and payroll. In certain circumstances, legal marijuana businesses can pay federal income tax rates at nearly 90 percent, while the U.S. Small Business Administration estimates that many small businesses pay an effective rate of around 20 percent.

“While the prohibition in § 280E has been broadly applied to date, an interpretation more in line with public opinion and the policy developments in Congress would tailor a narrower application of the rule, exempting legitimate state legal businesses,” the lawmakers wrote.

Last year, Blumenauer reintroduced the Small Business Tax Equity Act, legislation that would ensure that Section 280E would not apply to state-legal cannabis businesses.

Included below is the full text of the letter sent today. Click here for an electronic version.

 

June 3, 2016

 

Jacob Lew
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
 

Dear Secretary Lew:

 

We write to encourage your agency to undertake a revision in the scope of Internal Revenue Code § 280E and end its application to cannabis businesses operating in compliance with state and local law.

Conceived and enacted at the height of the War on Drugs in 1982, § 280E was designed to thwart large drug trafficking organizations by preventing them from taking deductions for ordinary business expenses. Congress did not envision its future application to marijuana businesses caught in between state and federal laws. Yet, because it was written to disallow deductions for anyone trafficking Schedule I or II substances, marijuana dispensaries operating in accordance with state law in 24 states are subject to this provision, and to significantly higher tax rates than other businesses, threatening their financial viability.

Attitudes toward cannabis are rapidly changing, and more and more states are moving toward legalization of both medical and adult use. Attitudes in the federal government are shifting as well, and Congress has twice passed a provision prohibiting the Department of Justice from interfering with state medical marijuana laws. Additionally, legislation has been introduced, H.R. 1855 in the House and S. 987 in the Senate, that if passed, would ensure that § 280E wouldn’t apply to state-legal cannabis businesses.

While the prohibition in § 280E has been broadly applied to date, an interpretation more in line with public opinion and the policy developments in Congress would tailor a narrower application of the rule, exempting legitimate state legal businesses.

Thank you for your consideration of this request‎.

 

Sincerely,

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