Cannabis Companies and the Marijuana Tax: It’s Not Easy Being Green

Legal Cannabis Companies are Under Pressure

The cannabis industry sits at an awkward legal crossroads, with only some states willing to embrace it. In addition, a brutal onslaught of taxation and restrictions has muddied the road forward for vulnerable cannabis companies trying to find their footing.

The situation has been so bad that many legitimate businesses retreated to the black market to survive, causing more problems Hope is on the horizon, but in the meantime, only the savviest operators can successfully navigate the industry’s financial quagmire.

Marijuana Taxes and the Illicit Market

The massive pressure on legal dispensaries comes from all sides, but the most prominent sources are state taxes and federal restrictions. In states where cannabis has been legalized, business owners need to worry about cultivation tax, sales tax, distribution tax, and local city tax structures, often adding up to more than half of what they make from sales.

In California, the excise tax on recreational marijuana alone is 15%, and that’s on the low end for the industry. It’s even higher in other states, with Oregon at 17%, Virginia at 21%, Nevada at 25%, and Washington at 37%.

Add on local and state licenses, resulting in a substantial financial burden that makes profitability impossible for many cannabis companies. This has the direct effect of chasing businesses into the black market, from coast to coast, with illicit marijuana sales thriving in the shadow of over-regulated legal operations.

In California, it was recently estimated that over 66% of cannabis sales come from the illicit market, according to Cal Matters, a California nonprofit news organization. In New York, in June 2023 alone, Governor Kathy Hochul reported seizing more than 1,000 pounds of illicit cannabis valued at over $10 million.

The Dangers of Driving Business to the Illicit Market

This is disastrous for many reasons, certainly not the least of which are the dangers posed by illicit sales. In the rash of vaping-related deaths in recent years, all reported cases involved unregulated cannabis and cannabinoids from illicit sales. According to the Centers for Disease Control and Prevention (CDC), illegal vaping products contain the additive Vitamin E Acetate, which causes lung inflammation, irreversible damage, and in some cases, death.

Consumers utilizing the black market are wide open to pesticides, bacteria, and other threats that can all too easily infiltrate their vape pens.

Despite legal cannabis being regulated, and verified as safer and more reliable, governments are not doing enough to enable these businesses to exist, much less thrive.

What is Section 280E?

Things aren’t any friendlier on the federal level, of course. Cannabis companies are trapped under the yoke of Section 280E, which forbids businesses from deducting regular expenses from gross income tied to Schedule I or II substances such as cannabis. Because of 280E, cannabis business owners cannot utilize the vast majority of deductions that would help any other business stay afloat.

Under the current code, dispensary operators can only deduct what they pay for their product, not the commonly deducted expenses afforded to most other areas of the economy, such as payroll, rent, and electricity. According to The National Cannabis Industry Association, 280E and strict, industry-specific regulations are crippling cannabis businesses.

With current rules and regulations, the need for keeping accurate books and records is greater for cannabis businesses than in any other industry. Having an industry-savvy CPA who fully understands matters like inventoriable costs can make the difference between staying afloat and going under.

However, there is hope for these struggling businesses, and those who make it through today’s tribulations may be rewarded tomorrow.

Renewed Hope: Marijuana’s Potential Reclassification

In recent years, two significant pieces of legislation tried working their way through Congress, the STATES Act and the SAFE Banking Act (H.R. 1595), offering hope of a much more sensible landscape for cannabis businesses. Together, they would have effectively dispelled the effects of 280E, lifting an onerous burden from the shoulders of cannabis business owners nationwide.

Unfortunately, neither bill found success in making it into law.

The STATES Act has been reconfigured and renamed several times, but as of September 2023, it is seeing a new light. The most recent incarnation, supported by the U.S. Department of Health and Human Services, seeks to reschedule cannabis from a Schedule I drug to a Schedule III drug, which would change how it is treated — and taxed, according to an Associated Press article.

Because of the potential of this reclassification, the SAFE Banking Act (Secure and Fair Enforcement Banking Act), which has hit several walls over the years, is being seriously reconsidered. According to The Hill, the bipartisan-backed bill would give federally regulated banks and credit unions the legal safety net to take on cannabis growers and dispensaries as customers.

There Is More Work to Be Done to Help Cannabis Businesses

While removing 280E would enormously simplify matters for cannabis companies, there is still the matter of overwhelming marijuana taxes, which is ultimately a state issue.

Thankfully, there are promising talks happening on this front as well. For example, California has tax break opportunities in the form of research and development (R&D) and employment training panel (ETP) tax credits.

California Gov. Gavin Newsom merged several regulatory agencies into a unified Department of Cannabis Control in July 2021 to streamline marijuana licensing, regulation, and tax collections. If other states follow California’s lead, as many often do, it could mean greatly improved feasibility for businesses across the industry.

Of course, a great deal of work remains to be done even if all of these stars align, not the least of which is the tricky subject of interstate trade. It won’t be easy, but with some financial know-how and careful planning, cannabis companies that stick with this industry long enough to see it evolve will undoubtedly find greener pastures awaiting them in the coming years.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Cannabis Basics 101 
2. Cannabis Investment: Successes, Failures, and Strategies for the Future 
3. The Very Basics: Forming the Business

This is an updated version of an article originally published on February 13, 2020.]

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