Whether you’re the kind of person who wants to End the Fed, or the kind of person who wants to tax the rich like a Scandinavian nation, you’ll probably agree on one thing: cannabis taxation is a problem. And it’s not just a small one. It’s theft. If I (or basically anyone else) had to pick one reason why the industry is in freefall, it’s taxation.
The ultimate cannabis tax trap: 280E
Let’s start on the federal side. The Internal Revenue Code, Section 280E, prohibits cannabis businesses from deducting almost anything. IRS clarified, a few decades ago, that cannabis companies can deduct goods sold costs. But that’s it. So cannabis businesses are ineligible for the vast majority of standard deductions available to businesses that sell alcohol, tobacco, opioids (so long as they’re legally prescribed of course), and a whole other slew of things that are objectively more harmful than cannabis.
It’s also worth noting that intoxicating hemp compounds aren’t subject to 280E, since hemp isn’t a controlled substance. The vast illegal market also does not fall under 280E. Those businesses – which sell materially competitive products – pay less in taxes and can pass those savings to consumers. They have a huge competitive advantage.
