Tax Relief

Will 2021 carry a tax break for the federal authorities?

There’s no faster way to make a climb out of a cannabis business owner than mentioning Section 280E, the dreaded Internal Revenue Service tax law that prohibits standard corporate deductions from companies that deal in illicit drugs nationwide – including licensed and strong taxed medical and adult use cannabis surgeries.

Section 280E is by far the single most important factor preventing cannabis from becoming a truly booming industry in the United States, and it has resisted numerous attempts to overthrow what most in the industry consider unduly punitive and anti-business condemn.

Now that cannabis operations have been deemed essential during the pandemic, the optimism weed is being legalized or the schedule is growing. The House of Representatives passed that in December Marihuana Opportunity Reinvestment and Expungement (MORE) Actthat would remove cannabis from the list of government controlled substances. Vice President Kamala Harris and other senior Democrats have expressed support for federal legalization.

But if a pandemic is still in full swing, unemployment rates are sky high, and the treasury is exhausted, politicians will be motivated to respond to 280E or give cannabis companies any other form of action Tax relief in 2021?

Old maid

Even for large corporations that buy in bulk at every point in the supply chain and push margins, making a profit at the retail level has been an elusive goal for most US retailers. The IRS allows a narrow path for tax breaks in A Limited Deduction of Costs of Goods Sold (COGS) below 280E, which has allowed vertically integrated companies to get creative and increase production costs to reduce their overall tax burden. However, strategies like these are a drop in the bucket compared to the usual deductions that all other businesses enjoy, such as rent, salaries, insurance, legal expenses, and travel expenses.

Richard Batenburg did a little bit of everything in the cannabis industry after Colorado pioneered the recreational space in 2014. He is currently Chairman of the Board at Clear Cannabis Inc. One end of the business he’s no longer hungry for is retail, which he said has been hit hardest by 280E. “There’s too much trouble in this segment and they’re really getting hammered,” he said. “If you run a chain of stores and can break even after tax, that’s great. Once 280E is repealed, you have a 35 percent margin deal the next day with no change. “

One might think that removing an onerous, unfair tax rule would be a more popular cause, as the measures would quickly and dramatically stimulate growth and allow businesses large and small to expand their business and hire more people. Unfortunately, both state and federal politicians are likely to adopt a more cynical stance, at least until the economy recovers. Cannabis taxes buffer budget deficits.

The biggest factors driving state legislation to legalize cannabis, be it for medicinal or recreational use, are the tax revenues that flow into the treasury and the jobs that the industry creates. In California alone, the state has generated nearly $ 2 billion in tax revenue since 2018, and Colorado recently passed the $ 1 billion mark. New limit dates The industry is predicted to generate nearly $ 130 billion in additional tax revenue, and more than 1 million jobs have been legalized through cannabis.

At a time when the economy is in its worst shape in decades, with staggering unemployment and a multitude of industries on the verge, it may seem logical to stimulate the cannabis industry, which has great growth potential in the US and internationally. The only problem with this proposal is that government budgets are bleeding from coast to coast and the government deficit is reaching unprecedented levels. Hence, many politicians are unlikely to support postponing or legalizing it until the pandemic is over.

“Colorado can’t live without this tax revenue, and the federal government has been printing $ 100 bills like they’re going out of style for stimulus packages,” Batenburg said. “How are you going to replace this income? Economics is essentially a huge Old Maid game, so it has to come from somewhere. I mean, they’re used to spending money [the money]and they didn’t take it and put it under the mattress. “

See you in court

If 280E wasn’t bad enough on its own, very few companies in the industry can afford the sky-high interest rates banks charge on accounts insured by the Federal Deposit Insurance Corporation. The reason banks have to charge such high interest rates – up to $ 5,000 to $ 10,000 a month on an insured account – is, of course, that the sale of illegal narcotics by their customers requires additional supervision and paperwork.

With one of the highest tax rates, California was ground zero for the fight against 280E. In 2010, Steve DeAngelo and Oaklands port The pharmacy DeAngelo owned at the time challenged 280E in court. The fight continues to this day. In May 2020 Greenspoon martens Lawyer James Mann filed a new appeal in the US Court of Appeals for the Ninth Circuit in San Francisco. There are two arguments: 280E was applied in an unconstitutional manner, which goes against the 16th Amendment, and the IRS and US Treasury Court misinterpreted how COGS should be calculated by cannabis companies.

While the Harborside case sheds bright light on the injustice of 280E, the courts are unlikely to help – which brings us back to Congress and our duly elected officials. Why haven’t the international and multi-state companies that invest heavily in the U.S. cannabis industry launched a meaningful lobbying campaign?

The clock is ticking, and if companies continue to be taxed at exorbitant tax rates, state and federal officials run the risk of kneeling down in an industry geared for growth that could become one of the brightest spots in the US economic recovery.

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