As the cannabis industry’s continued growth poses challenges and opportunities throughout the country, Congress is uniquely positioned to provide a practical solution to bolster the industry’s future success. While federal legalization of adult-use cannabis remains the long-term priority, Congressman Earl Blumenauer (D-OR) has championed various efforts providing much-needed immediate relief for the industry, and recent news of his Congressional retirement at the end of 2024 will mean the loss of one of the most ardent supporters of America’s cannabis industry inside the halls of Congress.
Throughout his career in Washington, Congressman Blumenauer’s been at the forefront of seeking to reform our nation’s archaic marijuana policy, culminating in President Biden’s signing of his Medical Marijuana and Cannabidiol Research Expansion Act during the 117th Congress.
Congressman Blumenauer’s legacy as a champion of America’s adult-use cannabis industry is not in question. But he has the opportunity to go out on a high note with the Small Business Tax Equity Act.
This is bipartisan legislation is cosponsored by Representatives Danny Davis (D-IL), Dwight Evans (D-PA), Val Hoyle (D-OR), Dave Joyce (R-OH), Barbara Lee (D-CA), Dean Phillips (D-MN), Nancy Mace (R-SC), Brian Mast (R-FL), Jim McGovern (D-MA) and Del. Eleanor Holmes Norton (D-DC-AL). It would have tremendous implications for adult-use cannabis should it pass Congress and be signed into law before his retirement.
Under Section 280E of the Internal Revenue Code, businesses are forbidden from deducting otherwise ordinary expenses from gross income associated with Schedule I or II substances, such as cannabis. The Small Business Tax Equity Act would change this, providing an exception allowing businesses operating in compliance with state laws to take business-related tax deductions associated with the sale of cannabis. In total, 38 states have legalized cannabis to some degree, and the current provisions of Section 280E have caused significant financial burdens for businesses in many of them.
The Biden administration is recommending changing cannabis’ status as a Schedule I drug, but the current landscape subjects the adult-use cannabis market to the financial restrictions of Section 280E. The Controlled Substances Act (CSA), which determines drug classifications, was enacted by Congress in the 1980s to target the illicit market and prevent illegal actors from benefiting from tax deductions. However, the CSA and the provisions of 280E have combined to severely hinder the adult-use market today, handcuffing its ability to take advantage of tax deductions for economic expenses incurred in the ordinary course of business.
This contemporary regulatory framework has left adult-use cannabis businesses with tax liabilities of up to 70% of their income, resulting in nearly two billion dollars in excess taxes in 2022 alone. Moreover, Section 280E has increased scrutiny on innocuous business expenses, such as employee salaries, utility costs, and marketing and advertising costs. In addition, Section 280E has a comprehensive effect on all businesses involved in the adult-use market, meaning everyone from cultivators to medical dispensaries and manufacturers feel the financial pressures of Section 280E.
Tahir Johnson, the Founder and CEO of Simply Pure Trenton, a Black-owned social equity licensee in New Jersey, knows firsthand how challenging 280E can be for cannabis businesses. Johnson is currently a Board Member at the Minority Cannabis Business Association, previously served as Director of Social Equity and Inclusion at the U.S. Cannabis Council and at the Marijuana Policy Project, and was the Manager of Diversity Equity and Inclusion at the National Cannabis Industry Association.
“I’ve directly faced the financial hurdles that Section 280E of the Internal Revenue Code places on cannabis businesses,” said Johnson. “This provision prevents us from utilizing standard business deductions, creating a significant financial challenge. The Small Business Tax Equity Act is a pivotal change. It seeks to amend Section 280E, enabling vital deductions and alleviating the undue burden that has stifled growth and innovation. This legislation isn’t just tax reform, it’s a crucial step toward equity, allowing entrepreneurs like myself to reinvest and prosper. It heralds a more equitable and sustainable future for the cannabis industry.”
While section 280E does include a provision allowing adult-use cannabis businesses to deduct their cost of goods sold, its overall framework has made it so that less than 25% of adult-use cannabis operators are profitable.
The Small Business Tax Equity Act will level the playing field between the adult-use cannabis market and all other regulated businesses. This bill will not only eliminate undue financial burdens on legal cannabis, but would also make it competitive with other industries that pay federal income tax at a standard rate of 15-30% of their income after expenses. The disproportionate tax burden 280E levies on cannabis businesses can put small dispensaries out of business and prevents other small businesses from entering the market altogether.
There are few, if any lawmakers who have done more for the emerging cannabis industry than Congressman Blumenauer, who has served as a much-needed advocate for the industry in Washington. The future shows tremendous potential for public health and economic benefits across the United States, and we owe that future in no small part to the work of a member who will soon no longer be there to be a voice of reason.
Congressman Blumenauer’s Small Business Tax Equity Act is not a silver bullet for resolving all challenges in the cannabis industry, but its provisions will rectify the financial burdens of 280E. The passage of this bill could help cement the legacy of a great champion for the adult-use cannabis industry and allow Congressman Blumenauer to leave knowing the industry’s future is in a better place thanks to his efforts.
