Feds Propose 50% Marijuana Tax—As A Tax Cut

DISTRICT OF COLUMBIA:  Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question. After all, virtually every business in every country pays tax on net profits, after expenses. But the topsy-turvy rules for marijuana seem to defy logic. And taxes are clearly a big topic these days.

Many have suggested that legalizing marijuana would mean huge tax revenues. As more states legalize it, the cash hauls look ever more alluring. In Colorado, the governor’s office estimated that it would collect $100 million in taxes from the first year of recreational marijuana. In the end, Colorado’s 2014 tax haul for recreational marijuana was $44 million, causing some to say that Colorado’s marijuana money is going up in smoke.

Still, that isn’t bad for the first year. Colorado was first to regulate marijuana production and sale, so other governments are watching. Colorado also collected sales tax on medical marijuana and various fees, for a total of about $76 million. The taxes are significant, but not all the sales are going through legal channels. Perhaps it was silly to think they would.

The Federal Government Is Taxing Marijuana Businesses To Death

DISTRICT OF COLUMBIA:  Voters in four states and Washington, DC, have approved marijuana legalization. But the drug remains illegal under federal law, creating all sorts of legal hurdles that state-legal marijuana businesses have to overcome.

One of those hurdles is federal taxes. Due to a section of the tax code known as 280E, many state-legal marijuana businesses have to pay taxes on their expenses — unlike other legal businesses, which are allowed to deduct them. For some businesses, this can drive their effective tax rates to 70 to 85 percent of their profits, which is enough to force many shops and growers out of business.

“It’s basically a dagger at the throat of the entire legal cannabis industry,” said Steve DeAngelo, co-founder of California-based medical marijuana dispensary Harborside Health Center.

Section 280E was originally passed in 1982 to prevent drug dealers from deducting expenses related to the trafficking of schedule 1 or 2 substances, including marijuana, from their federal taxes. It was in part inspired by a Minneapolis drug dealer who ran up deductions for expenses related to his dealing, including the cost of gas, trips to other cities, and even rent on his apartment, which he classified as his place of business.