Oregon House Bill 4014 Signed Into Law by Governor Kate Brown

by Larry J. Brant 

As reported in my November 2015 blog post, in accordance with Internal Revenue Code (“Code”) Section 280E, taxpayers (for purposes of computing federal taxable income) are prohibited from deducting expenses related to the production, processing or sale of illegal drugs, including marijuana.

A Bit of Welcome Relief?

Measure 91, officially called the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act, passed by Oregon voters, appears to have alleviated some of the impact of Code Section 280E as it relates to Oregon taxable income. Specifically:

  • Section 71 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our corporate income tax regime. This provision sets forth no specific effective date. So, in accordance with Sections 81 and 82 of Measure 91, it became effective on July 1, 2015.
  • Section 74 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our individual income tax regime. This provision of Measure 91 specifically provides that the change became effective for tax years beginning on or after January 1, 2015.

So, following the passage of Measure 91, were there any Oregon tax problems plaguing the cannibals industry? The short answer is: Maybe.

Measure 91 generally only applies to the recreational marijuana industry. Even though nothing in Measure 91 says Sections 71 and 74 are limited to recreational marijuana, maybe an argument could be made that these provisions did nothing to alleviate the Code Section 280E issue for medical marijuana business activities.

Don’t despair; Oregon lawmakers came to the rescue. The law is now clear (at least as clear as a law can be) that, with respect to the Oregon individual income tax regime, folks in both medical and recreational marijuana businesses may deduct (for Oregon purposes only) expenses that would be otherwise be nondeductible under Code Section 280E.

House Bill 4014 Is Signed Into Law

On March 3, 2016, Oregon Governor Kate Brown signed House Bill 4014 into law. The bill, which spans numerous pages, deals with several issues related to the Oregon cannabis industry, including the application of Code Section 280E to both the recreational and the medical marijuana industries.

The provisions of House Bill 4014 relating to Oregon income taxation are contained in: Sections 28, 28a and 29.

SECTION 28 of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 but for section 280E of the Internal Revenue Code.”

SECTION 28a of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 or 475B.395 or 475B.400 to 475B.525 but for section 280E of the Internal Revenue Code.”

SECTION 29 of House Bill 4014 provides that the amendments to ORS 316.680 by Section 28 apply to conduct occurring on or after July 1, 2015 but before January 1, 2016, and to tax years ending before January 1, 2016. The amendments to ORS 316.680 by section 28a apply to conduct occurring on or after January 1, 2016, and to tax years beginning on or after January 1, 2016.

Implications for the Oregon Cannabis Industry

What this means for the cannabis industry in Oregon is twofold:

  • For Oregon personal income tax purposes only (for tax years beginning on or after July 1, 2015 but before January 1, 2016), the prohibition contained in Code Section 280E does not apply to the non-medical production, processing or sale of marijuana. In other words, a subtraction from Oregon personal income tax is permitted by folks in a recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.
  • For Oregon personal income tax purposes only (for tax years beginning on or after January 1, 2016), the prohibition contained in Code Section 280E does not apply to the production, processing or sale of marijuana (medical and non-medical marijuana).  In other words, on or after January 1 of this year a subtraction from Oregon personal income tax is permitted by folks in bothmedical and recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.

Interestingly, House Bill 4014 does not appear to address the Oregon corporate excise or income tax regimes. Remember, Section 71 of Measure 91 clearly tells us that, after July 1, 2015, Code Section 280E does not apply to the computation of Oregon corporate taxable income.

Why did Oregon lawmakers feel the need to make it clear that Code Section 280E does not apply to the computation of Oregon individual taxable income in the case of both medical and recreational marijuana business activities (as of January 1, 2016), but did not do the same for the computation of Oregon corporate taxable income?

Oregon law clearly contemplates corporations and other entities will be used to operate marijuana related businesses. In fact, both Measure 91 and the Oregon regulations governing the local marijuana industry allow businesses to be organized as corporations (and other entities). The definition of “person” in Measure 91 includes corporations (Section 5(24)), and various parts of the regulations contemplate that marijuana licenses will be issued to corporations and other entities (e.g., OAR 845-025-1045(3).

Was this apparent omission intentional or simply as oversight by Oregon lawmakers? It certainly seems Measure 91 covers (for purposes of Code Section 280E) recreational and medical marijuana activities at both the Oregon corporate and individual income tax levels. Was House Bill 4014 necessary to clarify the elimination of the application of Code Section 280E for Oregon income tax purposes?

It will be interesting to see how the Oregon Department of Revenue interprets House Bill 4014 and Measure 91 in this regard. Time will tell.

An Observation

One interesting observation about Measure 91 is that the clear language eliminating the application of Code Section 280E for Oregon individual and corporate taxation is not expressly limited to marijuana activities. Arguably, it eliminated the application of Code Section 280E for Oregon income tax purposes in all instances (including the sale or distribution of illegal drugs). It appears House Bill 4014 removes that interpretation of the law in the instance of the Oregon individual tax regime as it expressly limits the application to marijuana, but its silence as to the Oregon corporate tax regime leaves that interpretation alive. I hope this was not the legislature’s intent.

City Council To Ponder Early Marijuana Sales

OREGON:  The Salem City Council has two decisions to make about marijuana sales in the city, and members will begin the process Monday, Aug. 31.

The most immediate is whether the city is going to allow or prohibit the “early sales” period beginning on Oct. 1, of recreational marijuana from medical marijuana facilities. A decision that’s made somewhat complicated to both local city code and state law.

In Nov. 2014 Oregon passed Measure 91, which, legalized the recreational sale and use of marijuana in Oregon. And at the end of legislature passed a law that allowed for sales of tax-free recreational marijuana at medical dispensaries to begin Oct. 1 – more than three months ahead of the planned start date of recreational marijuana sales on Jan. 4.

The World Famous Cannabis Cafe To Reopen This Summer

OREGON:  In 2009, The World Famous Cannabis Cafe became the first cafe in the United States for state-authorized medical marijuana cardholders to socialize and safely medicate. Even though the Cafe had a bumpy start in the beginning, it quickly became legendary—it really was world-famous—but after upgrading their Montavilla location, they closed in June 2014 after the city requested costly seismic improvements and new laws eliminated the ability for patients to medicate on location. Now that Measure 91 has passed, and anyone 21 and up will be able to consume marijuana on private property, The World Famous Cannabis Cafe is set to re-open later this summer. The new building will be on Southeast Foster, and founder Madeline Martinez, who was formerly the executive director of Oregon NORML is looking forward to making it the best version yet. “Third time’s a charm,” says Martinez.

For some idea of what to expect, take a tour of the original World Famous Cannabis Cafe:

Legislative Panel Backs Sales Tax For Marijuana

OREGON:  The state lawmakers preparing for Oregon’s legal marijuana program are supporting a sales tax for the drug.

A joint House-Senate committee approved a sales tax of up to 20 percent on Tuesday, setting the stage for a vote in the full House.

The sales tax would replace a tax on growers that was originally approved by voters as part of last year’s Measure 91.

Lawmakers say they’re aiming for a tax rate and method that allows legal marijuana to compete with pot from the black market. Medical marijuana users would not have to pay the tax.

 

 

Oregon Lawmakers Mull Erasing Marijuana Arrests

OREGON:   Lawmakers are mulling over two bills that could erase marijuana arrests or reduce sentences for certain Oregonians ahead of recreational pot becoming legal in July.

If you were cited with a marijuana-related crime that would have sent you to jail under newer laws, you’re likely not going to get a break. However, if you were cited with possession of one ounce of pot or growing four plants in your home, your charges could be dropped because Measure 91 legalizes those acts.

Supporters of the bills say it will free-up law enforcement and cut down court and jail costs.

“We know the costs add up, regardless of what they may be, we know this will save resources, save time and allow people to move on with their lives, for something that 57 percent of Oregonians say should be legal as of July 1,” New Approach Oregon Executive Director Anthony Johnson said.

 

Proposed Pot-Plant Limits Spark Outcry From Medical Marijuana Supporters

OREGON:  Defiant medical marijuana supporters urged lawmakers Monday not to set new limits on their growing operations when the recreational pot market opens this summer.

Patients and growers flocked to the Capitol for a meeting of the Legislature’s Joint Committee on Implementing Measure 91, arguing that proposed restrictions would do little to stem the flow of pot to the black market, as lawmakers contend.

Instead, they said, the limits would create statewide shortages and make it more difficult for legitimate patients to get their medicine.

“It will fall on the most vulnerable patients who are battling poverty, who will lose their grower,” said Anthony Johnson, chief sponsor of the Measure 91 campaign. “I encourage oversight in growing but not to restrict patients’ access.”

 

Oregon Marijuana Hearing Packs Chamber

OREGON:  About 500 residents had differing opinions Tuesday night about what rules state officials should write to regulate recreational marijuana.

They did, however, agree on one thing: Make sure out-of-state interests don’t put out of business the small local growers, processors and retailers whom the Oregon Liquor Control Commission will begin ­licensing next year.

Residents overwhelmingly supported a rule that applicants must be an Oregon resident to receive an OLCC marijuana license. And they cautioned the agency against writing so many rules that it prevents local entrepreneurs from entering the fledging industry.

“Too many rules will kill the family farmer,” one speaker said.

 

Oregon Home Marijuana Possession Limits Are Too High, John Kitzhaber Suggests

OREGON:  Gov. John Kitzhaber expressed concern Tuesday about how much marijuana Oregonians would be allowed to possess at home under the new legalization measure – and he indicated that he might ask legislators to seek lower limits.

The governor, saying he has “many concerns” about the initiative approved by voters, questioned the logic of allowing voters to possess up to a half-pound of marijuana at home but just one ounce in public.

“The amount you can actually grow in a home-grow operation seems to me to exceed the amount that you’re supposed to have legally,” Kitzhaber told reporters. “I don’t know how you enforce that.”

Backers of Measure 91, which was approved by 56 percent of voters at the November election, say they purposely set higher possession limits at home to allow adults to grow marijuana and make concentrates and pot-laced edibles.

Marijuana Legalization: Some Oregon Legislators Interested In Changing Law Approved By Voters

OREGON:  Oregon legislators took their first action Wednesday on the state’s new marijuana law — approving $583,000 to hire state regulators — as several seemed eager to dive in and rewrite sections of the initiative.

Ideas expressed during a legislative Emergency Board meeting ranged from keeping pot stores away from day-care centers to simply abolishing the medical marijuana program and shifting all users to the new retail market.

In the end, legislators may be more cautious about fiddling too much with an initiative that passed with support from 56 percent of voters.

But even the strongest supporters of Measure 91 said they expect the Legislature to pass some kind of bill giving the Oregon Liquor Control Commission further directions on how to regulate the marijuana market when retail sales start in 2016.

Edible Pot, Packaging Concern Lawmakers

OREGON:  Lawmakers asked lots of questions about Oregon’s new legal pot law during last week’s first legislative committee meeting since voters approved Measure 91.

Starting July 1, 2015, adults 21 and older can possess cannabis for personal use. The Oregon Liquor Control Commission will begin accepting applications for retailers in early 2016.

The agency has a lot of work to complete before then, and it was clear during the Nov. 19 hearing that two areas where OLCC employees and lawmakers will focus their attention are marijuana product packaging and regulation of edible products.

OLCC employees presented an outline of issues they have authority to regulate under Measure 91, and anticipated costs and staff needs to begin regulating marijuana.