Business

Cannabis advocates urge lawmakers to tackle tax provision

by Niv Elis - 05/28/18 8:00 AM ET

Representatives of the cannabis industry are ramping up their lobbying efforts on Capitol Hill, urging lawmakers to take action on taxes that affect their industry.

The main request in meetings with members of Congress this week: overturning a regulation that prevents legal cannabis companies, in particular, from deducting operating expenses.

Members of the industry have been disappointed that the GOP tax overhaul passed in December did not clear away the regulation. And while many don’t expect legislative action this year, given the fall midterm elections, industry advocates are holding out hope for Democratic-sponsored bills that could see movement in 2019.

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“Right now, cannabis is emerging at the fastest growing industry in America, and these are brand new jobs,” said Keegan Peterson, whose company Wurk helps cannabis businesses comply with various regulations. “The ability of the industry to grow and provide medicines to the people who need them depends [on] good tax laws.”

In terms of taxes, the main legislation the cannabis industry is supporting is the Small Business Tax Equity Act. The legislation targets a line in the tax code, put in place in 1982, that prohibits businesses from deducting a broad array of expenses if they are “trafficking in controlled substances.”

That means that companies operating legally in states that allow recreational or medicinal marijuana get stuck with a far higher federal tax bill than other businesses.

“Legal marijuana businesses should have the same tax treatment as any other business. Unfortunately, our outdated tax code penalizes marijuana businesses for complying with the law,” said Sen. Ron Wyden (D-Ore.), the lead sponsor of the Senate’s version of the bill.

Industry representatives are hopeful for action. In three days of lobbying this week, members of the National Cannabis Industry Association met with an eclectic group of lawmakers. They’ve found allies in offices including Wyden, Sen. Rand Paul (R-Ky.), Rep. Carlos Curbelo (R-Fla.) and Rep. David Joyce (R-Ohio), among others.

“Bottom line is this: There’s a natural alliance between liberal Democrats and libertarian Republicans on this issue,” said Tom Adams, managing director of the Investment Research Division of BDS Analytics, which produces market trend reports for the cannabis industry.

Curbelo, who introduced the House version of the bill, has argued that the tax burden ends up being a boon to illegal drug operators, giving them a cost advantage over legal sellers.

“Current federal law also prohibits these businesses from deducting the common expenses associated with running a small business when they file their taxes — expenses necessary to running a business like rent, most utilities and payroll,” Curbelo said on the House floor earlier this year.

“Simply put, this rule places legitimate enterprises, which have been established under state law, at a major competitive disadvantage,” he continued.

Broadly, cannabis businesses can’t deduct operating costs, though they are able to deduct expenses related to the cost of the goods themselves.

“They ruled, oddly, that you can deduct the cost of the illegal product, but not your operating expenses. That seems to be exactly backwards,” said Adams.

According to Adams, a straightforward reading of the law would stick average cannabis retailers with a federal tax bill of 23 percent of revenues, which is higher than the 18 percent in revenue that firms take home in profit on average.

But cannabis businesses have ways of trying to skirt the law, cordoning off portions of the business that don’t deal directly with the product in order to classify their operating expenses differently.

“What retailers are generally doing is adopting a practice called absorption, in which you absorb as much of your operation into your cost of goods, or as much as you can get away with,” Adams said.

That strategy helps bring the average bill down to 17 percent of revenues. Repealing the particular line of the tax code altogether and allowing companies to fully deduct their operations, however, would slash their federal tax bill to just 6 percent of revenues.

But doing so would also mean less money in the Treasury. In 2017, the cannabis industry took in $8.6 billion revenues, meaning that eliminating the rule would vaporize almost $1 billion in tax revenue.

Peterson argued that the move would help the industry flourish, however, creating new jobs and reducing the fiscal impact.

“Yes, there is a disincentive because the government is getting to tax more. On the flipside, these businesses can’t stick around forever with this level of tax, so if we don’t make it easier for them to do their business, they’re going to go away,” he said.

Tags Carlos Curbelo David Joyce Rand Paul Ron Wyden