A leading marijuana industry association has released a report calling on Congress to treat cannabis businesses like other lawful industries by allowing them to take federal tax deductions—and also to apply that policy retroactively to provide relief for past payments.
The report from the National Cannabis Industry Association (NCIA) and a coalition of stakeholders states that “no industry understands the pain of taxes as acutely as the state-regulated cannabis industry which currently pays draconian tax rates as a result of the unforeseen consequences of” an Internal Revenue Service (IRS) code known as 280E.
That code precludes even state-licensed marijuana businesses from taking federal deductions for their expenses because cannabis remains a Schedule I drug under the Controlled Substances Act (CSA).
“This provision is a punitive poison pill that threatens every business in these state-regulated markets, but poses a particular threat to small businesses that have responded to the will of voters,” the report says. “Picture the medical dispensary serving veterans with an alternative to deadly opioids or providing comfort to cancer patients in your community: those businesses cannot survive without action to repeal §280E and, crucially, retroactive relief.”
NCIA says the costs of the IRS policy for the cannabis sector are “staggering,” with marijuana businesses paying an effective tax rate of more than 70 percent. That rate “is economically prohibitive, unsustainable, and counter-intuitive,” it says.
“In the cruelest of ironies, the failure to include retroactive relief for state-regulated cannabis businesses will fall primarily on two groups: small cannabis businesses located in early legalization states and equity-owned businesses provided state-licensing priority specifically because of injuries suffered as a result of cannabis prohibition.”
Notably, NCIA stressed that tax relief for the marijuana industry should be applied retroactively. Without that stipulation, the association said “taxes will continue to result in the closure and consolidation of many state-regulated small businesses.”
“Beyond having negative economic impacts, inaction will also harm public health by forcing consumers back to the untaxed, untested, and unregulated illicit market,” it said.
“Omitting retroactive relief from §280E reform would create an unequal playing field favoring illicit market actors and new entrants, while penalizing those entrepreneurs who responded to the will of the voters and led this movement. This position is impossible, and becomes increasingly so the longer an operator faces these de facto penalties.”
To address the issue, NCIA and other businesses that signed on to the report—including Weedmaps, FundCanna, Fox Rothschild and more—said Congress “must urgently amend the tax code to exempt state-licensed businesses from §280E but should also include a retroactive tax credit in order to preserve the legal cannabis market and foster the success of small businesses.”
“The solution is simple: Congress should provide retroactive relief in the form of a refundable tax credit on the next tax filing for state-regulated cannabis businesses equal to tax incurred as a result of §280E,” it said. “In an industry composed mostly of independent entrepreneurs and small operators, this tax credit would primarily support businesses meeting the preexisting federal definition of a small business.”
“NCIA’s proposal would only carve out state-licensed and regulated cannabis activity from the penalty mechanism of §280E,” the report said. “Accordingly, it would not impact §280E’s application to other controlled substances or even illicit market sales of cannabis in the present.”
“Americans have increasingly rejected the failed policies of cannabis prohibition, first through ballot initiatives, followed by state-level legislative reforms, and now with growing momentum at the federal level. It’s time for Congress to stop taxing compliance like crime and level the playing field for cannabis operators; otherwise, the small businesses that built this regulated industry will not survive.”
Meanwhile, in June a U.S. district court ruled that the IRS 280E policy prevents state-legal cannabis companies from being eligible for refunds of employee retention credits (ERCs), which helped businesses continue to pay workers during early COVID-era shutdowns.
Separately, late last year IRS warned the marijuana industry that some cannabis companies had, without a “reasonable basis,” filled out a supplementary form in an attempt to take federal tax deductions that they’re prohibited from receiving under 280E.
In that notice, IRS said certain firms were attempting to circumvent the federal ban by completing the disclosure statement Form 8275. That form is “used by taxpayers and tax return preparers to disclose items or positions, except those taken contrary to a regulation, that are not otherwise correctly disclosed on a tax return in order to avoid certain penalties,” the agency said.
State-licensed cannabis businesses could be able to start taking broader federal tax deductions if the push to move marijuana to Schedule III is ultimately successful. But IRS separately advised last June that just because that possibility is on the horizon doesn’t mean the industry can start claiming deductions in the interim.
Multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to the IRS 280E statute, but the federal rule has not yet changed. And it’s unclear when the proposed federal marijuana rescheduling rule might take effect. An administrative hearing process concerning the rule is currently underway.
In 2023, then-Rep. Earl Blumenauer (D-OR) reintroduced a congressional bill that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.
The latest notices come three years after the Congressional Research Service (CRS) noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”
IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”
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