US Congressman Earl Blumenauer is emerging as one of the biggest marijuana supporters in the halls of power, championing various initiatives recently that would help the cannabis cause.
Now he’s tackling one of the most pressing issues facing the medical marijuana industry: Taxes. The Democratic representative from Oregon plans to introduce a new bill next week that would prevent the Internal Revenue Service from using a specific provision in US tax laws to put the marijuana industry in a stranglehold.
The Small Business Tax Equity Act of 2013 focuses on blunting Section 280e of the US tax code, which bars individuals and businesses engaged in the sale of certain drugs from deducting common business expenses from their tax bill. While initially aimed at drug traffickers, the IRS has used 280E to target the state-legal medical marijuana industry in recent years. That’s taken a huge bite out of the industry’s profits, making it difficult – and in many cases impossible – for dispensaries to stay afloat.
These businesses sometimes end up paying an effective tax rate of 70% or more of their net income vs. the standard 35% for an average company that can deduct common expenses, according to Steve Fox of the National Cannabis Industry Association, which is working with Blumenauer and other lawmakers to address the issue.
“It’s a huge problem, and it’s simply unfair,” Fox said. “I’ve seen estimates that the 280e tax burden for Colorado alone may be around $20 million. So the federal government is taking $20 million out of hands of Colorado business owners and the Colorado economy.”
In a nutshell, dispensaries pay anywhere from two to three times more taxes because of 280e, said Hank Levy, who runs an accounting firm in Oakland that works with medical marijuana operations. That can make or break a dispensary. Some MMJ businesses that are audited wind up closing because they can’t handle the tax burden, while others raise prices.
“If someone is running profitably and doing well, they’re probably going to raise prices, but that creates a cyclical problem in that they make more money but then pay more taxes,” Levy said.
Additionally, it’s often the law-abiding, more professional businesses that suffer the most. Some dispensaries across the country skirt the rules and don’t file their taxes – and therefore avoid the huge financial burden. Dispensaries that do try to play by the rules find themselves at a serious disadvantage.
Blumenauer’s bill will resemble a similar measure that was introduced – but ultimately sputtered out – in the last legislative session, though it will contain several key differences that will be unveiled next week.
The National Cannabis Industry Association will hold a press conference with Blumenauer on June 5 in Washington DC to delve more into the issue as part of its two-day lobbying effort in the nation’s capital. Fox and other cannabis industry leaders will also talk about the tax situation during MMJ Business Daily’s upcoming East Coast Seminar for Entrepreneurs and Investors.
The tax initiative – like all medical marijuana measures – faces an uphill battle in Washington (and that’s putting it nicely). If fact, even supporters of the bill acknowledge that it has little chance of passing in the near future – let alone a shot at getting a hearing.
“I’m not optimistic,” Levy said. “I just don’t think it’s on the radar of anybody, so it’s tough to get any kind of support.”
Still, the fact that the bill is being introduced is a positive sign and a critical step in the process.
“At this stage it’s really important to raise awareness about the issue,” Fox of NCIA said. “It gives us the opportunity to highlight the unjustness of this provision. We have a strong argument to make, and in many cases it’s just getting it out there.”