Whether you’re the kind of person who wants to End the Fed, or the kind of person who wants to tax the rich like a Scandinavian nation, you’ll probably agree on one thing: cannabis taxation is a problem. And it’s not just a small one. It’s theft. If I (or basically anyone else) had to pick one reason why the industry is in freefall, it’s taxation.
280E and the ultimate cannabis tax pitfall
Let’s start on the federal side. Section 280E of the Internal Revenue Code prevents a cannabis business from making almost any kind of deduction. A few years ago, the IRS clarified that cannabis businesses can deduct costs of goods sold. But that’s it. So cannabis businesses are ineligible for the vast majority of standard deductions available to businesses that sell alcohol, tobacco, opioids (so long as they’re legally prescribed of course), and a whole other slew of things that are objectively more harmful than cannabis.
It’s also worth noting that intoxicating hemp compounds aren’t subject to 280E, since hemp isn’t a controlled substance. Nor is the massive illegal market. Those businesses – which sell materially competitive products – pay less in taxes and can pass those savings to consumers. This gives them a big competitive advantages. If the federal government cared so much about public safety, you’d think they’d try to limit the market for illegal cannabis. Nope!
State cannabis taxation is all over the map
If you thought 280E was bad, just wait until we talk about the states. Every state that has legalized cannabis taxes it, without exception. And they tax it like there’s no tomorrow. In fact, high taxes are often one of the express promises that legislators or imitative drafters make. “Legalize it and we’ll make a lot of money!”
The folks behind California’s cannabis legalization bill, for example, got the bright idea to impose both cultivation taxes and excise taxes on the industry. This is on top of the state’s normal sales tax, which has a baseline of 7.25% of the sale price – subject to increases under city/county ordinances. Before the cultivation tax was eventually eliminated, it effectively was $161 per pound! As we sit here today, the excise tax is 15% of the sales price. Here’s a handy image from the folks at California NORML to illustrate how high the excise tax is:
Credit: Here
The above is just excise tax, to be clear. For any sale of cannabis, the excise and sales taxes alone will amount to at least 22.5%. That’s $22.50 on a $100 bill in just state cannabis taxation. A piece of proposed California legislation would have attempted to streamline some of the state level taxes to avoid double taxation, but it looks like the bill won’t advance much further. This is pretty terrible news during the midst of a literal crisis within the state’s cannabis industry.
Local cannabis taxation – just when you thought it couldn’t get any worse
In California, cities often tax cannabis businesses by their gross receipts. That means that if they generate $1mm in revenue, they will be taxed some percentage of that revenue. Sometimes the tax depends on the type of activity at issue and can fluctuate across the state, so this is a bit of an oversimplification. But we’ve seen cannabis taxes as high as 10% of gross receipts. That means that for $1mm gross receipts taxable at that rate, $100,000 would be paid as just the city’s gross receipts tax. This doesn’t factor in the state tax (hence the need for the failed bill mentioned above). Nor does it include 280E. We’re now talking about paying taxes on taxes.
What this looks like in practice
This following image of a cannabis receipt for a purchase in Los Angeles has made the rounds on Twitter in the last few months:
Credit: @jgriesler
Let’s think about this a bit. On a purchase price of $175.50 (accounting for a discount), the total after tax is $249.71. That means that the tax was more than $74. That is a tax rate of more than 42%.
To be clear, these are costs that are charged to a consumer. This means that if the same consumer were to buy the same amount of cannabis (in terms of value) from the illegal market, they would pay about $74 less. If they were to buy some kind of highly intoxicating cannabinoid product (which they could probably do via e-commerce without getting out of bed), they would pay about $74 less.
Is it any wonder why the illegal market is doing so well while established cannabis businesses are falling by the wayside and going into insolvency? If the federal government truly cared about the cannabis market – a market that employs hundreds of thousands of Americans – it could solve this problem in five minutes. Even states have the power to cut out the shenanigans and take the pressure off the industry.
Cannabis taxes are too damn high. And until the problem is solved, don’t be surprised when the industry falls to pieces.
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