Florida's Cannabis News Podcast

Tuesday November 17, 2020

Cannabis Taxation—Part III—Why 280E is Outdated and How 280E Cripples Today's Cannabis Industry.

This week, David continues Florida’s Cannabis News Podcast’s five part series on Section 280E. In this episode (Part III), we give a short history on the United States legal cannabis markets, explain why 280E is outdated, and why 280E does not satisfy any of its War on Drugs policy goals.

Here are the highlights:

The Nixon and Regan administrations set the stage for such low support for cannabis reform going into Bill Clinton’s presidency in 1992. Vilifying and marketing cannabis to the American public as a threat successfully maintained the status quo ‘no tolerance’ drug policies, but support for legalization began to increase. The traditional War on Drugs advertisements started to evoke humor, rather than fear, and the generation that led the counterculture movement started to have children.

The cannabis industry is similar to any other traditional agricultural industry. Farmers grow the crop in greenhouses or outdoors, regularly tend to the crop, and develop irrigation systems to achieve the best yield. Farmers also research how best to prevent pests and disease, which pesticides are safe and effective, and how genes and environment affect the production of key plant chemicals, like tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”).

As states started to implement their cannabis programs, the federal government prosecuted violators of the CSA regardless if the violators complied with their state’s law.But, as public opinion about the plan continued to shift, and more states legalized the plant, the Department of Justice (“DOJ”) lowered their prosecution priority for state-legal cannabis businesses. In 2009, Deputy United States Attorney David W. Ogden issued the “Ogden Memorandum” which announced the DOJ would not focus their prosecutorial resources to pursue cannabis companies who are in “clear and unambiguous compliance” with their state’s cannabis laws.Section 280E punishes legitimate businesses. This is not the intent of Section 280E. The legislative record suggests Section 280E was enacted to punish illegal drug dealers, not legal businesses.

Today, the distinction between legal cannabis businesses and illegal drug trafficking is material. The former distributes lab tested medicine to patients, while the latter sells unregulated substances to consumers who could be underage. Since the enactment of Section 280E, the federal government’s opinion on cannabis businesses evolved to a more accepting perspective, and the opinion of cannabis changed globally. Countries such as Germany, Italy, Mexico, Switzerland, Australia, Argentina, and the United Kingdom have all legalized cannabis as a medicine.

When Congress passed Section 280E into law, no state had enacted legislation legalizing any form of cannabis. To Congress’ credit, in 1981, Congress did not suspect legal drug trafficking would one day be a viable businesses model. In 2019, with thirty-three states and the District of Columbia now hosting medicinal or adult-use cannabis markets, Section 280E is applied to state-legal cannabis businesses more often than it is to the types of illegal drug dealers the drafters intended to penalize.

As applied, Section 280E contradicts the intent of Section 280E itself—to punish illegal drug dealers—not legal businesses. While the legislative record points to illegal drug traffickers as the targets of Section 280E, the IRS applies Section 280E to cannabis businesses in states that have legalized cannabis in some form because cannabis is still a Schedule I substance under federal law.

In turn, state-legal cannabis businesses struggle to survive because they have virtually no ability to deduct business expenses, compared to other businesses, legal or illegal, who are able to deduct rent on business property, salaries and wages, advertising, licensing fees, repair, and legal fees. With state markets online and operating, and Congress allowing the markets to grow without worry of federal prosecution by the DOJ, Section 280E remains an obstacle for state cannabis businesses because it denies state-legal cannabis business owners any deduction for any business expense, except for COGS.

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