MJBiz - November/December 2023 - 58

Edmondson took the U.S. government
to court-and won.
Edmondson was guilty of drug
charges and sentenced to four years in
prison. That much wasn't in dispute.
Instead, Edmondson convinced a tax
court to reverse an earlier IRS decision
and allow him to take deductions for
" business expenses " incurred while
selling the drugs, including rent,
phone bills and about $30,000 worth of
illicit drugs.
That decision didn't go over well in
the " Just Say No " 1980s. In response,
Congress amended the tax code to
specifi cally prohibit anyone " traffi cking
in Schedule 1 and Schedule 2 controlled
substances from deducting the cost
of payroll, advertising and most other
normal business expenses from
their federal tax returns. (In a twist,
cost of goods sold-that is, the illegal
drugs themselves-was and is still an
allowable deduction.)
It's highly unlikely that the authors
of 280E had " making life diffi cult for
a legal cannabis industry " in mind
while rewriting the tax code. But a
generation later, 280E's consequences
have landed squarely on stateregulated
marijuana dispensaries,
according to economic analyst Beau
Whitney, the co-founder of Oregonbased
Whitney Economics, who has
studied the issue at length.
" 280E hits retailers the hardest, " he
said. " It's completely crazy. "
The nation's cannabis retailers will
collectively pay an extra $2 billion
on their federal returns next spring,
Whitney estimates.
These are expenses that would be
deductible if 280E did not apply. And
they add up-depending on how much
a retailer spends on services they
cannot deduct-to an " effective " tax rate
in excess of 70%, while mainstream
businesses pay closer to 21% tax on
corporate income.
Section 280E is slightly kinder to
cultivators and manufacturers. But
since growers and extractors often don't
get paid until their products are sold
to consumers-and since retailers who
claim to be unprofi table might not be
quick to pay their bills-it's accepted that
280E negatively impacts the cannabis
industry up and down the supply chain,
hurting businesses big and small.
MORE CASH AVAILABLE
Legal experts agree that rescheduling
marijuana to Schedule 3 would solve
the industry's 280E problem.
That probably won't happen
overnight, but it could occur in time
for the next tax cycle-as soon as the
change in federal drug law becomes
offi cial-possibly in time to fi le 2024 or
2025 tax returns, Whitney predicted.
As long as rescheduling happens, tax
relief happens, too.
" 280E does not apply to Schedule 3, "
said Jonathan Caulkins, a professor
and drug-policy researcher at Carnegie
Mellon University in Pittsburgh.
" That's kind of a big deal. This will
greatly reduce the cost structure of the
industry, specifi cally the retailers. "
The lower tax burden also could
lead to lower prices for retail
customers, which could boost demand.
Alternatively, prices could stay stable
as retailers seek to make up for years
of low margins (or overdue accounts
receivable or angry investors).
With a lower tax bill, there would be
more liquidity available to plow back
into the business.
And like Mire, the Louisiana
dispensary owner keen to open another
58 November-December 2023 | MJBizMagazine
store, large multistate marijuana
operators also view rescheduling-and
with it, 280E reform-as an unalloyed
positive as well as the harbinger of
more reform to come.
" The loss of 280E will bring new
capital into the sector, for companies
big and small, " said Adam Goers,
senior vice president for corporate
affairs at Columbia Care and a cochair
of the Coalition for Cannabis
Scheduling Reform.
" Combined with SAFE Banking,
it's really the nexus of an actually
sustainable industry that then can work
toward federal legalization, " he added.
WON'T SAVE EVERYONE
It remains to be seen whether cannabis
businesses will be able to renegotiate or
restructure past-due balances if 280E
no longer applies. It's also far from
certain whether tax reform will be
enough to rescue struggling businesses.
" Will it save everybody? No, " said
Whitney, who noted that marijuana
businesses listed the federal tax
burden among their top concerns
during a recent survey he conducted.
" But will it save a bunch of people, or
will it increase their abilities to turn a
profi t? Absolutely. "
That magic word-profi t-might be
more than enough to keep otherwise
teetering businesses going, whether
it's in the form of tax cuts or more rope
from hopeful investors.
Mire concluded: " It just gets
everyone excited not to have 280E tax. "
Randy Mire hopes to
use tax savings to
grow his business.
Photo by Capitol
Wellness Solutions
MJBiz - November/December 2023

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