280E Is Working: Brookings

Internal Revenue Code section 280E, denying deductions for marijuana businesses other than cost of goods sold, is working.  Not only does it pinch businesses, it does so in a fortuitous way.

Section 280E is arguably working better than a flat, untargeted excise tax like our taxes on alcohol and tobacco:  The public has an interest in not promoting marijuana consumption, and section 280E it makes all advertising and marketing expenses – even point-of-sale displays — nondeductible.  Those expenses do not qualify as deductible cost of goods sold.   280E penalizes selling expenses, while not penalizing production expenses.   So Bravo.

A Brookings study by Stuart Taylor released today says this:  “Federal tax laws disallowing business expense deductions for sales of federally banned substances make it hard for state-licensed marijuana businesses to make profits.”  Well, that’s the point of a tax on a disfavored activity.

The study goes on: “Colorado and Washington seem certain to request a federal tax code revision.“  It’s hard to think they will get that – without some kind of federal tax in its place.  Any new tax is unlikely to target marketing and advertising so directly.

To be sure, 280E is overbroad in denying deductions for attorney’s fees and the like.  But it does rough justice.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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