An IRS ruling has changed everything and made most of the post below obsolete. More here or at https://newrevenue.org/2015/08/02/whats-next-for-280e/
“States could unilaterally correct this problem by changing the type of taxes they place on the marijuana industry. IRS treatment of sales taxes depends upon how a state defines the tax. If the state defines the tax as being levied on the seller, the tax is included in gross receipts. On the other hand, if the tax is defined as levied on the buyer, the seller is treated as a mere collector custodian of the state’s revenue and the amount levied is not properly included in gross receipts. For most businesses this is a distinction without a difference; sales taxes levied on a seller can be deducted as an expense. However, for dispensaries denied deductions by § 280E, this distinction could reduce federal tax exposure by huge amounts. Creative legislators could even redefine license fees as custodial sales taxes, by requiring retailers to collect the license fees from consumers instead of charging them directly to retailers.”
New explanation at http://taxfoundation.org/blog/one-simple-state-tax-code-tweak-favor-marijuana-taxpayers-over-tax-evaders?mc_cid=a792bd624c&mc_eid=c12785538d
“Such redefinition wouldn’t lower a state’s marijuana tax income, but might instead increase tax revenues by helping to level a playing field artificially tilted toward the tax evading black market alternatives § 280E was intended to punish.”
Thanks to Chris Law for sending that — author is James W. Kennedy.
Now for a tacked-together agglomeration of all I could find. (Notes for an article, maybe.)
The recent WA fix shifting tax burden from seller to buyer is in section 205 on page 8 here, or at http://leg.wa.gov/Senate/Committees/WM/Documents/2136%20AMS%20-%20S-3153%201.pdf. That’s the buyer pays approach (Nebraska sales tax rule), mentioned at the end. TAM withdrawal is noted below. 280E and canopy taxes are discussed here or at https://newrevenue.org/2015/04/15/280e-and-fees-arkley/. That this problem exists, and has not been fixed everywhere, shows the primitive state of marijuana tax design. Not deducting taxes is as primitive and zany as taxing by price, railed at and disparaged here. I myself let this deductibility issue slip a long time. It was such a crazy result, I didn’t think it possible.
THE STORY: Maybe a quick and tiny tweak to Washington’s state marijuana excise tax statute (and similar statutes in other states) could save businesses a lot of federal income tax under 280E, which lets federally illegal drug sellers deduct only cost of goods old. Now I kind of like 280E, insofar as it prohibits deductions for advertising, marketing, point-of-sales displays, and the like (disfavoring those activities in a way that does not allow any argument about freedom of speech), but can’t imagine why federal taxpayers shouldn’t be able to deduct state excise taxes. The industry complains mightily about 280E, but getting Congress to fix tax problems, or to help the marijuana industry, is not the work of a moment.
Luckily for the industry, no federal fix seems needed for this one signficant part of the 280E problem. The Washington Legislature (and Legislatures of other states with the same problem) should be able to make excise taxes federally deductible with the stroke of a pen, I think, and try to explain below.
And maybe a quick fix is possible. The Legislature has already shown it can act expeditiously to fix the Washington marijuana statute: “During the 2014 Legislative Session, I-502 was amended to explicitly allow the sale of extracts and concentrates.” http://liq.wa.gov/marijuana/faq_rules — that link is busted: Try http://lcb.wa.gov/mj2015/faqs-rules. Cutting the federal tax bill of a marijuana industry that’s struggling to beat the black market, at zero cost to the state, seems like an easy fix that might sail through on its own – even less controversial than allowing concentrates.
Continue reading State law fix for 280E problem? Update 13 August 2015