This is so preliminary . . . but here goes. Lots of thinking remains to do.
So Washington state went and changed its entire cannabis tax, with part of the rationale being to make the entire tax burden deductible under 280E. That’s why Washington transferred the burden from the seller (who arguably included the tax in income and couldn’t deduct it) to the buyer, who suffered no 280E problem. You can read about WA’s rationale at https://newrevenue.org/2014/12/04/wa-fix-for-280e-problem/.
Now the IRS says that Washington’s cannabis taxes were never, ever included in income. That result makes total sense. It not just comports with the statute, it avoids an irrational form-over-substance distinction, which would have made the tax a problem only if the seller paid, but not if the buyer paid. That would have been pointless.
So now what for 280E? I saw the thought somewhere that this IRS announcement portends loosening of 280E. Maybe. For sure, when the idea of repealing 280E comes up, the revenue estimate won’t reflect a huge loss from allowing deductions for state taxes, because they are deductible under the base line.
Putting a 280E penalty on state taxes would have been an outrage. But what’s left of 280E is more defensible now that state taxes are clearly deductible. Advertising is a frill for marijuana legalization, but anathema to opponents. More here
The main argument for the repeal of 280E is that the cannabis business should be treated like any other business. That’s the tomato model. I can’t disprove it, but I disagree with it. The entire debate so far has been black or white — keep 280E, or repeal it in toto. And the political analysis may never proceed beyond that point. At the political level, it’s easier to ignore (or procrastinate) or to smash rather than to tinker.
Maybe 280E will be repealed and not paid for. Maybe Congress will agree to treat marijuana like milk. But maybe not. Repeal of 280E is likely to involve a federal excise tax as a pay for – maybe raising more money than 280E brings in.
Since 280E is treaty-legal, and a federal excise tax may not be, repeal and replace creates problems – even if the package is revenue neutral.
Lots to think about here. And this will play out over time. As for future help from the IRS, here’s no way the IRS can allow advertising and marketing expenses under 280E.