280E revenue cost

If you believe numbers from the marijuana industry, repeal of federal tax Code section 280E might cost some $1.3 billion in 2020 alone, and then rise steadily after that.

Right now, section 280E says sellers of federally illegal drugs can’t deduct advertising, marketing, or selling expenses. They can deduct only cost of goods sold. They deduct product cost – what they pay to grow marijuana, or to buy it from a grower or reseller.

Once marijuana is no longer a federally illegal drug, 280E ceases to apply, and its revenue disappears.

How much revenue would 280E’s disappearance lose?  That’s a tough question, and I don’t know.  According to some industry numbers, though, repeal could cost over $1 billion a year in federal tax revenue by 2020.

Here’s the figuring. Take a 2020 market with total legal sales of $21.8 billion, the forecast of ArcView Market Research, quoted in Fortune. (ArcView is a marijuana industry player, and may take a rosy view of market size.)

How much of that would be 280E tax? The Cannabis Industry Association presents an example where 280E increases taxes by 6 percent of sales ($60,000 extra tax on sales of $1 million).

Left number column is Non-Cannabis Business   Right col. is Cannabis Business

Gross Revenue $1,000,000 $1,000,000
Cost of Goods Sold $650,000 $650,000
Gross Income $350,000 $350,000
Deductible Business Expenses $200,000 $0
Taxable Income $150,000 $350,000
Tax (30%) $45,000 $105,000
Effective Tax Rate 30% 70%

Again, that’s $60,000 extra tax on sales of $1 million.  Is that 6 percent number typical? The industry has an incentive to make the cost of 280E to a taxpayer look high. That might make the industry’s case more sympathetic. But overstating the cost makes repeal of 280E more of a budget-buster, and might hurt the industry’s cause.  So the incentives cut both ways.

If that 6 percent example is typical, the revenue cost of 280E repeal would be 6 percent of sales. If 2020 sales are $21.8 billion, the revenue loss to the federal government would be 6 percent of that, or $1.3 billion.

Now marijuana sellers even in states where the product is illegal are supposed to pay tax, and to comply with 280E. If they don’t, the IRS might find them – that’s how Al Capone ended up behind bars.  An estimate of the current market, legal and illegal, is in the $40 billion range.  But I wouldn’t assign too much revenue from 280E to those sellers.

In any event, for parents and worried about marijuana legalization, 280E serves the purpose of nudging against marketing and advertising.  A middle ground, keeping some of 280E but allowing deductions for, for instance, retail workers’ wages (we want to encourage jobs, right?), would cost less than full repeal.

And consumers who want money spent on improving what they buy get a weird little nudge from 280E. If a marijuana business has a dollar to spend, and spends that dollar on product improvement, or R&D, it can deduct everything it. If it spends that dollar on advertising, or otherwise trying to convince people to buy its products, it can’t deduct a penny.  So 280E might nudge the business to spend money in a tax-favored way: on marijuana, not on messaging.

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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.

4 thoughts on “280E revenue cost”

  1. Big Pharma and the alcohol industry must love this posting. Marketing an opiate? No problem, that’s tax deductible. Running ads for beer, wine, vodka? No problem, those are tax deductible as well. How about advertising casinos, cigarettes, porn sites, gun shops, fast food, sugary drinks, etc., etc., etc.? All tax deductible.

    280e was written for a completely different (and completely symbolic) reason than minimizing marketing of legal cannabis. If 280e was simply about marketing then it shouldn’t apply to every other deduction that is prohibited — from product liability insurance to the payment of state taxes.

    I’m glad that you suggest allowing “some” deductions — at least that’s an improvement where the current situation doesn’t even allow the deduction of providing health insurance for any employee not directly involved in production (I guess we are okay “nudging” employers away from that too.). It’d support non-deductability of marketing costs particularly if it was also applied to pharmaceuticals, alcohol and tobacco. Wouldn’t that make the hypothetical parents at the beginning of your posting even more happy to go after all vices not to mention the country’s treasury?

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