California Marijuana Tax 280E Conformity

California is considering letting individuals deduct all marijuana business expenses on California state income tax returns. The bill is A.B 420. A hearing is scheduled for July 12. http://sgf.senate.ca.gov/agenda

The real money here is in pass-through entities – S Corps, LLCs, and partnerships. These taxpayers get federal 280E treatment on California returns– they can deduct only cost of goods sold. California corporations can deduct all expenses. Here’s a long explanation of that California anomaly: https://newrevenue.org/2015/05/15/technicalities-of-california-marijuana-advertising-discrepancy/

The California Blue Ribbon Commission on marijuana legalization mentioned a possible rationale for part of California’s 280E nonconformity for individuals – as a way to limit advertising that opponents of legalization object to:

“The fourth policy tool is the denial of tax deductions for business advertising. Under section 280E of current income tax law, taxpayers cannot deduct the expenses of cannabis advertising on their federal returns. Similarly, individual taxpayers cannot now deduct those expenses on their California returns. There is no federal or state Constitutional right to deduct advertising or marketing expenses for any business, cannabis related or not. To be sure, denying state tax deductions would not eliminate advertising, but that approach would make it somewhat more costly. However, when legal operators are shouldering the costs of regulation, licensing and compliance, as well as other tax burdens, without the benefit of regular business tax deductions, such an additional burden at the outset may be too onerous.” https://www.safeandsmartpolicy.org/wp-content/uploads/2015/07/BRCPathwaysReport.pdf (I was co-chair of the Regulatory and Tax Structure Working Group of the Commission.)

Now it’s an anomaly for corporations, but not individuals, to take these deductions. The real money for the individual rule, to be sure, is with S Corps and LLCs. It might be possible to make corporate and individual treatment identical by denying deductions for all marijuana ads, but allowing deductions for lawyers’ fees and the like. That might be a revenue raiser, rather than a revenue loser. But that would presumable trigger Proposition 13’s supermajority requirement.

Meanwhile, National NORML has urged caution on 280E generally:

NORML suggests 280E compromise

“NORML believes that is essential that marijuana businesses be able to take tax deductions for standard expenses such as rent and employee compensation and benefits.  As part of a compromise package allowing those deductions, NORML would support the continuation of non-tax-deductibility of marijuana business advertising expenses.  For some citizens, advertising is a distraction, a red flag that can cause them to hesitate to support the sound policy of legalization.

“Allowing deductions for rent and employee costs would help the bottom line of small businesses and give incentives for further hiring, while acting as a preemptive move against well funded corporate controlled marijuana companies, which can afford extensive advertising.  This development would encourage the proliferation of a more diverse array of smaller businesses, as opposed to the consolidation by large corporate interests.  An industry dominated by smaller businesses in turn would create more competition leading to higher quality and better priced products for the consumer.” Erik Altieri, the new head of NORMLhttp://norml.org, sent me that statement, and authorized me to publish it. https://newrevenue.org/2017/02/16/5139/

Vermont activist Dave Silberman posted these tweets: “I advocated for not allowing ad expenses to be deducted in VT (see H490), as one (small) way to discourage overconsumption”; “[C]urrent dealers (selling ~$200m/yr in our small state) seem to be doing just fine by word of mouth, by the way.” ‪@DaveSilberman

And here is a long look at the pros and cons of 280E that Brookings posted: https://www.brookings.edu/blog/fixgov/2015/12/18/how-bob-dole-got-america-addicted-to-marijuana-taxes/

Lobbying expenses are nondeductible federally under section 162(e) – which makes clear the point that there is no constitutional right to a tax deduction, though there is a right to petition the government about grievances. Some kinds of speech are not tax-favored. Maybe the public could decide that cannabis ads fall into that category.

 

 

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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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