California is considering letting individuals deduct marijuana advertising expenses on California state income tax returns – for the first time. The bill isA.B. 1863, and is pretty far along. The text is at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1863 and far below.
I’ve long thought 280E was partly justified, and partly overbroad. A compromise could treat individuals like corporations, allow deductions for non-problematic expenses, and not lose revenue.
NORML agrees that advertising should not be tax deductible. They don’t want to irritate voters. https://newrevenue.org/2017/02/16/5139/.
But I would deny tax deductions not just for advertising, but also for marketing. https://www.brookings.edu/blog/fixgov/2015/12/18/how-bob-dole-got-america-addicted-to-marijuana-taxes/
There could be a California 280E compromise to
- Keep ads nondeductible;
- Allow deductions for specified fees and costs (accountant’s fees, license fees, etc.).
The opportunity in California’s situation is that while a bill like A.B. 1863 is a revenue loser, a compromise could be revenue neutral – much easier to pass under sensible budget rules. But this bill may be on a roll.
What California has now makes no sense: corporations deduct everything (no California 280E analog); individuals deduct nothing. Here’s a long explanation of that California anomaly: https://newrevenue.org/2015/05/15/technicalities-of-california-marijuana-advertising-discrepancy/
The real money here is in pass-through entities – S Corps, LLCs, and partnerships. These taxpayers get federal 280E taxation on California returns– they can deduct only cost of goods sold. California corporationscan deduct all expenses.
The Center for New Revenue opposes tax deductions for advertising and marketing not just for cannabis, but also for alcohol, tobacco, and prescriptions opioids. http://thehill.com/opinion/healthcare/382984-instead-of-taxing-opioids-we-can-it-put-the-tax-burden-directly-on-opioid
The LAO won’t give a firm number for the revenue loss: They say only, “at a six percent tax rate, the revenue loss would be $13 million per $1 billion of retail sales. Because the size of the cannabis market is unknown, the revenue loss resulting from this bill is indeterminable, but likely in the tens of millions of dollars annually.” https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180AB1863
I don’t know California budget rules. Federal rules tend to hit the brakes on any proposal officially estimated to lose revenue. But the official California estimate is too fuzzy to state a number — so far.
Does that fuzziness enable the tax cut to skate through? Who would know? Someone in the LAO?
If pressed, they should give an actual number, I think. https://newrevenue.org/2017/02/02/5119/
The bill:
AB 1863: Tax deductions: 280E
Allows cannabis businesses to deduct expenses on state taxes that would otherwise be prohibited by IRS Section 280E.
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1863
LEGISLATIVE COUNSEL’S DIGEST
AB 1863, as amended, Jones-Sawyer. Personal income tax: deduction: commercial cannabis activity.
Existing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities and authorizes persons to conduct specified commercial cannabis activities, as defined, in the state.
The Personal Income Tax Law and the Corporation Tax Law allow various deductions in computing the income that is subject to the taxes imposed by those laws. The Personal Income Tax Law conforms as of a specified date to federal income tax laws with respect to itemized deductions, including business deductions and items not deductible, except as specifically provided. The Corporation Tax Law does not conform to those federal income tax provisions, but specifically provides for deductions for purposes of that law. The Personal Income Tax Law, by conformity to federal income tax laws, disallows a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances, including marijuana.
This bill, for each taxable year beginning on and after January 1, 2018, would specifically provide in the Personal Income Tax Law for nonconformity to that federal law disallowing a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances, only for commercial cannabis activity, as defined, authorized defined under MAUCRSA, by a licensee under MAUCRSA, thus allowing deduction of business expenses for a cannabis trade or business under the Personal Income Tax Law, as provided.
This bill would take effect immediately as a tax levy.
DIGEST KEY
Vote: majority Appropriation: no Fiscal Committee: yes Local Program: no
BILL TEXT
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1.
Section 17209 is added to the Revenue and Taxation Code, to read:
17209.
(a) For each taxable year beginning on or after January 1, 2018, Section 280E of the Internal Revenue Code, relating to expenditures in connection with the illegal sale of drugs, shall not apply to the carrying on of any trade or business that is commercial cannabis activity, as defined in Division 10 (commencing with Section 26000) of the Business and Professions Code, by a licensee under Division 10 (commencing with Section 26000) of the Business and Professions Code. activity by a licensee.
(b) For purposes of this section, “commercial cannabis activity” and “licensee” shall have the same meanings as set forth in Division 10 (commencing with Section 26000) of the Business and Professions Code.
SEC. 2.
This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
The Center for New Revenue 