Ads and 280E

I’m giving a marijuana tax design talk to a Law School class at a major university on April 9.  One point I plan to make is that Tax Code section 280E, which makes marijuana advertising and marketing expenses nondeductible, is a good idea.  Ads enjoy protection under the commercial free speech doctrine, so states can’t ban them, but states, like the federal government, can make them nondeductible.  The professor saw some slides I put together, and didn’t think these were a useful part of an academic discussion.

 

CNR Vermont memo on 280E conformity

To:                   S.54 Conference Committee

From:             Pat Oglesby, Center for New Revenue

Re:                   Effectively Restricting Cannabis Advertisements via Tax Policy

Date:                March 11, 2020

Current Law

Current Vermont tax law follows Federal Internal Revenue Code §280E, allowing sellers of cannabis (whether or not licensed by the state) to deduct only their “cost of goods sold” – that is, the cost of producing or buying the cannabis they sell.

Under 280E, growers can deduct almost everything.  Nearly all their costs, such as salaries, rent, and electricity are treated as “cost of goods sold,” because they are inputs to producing cannabis.

Retailers, however, can typically only deduct only what they pay for the product itself.  They cannot deduct salaries, for instance, because that is an expense of selling cannabis, not of producing or buying it.  Similarly, 280E prohibits the deduction of advertisement costs.

As it looks at legalization, Vermont can consider carefully, ahead of the federal government, what to do about marijuana advertising.

 

Possible Options:

The House’s version of S.54 seeks to repeal 280E “conformity” for Vermont, and allow all selling expenses to be deducted for state income tax purposes.  This treats cannabis like every other business, which certainly seems an equitable approach – but it also would make advertising expenses tax deductible.  This would effectively create a state subsidy of cannabis advertising.

By adopting an amendment sponsored by Rep. Donahue, the House chose to completely ban cannabis advertising.  Such a blanket ban may be an unconstitutional infringement on “commercial free speech” – the case law is unsettled on the question. It may be that such a ban is permissible under Vermont’s Constitution, and that Federal courts would not take up such a case while Federal prohibition remains in place – but query how long Federal prohibition will last.  If Vermont’s blanket ban on advertisements is ultimately struck down, there will be no restriction on cannabis advertisements.

Alternative 1: Say what’s NOT deductible.

Denying deductions for advertising is a place to start.  Listing other non-deductible selling expenses like excessive salaries stifles potential constitutional challenges.

Alternative 2:  Say what IS deductible.

A more nuanced approach would be to only re-allow certain 280E-disallowed expenses, keeping all others (including advertising expenses) non-deductible.  The Legislature could be guided by broadly acceptable social goals – allowing, for example, deductions for W-2 employee pay and benefits, maybe up to a cap (say, $100,000 per person per year).  A limited list of deductions could favor labor over capital, and small businesses over large ones (“mom and pop” shops use word of mouth and the personal touch to attract customers, not capital).

Possible additional allowable deductions include 1099 “gig” workers, and service providers like lawyers.  Charitable contributions sound nice, but are often disguised promotions. Real estate interests would push hard for rent to be deductible, but parents like to keep retail spaces non-glitzy and unappealing.

Conclusion:

A blanket ban on advertisement is likely to encounter Federal and State Constitutional challenges.  If such a ban is enacted, and then overturned, the State would not have any effective retractions on cannabis advertisements on the books, and the Legislature would have to scramble to enact them, over the objections of an industry that is likely to have more lobbying clout in the future than it has now.

By reverting to the restrictions on advertisements in the pre-Donahue House version of S.54 (i.e., audience restrictions, requiring pre-approval of all marketing materials, along with payment of a material review fee, etc.), and ensuring that cannabis advertisements are not inadvertently subsidized by allowing their costs to be deducted for state income tax purposes, S.54 would better protect Vermonters from the dangers of widespread advertisements intended to increase potentially problematic use.