280E is constitutional

280E allows marijuana sellers to deduct only cost of goods sold, so they can’t deduct advertising and marketing expenses.  Taxpayers say the application of 280E to marijuana businesses is unconstitutional.  Off the cuff, I disagree.  (Here’s the Tax Court decision (finding 280E constitutional) and dissent in this case.)

First, the taxpayers say 280E changes a constitutional income tax into an unconstitutional tax, because for an income tax,  “there . . . has to be gain,” and 280E can impose tax when the taxpayer is actually in a loss position.  That goes too far, I think.  If a non-deductibility rule puts some taxpayer in a loss position and thereby presto-changeo converts an income tax into something else that’s not constitutional, then the same unconstitutionality would happen when the deduction is not for marijuana selling expenses but for disallowed lobbying expenses, golden parachutes, bribes, meals and entertainment, and so on.  That’s a big pile of nondeductibility rules to wipe off the books.  A single dollar of disallowed expense could well flip a tax return from gain to loss.  So all those rules would be unconstitutional, too.  And what about excess comp paid to a shareholder, actually paid, but designed to defeat the corporate tax and so disallowed?  Interest paid on what’s supposed to be debt and is actually equity?  And so on.  A matter of degree, but not of principle.

Second, even if the application of 280E turns the tax into something that’s not an income tax, doesn’t their argument prove that a VAT in the USA would be unconstitutional?  VAT allows deduction only for cost of goods sold, I think.

https://www.investopedia.com/ask/answers/042315/what-are-some-examples-value-added-tax.asp has this:

Example of Value-Added Taxation

To calculate the amount of VAT a consumer or business must pay, take the cost of the goods or service, and subtract any material costs previously taxed. An example of a 10% VAT in sequence through a chain of production can occur as follows:

A manufacturer of electronic components purchases raw materials made out of various metals from a dealer. The metals dealer—the seller at this point in the production chain—charges the manufacturer $1 plus a 10-cent VAT, and then pays the 10% VAT to the government.

The manufacturer adds value through its manufacturing process of creating the electronic components, which it then sells to a cellphone manufacturing company for $2 plus a 20-cent VAT. The manufacturer remits 10 cents of the 20-cent VAT it collected to the government, the other 10 cents reimbursing it for the VAT it previously paid to the metals dealer.

The cellphone manufacturer adds value by making its mobiles, which it then sells to a cellphone retailer for $3 plus a 30-cent VAT. It pays 10 cents of this VAT is paid to the government; the other 20 cents reimburse the cellphone manufacturer for the previous VAT it has paid to electronic component company.

Finally, the retailer sells a phone to a consumer for $5 plus a 50-cent VAT, 20 cents of which is paid to the government.

The VAT paid at each sale point along the way represents 10% of the value addedby the seller.

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Now the litigants in this case have spent a lot more time on it than I plan to.  I haven’t even read the government’s briefs.  But saying disallowance of a deduction is unconstitutional strikes me as implausible.

Tax marijuana by potency? $50 reward for finding a jurisdiction that does for cigarettes.

“I’ve challenged people over and over, including at conferences and on twitter, to name a jurisdiction that taxes tobacco by nicotine content, and no one has.” On 4 September 2018, I wrote that, and it’s still true.

Make that “unconcentrated tobacco” or “cigarettes.” Now that vaping has caught on, I wouldn’t rule out taxing vaping material by nicotine content.  It’s concentrated, so it’s homogeneous.  And it’s workable to tax marijuana concentrates by THC, like Canada.

But taxing unconcentrated plant material is SUCH a bad idea that no jurisdiction does it for analagous cigarettes.  Sampling allows cheating and manipulation.  These products are not homogeneous.  If that’s a deal killer for tobacco, why isn’t it for cannabis?

So maybe this is a publicity stunt.  The first message RECEIVED naming a jurisdiction that taxes cigarettes by nicotine content gets a $50 reward.  Write contest@newrevenue.org.

How notches or discontinuities in Illinois’s weed tax are an unnecessary vestige of the primitive Scales of Justice “range” method of liquor taxation

The notion that marijuana flower is best taxed by measuring its THC content refuses to die.  Illinois backed into a THC tax on flower with a rule that smokeable marijuana with THC over a certain percentage (35% or so) is taxed at a higher rate ad valorem – 25% versus 10% for less potent stuff.

Why didn’t Illinois tax by THC directly?  To answer a different question, no jurisdiction in the world taxes tobacco by tar nicotine content.  ($50 prize for first person to identify such a current tax.)  THC in flower is impractical to measure, so a wide “range” of up to 35% should cover it all.  Flower rarely exceeds 35% THC; most smokeable concentrates do.

Leaving aside the weakness of ad valorem taxes, why didn’t they just tax raw plant material at one rate and smokeable concentrates at another?  The rush of getting legislation to move, according to one report, without getting into the fine points.

So there’s a notch.  34.999% hits you with one tax bill; 35.001% hits you with a tax bill 150% higher.  (Gaming possibilities, are listed in the BOTEC report for the Washington State Liquor and Cannabis Board, like spraying flower with concentrates to land comfortably below 35%.)

Notches, or discontinuities in tax rates producing marginal rates over 100%, are  usually suboptimal.  Some may be unavoidable, like the UK VAT threshold.  With 499,999 pounds sterling in turnover, there’s no VAT.  With 500,001, you owe VAT on each transaction.  Now that’s awkward, and calls for prediction (if it’s not based on the previous year’s numbers,) but how else could you work it?  To have identical transactions taxed differently would be weird.  One customer sneaks tax free in before the 500k threshold, but the next customer in line that day pays the tax.

But discontinuities for excise taxes may not be necessary.  They used to be.  They  began, I think, with the liquor tax.  Higher proof spirits weigh less than weak ones, so weighing the batch reveals the alcohol content.  But digital scales weren’t invented when the United States (for instance) started taxing liquor, so they HAD to tax by ranges with discontinuities.  The old Scales of Justice scales, which operated by adding weights “only one at a time,” were all they had – with an alcohol adaptation called “Dicas’s hydrometer.”  So they had six ranges – unavoidable then, for differentiation, but at least internally accurate, and unbeatable by sampling.