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.
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.
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.