Tax issues with the MORE Act
I. 280E repeal
The MORE Act repeals 280E, perhaps the most useful marijuana tax model of all. (Descheduling marijuana takes if off the bad list cross-reference in 280E.) 280E, denying deductions for selling expenses, makes advertising and marketing more expensive, after tax. Weed ads, like these “sex sells” billboards, irritate parents.
The MORE Act devotes revenue dollars to casualties of the War on Drugs, but the tax side is not so friendly. 280E is basically a tax on retailers, and turns out to favor Mom & Pop – or the social equity licensee – over Big Retail Marijuana, like retail chains such as John Boehner’s Acreage Holdings.
While small businesses may rely on reputation and word of mouth, Big Business advertises. Recently, “$1 out of every $6 spent on restaurant advertising in America [was] done by McDonald’s.”
For retailers, cost of goods sold includes only what they paid for inventory. So salaries, rent, and electric bills are notdeductible. So today, the costs of operating sleek, chic boutiques – in high-rent districts that Mom & Pop and social equity licensees can’t afford – are not tax-favored. Both Mom & Pop and the chain boutique deduct what they pay the grower, but the chain boutique pays more federal income tax, because Mom & Pop’s non-deductible rent is lower.
Growers pay little 280E tax. Growers can deduct just about all their expenses – their employees’ salaries, their rent, even their electric bill for artificial grow lights – all that goes into producing cannabis as “cost of goods sold,” so it’s fully deductible. No problem.
Glitzy showrooms and beckoning strorefronts are frills. Social equity licensees can’t afford them. 280E is overbroad, hitting lawyers’ fees (!), but it’s better than nothing.
Now 280E was was designed as punishment. So 280E irritates key players in the marijuana industry, who view it as a cruel vestige of the misguided War on Drugs – an insult. Plus, they say it’s unfair, because it treats marijuana businesses more harshly than other businesses. But we’re not going to tax marijuana like milk. And sometimes a tool designed for one purpose is the best thing for another.
II. Tax cut – temporary so far
And nothing is what we get from the MORE Act. 280E creates a tax holiday. It’s a budget buster (does some point of order lie against it?)
280E goes away right away, but the Act’s replacement doesn’t show up for over a year.
Here’s section 4(c) :
Effective Date.—(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to articles manufactured or imported in calendar quarters beginning more than one year after the date of the enactment of this Act.
Will there be efforts to extend the holiday?
280E’s tax could be kept in place as descheduling happens: “The Internal Revenue Code of 1986 shall apply in all respects as it did the day before the date of enactment of this Act.”
III. Weak new tax, eventually
A. Tax collapse
The MORE Act imposes only a primitive ad valorem tax, five percent of price, which will quickly fade. Post-legalization, prices always fall, as sellers get past start-up problems and benefit from economies of scale. Taxes based on price collapse as prices do. The per-unit revenue stream will turn into a trickle.
Jane Gravelle’s 2014 Congressional Research Service Report stated, “the price of marijuana can be expected to drop from current retail prices of up [to] $200-$300 per ounce to prices closer to the cost of production at $5-$18 per ounce, if broadly legalized.” State legalization has already pushed prices down. Federal legalization will push them down further. Taxes will follow.
B. Transfer pricing
Huge pricing issues are inevitable for a federal pre-retail ad valorem tax (and even at retail, but that’s not on the table). Vertical integration is required in some states, and common in others, and the farm-to-store operation will have to assert a transfer price in every case. (I used to work in international tax, whose bane is still transfer pricing.) The bill recognizes that problem, and says the transfer pricing rules for large cigars will apply (new Code section 5702(r)(5)). (The only federal ad valorem substance tax is on large cigars, also imposed pre-retail, like the MORE Act’s weed tax. But that tax has a unit cap: 52.75% of the manufacturer’s price, with a cap at 40.26 cents per cigar.) Good luck. Those large rules probably haven’t had much of a work-out. The weed rules will.
IV. Other issues.
280E is part of the progressive income tax. Excises aren’t progressive.
The new excise taw will require a new set of forms, a new audit trail, and mucho mas.
A non-tax issue: the MORE Act opens up marijuana to interstate commerce. The once-prominent STATES Act would go the other way, and let states protect growers from imports. Interstate commerce will wipe out growers in most states. That’s not a killer defect, unless you’re a grower, but this is: interstate commerce will bring a quick end to experimentation with regulatory models, experimentation we desperately need. Even Canada is struggling with getting the details right. Take taxation, for instance. There is nowhere near a consensus on what to tax (the tax base: weight? THC? ad valorem?), let alone where to collect and how much to tax.