April 2021 – The Center for New Revenue

Why the federal government won’t legalize marijuana soon

A friend who advocates for social equity in handling cannabis profits said on a webinar yesterday that federal legalization needs more time – so don’t rush it. We don’t know how to protect social equity licensees, for one thing.

And Ulrik Boesen of the Tax Foundation has a bunch of questions, like these:

“How does the federal government design an excise tax for this complex market without disrupting state markets? How can federal and state testing and product safety requirements be aligned, considering how much these differ state by state?”

We do indeed need more time.

To figure out how to reinstitute alcohol taxes after a lapse during Prohibition, Congress devoted four fill days of joint hearings to liquor taxes alone in December 1933. Unlike with hemp drugs, we had already had lots of experience taxing liquor. But Congress studied it thoroughly anyway.

Pennsylvania Marijuana Monopoly + Taxes = Belt + Suspenders

An article quotes me praising state marijuana retailing over the for-profit alternative — in light of a bill in Pennsylvania to allow just that. The article, at https://www.law360.com/tax-authority/articles/1376043/pa-house-bill-seeks-to-legalize-tax-adult-use-cannabis, is throrough, but paywalled. It gives no prediction for the bill’s prospects.

280E MJ Tax Technicality, Lawyering, and Risks

A draft sent from me to scholarly private marijuana tax attorney Kat Allen (Tax L.L.M. from NYU) is followed by her response.

My draft:

At a webinar put on by MJbizdaily last week, two contrasting styles of tax lawyering were on display. Some say section 471(c) lets taxpayers reduce their tax bill under the section 280E Selling Expense Tax; some say it doesn’t. I don’t know the merits of the 471(c) issue, and hope not to study them.

Marijuana — Friend or Foe?

Many say marijuana is only good or only evil. (I’m for careful legalization, and sharing the wealth). But this septuagenarian friend, writing in early 2021, has a different take — but not one-sided. There are lots of folks who see both sides, like my old friend:

“I quit, roughly 13 years ago, give or take a few years. I came to a fork in the road—tennis or reefer. I could not continue to do both. The reefer was having too much effect on my stamina and my tennis. I was getting clobbered by people I used to beat. So I gave up on the reefer—easily done and done in a fell swoop—and sure enough the tennis got better, until it didn’t, like recently, because of age. I have never looked back and don’t miss being high. If ever or when I become decrepit, I will do it again. It was fun, but not, one hopes, for another decade or so.”

New York’s Cannabis Tax Could Help Pave the Way for Federal Legalization

States that tax marijuana ad valorem – that is, with price-based taxes – are not advancing the work needed for federal legalization.

280E Is a Bastard. So What?

Critics of the 280E marijuana Selling Expense Tax point out that it was conceived by advocates of the discredited War on Drugs: “Section 280E was born of politics – at the height of the war on drugs, in 1982.” Yeah, well, in some way, 280E is illegitimate. But a child born out of wedlock might turn out to be Alexander Hamilton.

The 280E Selling Expense Tax is overbroad, for sure, but it has three big things going for it – from the perspective of much of the marijuana community.

Advertising and glitzy marketing appeal to kids – and irritate their parents, to the detriment of legalization efforts. “Marijuana sells itself,” the saying goes. The commercial free speech doctrine says we can’t ban ads, but sophisticated consumers don’t need the ads or glitz – or the celebrity endorsements. The 280E Selling Expense Tax makes those kinds of things non-tax-deductible.

Big Business advertises and promotes sales more than small business. Mom & Pop – and social equity licensees – can’t afford the billboards, or deploy the marketing know-how that corporate giants specialize in. Think Budweiser ads. And recently, “$1 out of every $6 spent on restaurant advertising in America [was] done by McDonald’s.” That doesn’t count Burger King, or KFC. Mom & Pop rely on word of mouth. Big Marijuana wants to start deducting ad expenses — and Big Alcohol and Big Tobacco want to get in on the game.

Small business relies more on free word of mouth than does Big Business. Small business rarely pays for celebrity endorsements, which are nondeductible thanks to 280E.

The 280E Selling Expense Tax barely grazes growers because it allows a deduction for “cost of goods sold” – what the taxpayer pays to produce or buy the product. So while retailers and distributors can’t deduct wages and rent, growers can deduct wages of workers who grow the product and rent of grow houses and almost everything, because their costs are production costs. Middlemen and advertisers take a hit from 280E, and so do high-end retail landlords.

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The marijuana community, and especially small businesses and growers, might consider not so much the parentage of 280E, but its qualities and defects (yes, it’s overbroad in denying deductions for wages of retail clerks – a selling expense). But some tax is going to replace 280E — with a more direct hit on consumers if not growers.

Not all bastards deserve condemnation. For a longer though primitive look at 280E, see this Brookings piece, https://www.brookings.edu/blog/fixgov/2015/12/18/how-bob-dole-got-america-addicted-to-marijuana-taxes/#disqus_thread.

2023 Update: In some ways, the 280E selling expense tax may hit small businesses harder than large ones. Capital costs tend to be higher for small businesses, for instance, and there will be a certain amount of security costs, no matter how small the business. Big businesses may get quantity discounts on advertising and other marketing costs. Lots to think about. This may be updated further.

Here we go: Marijuana is coming to North Carolina

North Carolina medical marijuana just got real.

Medical marijuana legalization is the law in Georgia, and is advancing in South Carolina and Alabama. Recreational marijuana legalization is the law in Virginia. Here in North Carolina, nothing was happening. Only Democrats supported even medical marijuana.

But that changed overnight as two Republican State Senators came out in support of medical marijuana. So far as I know, they are the first GOP legislators to introduce a medical marijuana bill.

CNR says strengthen the Privileged Heir Tax

The Center for New Revenue is honored to be listed by Americans for Tax Fairness as a supporter of the Sanders-Gomez Estate Tax Reform Bill, the “For The 99.5% Act.” The wealthy like the term Death Tax; I like Privileged Heir Tax. Here, I’ll stick to “estate tax” as the bill does.

I got my start in tax work at the Washington, D.C. law firm Covington and Burling in the early 1980s, splitting time between international tax and, under the estimable Doris Blazek-White, estate work. Back then, the estate tax threshold was much lower, as it should be. But even then, the rich were getting richer. Not like now, but privileged heirs and heiresses were already lucking into plenty of wealth they hadn’t earned.