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US: Congress can bring cannabis tax policy in line with cannabis enforcement policy

Some would be appalled to know the taxes facing cannabis operators – specifically Internal Revenue Code at 26 USC § 280E. That provision discussed more fully below often subjects cannabis operators to effective tax rates far north of 50%, more than virtually any other businesses in the United States. Cannabis companies would be happy to pay George’s 5%.

Federal Obstacles to the Cannabis Industry
There are, of course, a number of federal policy headwinds facing cannabis operators. Three immediately come to mind. The first, naturally, being that cannabis remains a Schedule I substance in the Controlled Substances Act. The second, which flows from the first, is that federal law discourages most financial institutions from banking cannabis businesses. The third is 280E. IRC 280E provides:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Possible Solutions to These Obstacles
So, let’s examine whether the federal government will lessen those headwinds. First, there is a chance that cannabis will be rescheduled or de-scheduled from the Controlled Substances Act. As we wrote late last year, President Biden has ordered Secretary of Health and Human Services Xavier Becerra “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” This was a huge symbolic step, but we have expressed skepticism that it would lead to concrete changes in the short term.


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