How Current Tax Law Policy Affects the Marijuana Industry

Kimberly A. Houser, Jeffrey Gramlich, and Debra Sanders’ article, “How Current Tax Law Policy Affects the Marijuana Industry,” Tax Notes Federal, Feb. 22, 2016, pp. cover and 899-911 with permission from Tax Analysts (c) 2016

13 Pages Posted: 21 Apr 2020

See all articles by Kimberly Houser

Kimberly Houser

University of North Texas

Jeffrey Gramlich

Carson College of Business

Debra Sanders

Washington State University

Date Written: February 22, 2016

Abstract

Despite marijuana sales being legalized in many states, businesses engaged in such activities are penalized by current tax law. IRC Section 280E disallows deductions for ordinary and necessary expenses for taxpayers trafficking in Schedule I or II controlled substances. The Controlled Substance Act (CSA) lists marijuana on Schedule I alongside LSD, heroin, and methamphetamine, lumping these drugs together as having ‘‘no currently accepted medical use and a high potential for abuse.’’ That imposes a financial hardship on businesses that abide by state laws that allow the production and sale of marijuana. Under section 280E, businesses that legally sell marijuana must file federal income tax returns but are not allowed to deduct business expenses other than the cost of sales, which can cause an otherwise profitable, largely cash-basis business to have insufficient funds to pay its income tax liability. Because the rule applies only to businesses involved with selling Schedule I drugs, section 280E penalizes state-legalized marijuana businesses relative to other illegal activities such as racketeering, forgery, fraud, and thievery.

Keywords: Cannabis, Marijuana, 280E, Tax Law, Tax Policy

JEL Classification: K34

Suggested Citation

Houser, Kimberly and Gramlich, Jeffrey and Sanders, Debra, How Current Tax Law Policy Affects the Marijuana Industry (February 22, 2016). Kimberly A. Houser, Jeffrey Gramlich, and Debra Sanders’ article, “How Current Tax Law Policy Affects the Marijuana Industry,” Tax Notes Federal, Feb. 22, 2016, pp. cover and 899-911 with permission from Tax Analysts (c) 2016, Available at SSRN: https://ssrn.com/abstract=3539507

Kimberly Houser (Contact Author)

University of North Texas ( email )

Denton, TX 76203
United States

Jeffrey Gramlich

Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

HOME PAGE: http://https://business.wsu.edu/research-faculty/institutes/hoops-institute/

Debra Sanders

Washington State University ( email )

1812 E. McLaughlin Blvd.
Vancouver, WA 98663-3597
United States

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