Trent Woloveck the Chief Strategy Director for Jushi, a multistate publicly traded operator with operations in 7 states here in the US, talks 280e
280e, before we get to Illinois specifically, for those people out there who don’t know what 280e is, can you give us a quick overview of what it means and how it applies to cannabis businesses?
280E refers to a section of the federal tax code that applies to businesses “trafficking” in illegal substances, specifically those on Schedule I or II of the Controlled Substances Act, including cannabis companies licensed and legally operating under state law. Businesses subject to Section 280E are prohibited from deducting ordinary business expenses from gross revenue like other businesses are allowed to do, resulting in effective federal income tax rates that can exceed 70%. I think everyone agrees that any business with a federal income tax rate of 70%+ is extremely crippling for the industry.
What allows the Illinois legislature to change IRS rules? As far as we are aware no other state has gone down this path? Is that correct?
There is a lot to unpack here.
As to your first question, Illinois did not (and could not) change the Federal IRS rules. That’s something only the US Congress or the IRS itself can do. But there’s more to 280E than the IRS Code. Like in many other states, Illinois’ tax law includes the state equivalent to 280E of the IRS Code. Illinois’ 280E fix modernizes state tax law to reflect cannabis legalization so that licensed cannabis companies are treated in the same manner as other Illinois businesses for tax purposes at the State level.
With respect to your second and third questions, the answer is no. Illinois is not alone in modernizing its tax law to reflect cannabis legalization. In fact, several states have passed similar legislation, including NJ, NY, CO, CA, MA, MT, NM, LA, MD, MI, ME, HI, CT, MO, MN, OR, & AK. Similar legislation is pending in several other states, however, again this is only at the State level taxation.
Under the laws and rules of most states, businesses are required to pay an income tax to that state that is separate from and in addition to federal income tax. While not compelled to do so, most states choose to mirror federal tax law and IRS rules in their own laws and rules. Despite legitimate reasons it makes sense for state tax rules to mirror IRS rules, the practice can create problems when federal and state laws conflict. In these instances, it’s common for states to revise their tax rules so they align with the state’s policies, laws and priorities. State-level cannabis legalization is a great illustration.
When a state legalizes cannabis, it may not immediately revise its tax rules to reflect legalization and resulting conflict between federal and state law. Such was the case in Illinois, and despite legalization, both the IRS Code and state tax rules prohibited legally operating, state sanctioned cannabis companies from deducting their business expenses resulting in a 70% federal and state income tax rate. There’s a huge logical inconsistency here.
The intent of 280E was to punish criminal enterprises engaged in illegal conduct by imposing an excessive income tax. The intent was never to punish legal businesses engaged in legal conduct – Congress simply didn’t foresee state-level cannabis legalization. In the context of licensed, state sanctioned cannabis operations, sound policy does not support continued application of state-level 280E because neither the business nor the conduct are illegal. It’s logically irreconcilable for a state to legalize cannabis within its borders on the one hand and continue to treat companies engaging in licensed cannabis-related activity as illegal drug traffickers under the tax law. Illinois’ recent legislative action was intended to fix this incongruity.]
Up to the point of the legislation changing rules in Illinois, what was 280e doing in terms of impacting cannabis businesses? Does it also impact hemp and CBD businesses? Is every aspect of it negative or are there positives?
280E is a crushing tax burden. Punitive taxes drive up product costs and, among other things, make the legal market more expensive for all and unaffordable for many.
With respect to hemp and hemp-derived CBD businesses, the 2018 federal Farm Bill declassified CBD and all other cannabinoids in hemp from the Controlled Substances Act. Consequently, these products are no longer subject to 280E at the State or Federal level.
So 280e bans the industry from making key deductions that are available to other traditional markets, significantly increasing the effective tax rate that they pay… In practical terms, what does that mean for businesses, can you give an example?
This makes a retail only business practically impossible to free cash flow. This has a major impact on small business owners from an investment back into their communities or from an expansion perspective.
A provision has been added to the state’s existing tax code to allow cannabis business deductions for “an amount equal to the deductions that were disallowed under Section 280E of the Internal Revenue Code for the taxable year” Does this refer to the current tax year?
The provision you’re referring to specifically says that deductions will be allowed on or after January 1, 2023.
Are there any other provisions you would highlight in the new legislation that benefits businesses?
I suppose the answer to this question depends on what kind of businesses are involved. In my opinion, the most important changes outside 280E reform benefit social equity licensees. The legislation extends the amount of time these businesses have to find and receive approval for a physical location as well as the time these businesses have to become operational.
Going back to an earlier question .. after these changes have happened in Illinois do you expect them to be replicated in other states?
Yes. Until the federal government reschedules (or deschedules) cannabis, or alternatively, creates an exemption from 280E for state-legal cannabis operators, I think we will see more states legislatively revise their tax laws so licensed cannabis businesses are treated as legal enterprises for tax purposes – though I expect a few states, especially conservative states that oppose any cannabis legalization, won’t put much effort into legislation that will reduce the tax rate on hundreds of millions of dollars of annual revenue by 60% or more.
Finally, is there anything else you would like to add and do you think the introduction of federal legislation would simplify or further complicate this issue?
As to the impact of federal legislation, whether it simplifies or complicates cannabis law in America will depend on the legislation itself. Some proposed legislation, like the SAFE Banking Act, would be tremendously beneficial to all stakeholders, especially social equity businesses , while other proposed legislation, like proposals that call for FDA regulation and federal licensing, could seriously complicate the legal landscape. I think only time will tell and the time between now and the 2024 presidential election will tell a lot.