Considering Opportunities For The Upcoming Federal Taxation Of Cannabis

This article by Robert Carp was originally published on Cannabis & Tech Today, and appears here with permission.

The change in the presidential administration has focused cannabis businesses on the potential for legalization nationwide.

Running parallel to full federal legalization will be a corresponding regulatory and taxation scheme replacing the current regime of IRC §280E which prohibits anything but the cost of goods sold being deducted from a state licensed cannabis operation’s income statement. 

The evolution of the federal taxation of cannabis started with the Marijuana Tax Act of 1937, which applied tax to marijuana used for medicine.

Historians and critics alike maligned this legislation as an attempt to stop the use of cannabis rather than tax it.

The fines were greatly out of line with any failure in tax compliance — violators were fined up to $2,000 and a potential prison sentence of up to five years, while the actual tax was merely $1 per ounce or $24 per year. 

The Marijuana Tax Act was declared unconstitutional in Leary v. United States, and replaced with the Controlled Substances Act as Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970.1

Currently,  the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (H.R. 3884) is primed to be debated in Congress, with many cannabis insiders expecting either passage, or a short deferral to allow the new administration time to attend to other immediate priorities demanding their attention nationwide. 

The Terminally Flawed Marijuana Opportunity Reinvestment and Expungement Act of 2019

The Marijuana Opportunity Reinvestment and Expungement Act of 2019 (the “MORE Act”) has entered the end game of cannabis prohibition, and is externally palatable to  lawmakers, cannabis producers, and most consumers.

The provision for federal taxation, according to an article published by The Tax Foundation, is a “modest” five percent excise tax on marijuana sales at the manufacturer’s level (emphasis added).2 

This ad valorem tax (a form of taxation based on the assessed value of an item — think sales tax or real estate tax) would be imposed on manufactured cannabis as proposed in the amendment to IRC Section 5701 of the Internal Code of 1986 by “redesignating subsection (h) as subsection (i) and by inserting after subsection (g)….” which then defines “cannabis products.”

Essentially, the bill defines a “cannabis product” as “any cannabis or any article which contains cannabis or any derivative thereof.”   

Where are the flaws in the bill?

The bill has issues in its perception by the consuming public, the anticipated revenue it will produce, and the actual use of the money generated by the excise tax.

Let’s examine each individually.

Perception by the Consuming Public

The entrenched black market for cannabis will enjoy a greater share of the market if the MORE Act passes due to the increased cost of legal marijuana.

In most states where cannabis is legal for recreational use (as well as some states offering ) there is an additional sales tax imposed either at the point of sale or during the manufacturing process.

Per the IRS’s definition, “Excise taxes are often included in the price of the product.”3

If the MORE Act becomes law, unless the excise tax is imposed like alcohol and gasoline and remitted to the government by the manufacturer, consumers will balk at purchasing legal recreational cannabis, where the combined taxes may be 35% or higher.  

Flaws in the Expenditure Model

The proposed revenue model for the MORE Act creates an “Opportunity Trust Fund,” with a distribution plan where the expenditures derived from net revenues are to be divided as follows:

“(c) Expenditures—Amounts in the Trust Fund shall be available, without further appropriation, only as follows:

“(1) 50% to the Attorney General to carry out section 3052(a) of part OO of the Omnibus Control and Safe Streets Act of 1968.

“(2) 10% to the Attorney General to carry out section 3052(b) of part OO of the Omnibus Crime Control and Safe Streets Act of 1968.

“(3) 20% to the Administrator of the Small Business Administration to carry out section 5(b)(1) of the Marijuana Opportunity Reinvestment and Expungement Act of 2019.

“(4) 20% to the Administrator of the Small Business Administration to carry out section 5(b)(2) of the Marijuana Opportunity Reinvestment and Expungement Act of 2019.”

The 60% total provided to the Attorney General to carry out sections 3052(a) & (b) would be used exclusively to provide funding to 501(c)(3) nonprofits providing social services such as job training and substance abuse treatments. 

The amendments to the legislation promulgated in H.R. 5385 under section 3052(a) and 3052(b) …

Full story available on Benzinga.com

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