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Calls for reform of ‘unfair’ tax code facing cannabis firms

Business leaders are calling for reform of the Section 280E tax code, which prevents firms deducting business costs from income associated with the “trafficking” of controlled drugs.

After passing new legislation in April that allowed banks to provide services to cannabis companies in states where the drug is legal, the US House of Representatives sent a signal that it may be high time to remove barriers to business for the cannabis industry.

The bill, dubbed the SAFE Banking Act, comes after a major lobbying effort by the American Bankers Association, and still faces headway in the Senate.

Carissa Cartalemi, owner and operator of Star Buds Medical Marijuana Dispensary in Baltimore, says the bill marks a step in the right direction, addressing some of the hurdles facing dispensaries like hers. 

But there’s a long road ahead.

“Because medical cannabis is still federally illegal, we haven’t been able to use credit and debit card processors, online ordering or many financial services that most businesses take for granted,” says Cartalemi, who, along with partners Megan Rogers and Vincent Lidie, opened Star Buds in 2018.

Raising capital to start the business was also a challenge, she says. It wasn’t possible to get a traditional business loan from a bank. Instead, she worked with a consultant to find a private equity investor who would accept cannabis businesses,” she says.

“There are extra hurdles for us when it comes to funding because cannabis is still illegal federally. 

“We’re forced to bootstrap and get creative every single day with how we carry out our business.

CPA and accounting lecturer Samuel Handwerger at the University of Maryland’s Robert H. Smith School of Business says his clients in the cannabis industry have made do, using credit unions for banking activities and raising capital through private investors.

While the latest bill offers cannabis companies some financial reprieve, Handwerger says it fails to address the biggest issue plaguing them – the Section 280E tax code, which prevents businesses from deducting conventional business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.

“The industry needs this to change because otherwise, the cost of buying legal cannabis will forever remain above what it should be given that these businesses absorb the tax through their profits,” he says. 

“The result is that they have to charge accordingly in order to be able to turn an adequate profit at the end of the day for those investors, so it’s really unfair for the whole marketplace.”

It’s not an unrealistic goal, Handwerger says, especially considering the growing public support in recent years for decriminalised or legal marijuana.

In a 2020 poll conducted by Gallup, 68 percent of Americans supported the idea of legalising marijuana, up from 12 percent in 1969. 

Thirty-six states have legalised medical cannabis, and 17 states now allow adult recreational use, according to the National Conference of State Legislatures.

Still at issue is whether a state-by-state approach or sweeping federal legislation offers the best pathway toward repealing Section 280E. 

States can take the matter into their own hands and alleviate the burdens imposed by the tax, says Handwerger, but that only addresses the state tax at a rate usually only a fraction of the federal tax burden.

Handwerger says that since “most states define taxable income by using the federal code, you will solve the whole puzzle by getting Congress to amend the tax code.” 

Activists will get more bang for their buck by focusing their efforts at the federal level, getting to the root of the problem, he says.

Cartalemi agrees and says the recent banking reform, coupled with increased scrutiny of the tax law, can help improve public perception and garner more national support for the cannabis industry.

“I think federal law – it guides everything, including people’s opinions,” says Cartalemi. 

“We need to pass this legislation federally for everyone to see that our business should be treated just like every other business.”

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