Maine Governor Signs Bill Allowing State-Level Marijuana Business Tax Deductions That Are Prohibited Under Federal IRS 280E Code

The governor of Maine has signed a bill to allow licensed marijuana businesses to take state tax deductions as a partial workaround to the Internal Revenue Service (IRS) code known as 280E that prohibits such deductions at the federal level.

Gov. Janet Mills (D) gave final approval to the legislation from Sen. Teresa Pierce (D) last week. It expands on an existing policy that already provided tax relief for operators in the state’s medical cannabis industry.

Under the newly enacted law, the state will use part of the tax revenue it receives from marijuana sales to make up for lost revenue resulting from the new tax deductions that will be available for “business expenses related to carrying on a trade or business as a registered caregiver, a registered dispensary or a manufacturing facility,” as well as “a cannabis establishment or testing facility” as of January 1.

The deductions would be for “an amount equal to the deduction that would otherwise be allowable under this Part to the extent that the deduction is disallowed under the Code, Section 280E,” the bill text says.

“The contrast in the tax code is appalling. The effective tax rate for businesses able to write off business expenses is roughly 40 percent of their gross income. Comparatively, the effective tax rate for businesses that are unable to deduct ordinary businesses expenses is approximately 70 percent of gross income,” Pierce, the bill sponsor, said in testimony before a joint committee of the legislature in March. “This unfair tax code is significant and means a 30 percent loss for business owners to reinvest in their business, hire and retain quality employees, and offer greater benefits to current employees.”

“The medical cannabis industry in Maine is able to utilize this tax advantage,” she said. “It seems only fair and prudent that both our cannabis industries could have this opportunity.”

A fiscal analysis of the legislation says that it will decrease general fund revenue by $1.14 million in the 2023-24 fiscal year and $1.44 million in the 2024-25 fiscal year. It would also decrease local government fund revenue by $60,000 in 2023-23 and $76,000 in 2024-25.

The state’s Office of Cannabis Policy (OCP) said after the governor signed the bill that the reform “will allow licensees to take business expense deductions on their Maine tax returns like any other legal business and improves parity between the state’s medical and adult use cannabis businesses.”

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As congressional lawmakers work to normalize federal marijuana financial policy, a growing number of states have taken it upon themselves to facilitate relief for the cannabis industry.

For example, the governor of Illinois signed a budget bill in June that includes provisions that will allow licensed marijuana businesses to take state tax deductions that they’re currently prohibited from utilizing under the IRS code.

That same month, the governor of Connecticut also signed budget legislation that includes provisions to provide state-level tax relief to licensed marijuana businesses as a federal 280E workaround for the industry.

Also, the governor of New Jersey signed legislation in May to allow licensed marijuana businesses to deduct certain expenses on their state tax returns as a partial IRS 280E fix. Lawmakers in Iowa, New York, Pennsylvania and Virginia have similarly pursued tax relief for each of their state’s marijuana markets.

The New York Senate passed a bill in June to provide a 280E fix for New York City cannabis companies at the local level because the already-enacted statewide reform didn’t affect the city’s separate tax law. It also cleared the Assembly that month and has been returned to the Senate.

At the congressional level, Rep. Earl Blumenauer (D-OR) reintroduced a bill in May that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.

He told Marijuana Moment that he’s “absolutely convinced when we are able to fully deduct their business expenses that there actually will be more revenue collected because people will comply fully with the law.”

For the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And as the Congressional Research Service (CRS) noted in a 2021 report, IRS “has offered little tax guidance about the application of Section 280E.”

IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

Back in Maine, the legislature has also passed a number of other cannabis reform proposals, including bills championed by a GOP freshman lawmaker, who previously worked as a marijuana activist, to protect gun rights for cannabis consumers and increase the number of plants that adults can grow for personal use.

Illinois Sets 2023 Marijuana Sales Record With $140 Million In Recreational Purchases In July