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The New York legislature has officially sent legislation to the governor that would provide tax relief to New York City marijuana businesses that are currently blocked from making federal deductions under an Internal Revenue Service (IRS) code known as 280E.
About five months after the Senate and Assembly approved the proposal, both chambers transmitted their identical bills to Gov. Kathy Hochul (D) on Monday.
While Hochul signed a budget bill last year that included provisions allow state-level cannabis business tax deductions—a partial remedy to the ongoing federal issue—New York City has its own tax laws that weren’t affected by that change. The new measure is meant to fill that policy gap.
“This bill would allow a deduction for business expenses, incurred by taxpayers authorized by the Cannabis Law to engage in the sale, distribution, or production of adult-use cannabis products or medical cannabis, for purposes of the unincorporated business tax (UBT), the general corporation tax (GCT), and the corporate tax of 2015, commonly referred to as the business corporation tax (BCT),” a summary says.
A section of the city’s tax code would be amended to add sections allowing the deductions “in an amount equal to any federal deduction disallowed by section 280E of the internal revenue code.”
“This modification to income is appropriate because, while the expenses of cannabis-related business cannot be deducted for federal purposes, New York law permits and encourages these businesses akin to any other legitimate business occurring in the State,” a memo attached to the bill says. “The City’s business taxes should similarly encourage these business activities.”
It also notes that the reform legislation has the support of New York City Mayor Eric Adams (D).
Lawmakers in several states have pursued the tax workaround as congressional marijuana reform legislation continues to stall, leaving state-licensed cannabis businesses with significantly higher federal effective tax rates under prohibition.
Last month, for example, the Pennsylvania House approved a large-scale tax reform bill that contains language to provide state-level relief to medical marijuana businesses. The reform has drawn the ire of Republican members—who normally champion tax cuts—as a Democratic giveaway to the cannabis industry.
In August, the governor of Maine signed legislation to decouple the state tax from the federal policy for cannabis businesses.
The governor of Illinois also 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 and Virginia have similarly pursued tax relief for each of their state’s marijuana markets.
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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.”
The industry’s 280E problem could also be resolved if the Drug Enforcement Administration (DEA) accepts the recommendation of the U.S. Department of Health and Human Services (HHS) and moves marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
Photo courtesy of WeedPornDaily.
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