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The Pennsylvania House has approved a large-scale tax reform bill that contains language to provide state-level relief to medical marijuana businesses as they continue to struggle under federal financial barriers. The reform has drawn the ire of Republican members—who normally champion tax cuts—as a Democratic giveaway to the cannabis industry.
The marijuana provisions would allow state-licensed medical cannabis 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.
The House approved the tax bill in a party-live vote of 102-101 on Tuesday, sending it to the GOP-controlled Senate.
The language says that medical marijuana businesses may take an additional deduction “in the amount of the ordinary and necessary expensed paid or incurred during the taxable year” that are “ordinarily deductible for federal income tax purposes.” As such, the state tax policy would be decoupled from the federal prohibition that it has implemented on the state level.
Pennsylvania lawmakers approved similar language as an amendment to a tax bill in a House committee last year, but the legislation was ultimately laid on the table.
The new provision “will make us consistent with other states that have medical marijuana,” House Finance Committee Chairman Steve Samuelson (D) said on the floor ahead of the vote.
But Republicans have been quick to seize on the cannabis issue, including Rep. John Lawrence (R), who said that while “there are some positive aspects” to the overall bill, he’s opposed to “tax breaks for marijuana operations.”
“I’ve served in the House for 14 years. Not once have I had a constituent contact me asking for tax breaks for folks growing marijuana,” he said. In a press release, he listed tax policy issues that he said were not addressed in the bill such as property tax relief and again questioned why cannabis was included.
“The Democrats ran a Tax Code bill that increases taxes on working families,” Rep. Doyle Heffley (R) said. “Instead of both sides coming together in agreement, this non-negotiated bill rewards certain segments of the population at the cost of others, including giving special privileges for marijuana growers, the city of Reading and the movie industry.”
Rep. Valerie Gaydos (R) similarly criticized the inclusion of “special privileges for marijuana growers” in a statement. And Rep. Tim O’Neal (R) said the cannabis tax relief provision was an example of a “special interest giveaway” in the legislation.
“There are many sound policy initiatives in this legislation that can increase Pennsylvania’s competitiveness, stand up for our small business owners, and get government out of the way,” Republican Leader Bryan Cutler, who also called out the cannabis provision, said. “Unfortunately, they are tied in with bad policy choices and special interest giveaways that will ultimately put Pennsylvanians in a worse off position.”
It remains to be seen whether the Republican Senate will move to eliminate the marijuana tax relief language of the bill, but the oppositional messaging on the House GOP side signals that it could prove to be a contentious partisan issue even though Republicans tend to support tax cuts in general.
A fiscal note for the legislation estimates that the marijuana tax provision would cost the state $4 million in the current fiscal year, rising to $4.6 million in the 2024-2025 fiscal year.
Meanwhile, Pennsylvania Sens. Dan Laughlin (R) and Sharif Street (D) introduced another bill to legalize marijuana in the state in July, but it has not moved yet.
Another measure to allow all licensed medical marijuana grower-processors in the state to sell their cannabis products directly to patients cleared the Senate in September, and it’s now pending House committee action.
Black lawmakers discussed the need to ensure equity considerations are at the center of any marijuana legalization plan at a conference last month.
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Pennsylvania isn’t the only state that working to resolve cannabis industry tax issues under the federal 280E code.
In August, the governor of Maine signed legislation to decouple the state tax from the federal policy for cannabis businesses, for example.
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, 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.”
Meanwhile, the Senate Banking Committee passed a bipartisan marijuana banking bill last month that would free up cannabis industry access to traditional financial services. Senate Majority Leader Chuck Schumer (D-NY) has pledged to quickly bring it to the floor.
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).
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