Taxing Cannabis

There is a disconnect between how the state and federal governments tax small businesses for them to function profitably. Most of those laws come from big businesses funding PACs to get the laws that work for them, keeping competition from small businesses out of the mix. Whenever I hear or read another story from a small business owner being held to absurd rules, I think about lawyers. Lawyers are essential, whether we like it or not, but in the start-up world, I have seen too many lawyers attempt to tell founders how to run their businesses when they aren’t business people; they are lawyers.

The amount of regulation on cannabis businesses is teetering on absurd. Most states have allowed municipalities to decide if cannabis businesses can operate the hours and locations and have added extra taxes. Keep in mind that NY State has not yet dropped its rules and regulations for anyone except those who have previously been incarcerated.

The Federal Government has been the worst. They are taxing cannabis under Section 280E, which penalizes traffickers of Schedule I or II drugs by not allowing the deduction of “ordinary and necessary” business expenses. After reducing gross receipts by the cost of goods sold, federal income tax is calculated on gross income. That is roughly around 80%. How does the federal Government expect this new industry to succeed?

Keep in mind that the Federal Government has yet to decriminalize cannabis but is taxing the shit out of it. Does that make sense? It does for the Federal Government. It is essentially deeming all-new cannabis business owners as drug dealers, even though the state is awarding licenses to people to sell the goods. On top of that, the amount of taxes being racked in is enormous. Illinois generated $100m more in cannabis than alcohol and almost $390m in taxes in 2021. That is serious cash. It doesn’t include what the Federal Government is raking in.

Just like Fannie Mae and FEMA, which are essentially businesses for the Government to make money off their citizens, cannabis appears to be leading the charge. The difference is cannabis does not operate under the umbrella of the Government. If the states and Federal Government want to continue this newfound surplus of taxes, they should start taxing these new businesses differently while changing the narrative; otherwise, many will go out of business, and it will take decades to make it right. California is reeling from the poor decisions made after being in the highly regulated industry for the past decade.

As always, the big question here is how long will it take for the Federal Government to get this right?