The Roadblocks to Progress: How 280E is Crushing Cannabis Businesses

In this week’s episode of Proud to Work in Cannabis, host Karson Humiston is joined by special guests Beau Whitney, Chief Economist at Whitney Economics, and Jeremy Berke, Founder of Cultivated, to discuss the impact of 280E on the cannabis industry. This episode sheds light on the challenges faced by cannabis businesses and the need for federal taxation reform – Let's dive into the key takeaways from the episode.

The Current State of the Cannabis Economy

Beau recently published the Business Conditions Report, which surveyed businesses throughout the US, including cannabis businesses. The report reveals a bleak view of the cannabis industry, with only 25% of US cannabis operators reporting profitability. Factors contributing to this challenging economic landscape include supply chain issues due to COVID-19, increased input and labor costs, oversaturation of supply leading to price drops, and regulatory hurdles. The impact is evident not only in the numbers but also in the frustration and sentiment expressed by operators and employees.

The History of 280E and Its Effects

Jeremy highlights the issue of 280E, which imposes significant tax burdens on cannabis companies. He traces the origins of 280E back to a drug dealer in the 1970s and explains how it became a law to prevent deductions for expenses related to federally controlled substances. However, the law's unintended consequences have resulted in legal cannabis businesses being subjected to punitive taxation. The lack of relief from both state regulators and the federal government exacerbates the challenges faced by the industry.

Quantifying the Impact of 280E

Beau emphasizes how 280E disproportionately affects retail cannabis businesses. Unlike cultivators who can deduct production-related expenses, retailers face limited deductions. Expenses related to compliance, security, labor, marketing, and legal fees cannot be deducted, resulting in effective tax rates of up to 70-75%. Last year alone, cannabis businesses paid an additional $1.8 to $1.9 billion in taxes due to 280E, further hampering their profitability and ability to reinvest in their companies.

The Cultural Impact of 280E

Jeremy discusses how 280E prevents cannabis companies from reinvesting their profits and inhibits economic growth within the industry. The inability to allocate funds for expansion, research, and development not only affects morale but also stunts the growth potential of new businesses and the industry as a whole. Relief from 280E is essential to foster economic growth and allow cannabis businesses to thrive.

The Need for Reversal, Amendment, or Deletion of 280E

Various avenues exist to address the issue of 280E. Rescheduling cannabis to Schedule III or above, presidential action, or changes to tax policy by the IRS or Congress could provide relief. However, Beau cautions that comprehensive education about the cannabis industry's economic impact is needed to shift perspectives and overcome resistance to reform. According to Beau, a dynamic scoring model that considers the industry's growth potential is also necessary to dispel misconceptions and inform lawmakers about the benefits of supporting the cannabis industry.

Factors Affecting the Industry's Progress

Beau identifies factors contributing to the industry's current challenges, including stagnation in mature markets like Oregon, Colorado, and California, delayed deployments in new markets like New Jersey and New York, and increased interest rates affecting investments. To navigate these obstacles, operators must focus on working smartly, forming strong industry connections, and implementing efficient business practices. Weathering the current storm will position businesses to thrive in the future.

Proud to Work in Cannabis

Karson wraps up the episode by reminding listeners of the incredible potential of the cannabis industry and its positive impact on people's lives. It is crucial to support and advocate for reform to alleviate the burdens imposed by 280E. By working together, educating lawmakers, and promoting sustainable business practices, the cannabis industry can overcome its challenges and continue to grow. The thesis remains intact, and with ongoing support, the cannabis industry will emerge stronger on the other side.

We encourage you to listen to the full episode of Proud to Work in Cannabis for more insights from Beau and Jeremy on the topic of 280E and its impact on the cannabis industry. Together, let's support the industry's growth and build a brighter future for cannabis professionals.