Is Congress Keeping Black Market Marijuana Dealers In Business?

The wave of marijuana legalization that has swept across the country in recent years continued in the recent midterm elections. Oregon, Alaska and the District of Columbia all voted to legalize the drug for recreational use. As many expected, the cannabis industry is booming in states like Colorado, and some analysts predict that legal U.S. marijuana revenue could reach $10 billion by 2018.

There has long been an underground marijuana culture in the United States, but recent state-specific legalization has meant that the federal government is benefiting from marijuana tax revenue for the first time. Ironically, this boost in tax revenue has come despite the fact that marijuana is still illegal on the federal level.

While many newly-legal cannabis businesses are flourishing, some are suffocating under the weight of a federal tax code that business owners feel is unfair and is keeping black market marijuana dealers in business.

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Provision 280E

Provision 280E of the federal tax code is at the center of this marijuana tax debate. The tax code states that all income, whether earned legally or illegally, is subject to federal income tax law. Typically, a business is allowed to deduct business expenses such as advertising costs, rent, utilities and employee salaries from earned income prior to paying federal tax.

However, since marijuana is technically illegal at the federal level, provision 280E states that such expenses are not deductible for tax purposes because marijuana is still considered a “controlled substance” as defined by Congress in the Controlled Substances Act. As a result of 280E, rather than paying 30 to 40 percent tax rates that other businesses pay on profits, many marijuana businesses are paying 80 to 90 percent tax rates.

The original intent of provision 280E was to discourage illegal drug trafficking, but members of the cannabis industry, including the 280E Reform Movement, believe that the law has become obsolete. Business owners feel that lumping state-licensed marijuana sales in with the likes of illegal heroin and crystal meth street sales is not only unfair, but it’s also actually keeping the marijuana black market in business.

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How Congress Is Helping Criminals

According to Derek Peterson, CEO of Terra Tech Corp TRTC, the unfair tax burden on marijuana businesses is simply being passed on to the customer in the form of higher prices. "The tax burden can make it difficult for the legal market to undercut the black market’s prices, which is what you’re seeing a lot of in Washington State especially," he told Benzinga.

"An important reason to legalize cannabis is to put an end to the violent black market, which can only be fully achieved if the legal market delivers a better price than the black market," said Peterson.

In this sense, Congress’ unwillingness to modify 280E is making it easier for black market marijuana dealers to compete against legal marijuana businesses.

What’s Being Done?

The IRS's official stance on the issue is that they are simply enforcing the law, and any changes to tax policy must come via an act of Congress. The National Cannabis Industry Association has made lobbying Congress on 280E a top priority.

"We're also seeing a pretty dramatic increase of news coverage and overall awareness on it," Peterson added, "which is translating into legislators paying closer attention… so things are moving in the right direction."