Cannabis Industry Facing High Cost Challenges As Tax Day Approaches

As the tax filing deadline of April 15 approaches, it's intriguing to examine the fiscal challenges and structural injustices faced by the cannabis industry.

That's why we've prepared some back-of-the-envelope calculations: The cannabis sector has contributed significantly to states where it is legal. According to official data from the Census Bureau, approximately $2.8 billion in taxes were collected from the cannabis industry across all states in 2023.

The impact of the cannabis industry on state revenues is notable. Data indicates that Alaska, Montana, Washington and Colorado collected an astonishing 1% of their total taxes from marijuana, while Oregon collected 0.79%, Michigan 0.7%, Maine 0.59%, Oklahoma 0.39%, and California 0.23% (which, given its vast economy, equates to $160,000 in Q4 2023 alone and $1.7 billion since data has been available starting Q3 2021). However, this landscape may shift in the future.

Tax Injustice And The Unregulated Market

While the DEA's decision on cannabis scheduling is pending, following recommendations by US Health and Human Services to reclassify marijuana and remove it from the list of highly controlled substances, cannabis companies are subjected to higher taxes than typical businesses due to the IRS's 280e code, which prohibits them from deducting normal business expenses. Private estimates suggest that at around $1.8 billion could have been deductible if cannabis companies were rescheduled in 2022.

This tax burden stems from the initial belief that high taxes on cannabis would discourage excessive use. Advocates for legal cannabis frequently cited taxation as a benefit to persuade regulators and politicians of the advantages of legalization. Additionally, legalizing cannabis was seen as a way to shift revenue from the illegal market to state coffers. While these arguments are compelling, they presuppose a buoyant market, which may not hold in economic downturns.

Your Taxes Are Due in Two Weeks

It appears that governments may have overleveraged the financial boon provided by the cannabis industry. As the industry navigates market shifts and declining prices, the tax burden weighs heavily on businesses.

A Forbes article outlines new strategies, such as the adoption of Employee Stock Ownership Plans (ESOPs), which could help companies reduce their tax liabilities. However, this solution may not be viable for all business models. In addition to exploring new financial strategies, the excessive tax burden may inadvertently encourage the movement of products into the unregulated market. This has become a significant issue for many states, as maintaining control over sales channels and product traceability presents challenges for authorities. Without effective enforcement or sufficient resources to combat the illegal market, there may be merit in simplifying the process for licensed retailers to sell legally. Otherwise, the coexistence of heavily taxed products with unregulated markets could promote the growth of unregulated, covert operations.

In an industry facing financial hardships, delinquent payments are increasing as the April 15 tax deadline looms. Recent data from Whitney Economics reveals that total delinquent accounts receivable across the cannabis industry are nearing an alarming $3.8 billion. This debt exacerbates financial difficulties for businesses, leading to halted payments to suppliers and potentially resulting in consolidation and bankruptcy as negative externalities accumulate.

Want to commiserate with other cannabis companies on this important topic while gaining knowledge and info about all things cannabis, join us a the  upcoming Benzinga Cannabis Capital Conference in Florida at its new venue in Hollywood on April 16 -17. The two-day event at The Diplomat Beach Resort will be a chance for entrepreneurs, both large and small, to network, learn and grow. Renowned for its trendsetting abilities and influence on the future of cannabis, mark your calendars – this conference is the go-to event of the year for the cannabis world. You can get a 20% discount on tickets following this link right now. Hurry! Prices will increase soon!