In 2022 alone, cannabis operators paid over $1.8 billion in additional taxes when compared to ordinary businesses, according to a report by cannabis research firm Whitney Economics. By 2023, the excess is predicted to be as much s $2.1 billion.
The reason? Cannabis businesses are subject to federal tax provision 280E which Bloomberg Tax says penalizes traffickers of Schedule I or II drugs by disallowing the deduction of “ordinary and necessary” business expenses, essentially resulting in federal income tax liability calculated based on gross income, not net income.
In fact the tax burden is so heavy that “only 24.4% of cannabis operators surveyed indicated that they are profitable,” says Portland based Whitney. That’s a huge jump down from 42% the year prior.
With effective tax rates often exceeding 70% for cannabis retailers, a lack of banking services, anti-business regulation, and lack of interstate commerce, “cannabis operators are hanging on by a thread and do not expect things to change any time soon,” says the report.
“The cannabis industry is under extreme economic distress and the current regulatory and taxation environment is untenable, even in the short term,” says the firm’s chief economist Beau Whitney.
Whitney added that he observed that several state markets are “teetering on the brink of systemic collapse, which would result in significant personal wealth destruction and disproportionately impact smaller operators. Tax reform may be the solution that helps support the cannabis industry, while generating billions in economic activity.”