JEFFERSON CITY, Mo. (April 3, 2022) – Last week, the Missouri Senate passed a bill that includes provisions that would eliminate the state’s conformity with Internal Revenue Code (IRC) Section 280E. The enactment of this provision would represent a small, but important state tax relief for medical marijuana businesses despite ongoing federal cannabis prohibition.
Sen. Denny Hoskins (R) introduced Senate Bill 807 (SB807) on Jan. 1. The legislation would make several changes to the state tax code, including a provision that would provide much-needed tax relief for medical marijuana businesses in the state.
Section 280E of the IRC forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS applies Section 280E to state-legal cannabis businesses, meaning marijuana growers, processors and sellers cannot deduct expenses from their taxes that businesses in other sectors can write off. The only deduction that cannabis businesses can make is the cost of goods sold.
Under the current tax scheme, marijuana businesses pay effective tax rates of up to 80 percent.
The current Missouri tax code conforms to federal tax law, meaning legal marijuana businesses can’t claim normal businesses expenses on their state tax returns. Provisions in SB807 would allow taxpayers authorized under the Missouri Constitution to operate a business related to medical marijuana to claim an income tax deduction in an amount equal to any expenditures otherwise allowable as a federal income tax deduction, but that are disallowed for federal purposes because cannabis is a controlled substance under federal law.
Gov. Mike Parson (R) vetoed a similar measure last year.
On March 31, the Senate passed SB807 by a 23-7 vote.
SB807 would also create some tax breaks for new businesses, adjust the S-corp tax credit and make other changes to the Missouri tax code.
EFFECT ON FEDERAL PROHIBITION
Under the federal Controlled Substances Act (CSA) passed in 1970, the federal government maintains complete prohibition of marijuana. Of course, the federal government lacks any constitutional authority to ban or regulate cannabis within the borders of a state, despite the opinion of the politically connected lawyers on the Supreme Court. If you doubt this, ask yourself why it took a constitutional amendment to institute federal alcohol prohibition.
Missouri legalized medical marijuana in 2018 by a ballot measure, despite ongoing federal prohibition. This removed one layer of laws prohibiting the possession and use of marijuana in the state even though federal prohibition remains in effect. This is significant because FBI statistics show that law enforcement makes approximately 99 of 100 marijuana arrests under state, not federal law. When states stop enforcing marijuana laws, they sweep away most of the basis for 99 percent of marijuana arrests.
Furthermore, figures indicate it would take 40 percent of the DEA’s yearly budget just to investigate and raid all of the dispensaries in Los Angeles – a single city in a single state. That doesn’t include the cost of prosecution. The lesson? The feds lack the resources to enforce marijuana prohibition without state assistance.
A GROWING MOVEMENT
Colorado, Washington state, Oregon and Alaska were the first states to legalize recreational cannabis, and California, Nevada, Maine and Massachusetts joined them after ballot initiatives in favor of legalization passed in November 2016. Michigan followed suit when voters legalized cannabis for general use in 2018. Vermont became the first state to legalize marijuana through a legislative act in 2018. Illinois followed suit in 2019. New Jersey, Montana and Arizona all legalized recreational marijuana through ballot measures in the 2020 election. Earlier this year, New York, New Mexico, Virginia and Connecticut legalized marijuana through legislative action.
With 37 states allowing cannabis for medical use, and 18 legalizing for adult recreational use, the feds find themselves in a position where they simply can’t enforce prohibition anymore.
The lesson here is pretty straightforward. As Tenth Amendment Center Executive Director Michael Boldin noted, “When enough people say, ‘No!’ to the federal government, and enough states pass laws backing those people up, there’s not much the feds can do to shove their so-called laws, regulations, or mandates down our throats.”
The push to ease the tax burden on marijuana businesses highlights another important strategic reality. Once a state legalizes marijuana – even if only in a very limited way – the law tends to eventually expand. As the state tears down some barriers, markets develop and demand expands. That creates pressure to further relax state law. These new laws represent a further erosion of unconstitutional federal marijuana prohibition.
SB807 will move to the House for further consideration. Once assigned to a House committee, it must get a hearing and then pass the committee by a majority vote before moving forward in the legislative process.