SPRINGFIELD, Ill. (June 13, 2023) – Last week, Illinois Governor J.B. Pritzker signed a bill that includes provisions eliminating the state’s conformity with Internal Revenue Code (IRC) Section 280E. The enactment of this provision provides limited but important state tax relief for marijuana businesses despite ongoing federal cannabis prohibition.
Rep. Jehan Gordon-Booth and a large coalition of cosponsors introduced House Bill 3817 (HB3817) in February. Provisions in the budget bill decouple the state tax code from federal tax code as it applies to deductions for marijuana businesses. In effect, the changes will allow marijuana businesses in Illinois to take tax deductions on their state returns that they’re currently prohibited from utilizing.
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 this tax scheme, marijuana businesses pay effective tax rates of up to 80 percent.
Under Illinois law, the state tax codes generally conform to federal tax law with respect to itemized deductions and business deductions. With the enactment of HB3817, marijuana businesses will be able to take deductions for state tax purposes in “an amount equal to the deductions that were disallowed under Section 280E of the Internal Revenue Code for the taxable year.
HB3817 also includes provisions that will direct funding to a cannabis development fund and extend the deadline for conditional marijuana business licensees to find a storefront.
The House passed HB3817 by a 73-38 vote. The Senate approved the measure by a 36-20 vote. With Gov. Pritzker’s signature on June 7, the tax changes go into effect for the current tax year (2023).
EFFECT ON FEDERAL PROHIBITION
Illinois legalized medical marijuana in 2013 and legalized cannabis for adult use in 2019.
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.
The legalization of medical and recreational cannabis removed a huge layer of laws prohibiting the possession and use of marijuana. 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.
Providing tax relief for marijuana businesses in Illinois will help further expand the market and make it that much more difficult for the feds to enforce cannabis prohibition.
A GROWING MOVEMENT
Along with Colorado, Washington state, Oregon and Alaska were the first states to legalize recreational cannabis. 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. In 2021, New York, New Mexico, Virginia and Connecticut legalized marijuana through legislative action, and Rhode Island legalized cannabis for adult use in 2022. Missouri and Maryland legalized marijuana in November 2022, and Delaware and Montana joined in 2023, there are now 37 states allowing cannabis for medical use, and 23 legalizing it for adult recreational use.
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.”
State tax relief demonstrates an important strategic point. Passing bills that take a step forward sets the stage, even if they are limited in scope. Opening the door clears the way for additional steps. You can’t take the second step before you take the first.
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