A Democratic congresswoman has urged the Republican-controlled House Ways & Means Committee to prioritize legislation that could ease financial pressures on marijuana businesses. The proposed reform aims to address the restrictive tax rules imposed by an outdated federal policy, which has long frustrated cannabis entrepreneurs.
Pushing for Fairness in Federal Taxation
Rep. Dina Titus (D-NV), co-chair of the Congressional Cannabis Caucus, recently spoke at a “Member Day” hearing. Her focus was clear: amend Internal Revenue Service (IRS) code 280E to allow marijuana businesses access to the same federal tax deductions enjoyed by other small enterprises. Titus highlighted the growing acceptance of cannabis across the United States, pointing out its legitimacy as a job creator and tax revenue source.
“Like gaming, cannabis has now spread to many states, and it’s a legitimate source of jobs and tax revenue,” she said. Despite being legal for medical use in 39 states and recreational use in 24 states, cannabis businesses face significant hurdles under federal law. This inconsistency is rooted in marijuana’s classification as a Schedule I substance under the Controlled Substances Act.
Understanding Section 280E: A Historical Burden
IRS code 280E, introduced in the 1980s, was initially designed to prevent drug traffickers from claiming business expenses for illicit activities. However, its application to state-licensed cannabis businesses has created an uneven playing field. These businesses cannot deduct typical operating costs, leading to effective tax rates that can reach a staggering 70%.
The result? Increased prices for consumers and pressure on legal operators, which indirectly benefits the illicit market. “Section 280E drastically increases prices for consumers and harms businesses that are legitimate in these states,” Titus explained. The congresswoman argued that reforming this outdated code could promote fairness and support the legal market.
The Push for Broader Reform
Titus has long been a vocal advocate for revising federal marijuana laws. Her commitment is evident in her recent visits to cannabis operators in Nevada, where she discussed the challenges businesses face due to the disconnect between state and federal policies. Alongside Rep. Ilhan Omar (D-MN), she has assumed a leadership role in the Congressional Cannabis Caucus, pushing for comprehensive reforms, including the de-scheduling of marijuana.
While the Biden administration has initiated a review to potentially reclassify cannabis as a Schedule III substance, delays in the administrative process and regulatory freezes under President Trump’s earlier directives have stalled progress. If successful, this change could allow marijuana businesses to take broader federal tax deductions.
Federal Guidance and State-Level Efforts
The IRS has faced criticism for its handling of cannabis-related tax policies. In 2020, the Treasury Department’s inspector general flagged the agency for inadequate guidance on 280E compliance. While some updates have clarified specific rules, like the allowance of cost-of-goods-sold deductions, the overall burden remains significant.
Several states have stepped in to provide relief where federal rules fall short, offering state-level tax deductions for cannabis businesses. However, these measures only mitigate, rather than solve, the broader issue.
What’s Next?
The cannabis industry’s financial challenges under 280E are not just a business issue; they reflect a broader policy gap. Advocates like Titus are pushing for change that would treat marijuana businesses like any other small enterprise. The question remains whether Congress will act to address the inconsistencies in federal law and allow the legal cannabis market to thrive.