Representatives of the cannabis industry are ramping up their lobbying efforts on Capitol Hill, urging lawmakers to take action on taxes that affect their industry.


The main ask in meetings with members of Congress this week: overturning a regulation that prevents legal cannabis companies, in particular, from deducting operating expenses.


Members of the industry have been disappointed that the GOP tax overhaul passed in December did not clear away the regulation. And while many don't expect legislative action this year, given the fall midterm elections, industry advocates are holding out hope for Democratic-sponsored bills that could see movement in 2019.


“Right now cannabis is emerging at the fastest growing industry in America, and these are brand new jobs," said Keegan Peterson, whose company Wurk helps cannabis businesses comply with various regulations. "The ability of the industry to grow and provide medicines to the people who need them depends [on] good tax laws."


In terms of taxes, the main legislation the cannabis industry is supporting is the My Small Business Tax Equity Act. The legislation targets a line in the tax code put in place in 1982 that prohibits businesses from deducting a broad array of expenses if they are “trafficking in controlled substances.” 


That means that companies operating legally in states that allow recreational or medicinal marijuana get stuck with a far higher federal tax bill than other businesses.




“Bottom line is this: there’s a natural alliance between liberal Democrats and libertarian Republicans on this issue,” said Tom Adams, managing director of the Investment Research Division of BDS Analytics, which produces market trend reports for the cannabis industry.


Curbelo, who introduced the House version of the bill, has argued that the tax burden ends up being a boon to illegal drug operators, giving them a cost advantage over legal sellers.


“Current federal law also prohibits these businesses from deducting the common expenses associated with running a small business when they file their taxes – expenses necessary to running a business like rent, most utilities and payroll,” Curbelo said on the House floor earlier this year.


“Simply put this rule places legitimate enterprises, which have been established under state law, at a major competitive disadvantage,” he continued.


Broadly, cannabis businesses can’t deduct operating costs, though they are able to deduct expenses related to the cost of the goods themselves.


“They ruled, oddly, that you can deduct the cost of the illegal product, but not your operating expenses. That seems to be exactly backwards,” said Adams.


According to Adams, a straightforward reading of the law would stick average cannabis retailers with a federal tax bill of 23 percent of revenues, which is higher than the 18 percent in revenues that firms take home in profit on average.


But cannabis businesses have ways of trying to...

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