Despite the fact that marijuana is still illegal under the Controlled Substances Act, its sales in 2015 soared to $5.4 billion. According to data released by the ArcView Group, which tracks the marijuana markets, sales increased by 17.4 percent from 2014. The figures include medical and adult recreational sales. This annual gain was largely fueled by the explosive growth in consumer sales, as some states have approved adult recreational marijuana use. In fact, in 2014, adult use sales grew from $351 million to $998 million.
A major problem that the marijuana businesses have encountered is the amount in corporate tax that they are forced to pay, especially in the Federal system.
States across the country are beginning to legalize recreational marijuana, including Washington and Colorado. Within these states, monthly sales have increased dramatically. For example, in Washington, marijuana sales totaled $75.3 million in December 2015. Additionally, Colorado produced almost $1 billion in sales. Not only are these numbers great for the marijuana businesses that continue to grow, it is even better for both the State and Federal governments that get to tax the marijuana.
A major problem that the marijuana businesses have encountered is the amount in corporate tax that they are forced to pay, especially in the Federal system. Marijuana is still considered illegal under Federal law. Therefore, these businesses, which are required to file both State and Federal taxes, are subjected to a federal tax code, 26 U.S.C. § 280E. This provision specifically denies tax credits or exemptions to businesses “trafficking” in controlled substances, which are prohibited by Federal law.
The corporate tax can range anywhere between 40 and 70 percent. In some extreme cases, the tax rate can reach 90 percent. Comparatively, the typical corporate tax rate is around 35 percent, though many large, multinational companies in the U.S. reportedly pay closer to 12.5 percent. Unfortunately, these high tax rates are only for the Federal government. They do not include the State income taxes and sales taxes.
Meanwhile, States that have legalized marijuana for both medicinal and recreational purposes are receiving an increasing amount of revenue from their own taxes. Just from sales taxes, the state of Washington expects to receive $1 billion by 2019. In August 2015, Colorado collected $13.2 million in taxes and fees, the single highest month of tax revenues since recreational use sales began in January 2014.
However, State and local governments are proposing adding even more taxes to these businesses. For instance, California recently introduced a bill that would levy a 15 percent tax on the sale of marijuana in medicinal dispensaries. As with sales taxes, cities and counties would be able to enact their own local taxes or fees on top of this new 15 percent tax. In Ashland and Phoenix, Oregon, the City Council has proposed a 3 percent city sales tax only on marijuana sold for recreational purposes
One way in which these growing businesses are successfully beginning to get around this tax provision is by using a 2007 U.S. Tax Court decision in their favor.
One way in which these growing businesses are successfully beginning to get around this tax provision is by using a 2007 United States Tax Court decision in their favor. In Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r of Internal Revenue (the “CHAMP case”), the court allowed a California medical marijuana dispensary to allocate almost 90 percent of certain expenses to the non-marijuana aspects of its business. In the CHAMP case, the U.S. Tax Court rejected the IRS’s argument that once a business begins selling marijuana, all of its business deductions and credits are barred.
Because of this decision, marijuana businesses are also providing other services that are related, but not considered to be “trafficking.” The most common type of service, labeled as “caregiving” services, provides patient counseling, drug education, and advocacy.
Recreational marijuana dispensaries are also dealing with another problem that stems from their illegal status at the federal level.
Recreational marijuana dispensaries are also dealing with another problem that stems from their illegal status at the federal level. Since the revenue that these businesses make is still considered “drug money,” most banks refuse to conduct business with them. Marijuana is still classified as a Schedule I drug, which means that it has a high potential for abuse, no current medically acceptable use, and there is a lack of accepted safety for use of the drug under medical supervision.
This Schedule I designation denies dispensaries access to traditional banks. Therefore, these dispensaries have no real secure location to store all of their funds. They are also forced to deliver all of their tax payments personally by cash. Many business owners are fearful because they are transporting huge amounts of cash in duffel bags to these locations.
Recently at a California State Board of Equalization (“BOE”) office in San Francisco, a $400,000 payment came in carried in a “big bag.” This has led to strange problems for the BOE. For example, the teller windows in the office do not have slots big enough for the cash-stuffed envelopes to slide through. They have to be retrofitted to be bigger. In the meantime, the office staff is forced to come out of their safe rooms to receive payments.
Inside the cash room at a Sacramento office, money is stored in an old small safe. Even though the safe is about four feet tall, it still gets stuffed to capacity. BOE staff report that sometimes the cash drawers at the windows get so full that the money ends up being stacked on desks, out in the open. Additionally, instead of the aroma of marijuana, the room smells strongly of fabric softener because some depositors “wash” the money in a dryer before coming in.
There have been some ideas tossed around to end these problems for dispensaries. This includes self-service teller kiosks like tax ATMs, contracting with banks to allow the BOE to use a secure “back room” to receive payments. People have also suggested the use of Bitcoin. So far, no solutions have turned out to be viable.
In 2015, U.S. Representative Ed Perlmutter (D- CO), introduced the Marijuana Businesses Access to Banking Act of 2015 which would allow dispensaries to use traditional banking options if they complied with State laws. A sub-committee is currently reviewing this bill.
Both Hillary Clinton and Bernie Sanders have proposed plans to help resolve these problems.
Although President Obama has stated that marijuana reform is not on his agenda for his last year in office, presidential hopefuls Hillary Clinton and Bernie Sanders have discussed the issue. Both Hillary Clinton and Bernie Sanders have proposed plans to help resolve these problems. Their respective plans though, are completely different.
Bernie Sanders has proposed to completely remove marijuana from the Drug Enforcement Administration’s schedule of controlled substances. This would have many consequences on the regulation of marijuana, but most importantly it would allow States to decide for themselves whether or not to legalize it. In contrast, Hillary Clinton has proposed to change the designation of marijuana to a Schedule II drug. This change would mainly allow researchers to conduct studies into the possible medicinal uses of marijuana.
If the government fails to cut businesses a break, legal marijuana could be sold on the black market to dodge taxes. Although the U.S. is moving towards a more common-sense drug regulation after the height of the war on drugs, there is still a lot left to improve.