Most companies pay taxes on their net earnings, after expenses. But whether or not marijuana businesses should pay on gross or net is something of a debate today.
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Taxes are one of the stumbling blocks keeping the industry from really breaking out. The other is banking and marijuana’s continued illegality on the federal level. One of the arguments businesspersons and advocates alike uses are the impressive tax revenues generated from recreational marijuana. Colorado’s 2014 tax haul first predicted to be around $100 million. It was actually a far less impressive $44 million, though still significant especially since this was only the first year. The state made a far more remarkable $76 million on medical marijuana through various fees.
Other states particularly those with fiscal woes are watching and weighing their options. Still, considering what folks on the black market are making, there is still a significant pool of consumers out there which could be reached, should the legal variety become price competitive. Taxes are part of the problem, pushing potential consumers to get their supply from the black market instead. All told Colorado’s recreational marijuana is taxed at a rate of 27.9%. That’s 15% excise tax, 10% marijuana sales tax and 2.9% state sales tax. It is estimated that 40% of purchased cannabis in Colorado are through illegal channels.
Medical marijuana on the other hand is taxed at a scant 2.9%. There is reason to believe some patients may be getting access to medical marijuana and selling it themselves. For businesses, besides the taxes driving customers away, IRS code Section 280E is the big killer. This basically says that even illegal operations must pay federal taxes. But up until recently, cannabusiness operators can’t write off regular expenses such as payroll taxes, utilities, rent and more.
The IRS on the other hand said it was forced to enforce the tax code as it is. Recently the IRS released guidelines for those “trafficking in a Schedule I or Schedule II controlled substances”, meaning marijuana businesses. IRS guidance (ILM 201504011) is very complicated, as you might expect. Marijuana businesses can now deduct parts of goods sold, nothing outside of that. Such businesses can deduct rent, wages, repairs and operations due to production, but not those which are either marketing or general business activities. As for legislation, The Marijuana Tax Equity Act would remove this and instead tax cannabis federally at a 50% rate. Some say it’s better than IRS 280E. Another bill in Congress would see a phased 10% rate topping off at 25% in 10 years.