Drugs & Taxes

Have you ever financially benefited from illegal activity? Remember those dime bags you sold to make rent in college? I’m not here to judge.

Odds are the statute of limitations has passed on the petty misdemeanors of our youth. Just be thankful there were no federal charges filed against you – not for the weed – for tax evasion. That’s because the IRS, and this is real, instructs you to claim, “income from illegal activities, such as money from dealing illegal drugs… [in] your self-employment activity.”

It sounds crazy. After all, who would ever volunteer their illegal activities on a government form? And though there are a few strategic instances when someone may want to declare income made from illicit acts, you would be correct to assume that this instruction is seldom adhered to by tax payers.

However, just because John Q. Drugdealer isn’t recording all of his transactions in Quickbooks and reviewing monthly profit and loss statements, that does not mean that legitimate businesses are not hurt by the ridiculousness of the American tax code. Section 208[E] of the tax code specifically prohibits any business, regardless of its legality in a state in which the business is conducted, from benefiting from deductions or credits enjoyed by all other businesses if it profits from Schedule I or II narcotics. There are a few loopholes that a dispensary may be able to use, especially for caretaking costs in the medical realm. However, the fact remains that legitimate businesses involved in the cultivation and sale of marijuana are taxed at an exponentially higher rate than businesses with comparable finances.

Though it is easy to blame the IRS (they have actually helped dispensaries navigate this murky area of the law), they are only enforcing tax laws passed by Congress. In a political climate such as the one we live in, it may be difficult to believe that there is growing bipartisan support for legislation aiming to make the law more equitable for growers and dispensers. It may be even more surprising that the bill’s sponsor is Rep. Carlos Curbelo, a Republican from South Florida.

Curbelo, a son of Cuban exiles, represents the southernmost district in Florida; Once the frontlines for the war on drugs during the explosion of cocaine in the 1970’s and 80’s. The bill, called the Small Business Tax Equity Act, co-sponsored by Oregon Democrat Earl Blumenauer would allow businesses legally involved in the marijuana business to take advantage of deductions such as rent, office supplies, and payroll.

The bill has garnered support from both sides of the aisle as well as policy and lobbying groups. Liberals’ backing for the law is not especially surprising, but as marijuana moves more and more into the mainstream, traditionally conservative groups are also backing the bill. Most notably, perhaps, is the group Americans for Tax Reform (ATR). The president of ATR is infamous conservative activist Grover Norquist, a man who has tremendous influence in the Republican Party (ATR’s “Tax Protection Pledge,” which asks lawmakers to oppose any new tax increases, has been signed by 95% D.C. Republicans).

Economic conservative’s support for marijuana reform is not an especially new concept. Many in the ultra-right Libertarian Party have supported marijuana legalization for years. What is new is the increasing social and moral acceptance of some form of legalized cannabis. Take Rep. Cubelo’s home state. Florida narrowly went to Donald Trump in the 2016 election, but on that same ballot 71% of voters approved a medical marijuana law. The Florida law has its own issues – state legislation has banned smoking marijuana and established what some have called a state run “cartel” – but the fact remains: legal marijuana is now part of the Florida economy.

Looking across the nation, over sixty percent of the country now lives in a state that in one way or another has legalized cannabis. It is estimated that the marijuana business will exceed $50 billion by 2026. That is nearly a tenfold increase from what it is estimated to be today in only the next nine years. Nine years ago, only eleven states had medical marijuana and zero had recreational. The Arcview Group, a market research firm, has even suggested, “not since the internet have we seen this exponential growth in an industry.”

There is the classic argument about the number of alcohol and firearm related deaths in the United States compared to marijuana use. The argument has inherent flaws as a social commentary that do not need to be analyzed here. However, as the social stigmas are owned by a shrinking minority, the economics for those who buy and sell marijuana become increasingly important. And there certainly does not appear to be any rush by Congress to go after these industries. Tucked inside every budget bill since 2014, including this year’s proposal, is a little-known provision known as the Rohrabacher-Farr amendment. It states that, “none of the funds made available in this [budget] Act to the Department of Justice may be used, with respect to any of the States … which is to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

Rohrabacher-Farr does not preclude the DOJ from using its resources to crack down on recreational marijuana nor does it have any of the far reaching economic impact that the Small Business Tax Equity Act would have. It does suggest that Congress may be, at the very least, unwilling to interfere with how states apply their economic policies to medical marijuana. How long Congress can kick the can regarding economic equality remains to be seen, but if we are on the heels of the largest single industry boom since the digital revolution, ignoring that it is operating under different rules will soon no longer be an option.

Leave a Reply

Your email address will not be published. Required fields are marked *

Pin It on Pinterest