The Government Considers Marijuana Illegal And Taxes It Anyway

Legal state marijuana businesses face heavy income taxes because federal law prohibits the tax credits most businesses enjoy.
Posted at 7:43 PM, Apr 19, 2018

It's probably even more expensive than you think to run a recreational marijuana business. You have to have a license and a facility with high-powered growing-lights. You have to vet and hire staff. And because you're selling something the federal government still considers illegal, your tax bill is going to be enormous.

"Last year, Colorado Harvest Company's tax bracket was 78 percent," CEO Tim Cullen said. "That's ridiculous. No other business ever deals with tax brackets like that."

Selling marijuana might be against federal law, but the government will happily collect taxes on the revenue from those sales. According to the IRS, income is income and subject to taxation, even if it's from illegal sources. And a single subsection in the tax code prevents marijuana businesses, like Tim Cullen's, from deducting almost anything: 280-E.

"You're trafficking a federally illegal drug," Cullen said. "You cannot deduct your payroll. You cannot deduct the cost of retail space. You can't deduct advertising costs."

This means Cullen's company rides even thinner profitability margins than other businesses. It has to be choosy about advertising and careful with how many staffers it hires.

"The only thing standing in the way of our business being treated like every other business is how we pay taxes at this point," Cullen said. "We're in compliance with the Affordable Healthcare [sic] Act. We have 80 people that we employ. They all have health insurance. We occupy seven different buildings in town."

The fix, according to Cullen, is to repeal 280-E or to legalize marijuana federally so it no longer applies. But that requires clinical research that shows it has medical value — but it's hard to get research approved because the drug is Schedule I. It's a Catch-22.

And even without federal support, states are likely to just keep voting to legalize marijuana themselves.

"There's a reason 29 states have been able to pass it," Cullen said. "This is not top-down legislation; this is grassroots coming up. People want marijuana, and they want access to it. They're willing to vote for it."

Colorado even gives its marijuana businesses the tax cuts they can't get from the federal government. Denver taxes its marijuana at less than 15 percent, and it's still returned more than half a billion dollars to education and substance abuse treatment funds.