You Want Marijuana Businesses to Be Taxed Fairly? Think Again!

Markets Motley Fool

When it comes to the fastest-growing industries in the United States, marijuana probably comes to mind. Over the next five years, few if any industries have the potential to grow at a quicker pace. According to a report from Marijuana Business Daily, the legal weed industry has the opportunity to see its annual sales quadruple between 2016 and 2021 to approximately $17 billion.

Continue Reading Below

Underlying this massive surge in sales is a shift in the way the American public views weed. Once considered to be a taboo topic that most folks, including politicians, would shun, cannabis is now a mainstream topic. According to both an Oct. 2017 Gallup poll and an April 2017 CBS News survey, support for legalizing pot is at an all-time high (64% for Gallup, and 61% for CBS News).  By comparison, support stood at roughly a quarter of respondents back in the mid-1990s. This growing support for the pot industry gives hope that federal lawmakers may, one day, change their stance on the drug.

Marijuana businesses face a plethora of legal hurdles

But as it stands now, the marijuana industry faces a mountain of restrictions. At the federal level, marijuana is a schedule I substance, which means it has no recognized medical benefits, and it's on par with heroin and LSD. This scheduling comes with a host of issues for the industry.

On the medical side of the equation, the schedule I categorization makes it extremely difficult to conduct benefit-versus-risk clinical studies. The Drug Enforcement Agency only authorizes the University of Mississippi to grow cannabis for medical research, meaning there's a limited annual supply and a mountain of red tape researchers have to climb through in order to conduct tests.

For businesses, there are two primary disadvantages. First, most have little or no access to basic banking services, even including something as simple as a checking account. Because financial institutions answer to the Federal Deposit Insurance Corporation, and the FDIC is a federally created entity, offering financial services to marijuana companies could be construed as money laundering. If the federal government wanted to, it could criminally charge banks, or at the very least slap them with hefty fines for aiding pot companies.

Continue Reading Below

The other issue is tax code 280E, which disallows businesses that sell a federally illegal substance from taking normal corporate income-tax deductions. The result is pot businesses are forced to pay income tax on their gross profit as opposed to their net profit. Some estimates suggest that weed companies are paying an effective tax rate of 70% to 90% on their income, compared to 15% to 30% for a "normal" company. 

This senator just built up (then crushed) marijuana businesses and investors

This latter obstacle has been a talking point of select lawmakers on Capitol Hill for years. Having to pay such an exorbitant tax rate is a detriment to pot businesses that can adversely impact their ability to expand and hire.

One such lawmaker who looked to be making inroads against the three-decade-old 280E was Sen. Cory Gardner (R-Co.). Gardner hails from Colorado, one of the first two states to have legalized recreational weed (along with Washington), and the very first state to begin selling adult-use cannabis. Gardner knows firsthand what a burden 280E is on pot businesses in his home state, and he planned to do something about it. While Republicans in the Senate were refining their tax plan a little more than a week ago, Gardner was submitting an amendment that would have removed marijuana businesses from the restrictions associated with 280E, allowing them to instead be taxed like a normal business.

Unfortunately, the excitement surrounding Gardner's amendment proved to be short-lived. With a flurry of amendments and alterations coming from senators of both parties, Gardner's amendment was never voted on. Gardner wound up not requesting the amendment be put to vote on the belief that he wouldn't have had the required votes (51) for passage.

Why wouldn't it pass, you ask? According to Congress' Joint Committee on Taxation, putting cannabis businesses on par with normal businesses would have cost the federal government about $5 billion in tax revenue over the next 10 years. While that's practically peanuts relative to the $1.5 trillion deficit the GOP tax plan was scored at by the Congressional Budget Office, it would nonetheless move the needle in the wrong direction. 

The other possible issue is that Republicans aren't nearly as excited about marijuana's expansion as Democrats. Though Gallup's latest poll shows a majority of respondents (51%) who identify as Republican now favor the legalization of marijuana, the GOP is still considerably more skeptical about cannabis than Democrats. Since they control Congress for the time being, advancing new marijuana policy is unlikely.

The end result is that 280E isn't expected to go anywhere anytime soon. Couple this with the fact that Attorney General Jeff Sessions is pressing Congress for the right to prosecute marijuana businesses, and things aren't looking nearly as "green" for the marijuana industry as you might think.

10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017
The author(s) may have a position in any stocks mentioned.

 

The Motley Fool has a disclosure policy.