Tax Reform

Marijuana Industry Overpaid Federal Taxes By $1.8 Billion, Per Report

Marijuana Industry Overpaid Federal Taxes By $1.8 Billion, Per Report

Per a new report, the marijuana industry overpaid federal taxes by $1.8 billion in 2022. 

In a press release, Whitney Economics confirmed that this overpayment is expected to balloon to $2.1 billion in 2023. The main reason for excessive taxes within the cannabis industry is that operators are subject to IRS tax provision Section 280E.

This section of the United States tax code bans traffickers of Schedule I or II drugs to deduct "ordinary and necessary" business expenses, thereby resulting in federal income tax liability calculated from gross income, as opposed to net income.

Credit: Getty Images

TaxBuzz Guides [linked from "Section 280E"] notes that:

“ ...marijuana is classified as a Schedule I drug under the Controlled Substances Act (CSA), which is the statute prescribing federal U.S. drug policy. Under the CSA, the manufacture, importation, possession, use and distribution of certain substances is regulated. Thus, for federal purposes, the sale of marijuana is an illegal business. This position has been substantiated in the Tax Court and affirmed by the Ninth Circuit Court of Appeals (Olive, Martin, (2012) 139 TC 19, affd (2015, CA9)). ”


High taxes in the cannabis industry are not a new issue. Last summer, small weed farmers in California worried they would be "taxed out of existence," with several farmers sharing that their operations were already "near death" in August 2022. 

The Whitney report says that the current tax burden for cannabis growers "is so heavy that only 24.4% of cannabis operators surveyed indicated that they are profitable [in 2022].

Credit: Getty Images

In 2021, that number was 42%. 

As more and more U.S. states legalize the use of marijuana, it will be interesting to see how taxation plays out at the federal level. 

Just last month, federal legislation was introduced that would alter how Section 280E applies to cannabis. This proposed legislative amendment, called the Small Business Tax Equity Act, was introduced by Representative Earl Blumenauer (D-OR-03), founder of the Congressional Cannabis Caucus.

What do you think about cannabis taxation?

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Rebekah Barton

Rebekah Barton

Rebekah's search engine optimization career began completely by accident as a college student. Over the course of her career so far, she has "grown up" with the SEO industry, from writing content while juggling classes to managing her own teams of writers and overseeing SEO strategy in subsequent roles. She is excited to bring her passion for high-quality content to CountingWorks, Inc.

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