The Cannabis Industry was Brand New Ten Years Ago, Its Time To Update the Federal Tax Code

It has been another year and the burdensome tax code 280E is still devastating the Colorado marijuana industry. The Biden administration teased a repeal earlier this year but it has still not come to fruition. For those not in the know, 280E effectively classifies marijuana businesses in the same bracket as an illegal street dealer, with no tax breaks or write-offs. This places cannabis companies in the difficult position of never being able to write off business expenses or have tax dedications.

Coupled with the decreasing sales, and falling prices, Colorado’s cannabis industry has been hit hard. They are not alone, many states are facing a crisis. It is not just falling sales, it is faltering tax revenues that threaten school programs and general budgets.

Colorado’s legal cannabis industry is celebrating its 10th birthday this year, having been legalized in 2014, but the federal government still treats marijuana sales as an illegal income source. Fortunately, and very recently, the Colorado state government has decided to tax and regulate the industry instead of forcing it further underground. The idea of taxing and regulating what people are already purchasing sent shockwaves throughout the nation, and, many states followed this path. This has resulted in collecting $2.7 billion in taxes over the last decade for Colorado alone. Instead of street dealers pocketing money, marijuana has actually helped fund some of the programs Coloradoans are so proud of. Generally, cannabis taxes go towards education programs, with the remainder placed in the general fund.

However, one major stumbling block remains in place by the federal government, always notoriously slow to act — Tax Code 280E. 280E reads as follows: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in a controlled substance.” This classification is one of the major burdens that marijuana industry experts have shared with Yellow Scene Magazine.

Not all states are the same. In California, Assembly Bill 37 was signed into law back in 2019, “eliminating conformity” with the federal tax code for the cannabis industry. Although that tax break happened before Covid hit, Colorado is now following suit in hopes of offering the industry a path to recovery, which would give a boost to the struggling business owners after pandemic sales have slowed. Optimistically, there is movement from the Colorado legislature, but ultimately, it remains up to the federal government to truly change the face of this clearly legitimate industry. It really seems illogical that marijuana is still classified alongside heroin in this day and age.

280E or not to be

Yet confusion abounds. News media stories about changes in the tax code and press releases from major entities seemed to signal a shift. So many marijuana businesses — countless from Colorado — filed taxes thinking they were now in compliance that it prompted the IRS to issue a statement in June, 2024 that 280E still applies to any cannabis business, despite rumors and hopes it would change. This only leads to confusion and uncertainty for corporate cannabis companies and small business owners and makes it nearly impossible for small scale dispensaries to get off the ground in terms of making money. How can a local, family run business succeed when there are no tax benefits and nothing but uncertainty on the horizon?
Officially, however, according the the Federal Government, “Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.” Effectively this pushes out newcomers and small businesses that are simply unable to afford these expenses. As smaller shops close, corporate-owned entities expand into that market and take their revenue, making the rich even richer. Corporate cannabis is not something that seems fun, it is actually somewhat dystopian compared to the idea of weed in general — you can grow you own, it is meant to be shared, and it generally promotes comradery rather than competition.

State of the industry during COVID

The marijuana industry bloomed during the 2020 lockdowns. Although many of us struggled and found difficulty in the stay at home order, the cannabis industry thrived. During the Covid lockdowns, many of us were forced to sit at home. There were restrictions on gatherings, social events were cancelled, and making sourdough bread became all the rage. Plus, do you remember Tiger King? It was a weird time. The world was upside down. Escapism was not just an ideal, it was needed. It is no wonder that the use and sales of marijuana hit an all-time high — pun intended.

However, as the world slowly healed, and businesses reopened, the free time and anxiety from the unknown receded. Naturally, most people smoked less. Not necessarily anticipating this change, the marijuana industry over-expanded in 2020 and 2021 with new grow operations, storefronts, and an increase in employees. The boom, like all booms, simply would not last.

Post-Covid

This expansion was forever unsustainable. Covid would not last forever, the world would always reset. Yet, profits drove business decisions. It was tempting to open more, grow more, and sell more when the world was yearning for a stress reliever and time killer that weed could provide. However, by the end of 2021, and the beginning of 2022, the numbers started to fall. Less people were buying. Too much was being produced. The price per pound was sinking, leading to reduced prices. Marijuana was a great escape but the world was returning to what many consider normal.

Between 2021 and 2022, the price per gram fell by an entire dollar. Just like climate change numbers, the overall change may not seem significant to the average person, but widespread changes in prices and temperatures have drastic effects on the system. Retailers searched for discounts, and promoted products with more markup, but eventually felt the lower profits hitting them in the bottom line. Staff was laid off, grows were canceled, and prices were adjusted. The main contact was the customer, who not only expected low prices but demanded them in the face of all the rising inflation killing the average consumer.

Yet, it is truly not all doom and gloom. Talking with experrts, there is still room for growth, expansion, and success in finding a niche and succeeding in an industry that is oversaturated. Creating and marketing your own brand seems to be one path to success. As Wanda James previously shared, the competition is fierce and broad. You need to differentiate yourself from the other pot shops just down the street. Echoing marketing frustrations, she asked readers to name the liquor store, bottle shop, or wine store nearby. They simply seem interchangeable these days, it is really the branding, marketing, and customer service rather than the price that sets places apart.

Price per gram

According to a CU Boulder survey,  plus a plethora of anecdotal evidence, the price of marijuana seems to be bucking national inflation trends and dropping year to year.

$4.83 in 2021 | $3.84 in 2022 | $3.43 in 2023 | Lower in 2024?

Groceries are getting more expensive but your pot is not. Unlike food, insurance, and restaurants — which are all dramatically climbing — marijuana is actually getting cheaper. For consumers, this is great, but for business owners, it is deeply problematic. How do you keep up with raising wage expectations while the price of your product is falling year after year?

Chevron doctrine

Things rarely work out as expected. The Trump presidency was clearly a failure. One major adjustment during his term has sent shockwaves through every regulatory industry. The challenge and dismantling of the Chevron ruling. This is also a fantastic example of why the presidential election is so crucial because the winner appoints supreme court justices who rule on such broad topics as this, but I digress.

According to the Public Insitute of Policy, “The Chevron doctrine stems from the Supreme Court’s 1984 decision in Chevron v. Natural Resources Defense Council. The decision basically stated that if federal legislation is ambiguous or leaves an administrative gap, the courts must defer to the regulatory agency’s interpretation if the interpretation is reasonable.”

Chevron was overturned in part because some Justices believed the Federal government was becoming too powerful and bloated. Although this has potentially horrifying implications for environmental, food safety, and workplace regulations, it also opens the question of where the Federal government can regulate marijuana, at all in the first place. A legal challenge along these lines would open up a whole new set of arguments, potentially allowing marijuana but also unraveling decades of carefully crafted safety regulations.

Proposed Changes by CO

Although the federal government seems to be wavering, Colorado has initiated changes that echo what California did five years ago. Colorado SB24-076, the “Streamline Marijuana Regulation” was mainly sponsored by Sen. Kevin Van Winkle, Sen. Julie Gonzales, and Rep. William Lindstedt. This act repeals the requirement for specific identification cards for access to marijuana, adds in additional warnings for potential side effects, and makes it clear that cannabis businesses not under federal tax compliance will still be classified and treated in Colorado as if they are. These changes came into effect on August 7, 2024, also hinting at a major change that — as of yet— has not come.

All eyes on them

The industry is changing, and rapidly. More states have legalized since Colorado, driving down the demand in tourism. It is no longer a novelty to smoke weed in our society, in fact is it practically an accepted fact. The tourist income has dried up as many people can now find a source of legal consumption in their own block.

“There is absolutely no reason for people to come to Colorado for cannabis tourism,” Wanda James shared with Axios. Yet, there are ways to bring tourists back in. Allowing marijuana spas, restaurants with weed pairings, and touring grow operations in the same vein as a winery tour, could bring new life to a stagnant industry. If only the government will let them.

It is essentially a waiting game these days. There are signals things are moving. State governments like Colorado and California have made changes to better accommodate the marijuana industry but all eyes are focused on the potential federal reclassification of marijuana from Schedule I substance, which it has been classified as ever since the ratings system took effect in 1970.