Just two days after New Jersey residents voted to legalize cannabis, the head of the state’s largest group of accountants is calling on local lawmakers to decouple from a hated pot business tax.
Section 280E of the Internal Revenue Code strictly limits what expenses cannabis businesses can deduct on their taxes. As legislators develop regulations for the Garden State’s new REC market, the CEO and executive director of the New Jersey Society of Certified Public Accountants (NJCPA), Ralph Albert Thomas, is calling on state lawmakers to allow the deductions.
If the state were to decouple from the much-maligned Section 280E, Thomas said, cannabis operators would be able to deduct business expenses the same as other traditional companies on their New Jersey personal or corporate income tax returns. They would still be subject to the provisions of Section 280E on their federal returns, but wouldn’t be hit twice – on the federal and state levels, as operators in some states are – with what is effectively a tax penalty.
Decoupling on the state level, Thomas said in a message posted on the NJCPA website, would “ensure New Jersey small businesses, minorities and women can compete in the cannabis market.”
“Otherwise, this new market will be dominated by large and already established players, many of which will come from out of state,” he said.
The push from the NJCPA comes on the heels of voters approving a constitutional amendment Tuesday night that will allow the state to establish a REC program.
Internal Revenue Code Section 280E, a frequent target of complaints from cannabis businesses, was implemented in the early 1980s to prevent drug traffickers from receiving IRS deductions on illegal activity. The industry considers the law, enacted when a state-legal cannabis industry was unforeseen, as an unreasonable burden.
From an administrative standpoint, it makes sense to apply the code to federal tax returns, Thomas and the NJCPA argue, but not at the state level for what will be state-legal business activity.
“While we would prefer decoupling for all cannabis businesses, it is most important for small businesses, many of which are minority- and women-owned,” the statement from Thomas said. “Larger operators generally have enough cash on hand to withstand the drain on profits that §280E will cause in initial years, but smaller businesses often do not. It could literally stifle the ability of small cannabis businesses to get off the ground.”
Other states have already decoupled from the much-maligned law, including California, Colorado and Oregon.
Rachel Gillette, a partner and chair of the Cannabis Law Practice at Greenspoon Marder, noted that it took Colorado a few years after REC legalization to address the Section 280E issue. She said New Jersey would be wise to deal with the topic as early in the regulatory process as possible.
“I wish more states thought about this before they developed regulatory regimes and started licensing businesses,” she said.
Gillette referred to Section 280E as an “incredibly punitive” provision for cannabis businesses and said it is “outdated, archaic and needs to be gotten rid of.”
“What essentially is happening is the federal government is giving a subsidy to those people that are operating illegally because they don’t file taxes, they don’t file 280E, and they’re able to sell products at a lower cost because they’re not being treated in such a way,” she said. “It really just subsidizes the [illicit] market.”
A survey of NJCPA members found that 66% of respondents believed a REC market would bolster the New Jersey economy, according to the NJCPA.
A state commission that oversees the New Jersey MED market will also provide oversight to the new REC market. Legislators still need to develop a regulatory framework before REC sales can start. That could take months or years. The ballot measure allows for a state tax rate of 6.25% on cannabis sales, and municipalities will be able to impose a tax of up to 2% on top of that.
“If lawmakers and the public want a prosperous cannabis industry, with small businesses participating and thriving, then New Jersey needs to decouple from §280E,” concluded the statement from Thomas. “This needs to be done now, before the issue gets buried in the process of passing enabling legislation and drafting regulations for this promising new industry.”
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