If NJ Wants its New Cannabis Businesses to Succeed, Decoupling 280E is a Must
By Todd Johnson - Treasurer, NJCTA
In November 2020, New Jersey voters decisively voted to end the harmful drug policies of the past and embrace legalized cannabis. Now, as the State legislature grapples with how to structure an adult-use cannabis marketplace, it is at risk, whether intentionally or inadvertently, of maintaining the misguided policies of the past.
Specifically, New Jersey currently “piggybacks” onto code section 280E of the Internal Revenue code, which prohibits any business that is considered in the business of drug trafficking from deducting business expenses other than their cost of goods sold. This particular clause subjects legitimate cannabis businesses to effective tax rates that can sometimes exceed 100%.
280E was designed to apply to illicit operators, but although cannabis has been legalized in many states throughout the country, the federal government still considers cannabis operators to be illegal and thus subject to this particular tax clause. Because most states adopt a state analog or provision that references the federal Internal Revenue Code, the states that have legalized cannabis typically need to explicitly “decouple” 280E in their implementing legislation, which means they no longer apply the clause to the businesses operating within the states’ respective legal cannabis marketplaces.
Groups like the New Jersey Society of Certified Public Accountants (NJCPA), among others, have argued that 280E decoupling is crucial for cannabis businesses, particularly for operators of a single marijuana dispensary, to survive in a competitive and capital intensive industry. This is because 280E allows for more deductions for a cultivator when compared to a dispensary. Therefore, smaller operators, which likely have less capital at their disposal and thus are more likely to run/apply for retail licenses, would be subject to the most stringent aspects of 280E.
It is entirely contradictory for the New Jersey state government to implement a legal cannabis marketplace but still treat the legal cannabis companies as illicit operators. That misguided approach makes it unnecessarily difficult for smaller operators to break into the industry and may very well encourage some individuals to continue to operate in the illicit market instead of building a company in the state’s legal marketplace.
State-regulated cannabis businesses, both large and small, which operate under strict standards of compliance, deserve access to the same tax deductions that any non-cannabis business would have access to. This isn’t special treatment… it simply means being fair.
Legal cannabis companies face many uphill battles, looking to compete with and displace traditional illicit operators, operate in a capital-intensive industry, and push back against long established stigmas. Carrying over harmful legacy policies like 280E into the new legal cannabis system is not the way to help a fledging industry find its footing and fulfill the will of the voters.
If New Jersey is serious about wanting to create a vibrant marketplace that serves patients and consumers while generating tax revenue that it needs to fund its programs, the Legislature should reconsider its position and add 280E decoupling into its legal cannabis implementation legislation.