top of page
  • Todd Johnson

The Impact of 280E on New Jersey’s Cannabis Industry – And Why Reform is Needed Now

The Impact of 280E on New Jersey’s Cannabis Industry – And Why Reform is Needed Now

The one-year anniversary of the launch of New Jersey’s legal cannabis marketplace is fast approaching. As the industry welcomes newly licensed operators throughout the state, many more entrants are on the horizon. Many of these emerging operators are New Jersey residents, looking to join the nascent cannabis industry. Here at the NJCTA, we feel it is imperative that we continue to educate new entrants, legislators and the public on one of the most significant issues impacting our industry: Section 280E of the IRS Tax Code.

What is 280E?

Section 280E was instituted by Congress in 1982 in response to a court case in which a cocaine trafficker successfully argued in federal court that he should be able to legally deduct his ordinary business expenses as part of his criminal enterprise. As a result of his successful defense, 280E was created and prohibits any entity that is engaged in drug trafficking (Schedule I or II substances, as defined by the Controlled Substances Act) from deducting regular and ordinary business expenses as part of their business tax filings.

According to the CSA, Schedule I drugs are defined as drugs, substances or chemicals with no currently accepted medical use and a high potential for abuse. As of this writing, 38 states and Washington, D.C. (78% of the U.S.) have medical cannabis programs, which underscores the hypocrisy of the federal government to categorize it as a dangerous Schedule l drug along with heroin, LSD, quaaludes and peyote. Let’s underscore this point further by noting that the federal government categorizes both cocaine and meth as Schedule II substances.

How can a plant that 78% of the states in our country acknowledge as having medical benefits, still be a Schedule l status drug by the federal government?

This brings us to our great state of New Jersey. Even though New Jersey launched its legal cannabis marketplace, the language of the federal 280E tax code persists in our state’s tax code, thereby rendering operators as drug traffickers and subjecting them to the financial squeeze that 280E intended to have on criminal enterprises.

Financial Impact

To illustrate this, let’s compare two companies. The first company is a standard, non-cannabis entity, and the second is a standalone cannabis retailer required to file taxes while adhering to the onerous protocols of the IRS’ 280E.

From an operations perspective, both companies are exactly the same. They each have gross sales of $3,000,000, paid $1,750,000 in costs of goods sold (COGS) and had the following business expenses:

· Wages/Payroll: $450,000

· Rent/Utilities: $120,000

· Administration: $80,000

· Legal/Compliance: $75,000

· Insurance: $60,000

· Financing: $50,000

· Equipment Depreciation: $30,000

· Total: $865,000

Financial Impact of 280E: Comparison to a Non-Cannabis Entity

(The data below is from the New York State Society of Certified Public Accountants

Comments on Adult-Use Cannabis Proposed Regulations in New York.)

To calculate the business’ taxes, the business owner would subtract $1,750,000 of COGS and the $865,000 in other business expenses from their gross sales of $3,000,000. This calculation arrives at a taxable income of $385,000. Applying the federal tax rate of 37% and New Jersey tax rate of 9% to that amount, their income taxes for the year would be $177,100 – resulting in a net income, after-tax, of $207,900. This is a nuts-and-bolts analysis of how any business lawfully operating in the State of New Jersey would calculate the amount of the taxes they must pay for that year.

However, and here is where the hypocrisy is plain for all to see, the cannabis dispensary would subtract their COGS (the wholesale cost they paid for the cannabis sold that year) of $1,750,000 from their gross sales of $3,000,000 (leaving $1,250,000), but instead of deducting the $865,000 of legitimate business expenses, the dispensary would be required to calculate their taxes based on the whole $1,250,000 of gross profit. In so doing, at the federal tax rate of 37% and the New Jersey tax rate of 9%, the cannabis operator would owe $575,000 in taxes. The pre-tax profit is still the same $385,000 as it was with the non-cannabis business. However, the effect of 280E turns our cannabis retailer’s net income, after-tax, into a $190,000 loss due to the approximately $400,000 difference in taxes owed due to 280E. In turn, the cannabis company loses money and ends up owing more in federal and state income taxes than their entire net income for the year.

Push for Reform

New Jersey’s cannabis industry is still in its infancy, and its full potential – socially and economically – has yet to be realized. By decoupling 280E from the state’s tax code, cannabis operators would be treated like any other legal enterprise operating in New Jersey. The ability to deduct common business expenses from their taxes would afford them lower production and operating costs that could then be passed along to consumers while simultaneously increasing profitability for operators. Higher profitability allows for more hiring and the reinvestment of funds into operations and the surrounding communities.

Currently, legislation has been progressing on the state level to remove the hypocritical 280E stipulation that is penalizing legal cannabis enterprises, big and small. Thanks to State Assemblymembers Annette Quijano, Clinton Calabrese and Linda Carter, and State Senators Troy Singleton and Shirley Turner, New Jersey’s cannabis industry is inching closer to witnessing the decoupling of 280E from the state’s tax code.

Relief is on the horizon, but we must not let up our support until we cross the finish line. Until then, please continue to show your support for this significant reform and contact your local state representative to let them know that 280E reform must be passed that will allow New Jersey’s nascent cannabis industry to grow and flourish as a truly legal marketplace.

Todd Johnson is the executive director of the New Jersey Cannabis Trade Association (NJCTA), which is comprised of the state’s permitted medical and adult-use cannabis operators, which all share the mission of ensuring the legal cannabis marketplace is not only safe, accessible and affordable, but also equitable and just.

Todd is also a co-founder of Community Greenhouse, a mission-driven cannabis company that was recently awarded a conditional license to operate a retail dispensary in New Jersey.

Contributing Editor: John Pellitteri, CPA, partner at Grassi who leads the firm’s Healthcare and Cannabis Service Practices. John possesses over 30 years of experience in accounting, auditing, tax planning and business consulting, and is now applying his talent to the burgeoning cannabis industry.

360 views0 comments


bottom of page