As a Partial 280E Workaround, New Jersey Legislators Sent the Governor a Bill Allowing Marijuana Businesses to Use State Tax Deductions!


As federal deductions for the sector remain unavailable under IRS rule 280E, New Jersey lawmakers on Monday delivered the governor a bill that would allow licensed marijuana businesses to deduct certain expenses on state tax returns.

After no floor debate or discussion, the Senate voted 32-3 to adopt the legislation. Since passing the Assembly in October, this same piece of legislation has made its way through the Senate Budget and Appropriations Committee, where it was discussed during a meeting last month.

In the evening on Monday, the Assembly adopted the bill in its final form by a 59-8 margin; it will now be sent to Governor Phil Murphy (D) for his signature.

To make it possible for cannabis licensees with gross receipts of less than $15 million to be eligible for state tax deductions, Assemblymember Annette Quijano’s (D) version was changed in committee.

On Monday, the Assembly bill replaced its corresponding legislation from Sen. Troy Singleton (D).

Unlike the case with many other states, New Jersey’s tax laws state that gross income for cannabis businesses “must be determined without respect to section 280E of the [federal] Internal Tax Code.”

That doesn’t change the fact that under current federal law, businesses that illegally sell Schedule I or II medicines are not eligible for certain tax deductions thanks to the Internal Revenue Service’s 280E rule. At the state level, though, the legal cannabis sector might get some respite if the New Jersey proposal is enacted into law.

“shall apply to taxable years starting on or after January 1 following passage” is a provision that states when the law will take effect.

A budget report from last year predicted that the bill’s effects on the economy would be varied.

While marijuana firms would be eligible for tax relief, decoupling from federal 280E rules is projected to “result in an indefinite annual loss of revenue” for the state.

OLS countered that “providing access to these deductions and credits may also help generate more economic activity by cannabis businesses,” which could lead to “the State and local governments that tax cannabis businesses might indirectly realize an indeterminate amount of additional annual revenue.”

The specific financial difficulties the cannabis sector faces due to federal prohibition are not exclusive to New Jersey.

Iowa’s cannabis officials have stated that they will petition the state legislature to enact legislation that exempts medical marijuana from sales taxes and similarly decouples firms from federal 280E penalties.

Legislation identical to this was adopted by a Pennsylvania House committee last year, with the goal of allowing medicinal marijuana businesses to deduct expenses from their state taxes that are now disallowed by federal law.

Similar measures allowing marijuana firms to seek state tax deductions were signed into law by New York’s governor in last year’s proposed budget.

Tax policies and restrictions for the marijuana sector were studied by congressional researchers in 2021, with an eye toward how they might shift should any of the proposed federal reform legislation be implemented.

Over the years, several individual bills have been introduced in Congress to repeal the 280E penalty as it applies to the marijuana industry; most recently, Rep. Nancy Mace (R-SC) introduced a bill at the end of the 115th Congress that would do just that. However, none of these bills have been brought up for a vote or even a hearing.

As long as marijuana is illegal, tax policy problems will persist in the cannabis market. CRS also found that the IRS “had issued minimal tax guidance about the use of Section 280E.”

While 280E does not “prohibit a participant in the marijuana industry from deducting its gross receipts by its properly calculated cost of goods sold to determine its gross income,” the IRS did provide some clarification in a 2020 update, explaining that cannabis businesses cannot take standard deductions.

The Internal Revenue Service modification appeared to be in response to a 2020 report from the Treasury Department’s internal watchdog. IRS was chastised by the department’s tax administration inspector general for providing insufficient guidance to taxpayers in the marijuana industry regarding their legal obligations under federal tax law.

Furthermore, the body was tasked with “developing and publicly publishing recommendations unique to the marijuana sector.”

New Jersey officials have suggested new regulations for recreational marijuana use sites.

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