New Jersey Lawmakers Approve Bill To Let Marijuana Businesses Claim State Tax Deductions As Partial 280E Workaround

The New Jersey Assembly has approved a bill that would allow licensed marijuana businesses to deduct certain expenses on their state tax returns, a partial remedy as the industry continues to be blocked from making federal deductions under Internal Revenue Service (IRS) code known as 280E.

The legislation from Assemblymember Annette Quijano (D) cleared the chamber in a 60-6 vote on Thursday, about a month after it advanced through committee with amendments.

While many state tax policies simply mirror federal law, the new bill says that, for the purposes of the New Jersey’s tax code, a licensed cannabis business’s gross income “shall be determined without regard to section 280E of the [federal] Internal Revenue Code.”

When it comes to federal tax policy, those businesses would still be subject to the IRS 280E code, which precludes entities that illegally sell Schedule I or II drugs from making key tax deductions in their federal filings. But if the New Jersey bill is enacted, the licensed cannabis industry could at least see some state-level relief.

The legislation “shall apply to taxable years beginning on or after January 1 following enactment,” it says.

A fiscal analysis released earlier this month found that the bill would likely have mixed economic impacts.

On the one side, the decoupling from federal 280E policy is expected to “result in an indeterminate annual loss of revenue” for the state because marijuana businesses would be eligible for relief from taxes that they currently pay.

On the other side, the Office of Legislative Services (OLS) said that “providing access to these deductions and credits may also help generate more economic activity by cannabis businesses,” and so “the State and local governments that tax cannabis businesses might indirectly realize an indeterminate amount of additional annual revenue.”

“OLS notes that the legal adult-use cannabis industry in New Jersey is immature at the time of this writing, having only begun sales at limited locations in April of this year,” the analysis says. “The industry may significantly grow or change in unpredictable ways over the coming years, casting uncertainty over any fiscal estimate.”

The bill was amended in the Assembly Oversight, Reform and Federal Relations Committee last month, which members agreeing to remove an earlier provision that would’ve made it so only cannabis licensees with gross receipts less than $15 million would be eligible for state tax deductions.

Now the measure heads to the Senate for consideration.

New Jersey isn’t the only state that’s working to address the unique financial challenges that the cannabis industry faces under federal prohibition.

Earlier this year, a Pennsylvania House committee advanced legislation to similarly make it so medical marijuana businesses could receive state tax deductions for expenses they’re currently prohibited from claiming under federal tax law.

New York’s governor signed a budget proposal in April that similarly includes provisions to let marijuana businesses take state tax deductions.

Last year, congressional researchers examined tax policies and restrictions for the marijuana industry—and how those could change if any number of federal reform bills are enacted.

A number of standalone bills to remove the 280E penalty’s application on marijuana businesses have been filed over the years in Congress, but none has ever been given a hearing or a vote.

But for the time being, the marijuana industry continues to face tax policy challenges under the umbrella of prohibition. And the Congressional Research Service (CRS) noted that IRS “has offered little tax guidance about the application of Section 280E.”

IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

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