LITTLE ROCK, Ark. – As we wait to hear the decision on the five cultivation centers, high taxes could make it difficult for the new medical marijuana businesses in Arkansas to operate.
In 1982, Congress passed an amendment to the Federal Tax Code in response to a case involving a Minnesota drug dealer.
“Filed for a bunch of business deductions for his cocaine, methamphetamine, marijuana business,” explains Neal Levine with the New Federalism Fund.
The IRS denied the deductions but the drug dealer went to court and won.
Congress responded by adding Section 280E to the tax code.
“It essentially says if you traffic in a Schedule 1 or 2 substance that’s illegal under state or federal law, you may not take any standard business deductions outside of the true cost of goods sold,” Levine adds.
Fast forward 35 years and 29 states, plus the District of Columbia have legalized marijuana for some users.
Dispensary Owner Jeffery Kahn is a 65-year-old Rabbi who owns the Takoma Wellness Center in DC.
He got in the medical marijuana business after watching his father-in-law suffer for decades with Multiple Sclerosis.
“It made a huge difference for him,” he says.
But after five years in the business, Kahn says it hasn’t been the cash cow many people assume.
“It’s been quite complicated and I must say, we haven’t quite mastered the turn a profit part yet,” he continues.
Kahn says one of the major obstacles is Tax Code 280E.
“Rent and employee salaries and everything else that the average business is able to take off their taxes… we can’t,” he explains.
Industry experts say 280E hits marijuana businesses with tax rates that can be double what other businesses pay. But efforts to create an exemption have stalled in Congress.
“I took an oath to uphold the Constitution of the United States and as long as it’s against the law in the federal government, I’m opposed to it,” says Rep. Bruce Westerman (R-AR).
Members of the Arkansas congressional delegation are skeptical about the state’s medical marijuana program.
“I’ve been very opposed to medical marijuana,” says Sen. John Boozman (R-AR).
And they are hesitant to change federal law to accommodate the marijuana business.
“That said, the people of Arkansas have voted for medical marijuana and I think you need to be respectful of the state’s rights,” says Rep. Steve Womack (R-AR).
But until there’s change, the decades old tax law will continue to make business tough for those trying to turn one kind of green into another.