Section 280E: The Unsustainable Tax Burden for Cannabis Businesses

Analysis from the research firm Whitney Economics shows that marijuana companies paid over $1.8 billion in federal taxes in 2022. In 2024, taxation surpassed over $2.3 billion. The high figures owe to the US-specific tax treatment of the marijuana sector - the penal revenue code 280E. 

What Impacts Cannabis Taxes in the US? 

The excess payments result from Section 280E of the federal Internal Revenue Code, which basically penalizes those who work with controlled substances. The ‘penalty’ is collecting more significant sums of tax money, from a tax rule that does not apply to traditional business sectors. 

Section 280E prevents companies considered traffickers of Schedule I and II controlled substances from deducting business expenses like other businesses. Applying this code results in federal income tax liability calculated based on gross income instead of net income. In other words, Section 280E creates “phantom income.” Taxes are levied on earnings that were never really generated. 

Between 2020 and 2030, the U.S. marijuana industry taxes are estimated to reach around $65.3 billion with the added impact of 280E, according to MJBizDaily. This particular forecast is based on a total revenue projection of $720 billion, expected to be earned by cannabis operators over the designated period. A lot of cannabis businesses already owe millions under the 280E code. Only rescheduling cannabis as a Schedule III drug under the Controlled Substances Act (CSA) can remove this tax burden for U.S. cannabis operators. 

What Would Happen If Section 280E Is Abolished? 

280E directly drives up costs for patients and consumers alike, and it makes it particularly harder for small businesses to thrive and compete with the untaxed, black market. If Section 280E were to be abolished, the total tax forecast sum for the period between 2020 and 2030 would be halved, to around $35 billion. It will also make more cannabis operators profitable. 

Doing cannabis business peaked during the pandemic. In 2021, 42 percent of cannabis businesses reported being profitable, according to Whitney Economics. Since then, this figure has been steadily falling. Less than 30 percent of all registered cannabis operators in the US have reported profitability in the period between 2022 and 2024. Most are breaking even, and others are unprofitable. 

The industry has been under serious economic distress from inflation and rising costs of living. Several state markets have teetered on the brink of systemic collapse - markets that were always deemed stable. The 280E tax burden makes things further untenable. In the current context, only wider tax reform may offer a solution aiding the cannabis sector. 

Who Created Section 280E? 

Section 280 is an outdated tax law that was introduced at the height of the War on Drugs. Federal authorities added it as a component of the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982. As a provision, 280E explicitly targets the deduction of expenses for businesses dealing with controlled substances designated as Schedule I and Schedule II under the CSA. 

When California legalized medicinal marijuana in 1996, the War on Drugs found a friend in the Internal Revenue’s audit program and its Section 280E enforcement. Since Colorado became the first fully legal cannabis state, the IRS has continually trained revenue agents on how to collect tax from cannabis businesses by applying Section 280E. Tax agents have been trained in the finest details of the law, and the agency has continually upgraded its audit procedures and staff training materials. Everything indicates that these are meticulously planned ways for the government to collect considerable sums of money, by maximizing the use of federal law for purposes of tax collecting. 

Is It Possible to Remove Section 280E Without Federal Tax Reform? 

Section 280 is universally dreaded, at least among those in the cannabis industry who are directly impacted by it. There are currently 22 states with legal cannabis (recreational and/or medicinal) which “decouple” the IRS Section 280E from its state tax code, allowing cannabis businesses the same standard business deductions on state taxes as traditional industries. 

State tax codes often mirror federal deductions, sometimes with exceptions. States can create a specific exception for state-legal cannabis businesses. For example, in 2023, legislators in six separate states (Connecticut, Delaware, New Jersey, New York, Virginia and Washington DC) passed legislation that allows cannabis companies to deduct business expenses from their state income taxes. Some of the states allow deductions for both corporate business tax and gross income, however, other states do not allow deduction for both. Cannabis businesses in states that have never tracked IRC 280E are in the most difficult situation. 

In translation, cannabis tax plans are complex. The only way to make things simpler and more fair is to reschedule cannabis as a Schedule I drug and add it as a Schedule III drug. We explain the full impact of rescheduling cannabis under the Controlled Substances Act in this long read here: Cannabis Rescheduling Explained - What Schedule III Means for the USA in 2025