Taxation of Cannabis
Tax & AccountingMarch 09, 2021

2020 a Landmark Year for Cannabis - More State Legalization, IRS Guidance, and Federal Legislation

Pandemic Accelerates Growth of Cannabis

(NEW YORK, NY, March 2021) - Covid-19 has dominated the past year and resulted in significant changes in the way we do business. Many existing trends greatly accelerated--from e-commerce to digital payments. Several industries, including the cannabis industry, saw substantial growth driven by the pandemic-related lockdowns and other activities.

Cannabis was already among the country’s fastest-growing industries, but 2020 saw it taken to another level. At the height of widespread shelter-in-place orders beginning last March, dispensaries were classified as “essential” in many states alongside grocery stores, gas stations and pharmacies. This government recognition was a major indication that cannabis has been elevated to the mainstream.

2020 Was a Landmark Year for Cannabis

More States Legalized Cannabis for Recreational and Medical Use

By all accounts, cannabis was one of the biggest winners at the ballot box in 2020, with legalization passing in Arizona, Montana, New Jersey and South Dakota. Arizona, Montana, New Jersey, and South Dakota voters legalized recreational adult-use cannabis. Mississippi and South Dakota voted to allow the medical use of cannabis. More than one-third of the country, or over 111 million people, now live in a state with legal recreational cannabis. Currently, 35 states have legalized medicinal cannabis, and 15 states have legalized cannabis for recreational adult-use. See the map below for a list of states what each has legalized specifically.

Cannibis and Taxes

Unprecedented Activity on the Federal Level

Internal Revenue Service Issues FAQs and Marijuana Webpage

Despite more states legalizing cannabis in 2020, at the federal level, marijuana remains an illegal controlled substance. For tax purposes, this prevents cannabis businesses from deducting many of their business expenses while the income received is taxable.

To help business owners understand and meet their tax responsibilities, the IRS  issued tax guidance to the cannabis industry in September 2020 in the form of frequently asked questions (FAQs).  These FAQs were followed up with the release of a marijuana industry website that provides additional tax-related information for taxpayers engaged in the cannabis business. While the goal of this guidance was to provide taxpayers with useful information regarding the taxation of the cannabis industry, it also serves as a reminder that they are subject to the same filing requirements and tax-paying obligations as every other taxpayer. 


These FAQs also remind cannabis businesses that they are prevented by Section 280E of the Code from claiming credits and deductions. However, the guidance does not describe how costs of goods sold should be computed for these businesses, a point of contention that has been subject to litigation. The guidance reminds these businesses that they have the same tax payment and deposit obligations as any other taxpayer.  The IRS understands that not all cannabis businesses have access to bank accounts and noted that some IRS service centers can accept cash payments. 

House passes historic bill to legalize marijuana at federal level

In a groundbreaking vote in December 2020, the US House of Representatives passed a comprehensive bill that would remove marijuana from the Controlled Substances Act and end the federal government’s decades-old prohibition on the plant. This bill would provide cannabis businesses with greater access to financial services and free these businesses from the Section 280E provisions that prevent them from taking deductions for ordinary business expenses. The bill was not taken up by the Senate in 2020.

What to Expect in 2021

Federal Action

Senate Majority Leader Chuck Schumer and senators Cory Booker and Ron Wyden announced on February 1, 2021 that they will push to pass this year sweeping legislation that would end the federal prohibition on marijuana. The White House has previously expressed support of similar action.

States

As many states face significant revenue shortfalls resulting from the ongoing pandemic, six states (Connecticut, Maryland, New Mexico, New York, Pennsylvania, and Texas) have introduced bills to legalize recreational marijuana or have governors who have called for legislation ahead of upcoming legislative sessions, while the Virginia legislature just approved a bill legalizing marijuana for adult recreational use, but not until 2024. In addition, several other states including Alabama, Florida, and Texas have indicated they intend to move forward with legalization.

2020 was an unprecedented year for legal and tax developments regarding cannabis. As we move into 2021, the ongoing financial impact of the pandemic and the results of the last election suggest it is likely to see even more landmark developments in the legalization of cannabis and the tax rules applying to cannabis businesses across the industry.

Mark Friedlich
Author at Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the principal international & corporate indirect taxation analyst for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a Managing Tax Partner at PricewaterhouseCoopers.