Taxation of Cannabis
Tax & Accounting09 มีนาคม, 2565

2021 Saw Significant Growth of Cannabis Market - More State Legalization, IRS Initiatives, But No Federal Legislation

Cannabis sees record market growth, more state legalization, no federal legislation, new IRS initiative

Despite continued lack of comprehensive cannabis legislation in the US Congress, the list of states allowing for legal adult use of cannabis grew in 2021.  New York, New Jersey, Connecticut, New Mexico, and Virginia joined the list of states that allow for adult recreational cannabis use, increasing the number to 18, in addition to the District of Columbia. Alabama became the 38th state to legalize cannabis for medical purposes. In 2022, nearly half of the U.S. population has legal access to cannabis. See the map below for a list of states indicating what each has legalized specifically.

States Where the Sale of Medical Cannabis Is Legal

 

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Connecticut
  • Delaware
  • District of Columbia
  • Florida
  • Hawaii
  • Illinois
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
 

States Where the Sale of Recreational Cannabis Is Legal

 

  • Alaska
  • Arizona
  • California
  • Colorado
  • Connecticut
  • District of Columbia
  • Illinois
  • Maine
  • Massachusetts
  • Michigan
  • Montana
  • Nevada
  • New Jersey
  • New Mexico
  • New York
  • Oregon
  • Vermont
  • Virginia
  • Washington
   

US Congressional Action


Although Congress did not pass a bill to legalize cannabis, there was much activity in 2021. The Safe Banking Act, which would provide easier access to the banking system and end punitive tax code treatment passed the House for the fifth time but stalled again in the Senate. Bi-partisan support for legalization gained steam as Congresswoman Nancy Mace, a Republican from South Carolina, introduced a bill that would end the federal ban. In February of 2022, Senator Chuck Schumer of New York indicated that he would introduce legislation as soon as April that would legalize cannabis and establish tax and banking rules to oversee the industry. Despite all of this, moving a full legalization, open-banking, and “social justice” bill through US Congress in this truncated legislative year could prove challenging. 

IRS Launches a New Cannabis/Marijuana Initiative

De Lon Harris, commissioner of examination at the IRS Small Business/Self Employed (SB/SE) Division, spoke about tax-related issues in state-legal marijuana markets. He stated that the IRS recognizes that the status quo means that cannabis businesses are forced to operate on a largely cash-only basis, and federal prohibition also means that companies in the sector are precluded to taking key tax deductions.

However, while the tax statute known as 280E means the industry is ineligible for most federal tax deductions and credits, he said that cannabis firms “can deduct their cost of goods sold, which is basically the cost of their inventory.”

“What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses, to name a few,” Harris said

He discussed the new “Cannabis/Marijuana Initiative” the IRS launched that provides specific job training to the agency’s staff to effectively carry out audits within the industry, ensure that there’s consistency in the IRS’s policy for cannabis, work with stakeholders to ensure tax compliance, and help to identify non-compliant businesses.

Commissioner Harris continued, “Our strategy is not limited to pushing information out via our website in the hope that business owners will find it. I’ve made it a priority for my SB/SE organization to engage with the cannabis/marijuana industry through speaking events and other outreach. Through this extended outreach, we hope to help small business owners and others fully understand the unique tax rules before there are any compliance issues.”

In addition to this initiative, the IRS  issued tax guidance to the cannabis industry in September 2020 in the form of frequently asked questions (FAQs) and a “marijuana” industry website that provides additional tax-related information for taxpayers engaged in the cannabis business.

Despite all of this, cannabis business face continuing tax compliance and audit challenges without Congressional action de-classifying cannabis as a Schedule I drug and providing access to banks and other financial institutions 

What to Expect in 2022



More States Will Try to Legalize in 2022.
In recent polls, more than two-thirds of Americans are in favor of legalizing cannabis. State politicians are increasingly paying attention. Now that medical cannabis is legal in 38 states (with the 39th, Mississippi, on the verge), and adult use cannabis legal in 18, there is increasing momentum for further legalization and liberalization in many states that are missing out on the tax revenues their neighboring states enjoy and expect in coming years. Delaware and Oklahoma are on the road to pass adult-use legalization in 2022, and momentum is building in Maryland, Ohio, Pennsylvania, and Rhode Island to do the same. On the medical side, Nebraska and Wyoming are renewing their efforts for passage.

Pressure Building on US Congress to Act in 2022. As public support for legalization increases, and even more states move to legalization, pressure continues to build on US Congress to act. Despite increasing bi-partisan support and Senator Schumer’s statement indicating that cannabis legislation is a priority for him, and his stated intention to unveil a comprehensive bill in April, passage in the US Congress remains uncertain this year.

 
Mark Friedlich
Vice President of US Affairs for Wolters Kluwer Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the Vice President of US Affairs 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 has been 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 COO and Principal at PwC.

 

Research & Learning

CCH® AnswerConnect 

CCH® AnswerConnect gives you the industry’s most powerful web-based technology, combined with comprehensive and authoritative tax research content.
Tax & Accounting News

Whole Ball of Tax

A collection of topical press releases & charts featuring analysis from our federal and state tax experts for the tax season and beyond.

Back To Top