The Federal-State Tempest of Medical Marijuana Taxation: Seeking a Bridge over Troubled Waters

• In Event: Tax Policy and Research

Abstract

Presently, federal income taxation of medical marijuana is the same as for cocaine or heroin; the only permitted adjustment to gross revenues in calculating taxable income is for cost of goods sold. Where medical marijuana has been legalized, however, state income taxation of medical marijuana within those states is the same as for any other legal business, meaning that ordinary and necessary business deductions are also available to the taxpayer. This disparity, although simply stated, has earth-shaking economic implications to the producers and distributors of medical marijuana.

This federal-state schism creates a potentially extreme federalism problem; a conflict that has been characterized as a “war” between the federal government and some states over medical marijuana policy. This “war” has two fronts: a federalism issue regarding criminal law, and a parallel federalism issue concerning income taxation. In fact, state-sanctioned medical marijuana sellers consider the issue of federal tax law to be more problematic to the development of a legitimate medical marijuana industry than the federal criminal law issue, although the two are closely related.

As additional states continue to legalize marijuana for medical purposes, the federalism issue continues to loom large. This paper discusses the legal landscape and the federal-state conflict, the impact of the Controlled Substances Act upon IRC §280E which presently controls federal taxation of medical marijuana businesses, the federalism issues created by this conflict, and the recent changes in attitudes toward medical marijuana usage. Finally, this paper explains why we are near a tipping point for change in federal marijuana law, particularly as it applies to medical marijuana, and explores ways in which federal-state parity in the taxation of medical marijuana may at last be obtained.

Author

• Monique O Durant, Central Connecticut State University