Why Tax Day Is So Much Harder For Marijuana Businesses

Paying federal taxes can be a pain for any business, but federal restrictions on marijuana make it much harder for cannabis businesses.

Why Tax Day Is So Much Harder For Marijuana Businesses
Kevin Clancy, NEWSY staff

Paying federal taxes can be an expensive headache for any new business. But for cannabis entrepreneurs, tax day can be not only be really pricey, but dangerous. 

Cannabis businesses are forced to hand deliver their federal tax payments in cash, lots of cash. 

"Attempted robberies are an issue, occasionally tax collectors will say that they cannot accept it in the form of cash so then people will have to go and get a money order, which can be incredibly difficult because of the lack of access to banking," said Morgan Fox, media relations director for the National Cannabis Industry Association. 

That's because the federal government still considers pot an illegal substance, despite the fact that 33 states and the District of Columbia have legalized it in some form. 

So cannabis businesses typically have to operate on a cash-only basis because banks wont work with them over fears they will be penalized by the federal government. 

The government collected an estimated $4.7 billion in taxes from legal cannabis companies in 2017 on nearly $13 billion in revenue.

The payments are so overwhelming for tax collectors that the IRS is paying a Virginia company $1.7 million to help process cannabis federal taxes paid in cash.

And cannabis businesses end up paying much more in taxes than most other industries because they can't deduct any expenses that relate to the sale of a federally illegal substance. Here's how the National Cannabis Industry Association explains it: 

Imagine paying an effective tax rate 3.5 times than the business next door to you because you were forbidden from taking normal business deductions such as payroll, rent and other common costs of doing business. Cannabis dispensaries and cultivators are paying an effective tax rate of 70 percent or higher. 

"Well it's obviously going to trickle down to the consumer and making prices much higher, which in turn incentivizes the illicit market," Fox explained. "There are also problems with just companies being able to pay their employees well even though the cannabis industry by and large pays people much better than other industries, that's still something that a lot of people have to worry about for their bottom line."

But Congress has a couple of solutions in the works. 

Both the House and Senate have introduced bipartisan bills that would allow marijuana businesses to access federal banks, so they can use credit cards and open checking accounts, and file their taxes electronically. 

A Bill To Let Weed Businesses Use Banks Is One Step Closer to Passing
A Bill To Let Weed Businesses Use Banks Is One Step Closer to Passing

A Bill To Let Weed Businesses Use Banks Is One Step Closer to Passing

Most banks won't work with legal weed businesses as long as marijuana is still federally illegal. Congress could soon fix that.


But that alone won't lower the high tax rate cannabis businesses face. To do that, Congress would need to either reform the tax code or remove marijuana from the list of federally illegal controlled substances.

The House and the Senate have both introduced bills to do that, but getting legislation through a Republican-controlled Senate led by the staunchly anti-pot Majority Leader Mitch McConnell won't be easy. 

But Fox says opening up the legal cannabis industry and lowering taxes could likely be a financial boon for the federal government. 

"The benefit that the federal government could reap from additional taxes being paid by additional businesses because they have an easier time getting into the industry without the heavily burdensome tax rate I think would more than balance it out," Fox said.