280e Archives - Green Market Report

John SchroyerNovember 16, 2022
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6min45760

This article has been updated to include clarification from Curaleaf on the statements made by Boris Jordan. 

The modern marijuana industry is headed toward massive consolidation that will eventually feature just a handful of companies atop a global supply chain, predicted Curaleaf Executive Chairman Boris Jordan during an appearance at an investor forum this week.

Jordan, speaking during Cannavest at MJBizCon in Las Vegas, told audience members that a close friend of his in the tobacco industry noted that the U.S. cannabis industry needs overlap in the supply chain to make products cheaper for consumers. That likely would lead to a similar supply chain model as tobacco, with only about four companies dominating the global market.

“This industry has to consolidate. There’s no way there’s going to be 35 or 40 or 50 or 100 cannabis companies 10 years from now,” Jordan said. “It’s probably going to be three to four large operators, all of whom are probably going to be closely doing what the tobacco industry has done, in terms of their supply chain and their costs, in order to be able to earn a very healthy margin.”

What makes the biggest tobacco companies so dominant, Jordan said, is they share resources and only differentiate on brands.

“They all use the same packaging. They all use the same paper. They all use the same machines. They all use basically everything the same, and they have different brands,” Jordan said of tobacco companies such as Altria and Philip Morris.

The tobacco companies “were able to bring (their) margins and costs so low that even in a high-tax environment, they earn a very healthy margin,” Jordan said.

Such a monumental shift may be closer than many think, he said, given what he’s hearing out of Curaleaf’s lobbying team in Washington, D.C. They indicate that the SAFE Banking Act still has a chance of becoming law this year, and that the Biden administration is focused on rescheduling cannabis within the next two years.

“We’re hearing from our people in Washington (D.C.) that they’re targeting a 2024 rescheduling of cannabis, from Schedule 1 to 3, 4, or 5,” Jordan said, adding that “there’s genuine bipartisan going on with SAFE Banking.”

If those two reforms come to pass, he said, “the two biggest impediments for the industry are gone,” referring to the 280E provision in the federal tax code and banking restrictions.

Jordan tacked on a warning, with a nod to the financial difficulties in much of the industry: “If we don’t get SAFE, you’ll see swaths of companies go out of business next year.”

Even the SAFE Banking Act, however, won’t be enough to drag publicly traded U.S. cannabis companies into profitability, Jordan indicated.

“If we get SAFE, we’re going to have a major reevaluation, but the real reevaluation will be when we get 280E (repealed). Because people need cash,” Jordan said, adding, “This industry, at some point in time, is going to be a dividend-paying industry.”

Overall, the Curaleaf executive projected optimism, both about chances for U.S. federal reform and about the opening of new markets in the next 12 months, particularly Germany, which is poised to legalize recreational cannabis.

“If they move and actually pass this, which we expect they will … that’s going to be almost an earthquake in the cannabis sector,” Jordan said about German legislation to launch an adult-use marijuana market. “I’m very excited. I think the way Germany goes, eventually the rest of Europe goes.”


Clarification from Curaleaf:

In response to the article, as posted, a spokesperson provided the following clarifying statement via email on behalf of Curaleaf:

We would like to clarify some of the misinterpretations surrounding the remarks Chairman Boris Jordan made during his keynote at Cannavest yesterday.

Curaleaf supports a diverse and inclusive industry; in fact, Boris has repeatedly said there is and should be room for players of every size in this industry. Curaleaf supports many brands on our shelves, and has
partnered with minority and small business operators, craft, and legacy farmers. We are hopeful that the federal government authorizes an industry that protects state licenses and minority-owned businesses. The first step to that is safe banking.

Boris was asked about long-term predictions for the industry and commented that he believes eventual consolidation to be inevitable, and that every consumer product industry in the world has consolidated into major operators. He said he thought cannabis would likely follow a similar path as the tobacco and alcohol industries, because it is a low-margin business that needs volume. The fact is today the top 5 operators in cannabis represent less than 2% of the US cannabis market; in alcohol and tobacco the top players represent 80% of the market.


Kaitlin DomangueFebruary 4, 2020
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5min730

Many cannabis businesses are struggling to stay afloat, and it’s not because people aren’t interested in the industry. 

Due to the federal status of cannabis, businesses in the cannabis space are subject to different regulations than traditional businesses in the United States. One of the key factors responsible for the current state of affairs is Section 280E in the tax codes. 

Green Wave Advisors has released a new report explaining the impact of the federal prohibition on cannabis businesses. Since many multistate operators (MSO)’s have gone public, the companies are including financial disclosures explaining the influence of 280E. 

This tax code prevents those “trafficking” federally illegal substances from claiming business-related deductions on their taxes, and unfortunately at this time that includes cannabis, even if the business is operating legally at the state level. 

However, businesses are able to deduct the Cost of Goods associated with operating their business on their taxes. This is not an easy thing to prove, however, and can be costly to do so. This is not the only workaround 280E, but the others present similar challenges. 

Green Wave Advisors limited its scope to those businesses with a market cap of greater than $500M with the exception of MedMen Holdings Inc. (OTC: MMNFF). The report found that only three businesses it vetted turned a profit at the end of 2018’s fiscal year. 

Cresco Labs (OTC: CRLBF), Green Thumb Industries Inc. (OTC: GTBIF), and Trulieve Cannabis Corp. (OTC: TCNNF) were found to be those that were profitable, with tax provisions of $4.4M, $8.6M, and $28.8M respectively and income losses of $7.5M, $28.6M, and $71.7M. The three companies paid tax rates of 59%, 30%, and 40%. 

The remaining companies operated at a net loss in FYE 2018 and quantified a rough estimate of potential tax credits if Section 280E were not in place. 

Acreage Holdings (ACRG.U), Columbia Care (CCHWF), CuraLeaf (CURLF), Harvest Health & Recreation (HRVSF), and MedMen showed an estimated NOL tax credit loss of $13M, $8.3M, $11.8M, $14.7M, and $55.3M respectively.

“While regulatory uncertainty continues to loom, current valuations may provide an attractive risk/reward profile for investors with an undefined time horizon, able to “sit” patiently until federal laws are modified,” said Matt Karnes, the founder of Green Wave. “When the added costs of prohibition are no longer necessary, businesses will be better
able to generate meaningful free cash flows, become less dependent upon outside sources of capital
and ultimately garner higher valuations, in our view.” 

For the first nine months of 2019, the story is painted a bit differently as all mentioned MSOs incurred losses with the exception of Trulieve which has earned a profit due to an unrealized gain which was associated with the change in fair value of its biological assets. If Trulieve did not have this gain, it would also be in the red. 

As displayed, Section 280E is causing a fair amount of issues for cannabis companies. Other roadblocks for these companies include the limited access to traditional banking as well as the illicit market continuing to thrive. 

Green Wave Advisors believe that these problems will continue as long as restrictions are imposed and/or recreational cannabis use is legalized. 

Karnes added, “We believe losses in some markets will continue until restrictions are further eased and/or recreational use is legalized. A good example is New York State, and in particular, Manhattan, in which medical marijuana licenses are highly coveted. With limitations on allowable form factors (among other challenges) and high operating costs, these storefronts are likely losing money but the silver lining remains in the conversion to recreational use.”


Andy WilliamsDecember 1, 2017
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9min1777

When a U.S. Congressman recently told me that getting rid of Section 280E of the Internal Revenue Code “would amount to a tax cut for pot growers,” I was caught off guard by his twisted interpretation of this tax policy.

It was a huge reminder of how much more work organizations like the New Federalism Fund, of which I am a proud member, have left to do in our efforts to secure fair tax policy for the legal cannabis industry. Widespread misconceptions persist even at the highest levels of our government, with many continuing to regard our industry as an easy way to strike it rich in the new American “green rush.” But the truth is, there are still major hurdles that make it particularly hard for businesses to actually profit in the new marijuana sector.

Section 280E, which prevents state-legal marijuana companies from deducting otherwise ordinary business expenses from their total income, is one of the biggest obstacles cannabis entrepreneurs run up against. To many, this may seem like a mere inconvenience or minor setback. But I can assure you, it is not.

While most companies in the U.S. pay a standard corporate tax rate of 35 percent, cannabis businesses, thanks to 280E, often face effective tax burdens of 70 percent or more.

But there is hope on the horizon. Just this week, Sen. Cory Gardner’s press secretary said the senator “plans to file an amendment” to the sweeping Senate tax overhaul bill that would reform 280E so it no longer applies to marijuana businesses operating in accordance with state and local laws, according to a Forbes report.

Gardner, a Colorado Republican, also cosponsored a standalone bill to reform this tax measure earlier this month.

“Our current tax code puts thousands of legal marijuana businesses throughout Colorado at a disadvantage by treating them differently than other businesses across the state,” Gardner said in a press release. “Coloradans made their voices heard in 2012 when they legalized marijuana and it’s time for the federal government to allow Colorado businesses to compete.”

What is 280E and why does it matter?

The heart of Section 280E centers around how federal tax law deals with businesses that are associated with “trafficking” substances that are listed in Schedule I or Schedule II of the Controlled Substance Act. Since cannabis remains listed as a Schedule I substance at the federal level, the Internal Revenue Service applies Section 280E to most state-legal marijuana companies, preventing them from deducting normal business expenses from their total income.

The measure was originally passed in response to a 1982 U.S. Tax Court case in which a cocaine dealer successfully defended tax deductions relating to his illegal drug business. Congress enacted 280E to prevent other drug dealers from following suit and trying to deduct business expenses relating to their illegal activities.

Although it stems from the case of someone who was operating clearly outside the bounds of all state and federal laws, the IRS has subsequently determined Section 280E also applies to licensed, regulated marijuana businesses acting in full compliance with state cannabis laws and federal guidelines.

Most businesses in the United States are only required to pay taxes on their taxable income, which is calculated by subtracting business expenses from total income. But cannabis businesses can only deduct the cost of goods sold on their taxes – that is, the direct costs of the materials used in creating goods along with the direct labor costs used to produce those goods.

We cannot deduct operating expenses like payroll, rent, electricity, and advertising, or the high costs of obtaining a state marijuana license. Together, these non-deductible costs account for a substantial portion of the total costs associated with running a business.

As a result, state-legal marijuana companies are taxed at roughly double the rate of businesses in other sectors. Our tax burden is downright prohibitive, and it has nothing to do with the original intent of 280E to penalize illegal drug dealers.

280E undermines fundamental American values

On a very basic level, federal taxes represent a contract of sorts between private entities and the U.S. government. We pay taxes so that our government can collect the money it needs to fund vital services and programs that help citizens fulfill the classic American ideals of “life, liberty and the pursuit of happiness.”

For corporate entities, tax contributions help ensure a system of law and order exists in which they can confidently conduct legitimate business operations. But the federal tax contributions of state-legal cannabis companies often serve the opposite purpose, hobbling an industry seeking to legitimize itself, rather than giving it basic survival tools afforded to every other legal industry.

The federal government collects disproportionately large amounts of tax money from an industry it still won’t recognize in full, then turns around and uses that money to enforce policies that further stifle the industry’s growth. This double-whammy is a gross manipulation of the basic principles on which the American tax system was built.

Despite numerous federal memos and other directives explicitly giving state-legal cannabis businesses the ability to operate, the IRS still treats us like we’re convicted criminals undeserving of fair and equitable tax laws.

It should be noted that Section 280E also penalizes states that have made the thoughtful decision to have cannabis sold by regulated businesses instead of criminals. By over-taxing these state-licensed businesses, the provision literally takes tens of millions of dollars out of state and local economies and gives it to the federal government.

Where do we go from here?

Cannabis companies have created tens of thousands of new jobs in this country, and it’s time for federal tax policies to start acknowledging the very real contributions this industry is making toward the overall health of the American labor economy. The legal marijuana industry generated nearly $7 billion in sales in 2016, and market reports project that number to reach $50 billion by 2026.

While getting rid of 280E won’t erase every legal obstacle cannabis businesses face, it would at least set their tax burdens on equal footing with other legal industries. And that notion of equal footing is key. Cannabis businesses aren’t asking for tax breaks or special treatment, they’re just asking for the same financial opportunities given to every other legitimate business in this country. What could be more American than creating an equitable tax environment for all?


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