Will a federal excise tax replace lost 280E tax revenue?

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While the nature, extent and timing of US cannabis policy reform remains in limbo, a federal excise tax is inevitable and with it (if not before) the elimination of the 280E tax burden.

  • The Democrats are proposing a 25% excise tax (Cannabis Administration & Opportunity Act CAOA) while the Republicans are proposing 3% (The States Reform Act). The US deficit stands at ~$2.8tn, so none of the recommendations move the needle; however, the magnitude of lost revenue of 280E might establish a more practical maximum threshold.
  • Now, with 3 full years of public disclosures, we have a clearer (and arguably consistent) picture of the tax burden of 280E versus reported income (this is an update to our Q3 analysis which was published in a previous “Buzz”).
  • Our analysis reveals that an excise tax of around 10% would be sufficient to replace lost revenue of 280E (if that is the intention); The 25% proposed by Senator Schumer is excessive and would allow the illicit market to thrive.
  • Our review represented approximately 23% of US retail revenue in 2021 (~$25 billion), 16% in 2020 ($19 billion), and 8% ($12.9 billion).

REMARK: For the purposes of this calculation, we take the CURRENT tax provision (the amount of tax that will actually be paid in the next 12 months) which differs from the TOTAL tax provision which includes deferred taxes. If the company has positive pre-tax income (not too much), we use an effective tax rate of 21% (assuming 280E does not apply for state income tax purposes). We deduct this amount from the current provision to determine the charge of 280E.
Some MSOs provided a wholesale/retail revenue breakdown while others did not; we recognize that wholesale trade would not be subject to the same excise tax as retail trade, but the apportionment would probably be immaterial for the purposes of this illustration.

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