California’s personal income tax law bars cannabis businesses from deducting ordinary business expenses from their state income taxes, a significant disadvantage. A new bill would change that, and could be heading for the governor’s desk early this week.
The bill would not only help level the playing field for legal cannabis operators in California, but sends a symbolic and potent signal nationwide, with a key state focusing on tax and banking issues for the cannabis industry as the U.S. Congress also begins to turn toward such matters.
Assembly Bill 37, authored by Assemblyman Reginald Byron Jones-Sawyer Sr. of Los Angeles, would exempt commercial cannabis activity from a section of state law that prohibits the industry from deducting ordinary expenses such as rent, utilities, employee salaries, and employee health insurance premiums.
The bill passed the California State Senate on September 4 and was tossed back to the Assembly for a final vote on Senate amendments, which can come as early as Monday, Jones-Sawyer’s office told Cannabis Wire. The final version of the bill then would then head to the governor’s desk.
The state’s personal income tax law mirrors Section 280E of the federal Internal Revenue Code, barring businesses from deducting business expenses from income originating from the sale of Schedule I and 2 drugs, as defined by the Controlled Substances Act. Cannabis is still considered a Schedule 1 drug at the federal level.
The legislation represents another decisive move by California legislators in a week’s time aimed at providing the state’s cannabis industry a reprieve from its financial constraints, which are primarily tax and banking related.
On August 30, an Assembly committee gave the nod to a bill that would establish limited charter banks and credit unions for cannabis-related businesses, Cannabis Wire previously reported. Senate Bill 51 was penned in collaboration with State Treasurer Fiona Ma, who trekked to Washington, D.C. in February to urge federal lawmakers to pass the Secure and Fair Enforcement Act of 2019, known as the SAFE Banking Act. The legislation would protect banks from federal prosecution for working with cannabis companies.
Ma is also in favor of the state tax fix. In a May letter supporting AB 37, Ma said cannabis businesses operating legally in California are faced with up to 70% tax rates on their gross revenue. This creates a disincentive for them to participate in the state’s legal, regulated market, she said, a trend that could shrink California state coffers. “California is projected to earn $8-$20 billion annually from cannabis taxes,” Ma wrote in her support letter, “but only if the state helps to lessen the financial strains placed on the cannabis industry.”
Lindsay Robinson, executive director of the California Cannabis Industry Association, said in a March letter supporting AB 37 that licensed cannabis businesses are already paying much higher taxes and fees than their unlicensed competitors. These taxes include a 15% excise tax as well as a by-weight cultivation tax, she said, as well as any local taxes.
“Any and all incentives that reduce the tax burden on compliant cannabis businesses will encourage greater participation in the compliant marketplace and increase accountability,” she wrote.