Connecticut Bill would allow state tax deductions for cannabis companies

A bill pending before the Connecticut state legislature would allow companies in the state’s burgeoning cannabis industry to take tax deductions that companies in other industries typically enjoy. If passed by the Legislature and enacted, the legislation is expected to save companies in the cannabis industry $4.7 million in the fiscal year beginning July 1, growing to nearly $10 million by 2026.

In many states that have legalized marijuana for recreational or medical purposes, tax laws follow the lead of Section 280E of the Federal Tax Code, which denies most standard business tax deductions for cannabis businesses. Under the rule, cannabis businesses are only allowed to deduct the cost of goods sold, while deductions for other business expenses such as rent, payroll, and utilities are not allowed for most operators.

House Majority Leader Jason Rojas’ bill would allow cannabis companies to deduct standard business expenses from their state tax returns, although Section 280E would still apply to companies’ federal tax liability. While the measure won’t result in much windfall for cannabis companies, the change is expected to make Connecticut businesses more competitive with recreational marijuana dispensaries in neighboring Massachusetts and Rhode Island, where prices are significantly lower.

“Everyone I’ve met says it’s an incredibly difficult business to get into, particularly because of the capital costs involved, but also the regulatory environment is very complicated because you’re dealing with a controlled substance that is is still illegal at the federal level,” Rojas told the Hartford Business Journal about the legislation.

“Anything that can be done to reduce the cost of doing business, I think will benefit the state if we want this marketplace to actually be successful,” he added.

Adam Wood, president of the Connecticut Chamber of Cannabis Commerce, said the Rojas bill would benefit both businesses and consumers. The tax deduction would also likely result in lower retail prices, bring more consumers into the regulated market, and increase tax revenues over time.

“Any other company in the state is allowed to deduct overhead, equipment and labor,” Wood told CTInsider. “Our argument is that accounting for these state tax deductions will actually lower the price since the net operating cost wouldn’t be as high. When pricing is reasonable or under control, the regulated market will grow and sales taxes from these businesses will increase.”

The lack of standard business deductions makes it difficult for entrepreneurs to thrive and grow their businesses. The burden is particularly great for social participation companies, which often face additional difficulties in raising business capital to start their businesses. Tiana Hercules, a Hartford, Connecticut City Council member who was recently awarded a provisional cannabis cultivation license by the state’s Social Equity Council, said last week that the federal tax rule has its roots in the war on drugs.

“We’re being punished as if we weren’t legitimate companies,” Hercules said. “As a person in the social justice program, we are meant to develop business acumen and hopefully make a living and also build some generational wealth. We should be able to reinvest in the business, people and innovation as well. It makes a lot of sense if Connecticut wants to have a competitive and thriving cannabis industry. We are ready to cause a lot of excitement.”

To date, 19 legal cannabis states, including nearby New York and Massachusetts, have decoupled their tax laws from Federal Section 280E to allow companies in the industry to take business deductions. The Rojas bill, HB 5413, is currently under consideration by the Finance, Revenue & Bonding Committee of the Connecticut General Assembly.

“Connecticut is smart about finding ways to help its fledgling adult use businesses thrive, and providing state-level tax deductions is a best practice,” wrote Brian Vicente, founding partner of cannabis law firm Vicente LLP, in an email to Hohe Zeiten. “For too long, state-legal marijuana businesses have been subject to draconian federal taxes, and allowing cannabis businesses to take traditional deductions from overhead, equipment and labor will lead to healthier Connecticut businesses. Connecticut is poised to follow a trend from northeastern states that have passed state tax reforms for canna companies, including New York and Massachusetts.”

The Legislative Finance Committee will shortly begin voting on items to be included in next fiscal year’s budget. In an interview with local media, the bill’s sponsor said he hoped his colleagues in the legislature would support the tax changes in HB 5413.

“It’s going to be part of the larger discussion about revenue and whether we can approach this differently because it’s revenue leakage and there are a lot of priorities,” Rojas said. “But it’s a burgeoning market and we’re seeing what the other states are doing. It’s consumer friendly. I hope there will be room in the budget for that.”