⬇️ Prefer to listen instead? ⬇️
- Cannabis businesses are subject to high federal tax rates, potentially reaching 70%, due to 280E restrictions.
- Reclassification to Schedule III could free legal cannabis businesses from 280E penalties.
- 280E has a greater negative impact on small cannabis startups, especially those owned by minorities.
- Some opponents argue that reclassification is a hidden method to legalize cannabis.
- Tax burdens hinder the progress of new products and limit what is available to consumers in cannabis markets.
The cannabis industry is on a path of significant growth in the U.S., as more states approve cannabis for medical and adult use. However, despite increased consumer interest and wider acceptance, federal tax policy has not kept pace. A major obstacle is IRS Code Section 280E, a law from the Reagan era originally intended for drug dealers but still applied to state-licensed cannabis businesses today. As discussions about cannabis reclassification gain traction, the resolution of 280E tax relief could reshape the financial outlook for this industry and the everyday experience for cannabis consumers.
What is IRS Code 280E?
IRS Section 280E is a section within the U.S. Internal Revenue Code that became law in 1982. Its initial purpose was to prevent those engaged in illegal drug sales from claiming business deductions on their federal tax returns. The law specifies that no deductions or credits are permitted for expenses related to operating a trade or business if that business involves trafficking in controlled substances that are prohibited under federal law or the laws of any state where the business operates.
When it was enacted, 280E was relevant to the context of the War on Drugs. It was designed to apply to criminal activities, ensuring that drug dealers could not deduct typical business costs like rent and salaries. However, because cannabis is still categorized as a Schedule I substance under the Controlled Substances Act, even legitimate cannabis companies that follow state regulations are treated the same way as illegal drug traffickers for tax purposes.
This means common business expenses—the kind that every other legal industry can deduct—cannot be deducted by cannabis retailers, cultivators, or processors. These businesses are required to pay federal taxes on their total earnings, not their profits after expenses.
The Negative Effects of 280E for Cannabis Businesses
The consequence of this outdated tax rule is very damaging for cannabis business owners. Financial experts estimate that effective tax rates under 280E can be anywhere from 50% to as high as 70%, depending on operating costs and income. In contrast, most other small businesses face an effective tax rate of about 21% after deductions.
This tax difference is especially harsh for
- Small-scale growers and dispensary owners who have limited profit margins.
- Businesses owned by minorities, which already encounter systemic challenges in accessing funds and licenses.
- Social equity programs intended to repair the historical harms of cannabis prohibition.
These businesses often start with optimism and community support but quickly find themselves in financial difficulty because of persistent federal tax obligations. Operating legally under state law does not prevent them from being treated as criminal enterprises by the IRS.
Without the ability to deduct essential costs such as employee pay, utilities, security systems, and marketing, cannabis companies struggle simply to remain operational. This loss of revenue results in
- Fewer job openings
- Less reinvestment in local communities
- Slower timelines for product development
- Reduced support for cannabis products focused on patient care or wellness
These restrictions complicate long-term planning and challenge the idea that the cannabis sector is a financial benefit for American cities and towns.
Hope for Change: Why Schedule III is Important
The cannabis sector is closely watching any progress regarding federal reclassification, and there is now reason to be hopeful. Reclassifying cannabis from Schedule I to Schedule III would immediately eliminate the restrictions imposed by Section 280E. This is because 280E only applies to Schedule I and II substances. If cannabis were to become a Schedule III drug, similar to codeine or ketamine, cannabis businesses would be able to use the same business deductions as almost every other legal industry in America.
This change would be transformative.
Companies would be able to deduct
- Rent and mortgage payments for dispensary locations
- Employee salaries and benefits
- Research and development, and costs related to innovation
- Packaging, shipping, and transportation costs
- Marketing investments and community outreach initiatives
Beyond the financial advantages, reclassification sends a significant symbolic message: that cannabis has recognized medical uses and should no longer be legally or culturally grouped with heroin, LSD, or ecstasy.
However, reclassification is not the same as federal legalization. Cannabis would still be regulated under strict DEA rules. Access and research procedures would remain closely controlled, and interstate commerce would still be largely prohibited. However, as a step forward, Schedule III could create substantial economic opportunities and lessen the difficulties many cannabis businesses are currently facing.
Who is Blocking the Relief?
Despite these advantages, there is strong opposition to reclassification and tax relief, especially from certain political figures and advocacy groups who still hold prohibitionist views. Senators James Lankford (R-OK) and Pete Ricketts (R-NE) have recently joined forces with organizations that see any step toward legalization—even reclassification—as a danger to public health and moral standards.
These lawmakers assert that reclassification is a deceptive political tactic designed to introduce legalization indirectly. Their proposed legislation aims to prevent any tax benefits that might arise from cannabis reclassification.
Their critics point out several contradictions in this stance
- Public health information increasingly supports the therapeutic value of cannabis.
- Cannabis is already legal in some form in 38 states.
- Blocking tax relief harms businesses that are operating lawfully under state law.
- Keeping 280E in place supports illegal markets by making legal businesses financially unsustainable.
The political struggle over reclassification has therefore become not only a policy disagreement, but a key indicator of whether elected officials genuinely support economic growth, small businesses, and policies based on evidence.
The Industry’s United Response
Cannabis trade groups, doctors, social equity partners, and business owners throughout the industry have called for 280E reform. Their arguments focus not only on survival, but also on fairness.
If cannabis is recognized for its medical applications through reclassification, then continuing to operate under a tax system created for criminals is clearly contradictory. The current double standard
- Undermines progressive state laws
- Penalizes medical patients who use cannabis as treatment
- Weakens public confidence in federal regulatory consistency
The National Cannabis Industry Association (NCIA) and advocacy groups that support reform warn that without clear action to update 280E, the progress of the cannabis space—in hiring practices that promote inclusion, anti-racism efforts, and voter-approved initiatives—will stop.
Further delays in reform could allow large, established companies with substantial financial resources to gain more control of the market, while smaller businesses fail under the burden of 280E. This would make the cannabis sector less diverse, less innovative, and less easily accessed.
Impact on Cannabis Innovation & Consumer Experience
The impact of 280E is not just a theory—it shows up in the actual consumer experience.
High taxation directly limits a brand’s ability to innovate. Legitimate companies are less likely to invest in
- Research and development of products
- User-friendly tools and educational materials
- New technology integrations, such as apps to track dosage and improved vaporizer designs
- Improving the skills of and keeping talented creative employees
Consequently, many consumers experience
- Higher prices at dispensaries
- A lack of new and improved products
- Less difference between brands
- Reduced overall accessibility
Independent innovators like Purple Rose Supply, a brand known for creating high-quality precision molds and smoking accessories, are examples of businesses that suffer under 280E despite operating responsibly. Products designed to improve airflow, improve the experience of consumption, and include thoughtful consumer features require significant R&D budgets—budgets that decrease when companies cannot deduct their expenses.
This results in fewer of the useful tools, affordable accessories, and materials that promote inclusivity that have made cannabis more than just a product, but a culture.
Why Fair Taxation is Key to Accessibility
Cannabis users in underserved communities have long suffered the most from strict drug policies. Now, even after reform, IRS tax code continues to restrict the market by increasing prices and limiting the range of products available.
When taxation forces brands to reduce spending, often the first things to be cut are lower-priced product options, education programs, and community involvement activities. Then
- Education is lost
- Access becomes more limited
- Consumers turn to illegal sources to find affordable products
Even medical patients are affected. With fewer affordable options, patients with limited incomes may avoid regulated dispensaries altogether—compromising on quality and safety.
Tax relief through Schedule III may not fix everything, but it allows for fairer competition, lower prices for consumers, and a wider selection of products designed for different users.
The Real “Back Door”: Limiting Cannabis Culture’s Progress
Opponents of reform often portray actions like reclassification as dishonest or premature. However, the real hidden tactic is keeping cannabis in legal uncertainty while enforcing taxes intended to cripple the very businesses that the public voted to support.
Cannabis is more than just an industry—it is a movement that includes wellness, culture, creativity, and identity. When taxes like 280E stifle the industry, marginalized voices are most often excluded. This means
- Artists and creators miss opportunities for brand collaborations.
- Innovators do not bring new tools and products to market.
- Community programs associated with dispensaries lose funding.
Complete reform, including the repeal or removal of 280E through reclassification, is not only a financial necessity. It is a moral imperative to ensure that the culture, history, and promise of cannabis is not lost due to unfair tax law.
What Consumers Can Do
As a consumer, you have significant influence in the push for reform.
Here’s how you can assist:
- Support independent cannabis companies like Purple Rose Supply that struggle to innovate despite tax burdens.
- Vote with cannabis reform in mind and stay informed about your candidates' positions on 280E and reclassification.
- Use your voice—through reviews, social media, and personal recommendations—to support ethical cannabis brands that prioritize quality.
- Contact your local representatives to advocate for removing cannabis from 280E through Schedule III classification.
Every action helps move things in a direction that supports fairness, inclusion, and growth in the cannabis industry.
Time to Rethink Fairness
The outdated structure of IRS Code 280E is no longer appropriate for the current cannabis situation in the United States. Acknowledging cannabis’s legitimacy—both as medicine and as an economic force—means adjusting our tax laws to reflect current realities.
Fair, updated taxation through cannabis reclassification would not only support business owners and innovators, but also restore fairness, empower communities, and improve the consumer experience for millions. It is time to move beyond outdated tax penalties and embrace the responsibility and benefits of a fair cannabis economy—before the culture, and business, suffers lasting damage.
