NJCPA Proposes Legislation to Decouple New Jersey from 280E

 – November 10, 2020
NJCPA Proposes Legislation to Decouple New Jersey from 280E

This week, the New Jersey Society of CPAs wrote to members of the New Jersey Legislature to advocate for legislation that would level the playing field for small businesses, minorities and women looking to enter New Jersey’s cannabis marketplace. 

The proposal, which calls for decoupling New Jersey from Internal Revenue Code Section 280E, is making the rounds in the legislature and has garnered significant interest. 

Below is a copy of the letter.

Tax Change Needed to Level the Playing Field for Small Businesses, Minorities and Women in Cannabis Marketplace

Dear Honorable Members of the New Jersey Legislature:

To ensure New Jersey small businesses, minorities and women can compete in the cannabis market, it’s critical that the state change an obscure section of its tax statute. Otherwise, this new market will be dominated by large and already established players, many of which will come from out of state.

With all the heated political debate that took place over the issue of the legalization of adult-use cannabis, and the technical nature of the tax change needed, very few lawmakers are aware of this necessary tax change.

Deducting business expenses is a routine and integral part of operating a business and is critical for a company to be profitable. However, cannabis businesses do not have access to this tax benefit even though it is available to all other New Jersey businesses. And that’s because New Jersey “piggybacks” onto Internal Revenue Code Section 280E, which prohibits any company illegally engaged in drug trafficking from deducting business expenses on personal or corporate income tax returns. Since cannabis is still illegal on a federal level, this makes sense for federal taxes, but not here in New Jersey where it’s now legal.

That’s why the New Jersey Society of Certified Public Accountants (NJCPA) is urging state lawmakers to “decouple” New Jersey from §280E. While we believe decoupling for businesses of all sizes would stimulate cannabis-related economic growth and bring in more state revenues, we recognize the concerns lawmakers have about the state’s budget problems. Recognizing these concerns, we recommend capping the decoupling of §280E at $25 million in aggregate gross receipts. This ceiling represents the small business definition provided under Internal Revenue Code Section 448. 

Larger operators generally have enough cash on hand to withstand the drain on profits that §280E will cause in initial years, but smaller businesses often do not. The first few years of operation are the costliest for businesses, and many of them will not be able to get past these initial years without decoupling from §280E. It could literally stifle the ability of small cannabis businesses to get off the ground.

Many of the states that have legalized cannabis have decoupled from §280E. Of the 10 states with an adult-use market, two have decoupled completely, one has specifically decoupled corporations and two have no state tax at the business level thus decoupling by default. The states that have the most robust cannabis industry, Colorado and Oregon, have specifically decoupled.

In a survey of NJCPA members, 66 percent of respondents indicated that having a commercial cannabis industry in New Jersey will help the state’s economy. If lawmakers and the public want a prosperous cannabis industry, with small businesses participating and thriving, then New Jersey needs to decouple from §280E. This needs to be done now, before the issue gets buried in the process of passing enabling legislation and drafting regulations for this promising new industry.

We hope you will be supportive of this issue and would be pleased to talk with you about it further.

Thank you for considering our views.