Connecticut Bill Would Allow State Tax Deductions for Cannabis Businesses

A bill pending before Connecticut state lawmakers would allow businesses in the state’s nascent cannabis industry to take tax deductions commonly enjoyed by firms in other industries. If passed by the legislature and signed into law, the legislation is projected to save businesses in the cannabis industry $4.7 million in the fiscal year starting 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. 

Under the bill from Democratic Representative Jason Rojas, the House majority leader, cannabis businesses would be permitted to deduct standard business expenses on their state tax returns, although Section 280E would still apply to the firms’ federal tax liability. While the measure will not result in a huge 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 challenging business to get into, particularly because of the capital costs that are needed, but also the regulatory environment is very complicated as well because you are dealing with a controlled substance that is still illegal at the federal level,” Rojas told the Hartford Business Journal about the legislation. 

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

Adam Wood, president of the Connecticut Cannabis Chamber of Commerce, said that Rojas’ bill would benefit both businesses and consumers. The tax deduction would also likely result in lower retail prices, bringing more consumers to the regulated market and increasing tax revenue over time.

“Every other business in the state is allowed to deduct overhead, equipment, labor,” Wood told CTInsider. “Our argument is that allowing for these state tax deductions will actually drive down the price because net operating costs would not be as high. When pricing is reasonable or under control, the regulated market grows, and sales taxes from these businesses will increase.”

The lack of standard business deductions makes it difficult for entrepreneurs to succeed and grow their businesses. The burden is particularly tough for social equity businesses, which often face added difficulty raising business capital to launch their enterprises. Tiana Hercules, a Hartford, Connecticut city council member who was recently awarded a provisional cannabis cultivation license through 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 penalized as if we were not legitimate businesses,” Hercules said. “As a person in the social equity program, we are supposed to be developing business acumen and hopefully make a living and build some generational wealth as well. We should be able to reinvest in the business, staff and innovation as well. It makes a lot of sense if Connecticut wants a competitive and thriving cannabis industry. We’re ready to create a lot of excitement.”

So far, 19 states with legal cannabis, including nearby New York and Massachusetts, have decoupled their tax laws from the federal Section 280E to allow firms in the industry to take business deductions. The bill from Rojas, HB 5413, is currently under consideration by the Connecticut General Assembly’s Finance, Revenue & Bonding Committee. 

“Connecticut is smart to look for ways to help its fledgling adult-use businesses to succeed, and providing state-level tax deductions is a time-tested method,” Brian Vicente, founding partner of cannabis law firm Vicente LLP wrote in an email to High Times. “For too long state-legal marijuana businesses have been beholden to draconian federal taxes, and allowing cannabis businesses to make traditional deductions of overhead, equipment, and labor will lead to more healthy businesses in Connecticut. Connecticut is poised to follow a trend of Northeastern states that have adopted state tax reforms for cannabusinesses, including New York and Massachusetts.”

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

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