tax exemption

280E Update: Pursuing Normal Business Deductions for Missouri Medical Marijuana Licensees

Guest Post by David Smith, CPA, MBA, CM&AA | MoCannTrade Treasurer and Platinum Member |  Smith Patrick CPAs

Cannabis businesses, also known as marijuana related businesses (MRBs), face significant tax challenges.

Though cannabis businesses are now legal in some state laws, they are still illegal under federal law. This results in a challenging situation for the federal income tax treatment as it relates to Federal statute 280E.

Missouri Medical Marijuana Legislative Action

Missouri legislators have introduced bills that would decouple Missouri law from the federal law for cannabis businesses.

• SB 436 was filed by Senator Hoskins.  Status: Whipping the votes for Ways and Means committee and visiting with Pro Tem on referral of bills.
• HB 877 was filed by Rep. Christofanelli.  Status: Looking into committee assignments, possible General Laws or Economic Development.

Other Marijuana Legislative Progress on 280E

Some members of Congress are interested in changing the law to permit taxpayers in a marijuana business to deduct their business expenses and claim applicable credits.

Bills have been introduced to effectively remove marijuana from the Controlled Substances Act and section 280E, thereby allowing deductions and credits.

In the meantime, while the federal legislation plays out, some states decoupled from federal law and permit state-level ordinary and necessary business expenses and credits related to a marijuana business.

States that have decoupled from federal law on marijuana-related business include California, Colorado, Hawaii, and Oregon.

Why 280E Impacts Marijuana-Related Businesses

In 1982, Congress passed Internal Revenue Code (IRC) section 280E in response to a Tax Court case concerning a drug dealer who claimed ordinary and necessary business expenses related to his drug sales.

Section 280E disallows deductions and credits for amounts paid or incurred in the trade or business of trafficking in controlled substances prohibited by federal law or the law of any state where the trade or business is conducted.

Marijuana is listed as a controlled substance on schedule I and II of the Controlled Substance Act. This is why cannabis companies can’t take federal business-related tax deductions, which is a significant competitive disadvantage.

Read our previous article on the tax implications of 280E.

More Information

If you have questions about how Section 280E will affect your marijuana-related business’s income tax, reach out to us at 314-961-1600 or schedule directly here to discuss your situation.

David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He serves on MOCPA’s Legislative Policy Task Force and MOCPA’s Firm Leadership Committee. Reach him at 314-961-1600 or schedule directly here.   About Smith Patrick CPA Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.

A question or potential concern was communicated by a MoCannTrade member and licensee about whether or not medical marijuana facilities could qualify for the manufacturer’s sales and use tax exemptions. To ensure clarity on behalf of that member and the industry as a whole, MoCannTrade met with Missouri Department of Revenue (DOR) leadership. MoCannTrade wanted to get clarification on this important tax benefit, because for some facilities this opportunity could realize a one-time or even annualized savings of five to six figures+. 

Listed below is DOR's response, along with supporting documentation and forms to help facilitate this process for MMJ cultivation or manufacturing facilities in MO. Via DOR Senior Counsel Thom Houdek: “There is no prohibition to a marijuana facility to qualify as a manufacturer due to their specific industry or category of product produced. Medical cannabis manufacturing facilities will have to follow the same procedures as any other business claiming a manufacturing exemption and it will be determined on a case by case basis, as it would be for any other business.”

For our members' purposes, we have highlighted the FAQ directly from the DOR website on this specific matter, along with some important links to the relevant state laws and rules to provide additional guidance and clarity on the process and requirements to qualify. Keep in mind, it is the facility or taxpayer's responsibility to ensure qualification for these benefits and exemptions with DOR making the final determinations.

Does Missouri offer a sales tax exemption for manufacturers?

Yes. Replacement machinery, equipment, and parts, and the materials and supplies solely required for the installation or construction of such replacement machinery, equipment, and parts, used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption are exempt.

Materials and supplies are also exempt when they are required solely for the operation, installation or construction of the machinery and equipment purchased and used to establish a new, or to replace or expand existing, material recovery processing plants in the state of Missouri.

Parts, and the materials and supplies are also exempt when they are solely required for the installation or construction of such machinery and equipment purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state of Missouri, if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption.

Section 144.054 RSMo, exempts purchases of machinery, equipment, materials and chemicals used or consumed in manufacturing, processing, compounding, mining, or producing any product or used in research and development related to manufacturing, processing, compounding, mining, or producing any product from state tax and local use tax, but not local sales tax.

For additional MO exemptions info, please refer to Section 144.030 RSMo which also highlights exemptions for Electrical energy used in the actual primary manufacture, processing, compounding, mining or producing of a product, or electrical energy used in the actual secondary processing or fabricating of the product, or a material recovery processing plant as defined in subdivision (4) of this subsection, in facilities owned or leased by the taxpayer. Keeping in mind, it is the facility or taxpayers responsibility to ensure it qualifies for these benefits. 

Additional rules and FAQ reference on manufacturer’s sales and use tax exemptions: 

• Link to:  Missouri Form 149 – Sales and Use Tax Exemption Certificate Form
• Link to:  Rules of Department of Revenue Division 10—Director of Revenue Chapter 111—Sales/Use Tax—Machinery and Equipment Exemptions
• Link to:  Rules of Department of Revenue Division 10—Director of Revenue Chapter 110—Sales/Use Tax—Exemptions
• Link to:  Rules of Department of Revenue Division 10óDirector of Revenue Chapter 107óSales/Use Tax Exemption Certificates
• Link to:  Mo Department of Revenue FAQs page   

Missouri DOR also provided a direct contact number for their General Counsel's office should any facility or reseller have questions about the process or program elgibility: 573-751-0961