Will a Federal Excise Tax Replace Lost 280E Revenues?

KEY POINTS:

While the nature, extent and timing of U.S. cannabis policy reform remains in limbo, a federal excise tax is inevitable and with that (if not before) the elimination of the 280E tax burden.
The Democrats suggest a 25% excise tax (Cannabis Administration & Opportunity Act CAOA ) while the Republicans propose 3% (The States Reform Act). The U.S. deficit stands ~$2.8T so neither recommendation moves the needle; nonetheless, the magnitude of lost 280E revenues could establish a more practical maximum threshold.
Now with 3 full years of public disclosures, we have a clearer (and arguably consistent) picture of the 280E tax burden in relation to the reported revenues (this is an update to our Q3 analysis which was published in a previous “Buzz”).
Our analysis reveals ~10% excise tax would suffice to replace lost 280E revenues (if that’s the intent); 25% proposed by Senator Schumer is excessive and would enable the illicit market to thrive.
Our review accounted for ~23% of the U.S. retail revenues in 2021 (~$25B), 16% 2020 ($19B) and 8% ($12.9B).

NOTE: For purposes of this calculation, we take the CURRENT tax provision (the amount of tax that will actually be paid within the next 12 months) which differs from the TOTAL tax provision which includes deferred taxes. If the company has positive pretax income (not too many do), we use an effective tax rate of 21% (assumes 280E doesnt apply for state income tax purposes). We deduct this amount from the current provision to determine the 280E burden.

Some MSOs have provided wholesale/retail revenue split while others have not; we recognize that wholesale would not be subject to the same excise tax as retail but the breakout would likely be immaterial for purposes of this illustration.

KEY POINTS:

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