Section 280E forces cannabis retailers to pay 70%+ effective tax rates because they cannot deduct ordinary business expenses

IRC Section 280E prohibits any business that 'traffics' in Schedule I or II controlled substances from deducting ordinary business expenses -- rent, payroll, utilities, marketing -- from gross income. Cannabis retailers can only deduct Cost of Goods Sold (COGS), which for a retail dispensary is essentially just the wholesale cost of inventory. A dispensary with $1 million in revenue, $100,000 in COGS, and $700,000 in operating expenses owes federal income tax on $900,000 instead of $200,000, pushing effective tax rates above 70%. Why it matters: Dispensary owners pay taxes on revenue they never actually earned as profit, so they have almost no retained earnings to reinvest in their businesses. Without reinvestment capital, they cannot upgrade facilities, hire experienced staff, or build competitive operations, so they lose ground to the illicit market that pays zero taxes. Because licensed operators are uncompetitive on price, consumers continue buying from unlicensed sellers, so state tax revenue projections consistently fall short. Falling short on tax revenue undermines the political case for legalization in new states, so the entire legal market expansion stalls. The stall means patients in prohibition states still lack safe, tested, legal access to medical cannabis. The structural root cause is that Section 280E was enacted in 1982 to punish convicted drug dealers (specifically inspired by a cocaine trafficker who deducted a yacht), but it was written so broadly that it now applies to every state-licensed cannabis business operating legally under state law. Congress has not amended it because cannabis remains federally scheduled, and the December 2025 executive order to reschedule to Schedule III has not yet taken legal effect, leaving operators in limbo through at least 2026.