Big Pharma and 280e, why they don't have to abide!

September 12, 2016

Another awesome article by our intern Henry.  Truly great work and to no surprise Big Pharma makes their own rules as they have the money to buy it, I mean do it....


Pharmaceutical companies are not constrained by 280E since they are authorized by the DEA to produce certain quantities of schedule 1 and 2 controlled substances whereas state-legal marijuana businesses are not.

BACKGROUND
A common question has been whether or not pharmaceutical companies that produce schedule 1 and 2 controlled substances (mostly schedule 2 as schedule 1 drugs have no accepted medical use) face the same tax burden imposed by 26 U.S. Code § 280E that state-legal marijuana businesses face. 
The text of 280E states: "No deduction or credit shall be allowed...on any trade or business if such...consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) ..."
As marijuana is listed as a schedule 1 controlled substance under the CSA, little besides COGS can be deducted from a business’s taxable income. Pharmaceutical companies that manufacture other schedule 1 and 2 drugs (including cannabinoid based drugs) however, do not face the same tax regulations. 
Most important to understanding this distinction is that "trafficking" is defined as dealing or trading something illegal or illegally as seen in most legal contexts. 
Current marijuana businesses are not legal under federal law. While certain pharmaceutical companies also manufacture and distribute controlled substances, they do so with the approval of the DEA.

REGULATION
The DEA has authority to issue permits for the manufacture and distribution of controlled substances given that said manufacturer has submitted an application and meets all the necessary regulations. A facility licensed to produce schedule 1 and 2 controlled substances must adhere to a stringent list of security and oversight measures in order for the DEA to ensure the integrity of its “closed system of distribution.” More information regarding this can be found under Title 21 Code of Federal Regulations, Part 1301.
In addition to compliance, companies manufacturing schedule 1 and 2 controlled substances must also apply for a “quota” that they are allowed to produce. This Aggregate Production Quota (APQ) is set by the DEA through an Annual Assessment of Needs (AAN). Each company’s individual manufacturing quota (IMQ) is then determined via application and negotiation meetings between the two parties. 

CONCLUSION
Unless marijuana is reclassified below schedule 2 or 280E is repealed, cannabis related businesses will face a higher effective tax rate as there seems to be little precedence for the DEA allotting marijuana production to small growers/dispensaries. Whether this is a result of the perceived lack of need as determined by the AAN or the infeasi

 

bility of complying with the DEA’s closed system is unknown.

 

CITATIONS
"Quota Applications." Quotas -. Drug Enforcement Agency, n.d. Web. 02 Sept. 2016.
Silaika, Scott. "Manufacturing Controlled Drugs." Contract Pharma. N.p., 24 Jan. 2011. Web. 02 Sept. 2016.
"Title 21 Code of Federal Regulations." Title 21 CFR. Drug Enforcement Agency, n.d. Web. 02 Sept. 2016.
"26 U.S. Code § 280E - Expenditures in Connection with the Illegal Sale of Drugs." LII / Legal Information Institute. Cornell University Law School, n.d. Web. 02 Sept. 2016.

 

By Henry Zhu
 

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