Terra Tech Acquisition of Blum Reveals Unfair 280E Tax Burden for Cannabis Companies

Blum Oakland Pays an Astonishing Effective Tax-Rate of 966%

Entrepreneurs and investors in the cannabis industry face a litany of obstacles, but one of the worst is an antiquated tax rule known as 280E that can lead to income tax rates on profits in excess of 100%. If you aren’t familiar with 280E, the National Cannabis Industry Association (NCIA) published an easy-to-read primer that explains its punitive ways. In a nutshell, only the cost of goods can be deducted from revenue, while operating expenses are not included when calculating the profits for federal taxes. It is possible to run the cannabis business with no profit at all yet owe substantial income taxes.

Because almost the entire cannabis industry consists of privately-held businesses, most of the discussions around 280E are hypothetical. Occasionally, a company will share specifics, but industry observers rarely get the chance to see the real numbers in black and white. The recent acquisition of Blum Oakland (Black Oak Gallery DBA Blum Oakland) by publicly-traded Terra Tech (OTCMKTS:TRTC) has provided the industry with a rare glimpse into the punitive nature of 280E. Following the closing of the deal earlier this year, TRTC today published an amended 8-K that details the financials of Blum. Here is the 2015 income statement:

For 2015, the company generated an operating profit of just $60K, yet it paid income taxes of $636K. The notes to the financial statement reveal that the gross tax expense was actually $697,624, though the company was able to defer almost $61K.  Of the $697K, federal taxes represented over $658K, while California income tax represented almost $40K. The federal tax rate, then, worked out to an effective tax-rate of 966% of income before taxes. For 2014, it represented 66.5%, which is still a huge premium to the highest federal marginal tax-rate. The story in Q1 was even worse, as Blum Oakland reported an operating loss in excess of $55K yet still paid state and federal income taxes of almost $77K.

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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