Cannabis Industry Reacts After Gov. Newsom Signs Bill to Bring Tax Relief

Making it in the cannabis industry is notoriously difficult, but a new bill signed by Governor Gavin Newsom (D-Calif.) could make things a bit easier for California businesses.

Newsom recently signed several cannabis-related bills, including AB 37, which addresses U.S. Code Section 280E. This IRS code prevents cannabis businesses from taking itemized tax deductions. 


“Existing federal income tax laws disallow a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances, including marijuana,” AB 37 reads. “The Personal Income Tax Law conforms to those federal income tax law provisions with respect to deductions.”

The landscape for legal cannabis is becoming increasingly competitive and high costs associated with operating cannabis businesses often make it difficult to thrive in the industry. Adding the inability to take standard deductions that are critical to small businesses only increases the struggles faced by cannabis business owners.

“This bill, for each taxable year beginning on or after January 1, 2020, and before January 1, 2025, would specifically provide in the Personal Income Tax Law for nonconformity to that federal law disallowing a deduction or credit for business expenses of a trade or business whose activities consist of trafficking specified controlled substances only for commercial cannabis activity, as defined under MAUCRSA [Medicinal and Adult-Use Cannabis Regulation and Safety Act], by a licensee under MAUCRSA, thus allowing deduction of business expenses paid or incurred during the taxable year in carrying on that commercial cannabis activity under the Personal Income Tax Law,” AB 37 states.

California cannabis executives have been seeking changes to the tax code for a long time.

“This was long overdue and a much needed break for the regulated industry. It just makes sense, and I’m glad to see that this bill made it through,” Amanda Ostrowitz, chief executive officer and co-founder at CannaRegs told mg. “Since these are state legal businesses they should receive the same tax deductions as any other state legal businesses and that is what this bill accomplishes.”

Ostrowitz would still like to see further adjustments to the tax code but feels AB 37 is a good starting point.

“While they still do not receive the same normal business deductions at the federal level due to 280E and the federal illegality of cannabis, they are at least able to take those deductions at the state level,” she said. “While more needs to be done to alleviate the tax burdens on cannabis operators, this is a step in the correct direction.”

One recurring criticism of California’s cannabis business regulations, as well as those of other states, is that they favor large-scale operators. Aaron Riley, president at CannaSafe, believes AB 37 will provide financial relief to smaller companies.

“This deduction would be a huge boost for many of our clients who are subject to 280E, currently those with large cultivations are able to take some normal business deductions. Most businesses are paying taxes on their gross profit,” Riley told mg

Jamie Warm, co-founder and chief executive officer for Henry’s Original wants cannabis companies to have the opportunity to operate on a level playing field. “I commend Governor Newsom in taking the appropriate steps toward normalization and sustainability for cannabis companies,” Warm said. “It’s encouraging to see California recognize canna-businesses as contributing members to the economy by allowing us to deduct expenses as any other company would.”

The bill took effect immediately after Gov. Newsom signed it.