No taxation without representation. Repeal 280E
By Kaitlin Domangue
A lot of issues in cannabis set my heart on fire to do more and say more.
Repealing or amending Section 280E is one of them. Section 280E is a code set forth by the Internal Revenue Service. 280E says:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
In simpler terms: organizations distributing a Schedule I or Schedule II controlled substance can’t deduct or credit expenses incurred over the taxable year aside from the very limited Cost of Goods Sold. This includes state-licensed cannabis businesses.
280E was passed in the 1980s when an illicit drug dealer named Jeffery Edmondson was flagged by the IRS for not filing his taxes.
Edmondson prepared a case before the court, calculating and presenting the expenses that come with running an illicit drug operation; including trips to San Diego and the cost of a scale and packaging.
Mr. Edmondson won his case. And there were obviously a few WTF moments after that – because Section 280E was passed the following year.
As a result, cannabis businesses pay up to 100% in federal tax rates.
American cannabis businesses are left with next to nothing after Section 280E and the absurdly-high state tax rates are factored in.
These businesses are literally being taxed without federal representation.
There’s no telling exactly how much the federal government makes from cannabis businesses because of its illegality, but The Congressional Joint Committee on Taxation said that keeping cannabis federally illegal from 2018 to 2027 means the feds will make an estimated $5 billion with such high federal tax rates on cannabis businesses.
Naturally, the cannabis industry’s focus is on federally legalizing cannabis.
Legislation like The MORE Act would remove cannabis from the list of controlled substances and expunge U.S. cannabis convictions. It’s been deliberated in Congress since 2019.
Most of the cannabis industry’s problems would dissolve overnight if this bill passed, but not all members of Congress care to make it happen.
Meanwhile, as legislation stalls, legal cannabis operations are floundering.
Repealing or amending tax code 280e would immediately catapult cannabis businesses towards success and revitalize the industry while the government fights – I mean deliberates – over legalization.
Even ultra-conservative Justice Clarence Thomas called the federal government’s “half-in, half-out regime that simultaneously tolerates and forbids the local use of marijuana” a “contradictory and unstable state of affairs” during deliberations over Section 280E.
280E’s day in court
280E has been challenged before the U.S. Tax Court several times, in several different ways.
Harborside’s tax case
The Harborside Group, one of California’s largest operators, fought with the IRS over Section 280E for several years before the case closed in 2021.
Harborside’s taxes from July 2007 to July 2012 were first called into question in 2018. Harborside was accused of claiming inappropriate deductions and exclusions that weren’t in accordance with federal law.
A 3-day trial in the U.S. Tax Court ruled against Harborside in 2018 and the company appealed. Harborside went before the 9th Circuit Court of Appeals in 2021.
The court denied the bid to end Section 280E and Harborside was ordered to pay millions of dollars in back taxes.
Champ vs. Commissioner
CHAMP v. Commissioner is a 2007 case involving a California medical caregiving and counseling organization.
Californians Helping to Alleviate Medical Problems (CHAMP) facility allowed adults with debilitating diseases to come and receive healthcare services. CHAMP offered weekly group sessions, counseling, and food & hygiene products for low-income clients.
Members paid a fee to access these services and in addition, CHAMP provided members with medical cannabis if they wanted it. The IRS felt that CHAMP was trafficking a controlled substance and disallowed all business expenses except the Cost of Goods Sold.
After CHAMP’s argument was presented in court, the court agreed that CHAMP’s caregiving and counseling line of business was separate from the cannabis services. It was concluded that discontinuing cannabis services wouldn’t impact CHAMP’s bottom line, indicating it’s just a small part of the business.
It was ruled that CHAMP could deduct necessary and ordinary business expenses.
Alterman v. Commissioner
Alterman v. Commissioner is a 2018 case involving a Colorado retailer, Altermeds LLC, and the U.S. Tax Court, examining Altermeds’ taxes for 2010 and 2011.
Altermeds took a page out of CHAMP v. Commissioner’s book and argued that they sold non-cannabis merchandise, like pipes, and therefore exempt from Section 280E for that line of business.
The court determined that selling non-cannabis merchandise was not a separate line of business for Altermeds because 1) Altermeds generated most of its revenue from cannabis sales and 2) items like pipes “completed” the sale of cannabis, further identifying the primary line of business.
Two other arguments made by Altermeds were squashed due to poor record-keeping, and because of that, verifying Altermeds’ statements would be an “impossible” task.
What I’m thinking 🧠
It’s easy for me to say “remove section 280E!” Actually removing it is the obstacle.
The same federal government fighting over The MORE Act and The SAFE Banking Act is the *same federal government* that will have to approve repealing 280E.
There has been no shortage of cannabis businesses fighting the absurdity of 280E, though. And more cases have battled it out in court than the ones I mentioned. The 2007 CHAMPS case, however, was undoubtedly the most successful 280E case for an organization.
Findings show the IRS made almost $950/hour of IRS agent work for cannabis businesses over a certain time period in 2012, compared to the $545/hour for mainstream businesses.
In other words: the IRS makes more from cannabis audits than mainstream audits because only 3% of cannabis returns had no errors or adjustments – compared to 21% of other industry audits.
The cannabis industry is more likely to be audited by the IRS than mainstream businesses because of it.
And since they’re statistically more likely to uncover an error: maintaining impeccable accounting records should be at the top of our priority list in cannabis.
As federal legislation like the MORE Act stalls, I encourage the industry to continue tweeting and talking about Section 280E, putting pressure on lawmakers to *at least* amend this tax code if they can’t agree on legalization.
Just remember – the federal government stands to make $5 billion from unconstitutional tax rates between 2018 and 2027 if we don’t speak up.