By Shuki Greer, Esq.

Last week, the Tax Court continued the line of cases denying tax deductions under Internal Revenue Code §280E. That section says that any business which is “trafficking in controlled substances” cannot receive many of the traditional deductions that a business may take. Otherwise put, this means that a company must pay taxes on all of its incoming revenue before it subtracts most of its expenses.
This law can be a severe punishment for a cannabis company that may be operating entirely legally under state law. Unfortunately, the federal government still considers them to be “drug-dealers” and holds this punitive tax measure over their heads.
The case before the tax court involved a dispensary that filed taxes and took deductions for its business expenses. The IRS sent them a bill of $1.26 million, plus another 250K in fines. The company filed suit, asking the court to declare that it did not have to pay those bills.
A divided court rejected the company’s three arguments. In addition to the majority opinion, there were two concurring opinions and two dissenting opinions. Of particular interest is the Gustafson dissent, which opens up a new avenue for declaring §280E to be a Constitutional violation. Essentially, Gustafson argues, that the 16th Amendment allows Congress to tax income. Income is defined as “gain”, or net profits, minus costs, to get those profits. So for Congress to then disallow normal business expenses, it means that they are taxing more than actual income, which violates the 16th Amendment.
This argument was only agreed to by one other Judge on the tax court, which ultimately ruled against the dispensary. However, in the future, as the public opinion shifts, the policies behind these prohibitive rules may fall away, and we may not be far away from a court coming to the opposite conclusion. Legal Cannabis companies are working tirelessly to follow the law, and they should be rewarded for doing so. Continuing the regime of these prohibitive financial policies constitutes a “subsidy for the black market.” The way to solve this problem is to shift the financial incentives in favor of operating under a legal framework, and avoiding this severe tax problem is the best way forward.

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