What These Two Cases Could Tell Us About the Future of Section 280E and Cannabis Taxation

The cannabis industry continues to change rapidly throughout the United States. Many states, including Washington State and Colorado, have legalized marijuana for both recreational and medicinal purposes. Other states have legalized marijuana strictly for medicinal purposes but may permit recreational use in the future. Because the recreational cannabis industry is relatively new, the industry still has legal issues to iron out. And, one of the biggest issues is the application of IRC Section 280E to the cannabis industry.

At the federal level, cannabis is still considered a controlled substance, which means that it’s subject to IRC 280E. Section 280E states that no deductions or credits may be taken in connection with income generated through the sale of controlled substances. The IRS has flagged certain cannabis businesses which have attempted to take deductions in connection with their cannabis-derived sales income. Many in the cannabis industry have spoken out against the application of Section 280E.

Two recent cases have called into question whether Section 280E will continue to apply to the cannabis industry. Some analysts argue that a viable case can be argued against the constitutionality of Section 280E as applied to the cannabis industry. Let’s explore these two cases, and discuss their ramifications for Section 280E and the cannabis industry.


Overview of Colorado State Case

The Colorado labor department issued a $425,000 fine against a motel owner after he failed to maintain worker’s compensation insurance coverage. The motel owner contested the fine, arguing that the fine violated the Eighth Amendment because it was an “excessive” penalty. Ultimately, the Supreme Court of Colorado ruled in favor the motel owner.

Though State of Colorado petitioned the US Supreme Court to review the case, ultimately the Supreme Court declined to review the case. This leaves the door open for businesses in the cannabis industry to contend that deficiencies assessed under Section 280E are excessive fines in violation of the U.S. Constitution.


Overview of California / U.S. Tax Court Case

The US Supreme Court’s decision to leave the Colorado case alone occurred no long after another related court case. In October of 2019, the U.S. Tax Court heard a case after the IRS determined that a California cannabis company violated section 280E by taking $1.5 million in illegal deductions. Ultimately, the U.S. Tax Court agreed with the IRS that the deductions were illegal, and upheld the deficiency assessed by the IRS.

But, even though the California company lost the case, a couple of dissenting opinions argued that Section 280E creates an excessive fine or penalty in violation of the Eighth Amendment. Essentially, the dissenting judges argued that Section 280E can result in taxes which exceed income, and that situation violates the Sixteenth Amendment. And if Section 280E violates the Sixteenth Amendment in this way, then it violates of the Eighth Amendment as well.


Potential Ramifications for Cannabis Industry and IRC Sec. 280E

It’s significant that Supreme Court chose not to review whether a business fine classifies as an excessive penalty. What’s more, the dissenting opinions in the California / U.S. Tax Court case outline a viable case against the constitutionality of Section 280E when applied to the cannabis industry. If the Supreme Court ever determines Section 280E to be an excessive penalty, the decision would have a huge impact on the industry.

The determination could force the IRS to base its tax assessments on a business’s actual ability to pay. It would dramatically alter both existing and future tax liabilities in the cannabis industry. We encourage any cannabis business with outstanding tax liabilities to contact an experienced tax attorney. An experienced tax attorney can help you plot the best course to resolve youtax debt.


Contact Boxelder Consulting for Additional Information

This is quite a bit of information to take in. Many businesses in the cannabis industry are understandably confused by 280E accounting, tax deductions, and so forth. After all, these are complex topics. If you’re in this industry and need counsel on these issues, don’t hesitate to contact Boxelder Consulting for assistance today. The attorneys and tax professionals at Boxelder Consulting can help you navigate this difficult territory and give you the clarification you need to set your business straight. Call us today at 303-317-6111 today for more information.

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About the Author

A company founder standing by Colorado's Front Range

Tom Conradt

Co-Founder, IRS Collections Defense Attorney

Tom Conradt is the co-founder of Boxelder Consulting & Tax Relief, and has been practicing IRS Collections defense law for the past ten years. Graduating from the University of North Carolina at Chapel Hill, Tom is the lead IRS Collections Defense Attorney and heads the tax resolution department. Tom’s favorite part about working at Boxelder Consulting is hearing about the relief that clients experience after they sign up and start seeing immediate results on their case. Tom enjoys all the outdoor activities Colorado has to offer, including skiing, hiking and climbing. He is also looking forward to the return of indoor pickup basketball.

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