Will SCOTUS soon do something about the notorious 280E cannabis tax penalty?
A thorny federal tax provision familiar to state-legal cannabis businesses but unknown to most Americans could get a review from the highest court in the country. Justices for the Supreme Court will decide soon whether to hear a challenge to the obscure federal tax rules known as Section 280E from the Denver-based cannabis dispensary Standing Akimbo.
Comprehensive cannabis reform from Congress and the White House in the coming months or years could make the impact of 280E moot. But it’s unclear (at least to me) how such reforms might apply to previous tax years for existing cannabis businesses. Would they still be on the hook for stratospheric tax bills? Not to mention, Washington lawmakers could simply replace 280E with new federal taxes on cannabis.
In the Standing Akimbo case, a lower federal appeals court in Colorado has already ruled against the dispensary. So now it’s petitioning the Supreme Court for relief.
The IRS first launched an investigation of Standing Akimbo in 2017 to determine if the business had wrongly lowered its tax burden by claiming certain deductions that weren’t allowed under 280E. Without a warrant, tax enforcers then pursued business records from the state of Colorado that described Standing Akimbo’s sales, harvests, and plant inventories.
Federal tax authorities have opened innumerable similar audits and investigations targeting state-legal cannabis businesses around the nation in recent years. The IRS and the industry itself are keenly aware that cannabis businesses have powerful incentives to evade federal attention and compliance, rather than be as forthcoming as possible about their balance sheets to avoid trouble. Says the National Cannabis Industry Association in a fact sheet about 280E:
“Cannabis entrepreneurs want to pay federal and state taxes. ... But the current taxation climate has convinced some cannabis entrepreneurs to either ignore 280E on their tax filings, or forego paying taxes altogether. These businesses would rather gamble on the IRS overlooking their filing than see their revenues evaporate due to 280E.”
The 280E tax provision was first enacted in 1982. It’s just one of many tools Congress created at different stages of the decades-long war on drugs to confront narcotics kingpins and strip them of ill-gotten gains. (Drug-asset forfeiture laws are another such tool.) It was never conceived to punish state-legal entrepreneurs who arrived later. But that’s the effect.
These federal tax rules prohibit cannabis businesses from deducting ordinary business expenses for tax purposes that any other business -- say, a dry cleaner or coffee shop -- gets to enjoy. And it matters not in the eyes of the IRS that momentum is clearly heading in the direction of federal and state cannabis reform. When it comes to determining your business income for federal tax purposes, you are an unlawful drug trafficker.
Colorado’s Standing Akimbo and its attorney, James Thorburn, argue that 280E is today unconstitutional when applied to state-legal cannabis businesses. They say lawmakers in Congress when they enacted 280E never meant to ignore the will of states — in this case, the will of Colorado voters, who approved cannabis for recreational adult use in 2012.
The equivalent of 280E, according to Standing Akimbo’s petition, would be requiring the justices of the Supreme Court to pay income taxes not just on their salaries but also on the cost of running the court itself:
“Section 280E only applies to unlawful drug traffickers. In order for §280E to apply to state-legal cannabis sales, there must be a predicate finding that the taxpayer has committed a federally unlawful act -- drug trafficking. To this end, the IRS has taken it upon itself to investigate and administratively determine whether taxpayers, such as [Standing Akimbo], are unlawful drug traffickers”
The dispensary additionally objects to certain of Standing Akimbo’s confidential business records being handed over by the state of Colorado to the IRS without a warrant. In addition to a tax investigation, the IRS could at any time choose to pass these records along to other federal law enforcers. Those agencies, in turn, could then feasibly pursue federal drug charges that go far beyond the failure to pay taxes.
Despite their arguments, Standing Akimbo and Thorburn face a tough fight. In a move that surprised cannabis reformers, the U.S. Justice Department, newly led by President Joe Biden, filed a brief in February rejecting Standing Akimbo’s claims and urging the Supreme Court not to hear the case. Government lawyers argue that as long as 280E remains the law of the land and unaltered by Congress, Standing Akimbo’s petition against it has no merit.
Further yet, lower federal courts have ruled against cannabis businesses in several similar tax challenges around the country and upheld the right of the IRS to enforce 280E. The California cannabis retailer Harborside was already tied up in an $11 million tax dispute before one of its subsidiaries was hit with a separate, $4.2 million adverse tax judgment last month.
These facts have led to a small constellation of cannabis accounting and financial firms that specialize in the few and complicated methods that are available for cannabis businesses to possibly save on tax headaches. While 280E bars certain deductions, for example, your costs could be capitalized as an alternative. This means you may not be able to enjoy a tax benefit right away but could realize one at a later time, such as when you choose to sell a property.
Listening to: Etta James “I’d Rather Go Blind” Reply with an email or sign up to receive alerts. Follow Green Country Monitor on Twitter, Facebook, LinkedIn, and Instagram. If you appreciate this work, consider leaving a tip.