Executives from a Massachusetts-based cannabis company dressed in colonial garb aboard a ship in Boston Harbor on Wednesday to protest an IRS rule that requires regulated marijuana companies to pay taxes that are significantly higher than businesses in other industries. The demonstration, which evoked the legendary Boston Tea Party at the same site 250 years ago, was orchestrated by licensed cannabis company MariMed to protest 280E, an IRS tax rule that is the bane of state-legal cannabis companies from coast to coast.

Lucas McCann, the chief science officer and a co-founder of cannabis compliance consulting firm CannDelta, explained how the IRS rule that prohibits most standard business tax deductions affects companies in the regulated cannabis industry.

“Section 280E of the Internal Revenue Code is a daunting hurdle for cannabis businesses, including retail dispensaries. In short, 280E is a code used to make cannabis businesses less profitable by making them pay more of their overall profits in taxes,” McCann, who was not involved in Wednesday’s protest, writes in an email. “Rooted in the 1980s, this outdated tax legislation was crafted to prevent drug dealers from claiming any business expenses on their taxes. In a modern twist of coincidence, today’s cannabis businesses operate legally under state law but are still treated as illicit businesses, federally speaking, because cannabis is still listed as a Schedule I substance.”

Protest Evokes The Boston Tea Party

Wednesday’s protest re-enacted the famed Boston Tea Party of 1773, when colonists protested high taxes levied by the British Crown on tea shipped to the New England colonies. In an act of independence-minded defiance, members of the group the Sons of Liberty, some disguised as Native Americans, boarded ships moored in Boston Harbor and dumped chests of tea into the water to protest the high taxes.

MariMed’s demonstration resurrected themes from the protest 250 years ago, this time featuring executives from the company dressed in period clothing aboard the Liberty Star, a schooner adorned with banners protesting 280E. Brandishing boxes emblazoned with the word “weed,” the costumed protesters shouted slogans as they boarded the ship and heaved the chests into Boston Harbor. In a statement, the company noted that the boxes were empty, made of natural wood and promptly retrieved from the water. 

“As a Boston-based multi-state cannabis operator, MariMed protested in a way that would make the company’s Patriot ancestors proud – by paying homage to the most famous tax protest in history during the year of the Boston Tea Party’s 250th anniversary,” the company wrote. “By shining a light on Section 280E’s negative financial impact on legal cannabis operators, MariMed hopes to effectuate policy change geared towards industry growth and advancement.”

Jon Levine, the CEO of MariMed, said that the demonstration was a way to draw attention to the tax rules, which negatively impact patients and consumers and threaten to cripple businesses in the regulated cannabis industry. He also called for an end to 280E for businesses operating in compliance with state law.

“Section 280E is unfair and hampers companies striving to make cannabis accessible for consumers and medical cannabis patients in all legal states,” Levine said in a statement from MariMed. “It should be repealed. Doing so would remove an obstacle to our mission to improve people’s lives every day through cannabis.” 

But eliminating the tax rule is easier said than done. A legislative repeal of the rule is required, but so far, bills to reform the federal government’s policy on cannabis have not specifically addressed 280E. The comprehensive legalization of cannabis would make the rule a moot point, but that solution is unlikely to come anytime soon.

“There are several bills that have been floated in D.C., but none to our knowledge that includes language about eliminating 280E,” Levine said in a statement to High Times. “The most likely path to the elimination of 280E is for cannabis to be rescheduled or de-scheduled altogether. President Biden has asked the Department of Health & Human Services for an opinion about that, but nothing’s happened yet. Just another example of the slog in D.C. as it pertains to federal cannabis reform.” 

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Illinois Gov. J.B. Pritzker recently signed a budget bill on June 7 that includes provisions for the cannabis industry, specifically regarding establishing funds dedicated for cannabis businesses and allowing them to take tax deductions.

The Fiscal Year 2024 State Budget bill includes the Cannabis Regulation and Tax Act which addresses issues with cannabis businesses not being allowed to make tax deductions under Section 280E. Through the newly signed state budget, any licensed cannabis business will be permitted to take tax deductions on their business for “…an amount equal to the deductions that were disallowed under Section 280E of the Internal Revenue Code for the taxable year…” This new provision applies to taxable years from Jan. 1, 2023 and onward.

According to the National Cannabis Industry Association, Section 280E originated from a 1981 court case involving a cocaine trafficker who “asserted his right under federal tax law to deduct ordinary business expenses. By the following year, Section 280E was created to prevent anyone from making tax deductions if their trade involves controlled substances.

An Internal Revenue Service article written by Small Business/Self-Employed Examination Commissioner De Lon Harris in September 2021 reviewed the challenges that 280E poses for cannabis businesses in Illinois and elsewhere. “While IRS Code Section 280E is clear that all the deductions and credits aren’t allowed for an illegal business, there’s a caveat: Marijuana business owners can deduct their cost of goods sold, which is basically the cost of their inventory,” Harris wrote. “What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses, to name a few.”

Harris included tips such as knowing and trusting investors, filing and paying taxes on time, reporting cash transactions, and keeping accurate records, as ways to stay compliant. Later in December 2021, Harris participated in a webinar further explaining how to take advantage of the IRS as a resource to navigate the law. “It’s really our mission at the IRS, not just with marijuana and cannabis industries, but with all taxpayers, to promote voluntary compliance,” Harris said. “And that can happen in different ways. When most people think of the IRS, they think of examinations or audits and they think that’s the only way that we interact or try to promote voluntary compliance with taxpayers, but we do our fair share of outreach and education as well.”

The Fiscal Year 2024 State Budget bill also includes a provision that creates the Cannabis Business Development Fund that is aimed at helping cannabis business owners in Illinois. The fund would “provide low-interest rate loans to Qualified Social Equity Applicants” to pay for expenses such as “starting and operating” a cannabis business (and compensate the Department of Commerce and Economic Opportunity for costs related to those low-interest loans or grants). The fund would also pay for outreach “targeted to attract and support” social equity applicants, as well as research involving “minorities, women, veterans, or people with disabilities in the cannabis industry.” The provision ends by adding that by July 1, 2023, the State Controller will transfer $40 million from the Compassionate Use of Medical Cannabis Fund to the Cannabis Business Development Fund.

Illinois isn’t the only state attempting to enact legislation to assist cannabis businesses with their tax situations. On May 8, New Jersey Gov. Phil Murphy approved legislation to “decouple state tax provisions from federal prohibition on cannabis business deductions.” On June 12, Connecticut Gov. Ned Lamont also signed off on a biennial state budget that included provisions for tax deductions under 280E. 

The New York Senate also recently approved a bill to provide tax relief to cannabis businesses. “This modification to income is appropriate because, while the expenses of cannabis-related business cannot be deducted for federal purposes, New York law permits and encourages these businesses akin to any other legitimate business occurring in the State,” states a bill memo. “The City’s business taxes should similarly encourage these business activities.”

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A longtime Internal Revenue Service (IRS) official participated in a recent webinar where he made recommendations on how cannabis businesses can stay tax compliant.

The IRS Commissioner of Small Business/Self-Employment (SB/SE) Examination, De Lon Harris, participated in a PBC webinar on Wednesday, alongside PBC CEO and co-founder, Josh Radbod. There, he discussed the topic of how cannabis businesses can continue to be compliant, despite cannabis’ federal status.

“It’s really our mission at the IRS, not just with marijuana and cannabis industries, but with all taxpayers, to promote voluntary compliance,” Harris said during the webinar. “And that can happen in different ways. When most people think of the IRS, they think of examinations or audits and they think that’s the only way that we interact or try to promote voluntary compliance with taxpayers, but we do our fair share of outreach and education as well. Just like what we’re doing today.” 

The PBC Conference is a B2B event for “payments, banking and compliance in the cannabis industry.” Harris was also a keynote speaker at the PBC Conference in 2021, held on September 9-10, 2021. 

Harris also spoke of the IRS’ goal of reducing audits for the cannabis industry. “Regarding the cannabis marijuana industry, we developed a strategy that we hope will increase voluntary compliance and identify and address non-compliance when it’s there,” Harris said.

“Our focus is to positively impact filing and paying and reporting compliance on the part of all cannabis businesses to keep audits to a minimum.” On the IRS’ side, Harris noted that they seek to properly educate their examiners so they can conduct a quality examination, that the different sects of the IRS communicate properly with each other, and that they continue to partner with groups like the PBC to promote education.

As Radbod proceeded to ask Harris key questions during the webinar, he shared that cannabis statis as a Schedule I controlled substance doesn’t mean that taxes shouldn’t be paid. “As I’m sure you’re aware, and everybody listening, that a business engaged in the sale or production of marijuana or cannabis is considered illegal under federal law but nevertheless, it’s a business in every sense of the word, whether its categorized under federal statute as legal or illegal, it still remains to be obligated to pay federal income tax on the taxable income that it earns.”

The Internal Revenue Code 280E complicates matters, preventing businesses who sell cannabis from receiving tax deductions, even if those businesses operate legally in states that have legalized cannabis sales. However, that section does allow cannabis “to reduce their gross receipts by properly calculating a cost of goods sold to determine its income.” While a cannabis business can’t deduct advertising or selling expenses, it can reduce gross receipts, according to internal revenue code 471. 

Harris highly recommended that cannabis businesses strive to keep records of their receipts, canceled checks and any other documents that support evidence of income. “Well-organized records make it much easier to prepare the tax return, and to help provide answers if your return is selected by the IRS for an audit.”

Harris explained that all of this and more is available on the IRS website; however, users must search for “marijuana” in order to find information, rather than using the keyword “cannabis” for the time being. 

“So we’re making that change, but for now, you would type in ‘marijuana industry,’ and it would pull up the page that we give you information about, not only general information that would help you understand and meet tax responsibilities required by the cannabis industry, but the page which includes links to pages of more specific information,” he concluded.

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The tax man is extending a helpful hand to marijuana business owners, not something we would normally see for the cannabis industry. 

In an announcement posted on its website late last month, the Internal Revenue Service unveiled its new “Cannabis/Marijuana Initiative,” billed as a “groundbreaking effort” by the agency to assist such business owners as they navigate the often confounding U.S. tax code.

The goal of the initiative, the agency said, “is to implement a strategy to increase voluntary compliance with the tax law while also identifying and addressing non-compliance,” a move the IRS believes “will positively impact filing, payment and reporting compliance on the part of all businesses involved in the growing, distribution and sales of cannabis/marijuana.”

The agency said it has a number of “strategic activities” planned as part of the initiative, which include ensuring that “training and job aids are available to IRS examiners working cases so they can conduct quality examinations (audits) consistently throughout the country,” making sure “there is coordination and a consistent approach by the IRS to the cannabis/marijuana industry,” finding “ways to identify non-compliant taxpayers,” collaborating “with external stakeholders to increase an awareness of tax responsibilities to improve compliance” and giving “taxpayers access to information on how to properly comply with the filing requirements.”

Even as dozens of states have legalized marijuana for either medical or recreational marijuana use, and even as polls consistently show that majorities of Americans support legalizing marijuana outright, there remains a stubborn elephant in the room—cannabis is still listed on the Controlled Substances Act and is thus still illegal on the federal level. That makes things very difficult when it comes to tax breaks.

De Lon Harris, a commissioner at the IRS who authored the post on the initiative last month, alluded to that discrepancy as a motivation behind the new program.

Rather than just providing information on the IRS’ website, Harris said he intends to “engage with the cannabis/marijuana industry through speaking events and other outreach.” He said that he has hosted three such outreach events in the last year.

“It’s tricky from a business perspective, because even though states are legalizing marijuana and treating its sale as a legal business enterprise, it’s still considered a Schedule 1 controlled substance under federal law,” Harris wrote. “That means a cannabis/marijuana business has additional considerations under the law, creating unique challenges for members of the industry.  Specifically, these businesses are often cash intensive since many can’t use traditional banks to deposit their earnings. It also creates unique challenges for the IRS on how to support these new business owners and still promote tax compliance.”

Harris said that although IRS Code Section 280E establishes that “all the deductions and credits aren’t allowed for an illegal business,” there is a “caveat.”

“Marijuana business owners can deduct their cost of goods sold, which is basically the cost of their inventory. What isn’t deductible are the normal overhead expenses, such as advertising expenses, wages and salaries and travel expenses, to name a few,” he said. 

“I understand this nuance can be a challenge for some business owners, and I also realize small businesses don’t always have a lot of resources available to them. That’s why I’m making sure the IRS is doing what it can to help businesses with our new Cannabis/Marijuana Initiative,” Harris continued.

It may not be long before legalization goes federal. Democratic leaders on Capitol Hill like Senator Chuck Schumer have signaled that they are ready to press ahead with the reform. Earlier this year, Democratic members of the House introduced legislation that would both decriminalize and deschedule cannabis. 

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