Monday, June 6, 2016
The title of this post is the title of this notable new article authored by Benjamin Leff and now available via SSRN. Here is the abstract:
Over a year ago (March 7, 2015), a little store called the Cannabis Corner opened up in the small town of North Bonneville, Washington, about an hour by car from Portland, Oregon. The Cannabis Corner is the first marijuana store to be operated by a “public development authority,” an independent entity created by a state or local government. Public development authorities are generally exempt from federal income taxes under section 115 of the Internal Revenue Code. For a marijuana business, this exemption is especially valuable because section 280E of the Code currently prevents marijuana businesses from deducting many of the ordinary expenses other businesses regularly deduct, resulting in extremely high federal income taxes.
This Article is the first to address whether independent governmental affiliates that sell marijuana are exempt from federal income tax under section 115 of the Internal Revenue Code. It argues that such entities should easily pass the IRS’s current interpretation of the three requirements for tax-exemption under section 115: (i) that exempt income be derived from “the exercise of any essential governmental function;” (ii) that such income “accru[e] to a State or any political subdivision thereof;” and (iii) that the income “not serve private interests[.]” In addition, this Article argues that the fact that selling marijuana is illegal under federal law is not a bar to exemption under section 115 of the Code the way it is under section 501(c)(3).
Tax exemption for public development authorities that sell marijuana is important because of the non-tax benefits of a marijuana market dominated by government sellers. Some of these benefits exist when governments are participants in a marijuana market that is open to private sellers as well, such as is the case in North Bonneville, Washington. This Article also explores the benefits that might accrue if a state chose to create a regulatory regime for legalizing marijuana in which all marijuana selling took place in government-owned stores. Many states have experimented for years with state control of liquor sales, but there are reasons to believe that marijuana may be significantly more suited to a state-controlled market than alcohol, at least for a transitional period. The question of whether an independent governmental affiliate is exempt from federal income tax, including section 280E, is especially important to governments contemplating the contours of their legal marijuana markets.