Tuesday, April 9, 2019
"The Good, the Bad, and the Ugly: Why IRC § 280E is not the Industry Killer it is Portrayed to be"
The title of this post is the title of a presentation to be made by one of my students in my Marijuana Law, Policy & Reform seminar this coming week. Here is part of his explanation of his topic and links to some background reading:
State legalization of marijuana, and the rising prevalence of marijuana businesses, has continually thrust Internal Revenue Code (IRC) § 280E into the spotlight. Many scholars have argued for the provision’s abolishment, but the IRS’s staunch stance remains unyielding. The literature seems to suggest a tacit assumption that IRC § 280E will remain a hurdle if/until marijuana is removed from Schedule I. Although IRC § 280E is a hurdle, other mechanisms are shifting to allow marijuana businesses to be successful despite this tax provision.
For example, in many cases, the Tax Cuts and Jobs Act of 2017 did more for marijuana businesses than a repeal of IRC § 280E would have. Yes, marijuana businesses are still worse off than other businesses from a tax perspective, but marijuana’s competition is not necessarily other sectors, it is the black market. There is something to be said for the fact that the marijuana industry continues to grow, despite claims of IRC § 280E making growth “impossible.” However, the primary focus of this paper is not to explain why IRC § 280E predictions were incorrect, it is to look forward at why and how the industry can continue to succeed regardless of IRC § 280E.
Background Reading
April 2015 white paper by the National Cannabis Industry Association, "Internal Revenue Code 280E: Creating An Impossible Situation For Legitimate Businesses": Download 2015-280E-White-Paper
Fortune article, "The Marijuana Industry’s Battle Against the IRS"
Cannabis Business Times article, "Tax Court Reinforces IRS Code 280E in Harborside Ruling"
Memo from Rosenberg Martin Greenberg law firm, "Are Owners of Cannabusinesses Eligible for the Qualified Business Income Deduction Under Section 199A?"
https://lawprofessors.typepad.com/marijuana_law/2019/04/the-good-the-bad-and-the-ugly-why-irc-280e-is-not-the-industry-killer-it-is-portrayed-to-be.html
Your student is accurate that MJ businesses survive DESPITE 280E, but it is a job killer indeed. Having represented dozens of MJ businesses in audits, the repercussions of 280E may not be realized for years after income is earned. Not only that, such a punitive tax treatment for businesses "playing by the rules", is in effect a subsidy to the black market--- the black market does not file, nor pay taxes, so they can undercut legitimate MJ businesses punished by 280E. To suggest that this archaic provision of the tax code is somehow not killing this industry, slowly and by a thousand cuts, and as a means of backdoor enforcement, is naïve.
Posted by: Rachel Gillette | Apr 10, 2019 9:02:45 AM