Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.
Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance.
Reagan Era Law
Created during the Reagan Administration, Section 280E originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. In 1982, Congress created 280E to prevent other drug dealers from following suit. It states that no deductions should be allowed on any amount “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”
With 23 states and the District of Columbia now allowing some form of legal marijuana, 280E is applied to state-regulated cannabis businesses more often than it is to the types of illegal drug dealers that the provision was intended to penalize.
What types of business expenses are under 280E?
Employee salaries
Payments to contractors
Utility costs
Internet
Health insurance premiums
Advertising costs
Repairs and maintenance
Rental fees
Security
and more
What deductions are challenged?
General and administrative costs (bookkeeping, legal expenses, technology costs)
The Tax Court denied Harborside’s deductions from 2007 to 2012, citing Code Section 280E, which prevents any trade or business that “consists of trafficking in controlled substances from deducting any business expenses.” Harborside has appealed the decision to the Ninth Circuit.
The Harborside case is not the first time that an entity specializing in the processing, sale or distribution of cannabis has challenged the constitutionality of Code Section 280E, but it is very likely the largest and the most closely watched case. And if the Ninth Circuit agrees with the appellant, it will ultimately be decided by the Supreme Court.
2019 Harborside Inc. Receives Final Ruling by US Tax Court on 280E
OAKLAND, CA and TORONTO, Oct. 21, 2019 /PRNewswire/ – Harborside Inc. (“Harborside” or the “Company”) (CSE: HBOR), today announced that the U.S. Tax Court has issued a final decision under Tax Court Rule 155 on the income tax deficiency for Patients Mutual Assistance Collective Corporation (“PMACC”), the Company’s 100% owned subsidiary and owner of the iconic Harborside Oakland cannabis dispensary. The U.S. Tax Court has ruled that PMACC owes an aggregate tax deficiency of approximately $11.0 million for the fiscal years 2007 through 2012. This amount is consistent with the Company’s one-time provision for its estimated tax obligation for PMACC expensed in its financial results for the three-month period ended June 30, 2019. All dollar amounts in this press release are expressed in U.S. dollars.
“The Tax Court’s final computation of our tax obligation in PMACC’s long-standing 280E case is a good outcome for Harborside shareholders. By challenging the IRS’s overly aggressive interpretation of the tax law as it applies to cannabis businesses operating legally under State law, we have succeeded in reducing Harborside’s liability from the $36 million originally sought by the IRS to approximately $11 million – a $25 million reduction. The reduction includes $6 million in penalties that the court previously ruled we did not need to pay because of the unclear state of the law, and because Harborside acted in good faith,” said Harborside CEO Andrew Berman. “This ruling is also an important one for the cannabis industry in that, through this litigation, the court recognized there are legitimate deductions that legal cannabis companies can take in cost of goods sold. Harborside still intends to appeal the Tax Court’s ruling with regard to aspects of the decision as it pertains to the calculation of cost of goods sold, and has already retained appellate tax counsel.”
Steve DeAngelo, Harborside’s co-founder and Chairman Emeritus, also commented, “Harborside’s policy towards the federal government has always been to exhaust all reasonable available legal options to pursue justice. That policy has been validated by the Tax Court’s downward adjustment of PMACC’s liability. This outcome has strengthened our already strong resolve to continue pursuing justice by appealing the decision, with the goal of modifying or reducing 280E liability for Harborside, and in the future, eliminating it for every other state legal cannabis business in the United States. The issues at stake are of importance to the entire cannabis industry.”
The Company has 90 days within which to file an appeal with the United States Court of Appeals for the Ninth Circuit.
Harborside Inc. Announces Filing Appeal in Tax Case
The Tax Court decision was issued on Nov. 29, 2018. The ruling became final on Oct. 11, 2019, when liability of US$11,013,237 was formally entered by the Tax Court. Harborside is properly filing its appeal within 90 days from that date.
What impact does this have on the cannabis industry and states attempting to regulate marijuana?
Most cannabis business owners would like to be considered legitimate by paying federal and state taxes. But the current tax scenario has some convinced to ignore 280E on their tax filings, or don’t pay taxes at all. These businesses would rather gamble on the IRS overlooking their filing than see their revenues evaporate due to 280E.
Treasury Inspector General Recommends More Tax Audits for Cannabis
The Treasury Inspector General for Tax Administration (TIGTA) issued a report on March 30, 2020 which made recommendations to the Internal Revenue Service (IRS) regarding tax compliance and the cannabis industry.
The purpose of the report was to “evaluate the IRS’s examination and education approach to certain cash-based industries with an emphasis on legal marijuana operations,” as stated by the TIGTA.
The Michigan State Police said Wednesday that a driver who was stopped for following too close was found to be carrying for $40,000 in cash, which was seized, but the driver was let go.
The out-of-state driver was driving on I-75 in Monroe County when he was stopped for following too close on Tuesday.
According to MSP, troopers were led to the $40,000 in cash but they did not explain how it was found. Police seized the money but also did not explain why.
The driver, a 33-year-old man not from Michigan, was not arrested.
Police are still investigating.
Meanwhile elsewhere…
Man getting back his $82K life savings after it was seized at Pittsburgh International Airport
Because when you have a lot of money you’re guilty of drug dealing or something. Not working hard and saving all your life.
Terry Rolin, of South Fayette Township, and his daughter, Rebecca Brown, are still suing the DEA and the Transportation Security Administration, according to the Institute for Justice. The suit is looking to end the seizure of cash from air travelers without probable cause and includes class action claims and an individual claim for damages.
March 2, 2020 – Today, the Marijuana Regulatory Agency (MRA) announced a phase-out process for the transfer of marijuana and marijuana products into the regulated market from caregivers. The phase-out process begins immediately and ends on September 30, 2020 with a final termination of all external marijuana transfers.
During the ongoing transition to a regulated market, the MRA has been committed to maintaining patient access to medical marijuana by allowing certain licensed facilities to continue to source product from caregivers without it resulting in disciplinary action against their licenses. Now, nearly 200 grower licenses and more than 25 processor licenses have been issued in the medical marijuana market. As more licenses have been issued and more plants grown and processed, the marijuana product produced by licensed facilities has resulted in an increase in the supply of medical marijuana to patients.
“We have always put patients first when we make decisions regarding medical marijuana,” said MRA Executive Director Andrew Brisbo. “This phase out process is an important next step in implementing the will of Michigan voters and making sure that patients continue to have access to their medicine.”
Licensed businesses will have nearly seven months to make the necessary plans to continue to maintain a sufficient supply of medical marijuana in Michigan. During this time, the MRA will work closely with licensees to build relationships and provide outreach and assistance during this transition period.
Phase One – Growers and Processors
The MRA gave notice in December, that – beginning on March 1, 2020 – growers and processors who obtain marijuana plants, concentrates, vape cartridges, or infused products from caregivers would be subject to disciplinary action.
Phase One of the phase-out process begins immediately and runs through May 31, 2020. During phase one, growers and processors licensed under the MMFLA who obtain marijuana flower – defined as bud, shake, and trim only – directly from a caregiver who produced the flower will not be subject to disciplinary action by the MRA under certain conditions.
Phase Two – Growers
Phase two begins on June 1, 2020 and ends on September 30, 2020. During phase two, growers licensed under the MMFLA who obtain marijuana flower – defined as bud, shake, and trim only – directly from a caregiver who produced the flower will not be subject to disciplinary action by the MRA under certain conditions.
During phase two, the total weight of marijuana flower that growers obtain from caregivers must be less than or equal to the total weight of marijuana flower that the licensee harvested (both wet and dry) between March 1, 2020 and May 31, 2020 plus the projected harvest weight (dry) of all plants that are in the flowering process on May 31, 2020.
Phase Two – Processors
Phase two begins on June 1, 2020 and ends on September 30, 2020. During phase two, processors licensed under the MMFLA who obtain marijuana flower – defined as bud, shake, and trim only – directly from a caregiver who produced the flower will not be subject to disciplinary action by the MRA under certain conditions.
During phase two, the total weight of marijuana flower that processors obtain from caregivers must be less than or equal to 50% of the total weight of marijuana flower the licensee obtained from caregivers between the dates of March 1, 2020 and May 31, 2020. The marijuana flower obtained from caregivers must be processed and may not be sold or transferred as marijuana flower.
End of Phase Out Process
The phase out process for caregiver product ends on September 30, 2020. A licensee who accepts an external transfer after September 30, 2020 will be subject to disciplinary action by the MRA.
Colorado courts are still trying to figure out the ground rules for people using medical marijuana while on probation, and the state Supreme Court will weigh in when it hears oral arguments Thursday in an El Paso County case where a judge denied a woman’s use of the drug while on probation for DUI.
The woman will ask justices to decide whether a defendant must provide evidence that the marijuana is medically necessary or whether probationers can use it unless a judge decides it’s appropriate for the sentence. The case also questions to what lengths a probationer must go to prove the marijuana is critical to their health.
Attorneys who represent criminal defendants hope the court’s decision will provide more clarity on the issue. Supreme Court decisions take months.
A county court judge prohibited Alysha Walton from using medical marijuana while on probation for a DUI, and a district court judge agreed with the decision.
But the Colorado Public Defender’s Office, which represented Walton, has argued the county court abused its discretion and violated Walton’s rights, according to the opening brief to the Supreme Court. The judge placed an undue burden on Walton when she demanded that Walton have her doctor testify in court about the necessity of marijuana, the public defenders said. Walton had brought her state-issued medical marijuana card to court.
Nearly a year after voters approved adult use of recreational marijuana, Oakland County resident Kevin John Carlson continues to fight a possession/intent to deliver case, which he believes stems from a search warrant that should never have been granted.
Carlson, 30, was charged in early 2018 after police searched his Bloomfield Township home and reportedly found marijuana and other evidence — months prior to cannabis being legalized in Michigan. At the time Carlson was a registered marijuana patient and caregiver, legally allowed to have a certain amount of cannabis.
The magistrate who issued the search warrant — based on police reportedly smelling marijuana outside the home — was wrong to do so because it wasn’t based on probable cause, Carlson claimed.
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The court further found that the 2008 Michigan Medical Marihuana Act didn’t shield Carlson from the search, stating “the police were not obligated to determine, before obtaining a search warrant, the legality of the marijuana-related activities inside the defendant’s home and whether the defendant’s activities complied with the MMMA.”
However, Carlson’s defense attorney Michael Komorn said the judges failed to address if current Michigan marijuana law can be applied retroactively and are wrong in not considering its relevancy, as well as the state reclassification of medical marijuana as a Schedule II drug — permitted for some use. Carlson’s case is next headed to the Michigan Supreme Court for consideration, which earlier had remanded it to the Court of Appeals.
“This case is important for Fourth Amendment issues (regarding protection against unreasonable search and seizure) for constitutional reasons,” Komorn said, “and for the citizens of Michigan…just because somebody is doing something suspicious, that’s not enough for probable cause.”
LANSING –Michigan Attorney General Dana Nessel today established a four-member Wrongful Imprisonment Compensation Act (WICA) Board to review each WICA request and make recommendations on key decisions in the litigation of WICA cases. Once cases meet the legal standard of wrongful conviction, the Act ensures exonerees are provided appropriate compensation for the harm they suffered.
“These cases are complex and weave together the skill sets of criminal prosecution, criminal defense and civil litigation to ultimately decide whether or not an individual is entitled to compensation,” Nessel said. “It is critically important this board have representation from each of those skill sets to make certain we review all aspects of a case, from every legal angle, before awarding or denying compensation.”
Nessel appointed Michigan Solicitor General Fadwa Hammoud, a career prosecutor; Operations Chief Christina Grossi, a career civil litigator; Conviction Integrity Unit Director Robyn Frankel, a former criminal defense attorney; and Criminal Appellate Division Chief John Pallas, a former career prosecutor, to the WICA Board.
Nessel also established a protocol to ensure all claims undergo a thorough and systematic assessment before a decision is rendered. While not every case is entitled to relief under WICA, the protocol provides for a timely resolution where compensation is warranted, recognizing the immense material and psychological barriers wrongfully imprisoned individuals experience upon their release. The protocol also safeguards the integrity of the review process by establishing a standard to prevent conflicts and ensure proper communication between parties.
Under WICA, a plaintiff is entitled to compensation if he/she can show: 1) new evidence demonstrates that the plaintiff did not perpetrate the crime and was not an accomplice or accessory; 2) the new evidence resulted in the reversal or vacation of the charges; and 3) the new evidence resulted in either the dismissal of all charges or a finding of not guilty on all charges on retrial.
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