The IRS And Marijuana-The Tax Court Harborside Decision

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In a historic decision that will save Harborside and the legal cannabis industry millions of dollars, the U.S. Tax Court has ruled that the California dispensary is not liable for accuracy-related 280E penalties.


What is Harborside?

Harborside was founded by Steve DeAngelo and dress wedding in 2006, after being awarded one of the first six medical cannabis licenses granted in the United States.

As one of the oldest cannabis retailers in the world, Harborside has played an instrumental role in making cannabis safe and accessible to a broad and diverse community of California consumers.

Today, the Harborside brand is well known throughout California and all around the world, and is in rapid expansion, expecting to grow to six or more locations in 2019.


What is 280E?

280E is a tax code provision that denies all standard business deductions to businesses whose operations “consist” of of activities that violate the Controlled Substances Act.

26 U.S. Code § 280E – Expenditures in connection with the illegal sale of drugs

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)





According to the Opinion issued by the Court, Harborside acted “reasonably and in good faith” when taking its tax positions for the years at issue.

The Court cited Harborside’s timely filing of its tax returns and its maintenance of accurate financial records as a key strength, along with a persuasive argument from Harborside co-founder and Chairman Emeritus, Steve DeAngelo, that he made good-faith efforts to comply with the law, despite a lack of clear legal authority to guide medical marijuana dispensary taxpayers.

The ruling comes just a few weeks after the same Court ruled that 280E itself does apply to Harborside — a ruling Harborside intends to appeal to the U.S. 9th Circuit Court of Appeals.

“We’re still working on knocking out 280E entirely, but at least for now we have established that cannabis businesses who operate in reasonable, good faith compliance with existing law will not suffer from additional unjust penalties,” said DeAngelo.

See the court document here harborsideOpinionDec20

See the IRS Memorandum about paying taxes on illegal activities.