Marijuana Merchants Owe Taxes Even When They Take a Loss


Northern Lights Cannabis Co.

As we have noted here several times in the last few years, Section 280E of the Internal Revenue Code bars state-licensed marijuana merchants from deducting business expenses on their tax returns. USA Today reports that disallowing those deductions can result in an effective tax rate ranging from 70 percent to 100 percent. Needless to say, that handicap makes it hard to stay in business.

USA Today describes the predicament of Mitch Woolhiser, proprietor of Northern Lights Cannabis Co., a dispensary in Edgewater, Colorado, who last year owed $20,000 in federal income tax even though he did not turn a profit. "It's almost like they want us to fail," he says. Well, yes, it is exactly like that, if "they" refers to the members of Congress who enacted Section 280E in 1982 as way of sticking it to drug dealers. Woolhiser still qualifies as one of those under federal law, even though he is licensed by Colorado to sell marijuana.

Counterintuitively, cannabusinesses are allowed to deduct the "cost of goods sold," which includes whatever they spend to grow or purchase marijuana. The upshot, as I explained in Reason last year, is that a can of coffee in the break room may not be deductible, but a jar of Lemon Diesel buds on the shelf is. I say "may not" because marijuana merchants can try to deduct a portion of their business expenses, including big-ticket items such as rent, utilities, and wages, by attributing them to activities other than supplying cannabis. But that tactic, which is used mainly by medical marijuana dispensaries that provide ancillary services to patients, is complicated and open to challenge.

The IRS is not known for flexibility in dealing with state-legal cannabusinesses, but it does not have the discretion simply to ignore Section 280E. USA Today quotes a 2010 IRS letter to members of Congress who wanted it to stop enforcing Section 280E in states that have legalized marijuana for medical or recreational use. "The result you seek would require the Congress to amend either the Internal Revenue Code or the Controlled Substance Act," the IRS said. That is not quite true, since the executive branch has the power to reclassify marijuana under the Controlled Substances Act without new legislation from Congress. Section 280E applies only to substances in Schedule I or II, so moving marijuana to Schedule III or lower would make it much easier for cannabusinesses to pay their tax bills.

NEXT: Rand Paul: D.C. Residents Can Legalize Pot If They Want

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. “Nice store youse got here. It would be a real shame if anything unfortunate was to happen to it.”

  2. Given enough time and profit a tax lawyer will figure out a strategy to circumvent Section 280E. Plenty of small shops will fail before that happens.

    So what’s the word on Oregon, Alaska, and DC legalizing cannabis?

  3. The IRS cannot use the law as cover after it ignored the text of PPACA to implement the administration’s policy preferences for subsidies. The reason they don’t ignore section 280E is not that they cannot, but instead that administration’s policy preference is to keep weed illegal.

    1. But if that were the case, they could simply get injunctions against cannabusinesses for violations of the CSA.

  4. The IRS is not known for flexibility in dealing with state-legal cannabusinesses, but it does not have the discretion simply to ignore Section 280E.

    The IRS has done a fine job of ignoring the clearly delineated distinction in the ABA between state and federally operated Obamacare exchanges. I think the IRS does whatever it god damn pleases.

    1. Watch what you say, you’ll be on the audit list next year.

  5. something, something Libertarian Moment

    1. Liberaltarian Moment – Legalized Pot + Confiscatory Taxation

  6. “so moving marijuana to Schedule III or lower would make it much easier for cannabusinesses to pay their tax bills.”

    Wasn’t there some smug leftist journalists claiming awhile back that Obama lowering marijuana to Schedule III wouldn’t make a positive difference anyway or was he claiming that Obama didn’t have the power to do it? Someone help me out here, I’m too lazy to google.

    1. I believe you’re referring to Mark Kleiman.

      1. Ah yes, that was the douche I was thinking of.

    2. He would, but Republicans like Rand Paul would veto his executive orders.

  7. In the interest of fairness and equal protection of the laws, we should move to amend the law so that all businesses are treated in the same manner as marijuana dispensaries.

    1. Heh. That reminds me of the comment recently that we should make it so that the legal barriers to owning a gun and voting are exactly the same. Or was it for getting an abortion?

      1. I have said many times that casting a vote is one of the most potentially violent acts a person can commit in a free society.

      2. You mean getting a gun and voting on the way to the abortion clinic?after casting an extra vote for the fetus, of course.

  8. We’ll always have the Free (aka, black) market in this product.

    1. Not necessarily. If the government would get out of the way and allow the price of the legal stuff to drop below that of the illegal stuff, the black market would dry right up. It wouldn’t disappear totally, but illegal marijuana would be as prevalent as illegal booze.

    2. I can’t speak for Colorado’s market, but Washington’s experiment with legalization has created a strong and vibrant black market.

  9. This week in the comments, regulatory burden is bad.

    Principals, not principles.

  10. Marijuana Merchants Owe Taxes Even When They Take a Loss

    So do I… so do I…

  11. cannabusinesses

    Is this word going to… um, be a thing now?

  12. How on earth can they not be turning a profit?

  13. If the Justice Dept. isn’t enforcing laws against cannabusinesses, why can’t Treasury exercise similar discretion?

    Still, it does seem funny for members of Congress to ask IRS to do something they could compel IRS to do if they amended the statute. They are in Congress, after all!

Please to post comments

Comments are closed.