One of the greatest challenges facing the emerging Pennsylvania Medicinal Cannabis Industry is addressing taxes and appropriate deductions for operating expenses.
Because Marijuana is classified as a Schedule 1 controlled substance, it falls under Section 280E of the Internal Revenue code, which denies a medical marijuana business from deducting the business operating expenses on their tax return, even in states where the sale of medical marijuana is legal.
The United States Court of Appeals for the Ninth Circuit recently ruled on it’s second tax case involving IRC 280E in Canna Care vs. The Commission.
Canna Care, Inc., of California, appealed a decision by The United States Tax Court that IRC 280E applies to a business engaged in the sale of a substance that, while legal in California, is still illegal under Federal law.
The Tax Court ruled that medical marijuana is a Schedule 1 controlled substance and that the sale of medical marijuana is always considered trafficking under IRC 280E, even when permitted by state law.
The Ninth Circuit ultimately upheld the Tax Court ruling, however, Canna Care attempted to raise new issues on appeal, including a Constitutional challenge of IRC 280E as being a violation of the 8th Amendment protection against imposing excessive fines, however, because the issue was not raised in the original case, the Ninth Circuit did not rule on the Constitutional argument.
Challenging federal statues on constitutional grounds can often be difficult, but the constitutional arguments may have some merit. It is a best practice to raise all arguments before the court so they are not waived on appeal.
Further, all cannabis related businesses should consider filing protective refund claims, which will keep open the statute of limitations in the event IRC 280E is overturned by a court.
It is important for a cannabis business to understand the impact of IRC 280E on it’s tax liability and the potential risks of NOT applying IRC 280E when filing a return. The immediate tax savings may be attractive but in the long run, those savings must be weighed against the potential costs of having to defend their position down the road.
Cannabis Legal Solutions is available to help cannabis businesses develop a plan for dealing with IRC 280E and creating a strategy to negotiate the negative affects of IRC 280E and defend their position if challenged.