Politics
IRS Will Keep Applying 280E Tax On Marijuana For Years Prior To Rescheduling And Could Seize Assets From Businesses That Owe, Official Says
The Internal Revenue Service (IRS) will continue to seek tax payments from marijuana companies that have claimed deductions in anticipation of a possible federal rescheduling decision, an attorney with the federal agency says. And if the reform is enacted, he says IRS would theoretically be empowered to seize assets from cannabis companies that don’t pay their dues.
During a fireside chat at the American Institute of Certified Public Accountants (AICPA) cannabis conference in Denver last month, IRS Senior Counsel Luke Ortner discussed potential implications of the Biden administration’s proposal to move marijuana from Schedule I to Schedule III of the Controlled Substances Act (CSA).
While that policy change would free up state-licensed cannabis businesses to take federal tax deductions they’ve long been barred from under and IRS code known as 280E, several major companies have already claimed deductions even as the rulemaking process remains underway.
For example, in January the multi-state operator Trulieve disclosed receiving a $113 million in 280E refunds it applied for. TerrAscend and Ascend Wellness have similarly said that they’re expecting 280E refunds.
IRS later clarified that the 280E policy still applies until a final rule is issued, and Ortner affirmed that stance during last month’s conference. He added that even if rescheduling is implemented, IRS will “continue to enforce 280E for years prior” to the reform, according to a summary of his talk prepared by the law firm Holland & Hart.
“The IRS’s policy is not to look the other way because things have changed going forward,” the law firm paraphrased the official as saying during the closed-door chat.
An IRS spokesperson told Marijuana Moment on Monday that the agency conferred with Ortner, who confirmed the accuracy of Holland & Hart’s bullet point descriptions of his commentary.
Companies and industry stakeholders have made a number of legal arguments in defense of their 280E tax deduction claims, including making the case that the policy shouldn’t apply in instances where businesses’ marijuana activities are wholly intrastate.
Ortner acknowledged that certain challenges are playing out in the courts that could determine how IRS ultimately proceeds in the future. But for now, he said, the agency’s position hasn’t changed, and it will aim to recoup any payouts that were requested and granted in contravention of 280E.
“For now—unless courts say otherwise—the IRS interprets section 471(c) narrowly and will defend its position that it is not an end run around the application of 280E,” he said, according to the firm’s summary.
The summary of Ortner’s talk also notes that he said accountants won’t be punished for assisting state-licensed cannabis businesses with their tax returns.
IRS wants “‘good’ accountants advising cannabis companies and properly applying 280E,” it says.
While industry stakeholders are holding out hope that rescheduling moves forward and allows them to be treated like any other traditional businesses, at least as far as tax policy is generally concerned, the official also noted another potential impact of a Schedule III reclassification. That is, IRS would be positioned to take additional enforcement action against companies that fail to pay their taxes.
Because of the current status of marijuana as a federally prohibited Schedule I substance, IRS has effectively deferred to the Drug Enforcement Administration (DEA) on enforcing the law and hasn’t proactively gone after cannabis operators regardless of their tax compliance status. Ortner said that could change with rescheduling.
IRS “could seize and sell a cannabis business’s assets—including marijuana inventory—to satisfy outstanding tax liabilities,” the summary of his comments at the conference says.
But while the agency has seized and auctioned so-called vice products from liquor and tobacco businesses that violated federal tax laws, those products are not scheduled under the CSA, whereas marijuana would continue to be federally prohibited even if it’s moved to Schedule III. That makes it unlikely IRS would actually seize cannabis products even if the plant was reclassified, Holland & Hart partner Rachel Gillette told Marijuana Moment.
“Schedule III still means marijuana is a controlled substance, it’s just under a different category of the Controlled Substances Act. The IRS may have to wait for de-scheduling to seize MJ assets if ‘illegality’ is the concern,” she said. “I could see the IRS could getting more comfortable selling lights, grow equipment, and the like under a Schedule III designation though. I just think the cannabis itself may remain an issue.”
Again, rescheduling isn’t a given quite yet, as President Joe Biden himself recently acknowledged while touting the administration’s role in directing the review that led to the Schedule III recommendation. DEA is set to hold an administrative hearing to gain additional input on the proposed reform in December before potentially proceeding to final rulemaking.
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In the interim, multiple states have taken steps to provide state-level tax relief to marijuana businesses that are subject to the IRS 280E statute.
Also, last April, Rep. Earl Blumenauer (D-OR) reintroduced a congressional bill that would amend the IRS code to allow state-legal marijuana businesses to finally take federal tax deductions that are available to companies in other industries.
The Congressional Research Service (CRS) noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”
IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”
