Politics
Marijuana Companies Are Blocked From COVID-Era Employee Retention Tax Credits Under 280E Penalty, Federal Court Says
In yet another wrinkle stemming from the ongoing federal prohibition on marijuana, a U.S. district court has ruled that an Internal Revenue Service (IRS) tax rule prevents state-legal cannabis companies from being eligible for refunds of employee retention credits (ERCs), which helped businesses continue to pay workers during early COVID-era shutdowns.
In the decision, the U.S. District Court for the Western District of Washington ruled that “nothing in the plain text of [IRS code] Section 280E limits its application to income tax credits,” rejecting arguments from plaintiffs.
The government, meanwhile, contended that the Section 280E prohibits any and all tax credits, including refunds of the COVID-era ERCs, which are typically refundable for other businesses.
On May 9, the court granted the government’s motion to dismiss the the case, Solstice Holdings v. U.S.
Section 280E disallows standard tax deductions and tax credits for businesses that traffic in Schedule I or II substances. It applies even in cases where businesses are operating in compliance with state law.
The law firm Holland & Hart said in a post about the new ruling that it appears to be “the first case where a court has addressed the application of IRC § 280E to ERC.”
Another law firm, GreenspoonMarder, noted in post about the district court opinion that many cannabis businesses applied for the ERC during the pandemic—and many received it.
“Some were deemed ‘essential’ and had to stay open during the pandemic despite the higher costs associated with continued operations during the pandemic and various restrictions that rendered it much more difficult to visit their stores,” attorneys Nick Richards and Sabrina Strand wrote recently.
“When the ERC first came out, there was a question as to whether it was available to cannabis companies because it creates a tax credit that Section 280E may disallow,” the post points out. “There was also an argument that it didn’t apply to the ERC, because Section 280E is part of Section A of the [Internal Revenue Code], which concerns income rather than employment taxes. At least one court now disagrees.”
Both law firms suggest the case out of Washington State creates a standard across all states within the jurisdiction of the U.S. Court of Appeals for the Ninth Circuit. GreenspoonMarder, for example, says the ruling “technically only applies to companies located in the 9th Circuit.”
“That said, as the only opinion on this subject,” lawyers wrote, “the IRS may look to it as authority regardless of whether taxpayers are in one of the nine states located in the Circuit.”
Notably, as a district court case and not a published appellate opinion, the ruling has limited impact outside the immediate dispute and is not binding on other courts. That said, it’s the one indicator so far of how courts might rule in similarly situated cases.
Separately, late last year IRS warned the marijuana industry that some cannabis companies had, without a “reasonable basis,” filled out a supplementary form in an attempt to take federal tax deductions that they’re prohibited from receiving under 280E.
In that notice, IRS said certain firms were attempting to circumvent the federal ban by completing the disclosure statement Form 8275. That form is “used by taxpayers and tax return preparers to disclose items or positions, except those taken contrary to a regulation, that are not otherwise correctly disclosed on a tax return in order to avoid certain penalties,” the agency said.
State-licensed cannabis businesses could be able to start taking broader federal tax deductions if the push to move marijuana to Schedule III is ultimately successful. But IRS separately advised last June that just because that possibility is on the horizon doesn’t mean the industry can start claiming deductions 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, but the federal rule has not yet changed. And it’s unclear when the proposed federal marijuana rescheduling rule might take effect. An administrative hearing process concerning the rule is currently underway.
In 2023, then-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 latest notices come three years after 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.”
Read the court’s ruling below:
Do Cannabis Companies Really Have To Wait for Rescheduling To Escape The 280E Tax Penalty? (Op-Ed)
