Tax policies compound headaches for state-legal cannabis operators beyond 280E

The Internal Revenue Service continues to be a thorn in the side of state-legal marijuana businesses, even as their hemp industry cousins largely dodge the taxman’s scrutiny, creating an increasingly lopsided playing field.

“Hemp is not subject to 280E, or is at least reasonably interpreted as not being subject to 280E, even if you’re selling psychoactive TCHA flower or whatever the product may be,” said Rachel Gillette, partner and head of Holland & Hart’s cannabis and psychedelics industry group.

The 1980s-era tax code provision dubbed 208E was originally aimed at illegal drug dealers and prevents businesses trafficking in federally controlled substances from taking standard business deductions. For state-licensed cannabis companies, that means substantially higher effective tax rates than mainstream businesses.

“280E is still a really huge disadvantage to anyone trying to survive,” Gillette noted. “It’s certainly very unfair the way it’s being applied.”

The disparity has grown more stark as the hemp industry has reportedly outpaced regulated marijuana in size, according to Whitney Economics. Hemp-derived products with intoxicating THC levels are freely sold online, while licensed cannabis businesses face mounting compliance costs and regulatory scrutiny.

“(If) you go online to some of these websites that are selling like THCA flower, there’s not a lot of clarity of where it’s coming from,” Gillette said. “We know that there’s tests being posted, but they’re not hiding the fact that you add heat and it’s psychoactive.”

Despite the increased scrutiny and recent IRS signals, the potential seizure of cannabis inventory to satisfy tax debts post-rescheduling don’t seem feasible, Gillette said.

“I don’t think it’s realistic that they’re going to be going after your marijuana crops and selling them anytime soon,” she noted. “Bear in mind, Schedule III does not create a legal federal marketplace for these licensed state legal cannabis businesses.”

Beyond taxes, many operators also remain stuck in a cash-heavy business model due to limited banking access.

“If there’s only one bank in the state that banks marijuana companies and your business is 300 miles from that, you may not be able to get an account,” Gillette said.

The cash-intensive nature of the business creates additional compliance headaches. Cannabis businesses must file IRS Form 8300 for cash payments of more than $10,000, for example. These extra hurdles can be hard to manage for many cannabis operators, according to Gillette.

In addition, the IRS’ current system for handling cash tax payments is largely dysfunctional and often fails to to meet businesses’ needs, she said.

“It doesn’t work because no matter what, either there’s not a location that’s nearby to make the cash payment, or they schedule you out a month from now, but you’re trying to pay your biweekly employment tax payments,” Gillette explained.

That disconnect extends to regulatory understanding of the industry’s banking challenges. “I don’t know how many IRS revenue officers I’ve talked to … that are just like, ‘Oh, it’s so easy for a marijuana business to get banking,'” she said.

Even basic accounting guidance remains elusive.

“You could ask 10 accountants whether an expense is allowable in COGS (cost of goods sold) under section 471, and you’ll get 10 different answers,” she explained.

While the American Institute of CPAs pushed for clearer transition guidelines around potential rescheduling, Gillette suggested that some IRS officials do actually understand the burden on compliant businesses.

“I think there’s a lot of people in the IRS that understand that 280E is kind of unfair,” she said. But, “they’ve got a job to do, and I’ve got a job to do.”

Gillette believes the AICPA’s recent recommendations for 280E transition rules, such as only applying it for part of the year if descheduling occurs midyear, are a step in the right direction.

“The industry has wanted guidance for a very long time, and the IRS has failed to give it,” Gillette said. “There’s a lot of things that, you know, I think the industry and the IRS could help each other with.”