US Tax Court Rules That Legal Cannabis Dispensaries Are Just Drug Traffickers

The new ruling means state-legalized marijuana businesses are still not eligible to file for common tax exemptions because federal law still upholds cannabis prohibition.

That ruling came in connection with a case involving the California-based cannabis dispensary Harborside Health, which has been embroiled in a court battle with the IRS over their right to make "ordinary and necessary" tax deductions. Things like rent, phone bills, security and other typical expenses that are regularly treated as tax deductions by the majority of businesses in the US.

However, the US Tax Court ruled on Thursday that legal marijuana business cannot claim such expenses and Harborside must pay the IRS for all of the disallowed deductions they made between 2007 and 2012.

In their ruling, the court appealed to a tax law introduced in the 1980s called Section 280E. The law was originally established to prevent illicit drug dealers from making common tax deductions, but now it's being applied to state-legal cannabis operations as well. As Harborside's attorney Henry J. Wykowski explains, despite the fact that Harborside is legal in California, and one of the country'd largest dispensaries doesn't change that.

"To the [Tax Court] Commissioner that just makes it a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim, unable even to capitalize its indirect costs into its inventory, and subject to penalties for taking contrary positions on its tax returns," Wykowski told Leafly.

Harborside now has the option to appeal the Tax Court ruling to the Ninth US Circuit Court of Appeals. And while they have to decide if that's the route they want to take, Wykowski says it's clear that 280E hurts patients and prevents the legal cannabis industry from competing with the illicit market by driving prices up.

"[Section 280E] is an unfair burden not imposed on any other business operating under state law," Wykowski said. "It's unfortunate the federal government does not recognize at this late stage that cannabis has value and should not be punished based on historical inaccuracies."

Several bills looking to create a fair taxation and banking system for legal cannabis businesses have been killed in congress over the past year. Reform efforts are surely to continue through 2019 and with the recent change over of some key positions in Congress, we may actually see some pass.

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The cannabis industry has a packaging problem. In fact, more broadly speaking, it has a sustainability problem. Regulations in legal states, aiming to childproof cannabis products, have had the side effect of creating massive waste, while cultivation can be energy and water intensive.

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