Source: https://harrisbricken.com/cannalawblog/cannabis-taxes-and-section-280e-canna-care-v-the-irs/
Timestamp: 2020-07-03 17:09:34
Document Index: 667889647

Matched Legal Cases: ['§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280', '§280']

Cannabis Taxes and Section 280E: Canna Care v. The IRS - Canna Law Blog™
Tax	August 13th, 2017
Canna Care appealed to the Ninth Circuit Court of Appeals. None of the arguments before the Tax Court were made on appeal. Instead, Canna Care raised three new arguments, two of which were unique to Canna Care’s facts and likely not applicable to most other cannabis businesses.
Canna Care’s primary argument was that IRC §280E violates the Excessive Fine Clause of the 8th Amendment of the United States Constitution. In oral argument before the Ninth Circuit Court of Appeals, Canna Care argued that IRC §280E was enacted by Congress to punish drug dealers, and as such, it imposes a fine on cannabis dispensaries. Canna Care noted that its income tax liability was 1000% of its net income and a 1000% tax rate for engaging in an activity allowed under California law constituted a grossly disproportionate fine on such activity. The tax rate impact under IRC §280E is especially disproportionate when compared to the tax rate of other business – both legal and illegal. Accordingly, Canna Care’s income tax liability imposed under IRC §280E constitutes an excessive fine in violation of the 8th Amendment.
A tax deduction is granted by the legislative grace of Congress. Congress has clear constitutional authority to deny a tax deduction. Why is IRC §280E outside Congress’ legislative authority?
IRC §280E was enacted in 1982, well before enactment of the California Compassionate Use Act of 1996. This means that anyone getting into the cannabis industry was and is on notice of its the burdensome tax liabilities cannabis companies face. Given such notice, why does application of IRC §280E constitute an excessive fine under the 8th Amendment?
Why isn’t Congress the appropriate branch of government to address IRC §280E?
The Ninth Circuit Court of Appeals dismissed Canna Care’s appeal and upheld the Tax Court’s holding. Because the arguments presented were not raised in the lower court, The Court did not address the merits of each argument.
Assess Risk & Preserve Refund Claims
When filing their tax return, a cannabis businesses must understand the impact IRC §280E has on its tax liability. Equally important, cannabis businesses must understand the risk of not applying IRC §280E when filing their tax return. The immediate tax savings must be weighed against the risks and the costs of later having to defend the position in court.
Though it is difficult to challenge federal statutes on constitutional grounds, the constitutional arguments do have some merit. A cannabis business that challenges an IRS assessment under IRC §280E should raise all arguments early in the process to prevent a court from later dismissing arguments on procedural grounds.
Because the Ninth Circuit Court of Appeals did not rule on the merits of the 8th Amendment claim. it is possible a federal court could some day rule that IRC §280E is unconstitutional. To preserve a potential refund claim, all cannabis businesses should consider filing protective refund claims. A protective refund claim keeps the refund statute of limitation open beyond the standard three-year period. After October 15, 2017, a cannabis business cannot recover tax paid for tax year 2013. However, if a court were to hold after October 15, 2017 that IRC §280E is unconstitutional, a cannabis business that filed a 2013 protective refund claim can recover its taxes paid for that year.
It is likely more cases will be filed challenging IRC §280E. A cannabis business should take stock of its current tax return filings applying IRC §280E and craft a strategy to defend its position.
2 responses to “Cannabis Taxes and Section 280E: Canna Care v. The IRS”
The top tax rate is 39.6 %, income over $444,500 and since their are no deductions, that is equivalent to the cannabis business’s top line. The excise tax is $9.25 per ounce which is $147.20 per pound and based upon weight with no correlation to revenue that the ounce of marijuana generates. The August 4th Cannabis benchmark report for the spot price of California marijuana is $1,590 which is a 9.26% excise tax based upon that price. Those two tax amounts make up 48.86% of the revenue generated by the business and this is before a business as accounted for any operating expenses. If the price per pound drops, the excise tax becomes even more as a percentage of revenues. The taxes placed on the grower businesses are going to make being a legally licensed business very difficult to operate at a profit without any type of scale to the business.
Cherrypielady7 Cooking Channel says:
Could a cannabis business deduct contributions to a scholarship or other charitable organization?