What is Internal Revenue Code Sec. 280E?
Enacted in 1982, the year that President Ronald Reagan declared the “War on Drugs,” Section 280E of the federal tax code bans tax deductions related to “trafficking in controlled substances.” This tax code was put into effect prior to the decriminalization of medical marijuana in California in 1996. Since then 15 other U.S. states and the District of Columbia have legalized or decriminalized medical cannabis, but 280E has remained intact and in direct conflict with a growing number of state laws.
SECTION 280E: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
All businesses, like all citizens, are expected to file and pay taxes to the IRS each year. Perhaps different than when you pay your personal taxes, businesses are allowed to reduce their taxable income by taking standard deductions. These deductions include expenses such as the rent they pay for their space, their payroll, utilities, insurance, etc. The IRS then normally taxes businesses on the amount left over, known as taxable income.
The IRS has taken the position that medical cannabis providers are to be considered drug-trafficking organizations, and therefore fall under the purview of Section 280E. Accordingly, the IRS denied deductions for all expenses, including normally deductible items such as rent, payroll and health insurance for employees.
Why is 280E endangering the medical cannabis industry?
The IRS is currently auditing dozens of medical cannabis organizations nationwide, with news of new audits coming to light every week. In early audit results, the IRS has denied all normal and usual deductions and levied crippling tax bills. The resulting tax bills are so large — sometimes millions of dollars — that most medical cannabis providers are unable to pay and would be forced to close their doors if enforced. Based on the number of audits known about thus far, it appears that the IRS is targeting the entire industry. Massive closures of legal providers in medical cannabis states could leave patients with no alternative other than the illegal marketplace.
Why does 280E need to be reformed?
If Section 280E is not changed, the IRS is on course to close every legal provider of medical cannabis in the United States. Patients would lose safe access to laboratory-tested medicine and would be forced back to the criminal market. They would have to purchase medicine in unregulated and unsafe circumstances, and be exposed to robbery or possible injury. Tens of thousands of well-paying jobs in the legitimate medical cannabis industry would be destroyed, and hundreds of millions of dollars in state tax revenue would be eliminated. Instead of creating jobs and taxes, it would decrease public safety and divert money and cannabis to the black market.
What was the original purpose of 280E?
Section 280E was never intended to be applied to legal businesses that file tax returns. It was originally passed by Congress in 1982, after the IRS filed a tax case against a convicted cocaine trafficker, in order to seize his ill-gotten gains. The trafficker responded by filing a tax return, and took deductions for expenses such as the guns he used to protect his shipments, the yachts he used for smuggling, and the bribes he paid to foreign officials. Because there was at that time nothing in the IRS code to prohibit such deductions, the trafficker was able to hold onto part of his fortune.
When word of this reached Congress, Rep. Pete Stark (D-CA) sponsored legislation to create Section 280E. His intent was to prevent convicted criminals from keeping their loot, not to harass businesses that comply with their state’s medical marijuana laws. Today, Stark is one of the leaders in the 280E Reform effort, and is the sponsor of the Small Business Protection Act, which would force the IRS to respect state medical cannabis laws.
Who is really threatened by 280E?
The people most directly threatened by 280E actions are the patients who depend on regulated access to medical cannabis. If the IRS is successful, they will be placed in immediate physical danger. However, if legal providers of medical cannabis are forced to close, damage will quickly spread to the rest of the community.
In many cities, medical cannabis providers are among the top taxpayers, and have been the most effective creators of new jobs. They have rented long-vacant properties during a depressed real estate market, pumped new revenue into struggling publications, and catalyzed other new businesses such as testing laboratories and packaging companies. If the IRS is successful, communities will be impacted as well as patients.
What is 280E Reform’s legal strategy?
Attorneys working with the 280E Reform campaign, led by San Francisco’s Henry Wykowski, are developing legal strategies for organizations being audited. Mr. Wykowski argued the only existing case to reach a determination about 280E, C.H.A.M.P v. The Commissioner of Internal Revenue, in U.S. Tax Court. Some of the country’s best legal minds are working this issue, and no stone is being left unturned. Mr. Wykowski currently represents dozens of businesses that have fallen victim to the IRS 280E attack.
Harborside Health Center is one of the victims of the IRS audit campaign and under 280E was stuck with a multimillion-dollar tax bill. Harborside decided to fight back, which raised important questions about legal venue and strategy. After much discussion, it was determined that moving Harborside’s case from U.S. Tax Court to the U.S. District Court on appeal was too risky. If the assigned judge stopped Harborside’s lawyers from presenting a medical cannabis defense, the ruling could set a precedent that could potentially harm the industry as a whole.
Accordingly, that legal strategy has been replaced. Harborside will continue to fight its case in U.S. Tax Court leveraging the precedent set by the CHAMP case. All legal fees and tax penalties for this effort will be paid directly by Harborside.
This doesn’t address the issue of changing 280E.
How will 280E Reform work to change 280E?
We are using a multifaceted approach to effect change. We have developed a comprehensive business plan focusing on the following key components:
– Create a robust web site that will become the ‘go-to’ repository for all 280E information.
– The website will offer free and meaningful educational space filled with downloadable materials, answers to frequently asked questions and up-to-date progress reports.
– Additional, fee-based space will specifically address the educational needs of:
– Accountants and Bookkeepers
– Dispensary owners
– Elected officials and public employees
– This fee, along with other fundraising events, will allow us to sustain our initiative through the course of time to a successful change to 280E.
– Our plans are to hire federal and administrative lobbyists to further educate legislators on the financial ramifications and social injustice of the current 280E tax code.
– We currently are sourcing economists to quantify the financial contributions legal cannabis businesses provide to the communities in which they live.
Why would anyone want to pay for the services offered on 280EReform.org?
Our goal is to create and actually bring 280E certification to those who participate in our forums and training. 280E is a complicated tax code and if the right knowledge is obtained, there are ways to minimize the adverse implications. We feel strongly that this will improve the level of services provided to medical cannabis providers who are most impacted by this code.
Additionally, we will provide real feeds on what is going on in other 280E IRS audits and court cases so that attorneys will have quick access to legal precedents and trends.
We will help dispensaries understand how they can best physically organize their business to maximize their defense against 280E when filing taxes, how they can maximize their cost of goods sold, and much, much more from those who have survived tax audits.
We will also be setting up a referral network so people in the industry looking to secure a knowledgeable, certified person to represent them has been vetted out and trained by our 280E Reform Team.
What is CHAMP?
A landmark 2007 case, C.H.A.M.P v. The Commissioner of Internal Revenue, in U.S. Tax Court. This groundbreaking case resulted in a decision permitting California medical cannabis dispensaries to deduct expenses that could reasonably be separated from the sale of medical marijuana, or what the federal government considers “trafficking.” The decision meant a significant savings to the client, and for the other dispensaries that began lawfully deducting their business expenses following the decision. This is the only existing precedent to challenge 280E. The split resulted in an 85/15 ratio of taxable deductions.
Who is paying for all of this work?
Initially, the work done to date has been paid for by the current team members. This involved hundreds of labor hours along with real layouts of capital for printed material, travel expenses, programming development, etc., estimated to be somewhere around $80,000. They are unable to sustain those contributions indefinitely. The website, along with fundraising initiatives, is expected to raise enough capital to hire a part-time administrative person and cover costs for lobbyists, advertising/marketing and development of in-depth educational materials. Our initial fundraising goal is $200,000.
How is the 280E Reform campaign organized?
We are organized as a 501(c)(3) nonprofit California corporation. This allows donors to deduct their contributions on their income taxes and allows us to raise funds for education and political change.
Does 280E only affect dispensaries?
At first blush, you could assume that. But think about it, if all medical cannabis dispensaries in the country are forced to close because they can no longer afford to pay their taxes, other businesses will be affected: Shipping and packaging, marketing support, web locator sites, magazines that rely on advertisers, testing labs that ensure our cannabis is safe, landlords struggling to fill their vacancies, individual patient-growers, grow shops – the list is extensive. Dispensaries are a big part of the medical cannabis business sector, but they’re important in another way too. Without dispensaries, patients will lose their safe access and may be forced to go back to the underground economy.
Is this just a California issue?
No, but that’s where it first came to light. The medical cannabis movement started in California, and the IRS audits started there as well. Because of Harborside Health Center’s size and public visibility, the results of its tax audit were widely reported. (Sacramento Bee: “Millions at stake in IRS audit of Oakland medical marijuana dispensary” (Feb. 2011); Oakland Tribune: “Oakland medical cannabis club owes IRS millions in back taxes.” (Oct. 2011)) Digging deeper, it was learned that dozens of dispensaries are now being audited. You can help 280E Reform develop real-time data by using our IRS Tracker to report IRS activity.
Is this a Harborside initiative?
While Harborside offers valuable support, the 280E Reform team includes members from around the country who have no direct affiliation with Harborside. We have come together because if this fight isn’t fought, 280E will be the end of medical cannabis dispensaries around the country.
Why does Steve DeAngelo’s name keep coming up?
Steve DeAngelo, Harborside’s executive director, has been a political activist committed to progressing medical cannabis for more than 40 years. When Harborside was audited and he learned the unfair ruling presented a threat to all medical cannabis dispensaries, he felt compelled to respond by assembling a team to counter the threat. His leadership and political knowledge strengthens our initiative beyond words.
Mr. DeAngelo is disregarding political and legal advice to remain subdued and to simply fight Harborside’s case in tax court. He remains committed to providing patients with safe access to medical cannabis even at the risk of losing his own civil liberties as he uses his celebrity status to help educate the public and shape public policy. He is the founding member and president of the 280E Reform Campaign, and one of the key figures in the Discovery Channel series “Weed Wars.”