The Supreme Court declined to hear a case from a group of Colorado marijuana dispensaries challenging the Internal Revenue Service’s ability to investigate them.
The rejection of the case, Speidell v. United States, signals continued aggressive enforcement by the IRS of Section 280E of the Tax Code.
Section 280E states, “No deduction 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.”
The litigants in Speidell contended that the IRS lacked authority to investigate whether a taxpayer was dealing in controlled substances. The result is that despite operating legally under state law, businesses engaged in marijuana distribution are unable to deduct their expenses related to the business on their federal tax returns.
“The effect on these businesses, which are already incredibly regulated, is a 60 to 70 effective tax rate,” said James Mann, former deputy assistant attorney general of the Tax Division of the Department of Justice in charge of federal appellate tax litigation. He was lead counsel on a similar cannabis case, Harborside Health Center v. Commissioner.
“What Section 280E does is drive a lot of business people into the unregulated market,” said Mann. “If they want to sell and they can’t do it legally, they will do it in the unregulated market.”
