Trulieve’s Tax Refund Claim: A Potential Way Out of 280E for Cannabis Businesses?

There are only two certainties in this world: death and taxes. While tax season is undoubtedly stressful for nearly everyone, for legitimate cannabis businesses, tax time can be even more of a burden. That’s because section 280E of the Internal Revenue Service tax code outlines that no deductions can be allowed on any amount “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.” Cannabis is still an illegal Schedule I substance, according to the federal government, even if it is deemed legal by specific states. What does that mean? It means that legitimate cannabis businesses cannot deduct ordinary business and operating expenses from their gross income because that money is associated with “trafficking” an illegal Schedule I drug.

Section 280E has been a hindrance to cannabis companies operating in states that have legalized medicinal and adult-use cannabis, leading to significant tax consequences and often financial hardships. Today, one cannabis industry leader is trying to shake up the status quo and challenge its tax liability under 280E, potentially paving the way for others to bypass 280E tax code regulations.

What Is Tax Code 280E?

Tax code 280E emerged in the 1980s. It was a product of the Reagan Administration’s attempt to crack down on illegal drugs after a 1981 court case where a convicted cocaine trafficker said he had a right to deduct ordinary business expenses under current federal tax law. To dissuade other criminals from following suit, in 1982, Congress created 280E. 280E stipulates that there can be no tax deductions for individuals or businesses engaging in the trade or business of trafficking illegal, controlled substances.

No one wants to pay taxes. It’s just a fact of life. Typically, finding your tax burden starts by calculating your gross income. Next, a business can subtract legitimate expenses from that gross income to determine their taxable income. Their taxable income is the money they’ve earned that the government can tax. The lower your taxable income, the less you must pay the IRS. Subtracting business expenses has always been one method businesses in America use to lower their tax burden, paying less of their income to the government and keeping more money in their pockets. Cannabis businesses find themselves on the wrong side of the U.S. tax code because, under 280E, they cannot legally subtract business expenses from their gross income. Essentially, they are taxed more than other types of businesses.

Henry Wykowski, a California attorney who works with marijuana clients, says that the current U.S. tax code de-incentivizes legitimate cannabis operations from filing tax returns and penalizes individuals who are trying to work within the bounds of the law and who want to pay state and federal income tax. While other businesses can reap the benefits of the U.S. tax system and use the money they save to invest or expand, legitimate cannabis businesses face stiff consequences and harsh penalties.  

Is There a Tax Code Workaround?

Cannabis industry leader Trulieve Cannabis Corp. hopes to change the United States tax conversation. Trulieve recently filed for a $143 million federal income tax refund for 2019 through 2021. The company hopes the move challenges the interpretation of tax code 280E. How? Technically, we don’t know yet. The company sought the tax refund, citing “legal interpretations that challenge the Company’s tax liability under 280E.” What are those legal interpretations? That remains unknown because the company’s legal arguments are currently undisclosed. There is no way of knowing what the legal basis for Trulieve’s refund claims is at this time.

Knowing how U.S. tax law works, there is speculation that Trulieve could file refund claims, suggesting it is not subject to 280E regulations for certain aspects of its operation. The company does work in CBD and hemp-only markets. Additional speculation questions whether the company suggests that its original tax returns contained errors in how 280E was applied and argues that those errors need to be amended, resulting in the refund request. Without more information, it is hard to judge whether Trulieve’s efforts could extend to others in the legal cannabis industry.

Another cannabis company, Canna Provisions, is attempting to challenge the constitutionality of the Controlled Substances Act. By going after the CSA, asserting that it is unconstitutional at the state level, they hope they can subsequently mitigate the impact of 280E without directly attacking it. However, it could take years for the case to work its way through the legal system. Even if the company’s arguments were eventually successful, that doesn’t mean cannabis companies could apply for refunds for previous tax years. Other legal and financial hurdles could emerge from the Canna Provisions case.

What’s the Best Path Forward?

Without more details about the specifics of Trulieve’s legal strategy, it is unlikely that other cannabis businesses can leverage this new information into a tax refund strategy for themselves. One of the best paths forward for the cannabis industry may be to spur Congress and other government organizations into action.

In late 2023, the Department of Health and Human Services recommended rescheduling marijuana to a Schedule III substance, down from a Schedule I illegal substance. Currently, the Drug Enforcement Administration is reviewing the recommendation and has the final say in whether marijuana gets rescheduled to a lower drug tier. Rescheduling marijuana could potentially have a downstream effect on the marijuana business and its tax burden. Under 280E, deductions cannot be claimed by businesses trafficking Schedule I and Schedule II substances. Reclassifying cannabis as a Schedule III drug could have interesting business and tax implications in states with legalized cannabis markets.

It may take significant pushback from the legal retail marketplace, American voters, and staunch cannabis advocates to change the way the federal government views and regulates marijuana. You can get more information on this and other topics at Cannabutter Digest! We are your premier destination for cannabis-related news, recipes, and product reviews.