Congressional Researchers Analyze Whether Denying Marijuana Business Tax Deductions Under 280E Is Unconstitutional

As a federal marijuana rescheduling decision remains pending, congressional researchers have released an analysis of tax implications for cannabis businesses under current law—including a review of the idea that depriving the industry of the ability to take federal tax deductions amounts to a constitutional violation.

In a report published on Friday, the Congressional Research Service (CRS) said the Schedule I status of marijuana under the Controlled Substances Act (CSA) “means that marijuana businesses are treated differently from many other businesses for tax purposes.” One key example concerns the application of an Internal Revenue Service (IRS) code known as 280E, which “disallows taxpayers from taking tax deductions and claiming tax credits attributable to marijuana businesses.”

Despite attempts to contest 280E, the cannabis industry has “generally been unsuccessful” in pleading their case in court and “likewise have not succeeded in their attempts to challenge Section 280E on constitutional grounds.”

CRS pointed to a case, Northern California Small Business Assistants, Inc. v. Commissioner, in which a marijuana business challenged a notice of deficiency from IRS that explained how 280E “disallowed the taxpayer’s deductions.”

“The taxpayer filed a claim disputing the notice, and moved for partial summary judgment challenging the application of Section 280E,” the report said. “At the heart of the taxpayer’s arguments was that Section 280E imposed a penalty in violation of the Eighth Amendment’s Excessive Fines Clause. The panel agreed to deny the taxpayer’s motion for summary judgment, but the judges varied in their approach to reaching that decision.”

Ten of the tax court judges in the case issued a majority opinion upholding 280E and determining that the statute “does not violate the Eighth Amendment because the disallowance of deductions does not constitute a ‘penalty’ for the purposes of the Eighth Amendment.”

Another two judges didn’t address the question of whether 280E amounted to a fine under the Eighth Amendment, but they “concurred in the denial of the taxpayer’s motion for summary judgment because the taxpayer failed to show the fine was excessive.” Three other judges “concluded that Section 280E does impose a fine, but did not reach a conclusion on whether the fine was excessive.”

While the majority opinion stands, the marijuana sector may receive relief from 280E if cannabis is moved from Schedule I to Schedule III of the CSA, as federal agencies proposed following a review initiated by the Biden administration. President Donald Trump in December also signed an executive order directing Attorney General Pam Bondi to expeditiously finalize the process, but it’s unclear when that might happen.

Bondi is scheduled to appear before a key House committee on Wednesday—and advocates are holding out hope that lawmakers will press her to provide an update on the Justice Department’s progress in fulfilling the president’s order to finalize rescheduling.

A Justice Department spokesperson told Marijuana Moment last month that it had no “comment or updates” to share on the topic. However, an agency official more recently told Salon that “DOJ is working to identify the most expeditious means of executing the EO.”

The president’s directive is overwhelmingly popular among cannabis consumers, according to a recent poll from the cannabis telehealth platform NuggMD.

About 83 percent of respondents said they support the executive order, compared to 7 percent who expressed opposition and 10 percent who said they didn’t have an opinion about the proposed reform.

DOJ has been notably silent on the issue in the weeks since Trump signed the order—even as the White House recently touted the president’s order as an example of a policy achievement during the first year of his second term.

—Marijuana Moment is tracking hundreds of cannabis, psychedelics and drug policy bills in state legislatures and Congress this year. Patreon supporters pledging at least $25/month get access to our interactive maps, charts and hearing calendar so they don’t miss any developments.

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Meanwhile, in 2024, IRS warned the marijuana industry that some companies have, without a “reasonable basis,” filled out a supplementary form in an attempt to take federal tax deductions that they’re prohibited from receiving under 280E.

CRS, for its part, noted in a 2021 report that the agency “has offered little tax guidance about the application of Section 280E.”

IRS did provide some guidance in an update in 2020, explaining that while cannabis businesses can’t take standard deductions, 280E does not “prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The IRS update seemed to be responsive to a Treasury Department internal watchdog report that was released in 2020. The department’s inspector general for tax administration had criticized IRS for failing to adequately advise taxpayers in the marijuana industry about compliance with federal tax laws. And it directed the agency to “develop and publicize guidance specific to the marijuana industry.”

Photo courtesy of Chris Wallis // Side Pocket Images.