IRC 280E & Marijuana
Internal Revenue Code 280e
IRC 280e Text:
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.
(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)
The Controlled Substances Act (CSA) expressly prohibits possession and commerce in marijuana. 21 U.S.C. §§ 841(a)(1), 846. All marijuana is prohibited, no exceptions.
However, a different law that authorizes federal funds to the Department of Justice contains an exception to the prohibition of marijuana pursuant to the CSA – at least in Section 538 of the Budget that has defunded the war on medical marijuana.
Despite this, state law compliant cannabis dispensary businesses still have problems with double taxation due to Section 280E of the Internal Revenue Code (IRC)
If you need a cannabis attorney, or a consultant to help you with your IRC 280E compliance, which may include a management company – feel free to call us from our website.
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“IRC 280E has the cannabis industry paying more taxes than any other legitimate business in the United States.”
IRC 280E creates havoc for medical marijuana businesses
Photograph by Lorem Ipsum via Unsplash
Here’s the takeaway from IRCE 280e
In 1980 a coke dealer got busted, but his attorney said that he should be able to deduct the cost of his illegal cocaine sales business. As a result, Congress passed IRC280E and forbid deducting costs of “carrying on” a business of selling schedule 1 substances, which are prohibited by state or federal law.
Businesses typically deduct two main costs – those of goods sold, and those of ‘carrying on’ the business.
The costs for carrying on a business are those related to operations in sales. For example, your rent, phone bill, utilities, employees, marketing, little baggies for the above-described coke dealer, everything except the costs of the goods sold (COGS).
Fun Fact: Congress did not include COGS in the law banning the ‘carrying on’ deductions for fear of a constitutional challenge.
The marijuana industry makes this distinction quite easy. Costs of goods sold are those incurred in growing and preparing the crop for market, while those of carrying on the business are those related to its sale. As a result, cultivation centers have to worry about the double tax less than dispensaries.
IRC 280e will apply until Marijuana out of CSA
The costs a cultivation center incurs go to the cost of producing the cannabis, while the costs incurred by the dispensary are all related to its sale.
In the video, Tom explains how the precise wording of three pieces of federal law – and a bedrock principle of tax law – all come together to avoid the double taxation issue to state-law approved medical marijuana businesses.
Check out the video – and subscribe to the Cannabis Industry Lawyer’s YouTube channel to ask your question about a legal issue in the legal marijuana industry.
Arizona Marijuana Dispensary Application 2021
After the Smart and Safe Arizona’s initiative to legalize commercial recreational Marijuana in Arizona gathered 420,000 signatures, almost twice the number required to make the ballot, chances are Arizona joins the current 12 states in the United States to allow adult use of cannabis business. Here is what you need to know about the initiative if you are one of the many interested in opening a marijuana dispensary in what is projected to become a multimillionaire market in Arizona.
Smart and Safe Arizona Act establishes legal the use of marijuana for adults of 21 years of age or older, allowing the possession of Marijuana up to 1 ounce with no more than 5 grams of marijuana concentrate. Further, it allows up to six plants in a locked location and with no public view cultivated per home, with no more than 12 plants in homes with at least 2 adults.
This legalization also means its production, consumption, and distribution would be subject to regulation, taxation and local ordinance.The Department of Health Services, which regulates the state’s medical marijuana program is designated as the regulatory authority to govern and oversee the commercial adult-use of marijuana establishments and facilities, notwithstanding the content of this Act.
RELATED POST: How to Open a Cannabis Dispensary in Arizona
RELATED POST: Arizona Cannabis Lawyer
About the License
There are important points to take into consideration when applying for a marijuana license in Arizona:
How are the Dispensary Licenses issued?
The Regulatory Authority will only issue two Marijuana Establishment License per county as long as it does not contain a non profit medical marijuana dispensary, if it contains one registered non profit medical marijuana dispensary, it will only issue one. The issuance of the licence should be done by random selection according to the rules adopted by the Department. At least 60 days prior to the selection it should be publicized on its official website and other means of distribution looking to reach all the interested parties.
The licenses will be valid for two years. After it expires the applicants will have to renew their licences and pay the renewal fees.
What is an Early Applicant?
An early applicant is any entity seeking to operate a marijuana establishment in a county with less than two registered nonprofit medical marijuana dispensaries, or a non-profit medical marijuana dispensary registered and in good standing with the department that wishes to obtain an establishment license. The early applications will be accepted from January 19th, 2021 to March 9th, 2021, no later than 60 days after the application is received the Department must issue a marijuana establishment license to the qualified early applicants.
What is a Dual License?
A Dual License is defined as an entity that holds both a non profit medical marijuana dispensary and a marijuana establishment licence. Meaning existing Medical Marijuana Dispensaries are allowed to apply as an “early applicant” for the Establishment License.
What types of licences are available?
The Smart and Safe Arizona Act differs with other state’s regulations, regarding marijuana dispensary licenses in multiple aspects, for example, it only establishes two types of licenses available:
- The Marijuana establishment license, that authorizes to have a single retail location to sell, a single off site location to cultivate, process and produce and a single off site location to manufacture and package marijuana, the last two are not authorized to sell Marijuana in any manufacturing or cultivating location. The department of Health Services will issue no more than one marijuana establishment license for every ten pharmacies
- The Marijuana testing facilities license authorizes the analysis and monitoring of the potency of the product and testing for any harmful contaminant in the marijuana. Not limited to private entities, the Department of Health Services could function as a testing facility as well.
What about the On-site consumption license?
Unlike states like Illinois and Alaska, this law does not contemplate a license for on-site consumption. Also, since we are discussing subjects not contemplated in the law, delivery of marijuana understood as transportation of marijuana to a consumer at a location other than the designated retail location, is considered unlawful, until the Department of Health Services regulates this subject matter, which is directed to adopt regulations for home delivery by 2025.
What rules do I have to follow once I have my license?
In order to operate a Marijuana establishment, a set of rules must be followed. if not, each violation could be up to $1,000
- Sufficient security of the establishments and facilities;
- Proper safety of the cultivation, processing and manufacturing process by the establishments; and
- Appropriate tracking, testing, labeling and packaging of marijuana within the regulations established in the law.
What about taxes?
Marijuana would be subject to sales tax rate of 5.6%, plus 16% excise tax. The money from the excise tax would be used to fund the Department of Health Services and the department of Public Safety to ensure the implementation of the law. The remaining would be distributed among community college districts, fire and police departments and other grants or programs that support public health.
What other things should I know about the Smart and Safe Arizona initiative?
- The Smart and Safe Arizona initiative specifies violations for adults over 21 caught with more than 1 ounce but less than 2.5 ounces guilty of a petty offense and minors caught with less than an ounce to be sanctioned with a $100 fine on first offense and drug counseling.
- The act explicitly does not allow marijuana use in public places such as parks or restaurants and does not allow driving, flying or boating while impaired to even the slightest degree by marijuana.
- Also, It does not inhibit the rights of the employer to demand for drug-free workplaces or to implement policies restricting the use of marijuana for its workers or job applicants.
Do not forget that marijuana legalization in Arizona is only a few months away. If you are interested in joining this business full of opportunities, start planning and don’t hesitate on contacting the right professionals to guide you through this process
Check Out:
- Thomas Dean, Arizona Cannabis Lawyer
- Tom Howard at CannabisIndustryLawyer.com
- Miggy at Cannabis Legalization News
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