The Application of Internal Revenue Code Section 280E to Marijuana Businesses: Selected Legal Issues

The Application of Internal Revenue Code Section 280E to Marijuana Businesses: Selected Legal Issues

The Application of Internal Revenue Code
March 10, 2021
Section 280E to Marijuana Businesses:
Milan N. Ball
Selected Legal Issues
Legislative Attorney

The marijuana industry has grown as an increasing number of states have relaxed state law
prohibitions on the use of marijuana for medical and recreational purposes. Under federal law,

marijuana remains classified as a Schedule I controlled substance under the Controlled
Substances Act (CSA), meaning that the production, distribution, and possession of marijuana remains illegal, except in the
narrow context of federally approved research studies. Regardless of marijuana’s status under federal or state law, marijuana
businesses are subject to the federal income tax.
The Schedule I status of marijuana means that marijuana businesses are treated differently from many other businesses for
tax purposes. Internal Revenue Code (IRC) Section 280E (Section 280E) denies deductions and credits for amounts paid or
incurred in carrying on the trade or business of trafficking controlled substances (within the meaning of Schedules I and II of
the CSA) in violation of federal or state law. Consistent with marijuana’s classification as a Schedule I controlled substance,
Section 280E disallows taxpayers from taking tax deductions and claiming tax credits attributable to marijuana businesses.
Nonetheless, for reasons related to constitutional concerns raised at the time of Section 280E’s enactment regarding the scope
of Congress’s Sixteenth Amendment power to tax “income,” businesses subject to Section 280E may offset gross receipts by
the cost of goods sold when determining their gross income. Outside this general convention, there is little tax guidance
concerning the application of Section 280E. Marijuana businesses have generally been unsuccessful in challenging the
Internal Revenue Service’s application of Section 280E and likewise have not succeeded in their attempts to challenge
Section 280E on constitutional grounds.
Congress has broad authority to alter the tax treatment of marijuana businesses. The legislative history of Section 280E
indicates that Congress enacted the provision to codify a sharply defined public policy against drug dealing. Recent
legislative proposals aim to relax federal restrictions on marijuana or to mitigate the disparity between federal and state
marijuana regulation. Many of these proposals would alter the tax treatment of marijuana businesses by re-scheduling or de-
scheduling marijuana under the CSA or by making marijuana-specific exceptions. Under these proposals, Section 280E
would no longer prohibit marijuana businesses from taking deductions and credits.
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Contents
Introduction ............................................................................................................................... 1
How are marijuana business taxpayers treated differently than business taxpayers
engaged in activities that do not violate federal law? ............................................................ 2
How does Section 280E work? ................................................................................................. 3
What prompted the enactment of Section 280E? ...................................................................... 6
Does Section 280E apply to marijuana businesses in states where marijuana is legal
under state law? ...................................................................................................................... 8
Does Section 280E violate the Eighth Amendment’s Excessive Fines Clause? ....................... 9
How would legislative proposals alter taxes on marijuana businesses?................................... 11

Contacts
Author Information ........................................................................................................................ 12

Congressional Research Service

The Application of Internal Revenue Code Section 280E to Marijuana Businesses

Introduction
Most states, as well as the District of Columbia, have enacted laws relaxing in some capacity
criminal prohibitions on the use of marijuana,1 from qualified medical use to recreational use.2
Marijuana industry sources project that the marijuana industry experienced $11 billion in sales in
2018 and will reach $25 billion in sales by 2025.3 While more and more states have allowed
marijuana businesses to operate legally under state law, the federal Controlled Substances Act
(CSA) continues to classify marijuana as a Schedule I controlled substance.4 The Schedule I
status of marijuana makes it a federal crime to produce, dispense, or possess marijuana outside
the context of federally approved scientific studies.5 As a result of this classification, Internal
Revenue Code (IRC) Section 280E (Section 280E) prohibits marijuana businesses from taking tax
deductions and claiming tax credits.6
The Internal Revenue Service (IRS) has offered little tax guidance about the application of
Section 280E.7 A 2020 Treasury Inspector General for Tax Administration (TIGTA) report that
looked at marijuana businesses in California, Oregon, and Washington concluded that marijuana
businesses in those states have a high rate of noncompliance with Section 280E.8 The TIGTA
report also explained that, “[a]ccording to the IRS, there is no easy method to identify marijuana
businesses based on tax filing information.”9 TIGTA states, “Additional guidance in the
[marijuana] industry is critical to improve the compliance rate with I.R.C. § 280E.”10
This report addresses select legal questions pertaining to the application of Section 280E to
marijuana businesses.

1 This report uses the more widely accepted spelling of “marijuana” instead of the spelling generally used in the
Controlled Substances Act (CSA), 21 U.S.C. Sections 801–904, “marihuana.” For the purposes of this report, the term
“marijuana” is used as it is defined in Section 802(16) of the CSA. Hemp and marijuana are both varieties of the single
plant genus, Cannabis sativa L. Hemp is defined as “the plant Cannabis sativa L. and any part of that plant . . . with a
delta-9 tetrahydrocannabinol [(THC)] concentration of not more than 0.3 percent on a dry weight basis,” and is not a
controlled substance. 7 U.S.C. § 1639o. The non-psychoactive cannabinoid cannabidiol (CBD) may be derived either
from marijuana or from hemp. CBD containing less than 0.3% THC is not treated as a controlled substance. See 21
U.S.C. § 802(16)(B)(i). For a discussion of the different strains of the single plant genus Cannabis sativa L. and their
classifications under federal law, see CRS Legal Sidebar LSB10482, State Marijuana “Legalization” and Federal
Drug Law: A Brief Overview for Congress, by Joanna R. Lampe; CRS Report R44742, Defining Hemp: A Fact Sheet,
by Renée Johnson.
2 DEP’T OF TREAS., TREASURY INSPECTOR GENERAL FOR TAX ADMIN., 2020-30-017, THE GROWTH OF THE MARIJUANA
INDUSTRY WARRANTS INCREASED TAX COMPLIANCE EFFORTS AND ADDITIONAL GUIDANCE 1–2 (2020) [hereinafter
GROWTH OF THE MARIJUANA INDUSTRY]; see CRS Report R44782, The Marijuana Policy Gap and the Path Forward,
coordinated by Lisa N. Sacco.
3 GROWTH OF THE MARIJUANA INDUSTRY 7.
4 21 U.S.C. § 812(c).
5 Id. §§ 841–865; see CRS Report R45948, The Controlled Substances Act (CSA): A Legal Overview for the 117th
Congress, by Joanna R. Lampe.
6 26 U.S.C. § 280E.
7 GROWTH OF THE MARIJUANA INDUSTRY 3, 13. Following the TIGTA report, the IRS issued unpublished sub-regulatory
guidance directed at the marijuana industry, in the form of a short list of frequently asked questions. I.R.S., Marijuana
Industry Frequently Asked Questions (Nov. 19, 2020), https://www.irs.gov/businesses/small-businesses-self-
employed/marijuana-industry-frequently-asked-questions.
8 GROWTH OF THE MARIJUANA INDUSTRY 10.
9 Id.
10 Id. at 13.
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The Application of Internal Revenue Code Section 280E to Marijuana Businesses

How are marijuana business taxpayers treated differently than
business taxpayers engaged in activities that do not violate federal
law?
Like non-marijuana businesses, marijuana businesses are subject to tax on all of their income.11
Under federal law, all income is taxable, including income from unlawful activities.12 In contrast,
not all expenses are deductible from a taxpayer’s gross income.13 The Supreme Court has
explained that tax deductions and tax credits are matters of “legislative grace.”14 Taxpayers
conducting lawful activities may deduct “ordinary and necessary” trade or business expenses
when computing their taxable income.15 Taxpayers may claim tax credits to the extent permitted
by statute.16

11 See U.S. CONST. amend. XVI; 26 U.S.C. § 61(a); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1199
(10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019).
12 U.S. CONST. amend. XVI (“The Congress shall have power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several States, and without regard to any census or enumeration.”);
26 U.S.C. § 61(a) (“Except as otherwise provided in this subtitle, gross income means all income from whatever source
derived . . . .”); United States v. Sullivan, 274 U.S. 259, 263 (1927) (ruling that there was no “reason why the fact that a
business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.”); Wood v. United
States, 863 F.2d 417, 419 (5th Cir. 1989) (ruling proceeds from illegal activities are taxable even when they are
forfeited to the government); see James v. United States, 366 U.S. 213, 218 (1961) (“It had been a well-established
principle . . . that unlawful, as well as lawful, gains are comprehended within the term ‘gross income.’ Section II B of
the Income Tax Act of 1913 provided that ‘the net income of a taxable person shall include gains, profits, and income .
. . from . . . the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived
from any source whatever . . . .’ When the statute was amended in 1916, the one word ‘lawful’ was omitted. This
revealed, we think, the obvious intent of that Congress to tax income derived from both legal and illegal sources, to
remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune.”
(citations omitted)); Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (“Here we have instances of undeniable
accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the
payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character
as taxable income to the recipients.”); see generally Boris I. Bittker, Taxing Income from Unlawful Activities, 25 CASE
W. RES. L. REV. 130 (1974).
13 26 U.S.C. § 261 (“In computing taxable income no deduction shall in any case be allowed in respect of the items
specified in this part.”); Alternative Health Care Advocates v. Comm’r, 151 T.C. 225, 236 (2018) (“ ‘[T]his part’
includes section 280E, Expenditures in Connection With the Illegal Sale of Drugs.” (quoting Californians Helping to
Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 180 (2007)).
14 INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992) (“[T]his Court has noted the ‘familiar rule’ that ‘an income tax
deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on
the taxpayer.’ ” (quoting Interstate Transit Lines v. Comm’r, 319 U.S. 590, 593 (1943)); Lewyt Corp. v. Comm’r, 349
U.S. 237, 250 (1955) (“[D]eductions and credits are matters of legislative grace and the taxpayer must bring himself
clearly within the relief he claims.”); Commodore Mining Co. v. Comm’r, 111 F.2d 131, 133 (10th Cir. 1940)) (“The
authority of Congress to discontinue the right to such deductions is not open to doubt. Congress has unquestioned
power to condition, limit, or deny deductions from gross income in arriving at the net which is to be taxed.” (citing
Helvering v. Indep. Life Ins. Co., 292 U.S. 371 (1934)).
15 26 U.S.C. § 162(a) (“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business . . . .”); Welch v. Helvering, 290 U.S. 111, 113–14 (1933)
(explaining an expense is “necessary” if it is “appropriate and helpful” for the development of the taxpayer’s trade or
business and “ordinary” if it is “common and accepted” in the taxpayer’s line of trade or business); Alpenglow
Botanicals, 894 F.3d at 1200 (“The Supreme Court has defined ‘ordinary and necessary expenses’ as those expenses
that are ‘appropriate and helpful to the development of the (taxpayer’s) business,’ and ‘normal[ ] in the particular
business.’ ” (citations omitted)).
16 Packard v. Comm’r, 746 F.3d 1219, 1222 (11th Cir. 2014) (per curiam); Feigh v. Comm’r, 152 T.C. 267, 276 (2019);
see Schumacher v. United States, 931 F.2d 650, 652 (10th Cir. 1991).
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The Application of Internal Revenue Code Section 280E to Marijuana Businesses

Section 280E denies tax deductions and tax credits attributable to the trade or business of
trafficking in CSA Schedule I or II controlled substances where the trafficking is “prohibited by
Federal law or the law of any State in which such trade or business is conducted.”17 As discussed
supra, under the CSA, marijuana is a Schedule I controlled substance and it is a federal crime to
produce, dispense, or possess marijuana outside the context of federally approved scientific
studies.18 Accordingly, Section 280E prohibits marijuana businesses from deducting expenses and
claiming tax credits.
How does Section 280E work?
Section 280E prohibits a marijuana business from taking deductions and claiming credits on any
amounts paid or incurred in trafficking marijuana.19 Section 280E does not define “trafficking.”
That said, courts have interpreted the term “trafficking,” in the context of Section 280E, to mean
“engaging in a commercial activity—that is, to buy and sell regularly.”20
The prohibition on deductions includes deductions for: “ordinary and necessary” business
expenses under IRC Section 162(a), state and local taxes under IRC Section 164, losses under
IRC Section 165, and depreciation under IRC Section 167.21 More recently, the Tax Court held

17 26 U.S.C. § 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.”).
Businesses trafficking in Schedule II controlled substances in violation of federal or state law are also subject to
Section 280E. Id. For further discussion of the different CSA schedules, the various controlled substances listed on
those schedules, and their treatment under federal law, see CRS Report R45948, The Controlled Substances Act (CSA):
A Legal Overview for the 117th Congress, by Joanna R. Lampe.
18 21 U.S.C. § 812(c); id. §§ 841–865.
19 26 U.S.C. § 280E; S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050; Californians
Helping to Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 182 (2007) (“Section 280E and its legislative
history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in
controlled substances.”).
20 Alternative Health Care Advocates v. Comm’r, 151 T.C. 225, 236–37 (2018) (“In [Californians Helping to Alleviate
Medical Problems], 128 T.C. at 182, we defined “trafficking” as the act of engaging in a commercial activity—that is,
to buy and sell regularly. In Olive v. Commissioner, 139 T.C. at 38, we held that ‘dispensing . . . medical marijuana
pursuant to . . . [California law] was ‘trafficking’ within the meaning of section 280E.’” (second, third, and fourth
alterations in original)); see also Alpenglow Botanicals, LLC v. United States, No. 16-CV-00258, 2016 WL 7856477,
at *3 (D. Colo. Dec. 1, 2016) (citing Californians Helping to Alleviate Med. Problems, 128 T.C. at 182), aff’d, 894
F.3d 1187 (10th Cir. 2018); High Desert Relief, Inc. v. United States, No. 16-CV-469, 2017 WL 1740467, at *5
(D.N.M. Mar. 31, 2017) (citing Alpenglow Botanicals, 2016 WL 7856477, at *3–4), aff’d, 917 F.3d 1170 (10th Cir.
2019).
21 26 U.S.C. §§ 161, 162(a), 164, 165, 167, 170, 261, 280E; see, e.g., San Jose Wellness v. Comm’r, 156 T.C. No. 4,
2021 WL 614063, at *4–10 (2021) (applying Section 280E to deny depreciation deductions under IRC Section
167(a)(1) and deductions for charitable contributions under IRC Section 170); N. Cal. Small Bus. Assistants Inc. v.
Comm’r, 153 T.C. 65, 72–73 (2019) (applying Section 280E to deny deductions for taxes under IRC Section 164 and
depreciation deductions under IRC Section 167); Beck v. Comm’r, T.C. Memo. 2015-149, 110 T.C.M. (CCH) 141
(2015), 2015 WL 4720041, at *6 (applying Section 280E to deny an IRC Section 165 loss deduction for marijuana
seized by the Justice Department’s Drug Enforcement Administration); Californians Helping to Alleviate Med.
Problems, 128 T.C. at 173–74, 180–81 (applying Section 280 to deny deductions for ordinary and necessary business
expenses under IRC Section 162(a)); but see I.R.S. Chief Couns. Adv. 201531016 (June 9, 2015), 2015 WL 4591378
(permitting a taxpayer to offset gross sales by the state excise tax because the state excise tax was a reduction in
amount realized on the sale of property, not a deduction or credit under Section 280E (citing IRC Section 164(a) flush
language)); see also Welch v. Helvering, 290 U.S. 111, 113–14 (1933) (explaining an expense is “necessary” if it is
“appropriate and helpful” for the development of the taxpayer’s trade or business and explaining an expense is
“ordinary” if it is “common and accepted” in the taxpayer’s line of trade or business); Alpenglow Botanicals, 894 F.3d
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The Application of Internal Revenue Code Section 280E to Marijuana Businesses

that charitable contributions “in carrying on” the business of trafficking marijuana are
nondeductible.22 As a result, marijuana businesses, from farmers and processors to distributors
and retailers, are prohibited from writing off many of their day-to-day expenses and overhead
costs, such as rent, utilities, compensation, costs of administration, and charitable gifts to promote
goodwill.23
When a taxpayer operates more than one trade or business, Section 280E only disallows
deductions and credits related to the marijuana business.24 Under the IRC, an activity qualifies as
a separate trade or business when the taxpayer is “involved in the activity with continuity and
regularity and . . . the taxpayer’s primary purpose for engaging in the activity [is] for income or
profit.”25 For example, the U.S. Tax Court found a taxpayer operating a community center for
members with debilitating diseases was engaged in two separate trades or businesses for the
purposes of Section 280E—one that provided a variety of caregiving services and another that
dispensed medical marijuana.26 Thus, the court ruled the taxpayer could deduct expenses
attributable to its caregiving services, but could not deduct expenses attributable to its marijuana
business.27
Still, multiple activities may constitute a single trade or business when they “share a close and
inseparable organizational and economic relationship.”28 In another case, the Tax Court
determined that a taxpayer dispensing medical marijuana and providing caregiving services was
not operating more than one trade or business when the taxpayer’s only source of revenue was
from the sales of medical marijuana.29 As a result, the court held Section 280E precluded the
taxpayer from taking deductions.30 Similarly, the Tax Court has ruled that Section 280E prohibits

at 1200 (“The Supreme Court has defined ‘ordinary and necessary expenses’ as those expenses that are ‘ “appropriate
and helpful” to “the development of the (taxpayer’s) business,” ’ and ‘normal[ ] in the particular business.’ ” (citations
omitted)).
22 San Jose Wellness, 2021 WL 614063, at *16–22.
23 See, e.g., San Jose Wellness, 2021 WL 614063, at *16–17; Alternative Health Care Advocates, 151 T.C. at 233–42;
Californians Helping to Alleviate Med. Problems, 128 T.C. at 178–86; Loughman v. Comm’r, T.C. Memo 2018-85,
115 T.C.M. (CCH) 1472 (2018), 2018 WL 3039824, at *2–4.
24 See, e.g., Californians Helping to Alleviate Med. Problems, 128 T.C. at 183–86; see also Alternative Health Care
Advocates, 151 T.C. at 239.
25 Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987); see Alternative Health Care Advocates, 151 T.C. at 239; see also 26
C.F.R. § 1.183-1(d)(1).
26 Californians Helping to Alleviate Med. Problems, 128 T.C. at 183–86.
27 Id. at 185. In Californians Helping to Alleviate Medical Problems, the taxpayer charged each member: (i) a
membership fee that covered caregiving services; and (ii) the cost of each member’s set amount of medical marijuana.
Id. at 176. In Canna Care, Inc. v. Commissioner, the Tax Court ruled a taxpayer was only engaged in the trade or
business of selling marijuana where the taxpayer also sold books, T-shirts, and other items. T.C. Memo 2015-206, 110
T.C.M. (CCH) 408 (2015), 2015 WL 6389130, at *5, aff’d, 694 F. App’x 570 (9th Cir. 2017). The Tax Court could not
determine what percentage of the taxpayer’s income was from sale of items other than marijuana based on the evidence
presented. Id.
28 Olive v. Comm’r, 139 T.C. 19, 41 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); see Alternative Health Care
Advocates, 151 T.C. at 239 (“[T]he activities of separate entities can be treated as a single trade or business if they are
part of a ‘unified business enterprise’ with a single profit motive.”); Alterman v. Comm’r, T.C. Memo 2018-83, 115
T.C.M. (CCH) 1452 (2018), 2018 WL 2980049, at *9 (“Whether selling non-marijuana merchandise was a separate
business from selling marijuana merchandise is an issue of fact that depends on, among other things, the degree of
economic interrelationship between the two activities.”).
29 Olive, 139 T.C. at 41–42.
30 Id. at 42.
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The Application of Internal Revenue Code Section 280E to Marijuana Businesses

a taxpayer from taking deductions when the taxpayer’s business activities that are unrelated to the
sale or distribution of marijuana are ancillary to its marijuana business.31
Section 280E does not prevent marijuana businesses from reducing their gross receipts by the cost
of goods sold (COGS) when calculating their federal income tax liability.32 The term COGS
refers to “expenditures necessary to acquire, construct or extract a physical product which is to be
sold.”33 By and large, taxpayers compute COGS by taking the inventories at the beginning of the
year, adding the year’s purchases and production costs, and subtracting year-end inventories.34 A
marijuana business may make a downward adjustment for COGS because it is not considered a
deduction from gross income—it is outside the scope of Section 280E.35 COGS offsets gross

31 Alternative Health Care Advocates, 151 T.C. at 240; see, e.g., Patients Mut. Assistance Collective Corp. v. Comm’r,
151 T.C. 176, 208–10 (2018) (“Harborside dedicated the lion’s share of its resources to selling marijuana and
marijuana products. Those sales accounted for over 99.5% of its revenue. Its other activities were neither economically
separate nor substantially different. We therefore hold that Harborside had a single trade or business--the sale of
marijuana.”), appeal docketed, No. 19-73078 (9th Cir. Dec. 4, 2019); Beck v. Comm’r, T.C. Memo. 2015-149, 110
T.C.M. (CCH) 141 (2015), 2015 WL 4720041, at *5 (“The sole purpose of the [taxpayer’s] dispensaries was to provide
customers with medical marijuana and instruct those customers on how to use it. Unlike the taxpayer in [Californians
Helping to Alleviate Medical Problems], petitioner has provided no evidence that he had any business activity unrelated
to the sale or distribution of marijuana.”); see also Desert Organic Solutions v. Comm’r, T.C. Memo. 2021-22, T.C.M.
(RIA) 2021-22, 2021 WL 673016, at *2.
32 See, e.g., Alterman, 2018 WL 2980049, at *11; Beck, 2015 WL 4720041, at *6 (“COGS is an offset to gross receipts
in determining business income.”); see also I.R.S., Marijuana Industry Frequently Asked Questions (Nov. 19, 2020),
https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions (“[A]
marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross
receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471.”).
33 Reading v. Comm’r, 70 T.C. 730, 733 (1978), aff’d, 614 F.2d 159 (8th Cir. 1980).
34 Alterman, 2018 WL 2980049, at *11 (“Properly computed, cost of goods sold equals[:] the cost of merchandise on
hand at the beginning of the taxable year (‘beginning inventory’), [26 C.F.R. §] 1.471-3(a)[;] plus the cost of
merchandise purchased since the beginning of the taxable year (‘purchase costs’), [26 C.F.R. § 1.471-3](b)[;] plus the
direct and indirect cost of producing merchandise (‘production costs’), [26 C.F.R. §§ 1.471-3](c), 1.471-11[;] minus the
cost of inventory on hand at the end of the tax year (‘ending inventory’), [26 C.F.R. §] 1.471-1. Inventories must be
recorded in a legible manner, properly computed and summarized, and these inventory records must be preserved by
the taxpayer. [26 C.F.R. §] 1.471-2(e).”); see 26 U.S.C. §§ 168(k), 179, 263A, 471; I.R.S., Marijuana Industry
Frequently Asked Questions (Nov. 19, 2020), https://www.irs.gov/businesses/small-businesses-self-
employed/marijuana-industry-frequently-asked-questions (“The Internal Revenue Service takes the position that
section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471
and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross
receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the
business.” (citing I.R.S. Chief Couns. Adv. 201504011 (Jan. 23, 2015))); see also Alterman, 2018 WL 2980049, at *11
n.21 (“In certain situations, farmers may use the cash method of accounting as an alternative to the inventory
method.”); GROWTH OF THE MARIJUANA INDUSTRY 14–15 (“The Tax Cuts and Jobs Act contained a new provision,
I.R.C. § 471(c), which is applicable to taxable years after December 31, 2017, and will have the effect of reducing the
burden for tracking inventory for small businesses with less than $25 million in gross receipts. These qualified
businesses would not be subject to the general rule for determining inventory. Instead, they may elect to use internal
financial statements or accounting procedures to account for costs in lieu of keeping inventories in the manner
otherwise required by I.R.C. § 471(a). Under this new provision, marijuana businesses could argue they are entitled to
use a method of accounting that includes all expenses in cost of goods sold to potentially avoid the impact of I.R.C.
§ 280E.”) (footnotes omitted).
35 26 U.S.C. §§ 61 (defining gross income), 63 (defining taxable income); see Alpenglow Botanicals, LLC. v. United
States, 894 F.3d 1187, 1200 (10th Cir. 2018) (“The cost of goods sold is a well-recognized exclusion from the
calculation of gross income, while ordinary and necessary business expenses are deductions.”); see, e.g., Alterman,
2018 WL 2980049, at *11 (“Taxable income is equal to gross income minus deductions. Cost of goods sold is a
reduction made in the course of computing gross income. It is not a deduction.” (citations omitted)).
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The Application of Internal Revenue Code Section 280E to Marijuana Businesses

receipts when determining gross income, whereas deductions reduce gross income to calculate
taxable income.36
Since marijuana businesses are limited to reducing their gross receipts by COGS, how they
calculate COGS is critical to determining their tax liability.37 Taxpayers must be able to
substantiate any amounts claimed as COGS.38 For example, a marijuana business can reduce their
gross receipts by the cost of the marijuana purchased if properly substantiated.39
Section 280E’s legislative history suggests that taxing gross receipts without providing an
adjustment for COGS to arrive at taxable income might be subject to constitutional challenge.40
This is based on the principle that the power to levy an “income” tax granted by the Sixteenth
Amendment to the U.S Constitution refers to “gross income,” not gross receipts, and a tax on
gross receipts might be interpreted as “something other” than an income tax.41
What prompted the enactment of Section 280E?
Congress enacted Section 280E to preclude courts from applying the common law “frustration of
public policy” doctrine in certain tax disputes related to drug trafficking and to codify a “sharply
defined public policy against drug dealing.”42 Prior to the enactment of Section 280E, courts
applied the frustration of public policy doctrine to deny taxpayers deductions attributable to
unlawful drug trafficking activities.43 Under the frustration of public policy doctrine, courts weigh

36 26 U.S.C. § 63(a) (“[T]he term ‘taxable income’ means gross income minus the deductions allowed by this chapter
(other than the standard deduction).” (emphasis added)); 26 C.F.R. §§ 1.61-3(a) (“In a manufacturing, merchandising,
or mining business, ‘gross income’ means the total sales, less the cost of goods sold, plus any income from investments
and from incidental or outside operations or sources.”), 1.162-1(a) (“The cost of goods purchased for resale, with
proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income.”).
37 See, e.g., Richmond Patients Grp. v. Comm’r, T.C. Memo. 2020-52, 119 T.C.M. (CCH) 1342 (2020), 2020 WL
2114334, at *5–6; Alterman, 2018 WL 2980049, at *11–13; Beck, 2015 WL 4720041, at *6.
38Alterman, 2018 WL 2980049, at *11; Beck, 2015 WL 4720041, at *6 (citing Wright v. Comm’r, T.C. Memo 1993-27,
65 T.C.M. (CCH) 1792 (1993), 1993 WL 17590); see 26 U.S.C. § 6001 (“Every person liable for any tax imposed by
this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply
with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the
Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such
returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such
person is liable for tax under this title.”); 26 C.F.R. § 1.6001-1.
39 See Ryan v. Comm’r, T.C. Memo 1989-297, 57 T.C.M. (CCH) 747 (1989), 1989 WL 64617.
40 S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050 (“All deductions and credits for
amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To
preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs
of goods sold is not affected by this provision of the bill.”); see Alpenglow Botanicals, 894 F.3d at 1199 (“To ensure
taxation of income rather than sales, the ‘cost of goods sold’ is a mandatory exclusion from the calculation of a
taxpayer’s gross income.”).
41 N. Cal. Small Bus. Assistants, Inc. v. Comm’r, 153 T.C. 65, 82–84 (2019) (Gustafson, J., concurring in part and
dissenting in part); see Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of “Incomes,”
33 ARIZ. ST. L.J. 1057, 1149–54 (2001); but see Alpenglow Botanicals, 894 F.3d at 1201–02 (“Alpenglow also argues
that, by refusing to allow deductions for unavoidable business expenses, Congress is permitting the IRS to tax its gross
receipts rather than its income. But, ‘it is [not] a violation of due process to impose a tax on gross receipts regardless of
the fact that expenditures exceed the receipts. . . . The mere fact of intake being less than outgo does not relieve the
taxpayer of an otherwise lawfully imposed tax.’ ” (alterations in original) (quoting Penn Mut. Indem. Co. v. Comm’r,
277 F.2d 16, 20 (3d Cir. 1960))).
42 S. REP. NO. 97-494, at 309; see Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173,
181–82 (2007); see also Alpenglow Botanicals, 894 F.3d at 1201.
43 See, e.g., Wood v. United States, 863 F.2d 417, 421 (5th Cir. 1989); Holmes Enters., Inc. v. Comm’r, 69 T.C. 114,
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the government’s interest in accurately measuring taxable income against the government’s
interest in disallowing deductions that “frustrate sharply defined national or state policies
proscribing particular types of conduct, evidenced by some governmental declaration thereof.” 44
Courts have a long history of applying the frustration of public policy doctrine to deny taxpayers
deductions for expenses attributable to unlawful activities.45 In 1969, Congress precluded courts
from applying the frustration of public policy doctrine in certain tax disputes by enacting
legislation to disallow deductions of business expenses attributable to specific types of unlawful
conduct.46 Prior to Section 280E’s enactment, Congress had amended the IRC to make fines and
penalties, illegal bribes, and kickbacks, and certain other illegal payments nondeductible
expenses.47
Congress enacted Section 280E in 1982,48 one year after the Tax Court decided Edmondson v.
Commissioner.49 In Edmondson, the court ruled that a taxpayer operating an illegal drug business
could offset sales by COGS and “ordinary and necessary” business expenses, making no mention
of the judicial frustration of public policy doctrine. 50 The court found that the taxpayer was self-
employed in the trade or business of selling amphetamines, cocaine, and marijuana.51 The court
held that the taxpayer could deduct business expenses, including rent, telephone, and automobile

116 (1977); Holt v. Comm’r, 69 T.C. 75, 80 (1977); Mack v. Comm’r, T.C. Memo 1989-490, 58 T.C.M. (CCH) 89
(1989), 1989 WL 101869.
44 Tank Truck Rentals, Inc. v. Comm’r, 356 U.S. 30, 33–34 (1958); see Comm’r v. Sullivan, 356 U.S. 27, 29 (1958).
45 Comm’r v. Tellier, 383 U.S. 687, 693–94 (1966) (“Deduction of expenses falling within the general definition of
§ 162(a) may, to be sure, be disallowed by specific legislation, since deductions ‘are a matter of grace and Congress
can, of course, disallow them as it chooses.’ . . . But where Congress has been wholly silent, it is only in extremely
limited circumstances that the Court has countenanced exceptions to th[is] general principle . . . . Only where the
allowance of a deduction would ‘frustrate sharply defined national or state policies proscribing particular types of
conduct’ have we upheld its disallowance. Further, the ‘policies frustrated must be national or state policies evidenced
by some governmental declaration of them.’ ” (emphases added) (citation omitted)); see Alpenglow Botanicals, 894
F.3d at 1206; see also S. REP. NO. 91-552, at 273–74 (1969), as reprinted in 1969 U.S.C.C.A.N. 2027, 2310–11 (“At
the present time there is no statutory provision setting forth a general ‘public policy’ basis for denying deductions
which are ‘ordinary and necessary’ business deductions. Nevertheless, a number of business expenses have been
disallowed on the ground that the allowance of these deductions would be contrary to Federal or State ‘public policy.’
This has been true, for example, in the case of fines. . . . From the standpoint of tax policy, there generally has been a
reluctance to deny business expenses on the ground that this departs from the concept of a tax imposed on actual net
business income. There still remains, however, the question as to what is an ordinary and necessary business expense.
The Supreme Court in [Tank Truck Rentals], for example, in holding that the payment of fines could not be considered
as ordinary and necessary, stated: ‘A finding of “necessity” cannot be made however, if allowance of the deduction
would frustrate sharply defined national or State policies proscribing the particular types of conduct evidenced by some
governmental declaration thereof.’ On the same grounds, it appears appropriate to deny deductions for bribes, illegal
kickbacks, and the penalty portion of antitrust treble damage payments.”).
46 Tax Reform Act of 1969, Pub. L. No. 91-172, § 902, 83 Stat. 487, 710 (1969); S. REP. NO. 91-552, at 274–75.
47 26 U.S.C. § 162(c) (“Illegal bribes, kickbacks, and other payments”), (f) (“Fines, penalties, and other amounts”), (g)
(“Treble damage payments under the antitrust laws”); see also Tellier, 383 U.S. at 693 n.10. Although Congress has
enacted several laws to preempt the frustration of public policy doctrine, including Section 280E, the courts and IRS
continue to apply the frustration of public policy doctrine when there is a gap in legislation. Hackworth v. Comm’r, 155
F. App’x 627, 630–32 (4th Cir. 2005) (per curiam); Rev. Rul. 82-74, 1982-1 CB 110; Rev. Rul. 81-24, 1981-1 CB 79;
Rev. Rul. 77-126, 1977-1 CB 47; I.R.S. Chief Couns. Adv. 201346009 (Aug. 1, 2013); see also Nacchio v. United
States, 824 F.3d 1370, 1377 (Fed. Cir. 2016).
48 Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 351, 96 Stat. 324, 640 (1982).
49 Edmondson v. Comm’r, T.C. Memo 1981-623, 42 T.C.M. (CCH) 1533 (1981), 1981 Tax Ct. Memo LEXIS 118,
superseded by statute, Tax Equity and Fiscal Responsibility Act of 1982 § 351.
50 1981 Tax Ct. Memo LEXIS 118, *4–9.
51 Id. at *3.
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expenses, because the expenses were “ordinary and necessary” expenses made in connection with
the taxpayer’s illegal drug business.52
The Senate Finance Committee’s report accompanying the bill enacting Section 280E indicates
Congress enacted the provision in direct response to Edmondson and designed the provision to
disallow “[a]ll deductions and credits for amounts paid or incurred in the illegal trafficking in
drugs.”53 The Senate Finance Committee’s report explained:
There is a sharply defined public policy against drug dealing. To allow drug dealers the
benefit of business expense deductions at the same time that the U.S. and its citizens are
losing billions of dollars per year to such persons is not compelled by the fact that such
deductions are allowed to other, legal, enterprises. Such deductions must be disallowed on
public policy grounds.54
Does Section 280E apply to marijuana businesses in states where
marijuana is legal under state law?
Section 280E applies when trafficking marijuana violates federal or state law.55 Section 280E
applies to marijuana businesses operating in compliance with state law because trafficking
marijuana continues to violate federal law.56 Section 280E also applies to marijuana businesses
engaged in state-sanctioned medical marijuana sales because marijuana is a Schedule I controlled
substance under the CSA.57

52 Id. at *9.
53 See S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050; Californians Helping to
Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173, 181–82 (2007); see also Alpenglow Botanicals, LLC v.
United States, 894 F.3d 1187, 1201 (10th Cir. 2018).
54 S. REP. NO. 97-494, at 309.
55 26 U.S.C. § 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 . . . consists of trafficking in controlled substances . . .
which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” (emphasis
added)); Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1158 (10th Cir. 2020) (“Congress’s use of ‘or’
extends the statute to situations in which federal law prohibits the conduct even if state law allows it.”), petition for
cert. filed, No. 20-645 (U.S. Nov. 6, 2020).
56 Standing Akimbo, 955 F.3d at 1158 (“So, despite legally operating under [state] law, ‘the Taxpayers are subject to
greater federal tax liability’ because of their federally unlawful activities, and any ‘remedy [for this] must come from
Congressional change to § 280E or 21 U.S.C. § 812(c) (Schedule I) rather than from the courts.”’ (citing Feinberg v.
Comm’r, 916 F.3d 1330, 1338 n.3 (10th Cir. 2019))); Alternative Health Care Advocates v. Comm’r, 151 T.C. 225,
238 (2018) (“In response to the taxpayer’s arguments related to congressional intent and public policy, the court
concluded that ‘[i]f Congress now thinks that the policy embodied in . . . [section] 280E is unwise as applied to medical
marijuana sold in conformance with state law, it can change the statute. We may not.’ ” (alterations in original) (quoting
Olive v. Comm’r, 792 F.3d 1146, 1150 (9th Cir. 2015))); Olive v. Comm’r, 139 T.C. 19, 39 (2012); see CRS Legal
Sidebar LSB10482, State Marijuana “Legalization” and Federal Drug Law: A Brief Overview for Congress, by
Joanna R. Lampe.
57 Alternative Health Care Advocates, 151 T.C. at 236 (“Marijuana is a schedule I controlled substance in the context of
section 280E even when the marijuana is medical marijuana recommended by a physician.”); Californians Helping to
Alleviate Med. Problems, 128 T.C. at 181 (“In the context of section 280E, marijuana is a schedule I controlled
substance. Such is so even when the marijuana is medical marijuana recommended by a physician as appropriate to
benefit the health of the user.” (citation omitted)); see United States v. Oakland Cannabis Buyers’ Co-op., 532 U.S. 483
(2001) (holding there is no implied medical necessity exception to the CSA).
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The federal government has not consistently enforced the CSA against state-sanctioned marijuana
businesses.58 However, any lack of enforcement of the CSA does not render Section 280E
inoperable.59 Unlike other sections of the IRC, Section 280E does not contain an exception that
makes its application contingent on the federal government’s policy on enforcing the CSA.60 The
IRS is authorized to initiate an investigation into whether a taxpayer is violating the CSA for
purposes of applying Section 280E—neither a criminal investigation nor a criminal conviction is
a prerequisite to an IRS investigation.61
Does Section 280E violate the Eighth Amendment’s Excessive Fines
Clause?
In Northern California Small Business Assistants, Inc. v. Commissioner, the Tax Court provided
an in-depth explanation of its reasoning in ruling that Section 280E does not violate the Eighth
Amendment’s Excessive Fines Clause.62 The Eighth Amendment to the Constitution provides:

58 Due to what it described as limited investigative and prosecutorial resources, the Department of Justice issued several
memoranda during the Obama Administration indicating that it would not prioritize enforcement against individuals
engaging in medical marijuana activities compliant with state law, and it would rely on United States Attorneys to
exercise discretion in pursuing federal enforcement actions against businesses in their districts engaging in state-
sanctioned medical marijuana activities. See, e.g., Memorandum from David W. Ogden, Deputy Att’y Gen., U.S. Dep’t
of Justice, on Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana to selected United
States Attorneys (Oct. 19, 2009), https://www.justice.gov/sites/default/files/opa/legacy/2009/10/19/medical-
marijuana.pdf; Memorandum from James M. Cole, Deputy Att’y Gen., U.S. Dep’t of Justice, on Guidance Regarding
the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use to United States Attorneys (June 29,
2011), https://www.justice.gov/sites/default/files/oip/legacy/2014/07/23/dag-guidance-2011-for-medical-marijuana-
use.pdf; Memorandum from James M. Cole, Deputy Att’y Gen., U.S. Dep’t of Justice, on Guidance Regarding
Marijuana Enforcement to all United States Attorneys (Aug. 29, 2013), https://www.justice.gov/iso/opa/resources/
3052013829132756857467.pdf [hereinafter Cole Memo]. On January 4, 2018, following the change in presidential
administrations, the Department of Justice rescinded prior guidance and reaffirmed the authority of the federal
government to exercise prosecutorial discretion to enforce federal marijuana offenses “in accordance with all applicable
laws, regulations, and appropriations.” Memorandum from Jefferson B. Sessions, Att’y Gen., U.S. Dep’t of Justice, on
Marijuana Enforcement to all United States Attorneys (Jan. 4, 2018), https://www.justice.gov/opa/press-
release/file/1022196/download. For information about appropriations riders limiting the Department of Justice’s ability
to prosecute state-sanctioned medical marijuana activities, see CRS Legal Sidebar LSB10482, State Marijuana
“Legalization” and Federal Drug Law: A Brief Overview for Congress, by Joanna R. Lampe.
59 High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1198 (10th Cir. 2019).
60 Id. at 1196 n.13 (“26 U.S.C. § 162(c)(2) . . . prevents deductions for bribes that are made illegal by state law ‘only if
such State law is generally enforced.’ This unique statutory provision then does not support a more generalized ‘dead
letter rule’ based on non-enforcement—particularly with respect to § 280E, which has no analogous language that
makes its application turn on whether the federal Executive Branch generally enforces the CSA.” (citations omitted)).
61 Id. at 1186–89; Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1197 (10th Cir. 2018) (“In summary, it
is within the IRS’s statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in
controlled substances. Thus, the IRS did not exceed its authority in denying Alpenglow’s business deductions under
§ 280E.”); Green Sol. Retail, Inc. v. United States, 855 F.3d 1111, 1121 (10th Cir. 2017) (“But § 280E has no
requirement that the Department of Justice conduct a criminal investigation or obtain a conviction before § 280E
applies.”).
62 153 T.C. 65, 68–72 (2019). Marijuana businesses have not succeeded in challenging Section 280E on constitutional
grounds. See, e.g., Speidell v. United States, 978 F.3d 731, 743–44 (10th Cir. 2020) (holding the IRS’s attempt to
collect and audit information about marijuana-related business practices from third parties to enforce Section 280E did
not violate any Fourth Amendment right to privacy (citing Standing Akimbo, LLC v United States, 955 F.3d 1146,
1164–65 (10th Cir. 2020), petition for cert. filed, No. 20-645 (U.S. Nov. 6, 2020))); Feinberg v. Comm’r, 916 F.3d
1330, 1333 (10th Cir. 2019) (“[W]e reject the Taxpayers’ argument that placing the burden of proof on them to
disprove their business is engaged in the trafficking of a controlled substance violates their Fifth Amendment right
against self-incrimination.”), cert. denied, 140 S. Ct. 49 (2019); High Desert Relief, 917 F.3d at 1188 (rejecting
petitioner’s Fifth Amendment challenge to Section 280E because the taxpayer was a corporation with “no Fifth
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“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual
punishments inflicted.”63 When applying the Eighth Amendment, the Supreme Court’s concerns
include “direct actions initiated by the government to inflict punishment.”64 The Court has
reviewed the history of the Eighth Amendment and determined that the drafters of the Eighth
Amendment understood the term “ ‘fine’ . . . to mean a payment to a sovereign as punishment for
some offense.”65 The Court has ruled that a fine is excessive where it is “grossly disproportional
to the gravity of [the] . . . offense[ ].”66 Whether Section 280E’s disallowance of deductions is a
denial of a tax benefit or a punishment for the purposes of the Eighth Amendment is a matter of
debate.67 In Northern California Small Business Assistants, a panel of fifteen Tax Court judges
issued differing opinions on the Eighth Amendment’s application to Section 280E.68
The corporate taxpayer in Northern California Small Business Assistants operated a medical
marijuana dispensary, which was legal under California state law.69 Applying Section 280E, the
IRS issued the taxpayer a notice of deficiency showing that the IRS disallowed the taxpayer’s
deductions.70 The taxpayer filed a claim disputing the notice, and moved for partial summary
judgment challenging the application of Section 280E.71 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.72 The panel agreed to deny the taxpayer’s motion for summary judgment, but varied in
their approach to reaching that decision.73
The majority opinion, joined by ten Tax Court judges, held that Section 280E does not violate the
Eighth Amendment because the disallowance of deductions does not constitute a “penalty” within
the Eighth Amendment.74 The opinion emphasized Congress’s unquestionable authority to tax
gross income and concluded that Congress was the proper body to address the taxpayer’s
grievances.75 Two Tax Court judges did not advance a view on whether Section 280E imposed a

Amendment privilege that it c[ould] properly invoke.”); Alpenglow Botanicals, 894 F.3d at 1198–1203 (holding
Section 280E does not violate the Eighth and Sixteenth Amendments); Patients Mut. Assistance Collective Corp. v.
Comm’r, 151 T.C. 176, 208–10 (2018) (rejecting petitioner’s argument that limiting COGS to “only the actual cost
used to purchase inventory” violates the Sixteenth Amendment”), appeal docketed, No. 19-73078 (9th Cir. Dec. 4,
2019).
63 U.S. CONST. amend. VIII.
64 Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 260 (1989).
65 Id. at 265.
66 Cooper Indus. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 434 (2001) (quoting United States v. Bajakajian, 524
U.S. 321, 334 (1998)); Bajakajian, 524 U.S. 321 (considering the amount of the fine, the particular facts of the case, the
character of the defendant, and the harm caused by the offense in determining whether an asset forfeiture imposed as
part of a criminal sentence violated the Eighth Amendment’s Excessive Fines Clause).
67 See Bryan Camp, Lesson From The Tax Court: § 280E Does Not Violate The Eighth Amendment (Oct. 28, 2019),
https://taxprof.typepad.com/taxprof_blog/2019/10/lesson-from-the-tax-court-280e-does-not-violate-eighth-
amendment.html.
68 N. Cal. Small Bus. Assistants, Inc. v. Comm’r, 153 T.C. 65 (2019).
69 Id. at 66.
70 Id.
71 Id. at 66–67.
72 Id. at 66, 68–72.
73 Id. at 67–72, 74.
74 Id. at 69–72, 74–76 (Lauber, J., concurring), 76 (Morrison, J., concurring), 77–90 (Gustafson, J., concurring in part
and dissenting in part), 90–94 (Copeland, J., concurring in part and dissenting in part).
75 Id. at 71–72, 74; see id. at 75 (Lauber, J., concurring) (adding that a tax provision imposed to discourage activity
does not make the provision “in the nature of a penalty,” even where the disfavored activity is illegal).
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fine for the purposes of the Eighth Amendment, but concurred in the denial of the taxpayer’s
motion for summary judgment because the taxpayer failed to show the fine was excessive.76
Three Tax Court judges concluded that Section 280E does impose a fine, but did not reach a
conclusion on whether the fine was excessive.77
How would legislative proposals alter taxes on marijuana
businesses?
A number of legislative proposals would make Section 280E inapplicable to marijuana businesses
by rescheduling marijuana as a Schedule III controlled substance or entirely de-scheduling
marijuana under the CSA.78 A few legislative proposals would have carved out an exception in
Section 280E for marijuana businesses operating in compliance with state and tribal laws.79
Under either approach, Section 280E would no longer prohibit marijuana businesses from taking
deductions and claiming credits.
A few legislative proposals would have gone a step further, and would have implemented
marijuana taxes and regulate marijuana.80 For example, the Marijuana Revenue and Regulation
Act would have imposed an excise tax on marijuana products produced in or imported into the
United States and an “occupational tax” on marijuana production facilities and export
warehouses.81 The Marijuana Opportunity Reinvestment and Expungement Act of 2020 would

76 Id. at 76 (Morrison, J., concurring).
77 Id. at 77–90 (Gustafson, J., concurring in part and dissenting in part); id. at 90–94 (Copeland, J., concurring in part
and dissenting in part). Judge Gustafson’s concurrence notes the court would also need to address “whether the
protections of the Eighth Amendment extend to corporate taxpayers.” Id. at 90 (Gustafson, J., concurring in part and
dissenting in part). Since the majority in Northern California Small Business Assistants held Section 280E was not a
penalty, it did not address whether the Eighth Amendment protects corporations from excessive fines. Id. at 68 n.4
(citing Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 276 n.22 (1989) (declining to address
whether the Eighth Amendment applies to corporations)).
78 See, e.g., H.R. 365, 117th Cong. § 2 (2021); H.R. 3884, 116th Cong. § 3 (as passed by House, Dec. 4, 2020); H.R.
4323, 116th Cong. § 1 (2019); H.R. 4322, 116th Cong. § 3 (2019); S. 2400, 116th Cong. § 3 (2019); S. 2227, 116th
Cong. § 2 (2019); H.R. 3884, 116th Cong. § 2 (2019); H.R. 3544, 116th Cong. § 2 (2019); H.R. 3540, 116th Cong. § 2
(2019); S. 1552, 116th Cong. § 2 (2019); H.R. 2843, 116th Cong. § 2 (2019); H.R. 1893, 116th Cong. § 202 (2019); S.
697, 116th Cong. § 202 (2019); H.R. 1588, 116th Cong. § 3 (2019); S. 597, 116th Cong. § 2 (2019); H.R. 1456, 116th
Cong. § 2 (2019); H.R. 1120, 116th Cong. § 201 (2019); H.R. 420, 116th Cong. § 201 (2019); S. 420, 116th Cong. §
201 (2019); see also CRS Legal Sidebar LSB10556, The MORE Act: House Plans Historic Vote on Federal Marijuana
Legalization, by Joanna R. Lampe.
79 See, e.g., S. 422, 116th Cong. § 2 (2019); H.R. 1119, 116th Cong. § 201 (2019); H.R. 1118, 116th Cong. § 2 (2019);
S. 421, 116th Cong. § 201 (2019). The Strengthening the Tenth Amendment Through Entrusting States Act (STATES
Act) is analogous to the legislative proposals carving out exceptions to Section 280E. S. 1028, 116th Cong. (2019);
H.R. 2093, 116th Cong. (2019). The STATES Act re-characterizes certain state-sanctioned marijuana conduct as not
“unlawful” and as conduct that does “not constitute trafficking in a controlled substance under section 401 of the
Controlled Substances Act (21 U.S.C. 841) or any other provision of law.” S. 1028, 116th Cong. § 6 (2019); H.R. 2093,
116th Cong. § 6 (2019).
80 See, e.g., H.R. 3884, 116th Cong. § 5 (as passed by House, Dec. 4, 2020); S. 2227, 116th Cong. § 4 (2019); H.R.
3884, 116th Cong. § 4 (2019); see also CRS Report R43785, Federal Proposals to Tax Marijuana: An Economic
Analysis, by Jane G. Gravelle and Sean Lowry.
81 S. 420, 116th Cong. § 101 (2019) (“Any person engaged in business as a producer or an export warehouse proprietor
shall pay a tax of $1,000 per year (referred to in this subchapter as an ‘occupational tax’) in respect of each premises at
which such business is carried on.”); H.R. 1120, 116th Cong. § 101 (2019) (identical to S. 420, 116th Cong. § 101
(2019)); see also H.R. 3884, 116th Cong. § 5 (as passed by House, Dec. 4, 2020) (imposing an occupational tax).
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have used funds raised from an excise tax on cannabis products to fund a trust fund for specified
programs.82
Several legislative proposals would have also attempted to increase marijuana businesses’ access
to banking and financial services.83 Many financial institutions are unwilling to provide state-
sanctioned marijuana businesses with common banking products and financial services due to
federal laws that impose civil and criminal liability on financial institutions handling money tied
to marijuana.84 As a result, many marijuana businesses reportedly operate exclusively in cash.85
Former Treasury Secretary Steven Mnuchin expressed that marijuana businesses’ lack of access
to financial services “creates significant problems for the IRS.”86 Then-Secretary Mnuchin also
stated: “We have to build cash rooms where we have to take in cash because many of these
entities are . . . not banked. . . . That creates significant risk in the communities [where] we’re
collecting.”87

Author Information

Milan N. Ball

Legislative Attorney

82 H.R. 3884, 116th Cong. §§ 5–6 (as passed by House, Dec. 4, 2020).
83 See, e.g., H.R. 6800, 116th Cong. § 110606 (2020) (as passed by House, May 15, 2020) (addressing marijuana, CBD
and hemp business access to banking issues); S. 1200, 116th Cong. §§ 2–4 (2019); H.R. 1595, 116th Cong. §§ 2–4
(2019); H.R. 1119, 116th Cong. § 204 (2019); S. 421, 116th Cong. § 204 (2019); see also H.R. 1595, 116th Cong.
§§ 11–12 (2019) (addressing CBD and hemp businesses access to banking issues).
84 GROWTH OF THE MARIJUANA INDUSTRY 4–6; see CRS In Focus IF11373, Financial Services for Marijuana
Businesses, by David H. Carpenter.
85 GROWTH OF THE MARIJUANA INDUSTRY 5; see also Memorandum from Maria T. Vullo, N.Y. State Superintendent of
Fin. Servs., to CEOs or Equivalents of N.Y. State-Chartered Banks & Credit Unions, re: Guidance on Provision of
Financial Services to Medical Marijuana & Industrial Hemp-Related Businesses in New York State, N.Y. DEP’T OF FIN.
SERVS. 2 (July 3, 2018), https://www.dfs.ny.gov/system/files/documents/2020/03/il180703.pdf (“Because marijuana
currently is still listed on Schedule I under the Federal Controlled Substances Act, medical marijuana and industrial
hemp-related businesses operating in accordance with New York State laws and regulations continue to have difficulty
establishing banking relationships at regulated financial institutions. The ability to establish a banking relationship is an
urgent issue today for the legal cannabis industry. So long as it remains difficult to open and maintain bank accounts,
the industry will largely rely on cash to conduct business and operate.”).
86 Dep’t of the Treas. Budget Request for FY 2021 Hearing Before the Subcomm. on Fin. Servs. & Gen. Gov’t of H.
Comm. on Appropriations, 116th Cong. (2020).
87 Id.
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Congressional Research Service
R46709 · VERSION 1 · NEW
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