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‘Giant drug trafficker’ wants to change tax law that affects legal pot companies

Brennan Linsley

The US Tax Court once called Harborside Inc. “a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim.” The cannabis company is now arguing that view is unconstitutional in a case that could have big implications for the industry.

It sounds arcane, but Section 280E of the Internal Revenue Code has long been a thorn in the side of legal pot companies. The law, introduced in the 1980s when a drug dealer tried to deduct business expenses, prevents any company that sells Schedule 1 or 2 controlled substances from claiming ordinary tax deductions available to other businesses. As a result, state-legal cannabis companies can end up paying tax rates upwards of 70 percent.

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Harborside challenged that and lost. It’s now appealing in a move lawyer James Mann hopes will set a precedent for cannabis companies across the United States.

“280E is this unwelcome intrusion of moral judgment in the tax law and it doesn’t really belong there,” said Mann, a former Greenspoon Marder LLP partner who’s representing Harborside in the appeal.

Mann’s appeal rests on two arguments: the first is that 280E violates the 16th Amendment by taxing more than just income, and the second is that Harborside should be allowed to deduct the cost of goods sold like wages regardless of 280E, because 280E only applies to bottom-line expenses.

“They’re trying to force expenses from above the line, which is cost of goods sold, to below the line, which is expenses and deductions, and I think that’s opportunistic rather than out of a desire for fair and just administration of the tax law,” Mann said.

In an amicus brief supporting Harborside, the National Cannabis Industry Association said 280E could help the illegal market at the expense of the legal one. “The tax burden lawful marijuana operators suffer through the IRS’ imposition of 280E is so severe, that many commentators identify punitive taxation under 280E as the single biggest threat to the industry,” it said.

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Mann expects oral arguments in the case to begin in late 2020 or early 2021.