TAX CHALLENGES LOOM FOR NEW JERSEY’S CANNABIS INDUSTRY By MELISSA A. DARDANI, CPA
LEADER OF THE NJCPA CANNABIS INTEREST GROUP
A 2019 U.S. Tax Court ruling involving Internal Revenue Code §280E and a California cannabis business was not a win for taxpayers, but Judge David Gustafson’s dissent, along with other arguments, may lay the groundwork for future challenges against the law.
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SPRING 2021 | NEW JERSEY CPA
Due to the classification of cannabis under the Controlled Substances Act (CSA), medicinal and commercial cannabis businesses are considered illicit enterprises under federal law. This introduces a range of business issues for industry operators, among the costliest being the imposition of Internal Revenue Code (IRC) Section 280E, which bars cannabis businesses from deducting business expenses in computing taxable income. IRC §280E spans a mere single paragraph in a concise and seemingly straightforward manner. Yet the application of this law has been complicated by arguments against it, some of which challenge the technical and linguistic interpretations of the IRC while others deem the law to be unconstitutional. SIXTEENTH AMENDMENT — RIGHT TO TAX The Sixteenth Amendment to the U.S. Constitution grants Congress the unquestionable right to tax income from whatever source derived, which includes income earned illegally. In 1981, the owner of an illicit enterprise was subject to a jeopardy assessment and resulting tax due. In computing his taxable income as any taxpayer would, he took account of deductions for ordinary and necessary business expenses such as rent, mileage and travel, among others. In realizing there was nothing to prevent the taxpayer from claiming these deductions and fearing a lack of deterrent was encouraging illegal activity, Congress enacted §280E as part of the Tax Equity and Fiscal Responsibility Act of 1982. It is worth noting that “gross income” as defined by the Code of Federal
Regulations (CFR) means total sales less the cost of goods sold. This definition has U.S. Supreme Court case law precedent supporting its application and has been held as a taxpayer’s constitutional right as it applies to cannabis businesses (see Eisner v. Macomber and Alpenglow Botanicals, LLC v. United States). It has been held that deductions from gross income above and
