Troubling Taxation

Colorado Alternative Health Care in Palisade is taking the United States’ Internal Revenue Service (IRS) to court under a claim that the business’ income was taxed twice. The troublesome tax issue stems from Section 280E of Internal Revenue Code, which does not allow cannabis businesses to claim certain credits and deductions on income earned from selling cannabis. The clause originally was intended to prevent drug dealers and those in the black market from claiming income deductions on illegal drug sales. Since earning income from cannabis is completely legal on the state level in Colorado, many feel that Section 280E is now unfair.

“What is happening here is that the federal government is actually providing a subsidy to the black market purveyors in Colorado so they are able to keep their cost of cannabis lower than those who are in the regulated industry and face this increased tax burden.”

“What is happening here is that the federal government is actually providing a subsidy to the black market purveyors in Colorado so they are able to keep their cost of cannabis lower than those who are in the regulated industry and face this increased tax burden,” Rachel Gillette of Greenspoon Marder, the lawyer handling this case, told CULTURE. “It’s unfortunate that the federal government during all this is going through a policy of backdoor enforcement and punishing these businesses via tax policies. They are also really serving to support the black market, because it incentivizes people to stay there and sell illegally.”

In making her case, Gillette pointed out that the company is officially registered as an S Corp., meaning that income and tax liability should flow through the shareholders, which in this case is the owners of the business, Jesse and Desa Loughman. She also stated that they properly listed their wage income the way the IRS requires. However, the IRS still decided to disallow a deduction based on the fact that they considered the income “trafficking,” which caused their income to be taxed twice, once as wages and secondly as S Corp. earnings.

Gillette believes that if she is able to help the Loughmans with their case, it could have wider implications for the industry as a whole. “If we win, we fix a problem that is a result of Section 280E, but it could have real world results in saving businesses money in that the IRS would now allow cannabis businesses to report their business expenses,” she explained. “It could have the effect of saving cannabis businesses some tax dollars.”

While this would be a positive step forward, she still admits that there is much more to be done before cannabis is taxed and treated fairly. “However, it really is a toe in the door,” she added. “We’ve got so much more work to do pertaining to this issue, and the real solution is to have congress take congressional action and change things so that Section 280E is no longer applicable in legal states.”