Can Your Marijuana Dispensary Deduct Complimentary Food & Snacks?

Many Marijuana dispensaries provide complimentary food and refreshments.  After all, free snacks and drinks can encourage members to spend additional time in the dispensary, purchase additional products, and otherwise support sales.  However, while other businesses can easily deduct complimentary food and snacks, some marijuana dispensaries wonder whether they can in light of IRC 280E.  

Separate Trade or Business?

Some marijuana dispensaries have argued that their provision of complimentary food and drinks is part of a separate trade or business.  After CHAMP, that arguable second business often takes the form of ‘caregiving’ services, and the argument goes that the provision of complimentary food and beverages is part of the separate non-trafficking business of caregiving services whose deductions are not prohibited by 280E.  Unfortunately, the tax courts have been skeptical of these arguments, often distinguishing marijuana dispensaries with free food and drinks for clients from the CHAMP entity that had extensive caregiving services.  At base, when the provision of free food and beverages compliments the primary revenue of marijuana sales, courts have often concluded that the dispensary is engaged in a single trade or business of trafficking in a controlled substance and that the free food and drinks are an activity incident to the sole business of buying and selling marijuana.  Accordingly, deductions for complimentary food and drinks are often denied pursuant IRC 280E.

Olive v. Commissioner Bookstore Analogy

To illustrate why a marijuana dispensary with complimentary food and services is often engaged in a single business of trafficking in a controlled substance, the court in Olive v. Commissioner gave the following analogy:

Bookstore A sells books. It also provides some complimentary amenities: Patrons can sit in comfortable seating areas while considering whether to buy a book; they can drink coffee or tea and eat cookies, all of which the bookstore offers at no charge… The ‘trade or business’ of Bookstore A consists of selling books.  Its many amenities do not alter that conclusion; presumably, the owner hopes to attract buyers of books by creating an alluring atmosphere.  By Contrast, Bookstore B sells books but also sells coffee and pastries, which customers can consume in a cafe-like seating area.  Bookstore B has two ‘trades or businesses,’ one of which ‘consists of’ selling books and the other of which ‘consists of’ selling food and beverages.

Olive v. Commissioner, Ninth Circuit Court of Appeals

So, if my marijuana dispensary sells food and drinks do I have a separate trade or business that qualifies for deductions?

The Bookstore analogy in Olive was utilized by the marijuana dispensary in Harborside to argue that their selling of branded clothing, hemp bags, books about marijuana, and marijuana paraphernalia was analogous to Bookstore B, and therefore a separate trade or business; unfortunately, the court disagreed.  According to the Harborside decision, the point of the analogy is to show that a free service that attracts customers is not a separate trade or business; the analogy doesn’t mean that selling two things automatically means that a marijuana dispensary has two separate trades or businesses.  In fitting with the analogy, the court considered Harborside’s non-marijuana sales analogous to a Bookstore B that derived .5% of its revenue from selling stationery, bookmarks, and T-shirts with pictures of books on them, using the same employees, sales floor, management, ledgers, and business entity.  Accordingly, even charging for what would otherwise be complementary foods and drinks won’t automatically create a separate trade or business with deductible expenses.