Should Your Cannabis Business Share Employees With Your Non-Marijuana Business?
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Marijuana dispensaries face tax challenges unique to the cannabis industry. In addition to payroll tax obstacles and state excise tax payments, all marijuana dispensaries are faced with the harsh effects of IRC 280E. In brief, while many businesses are entitled to deduct business expenses, IRC 280E prevents any trade or business which trafficks in a controlled substance from deducting business expenses. The practical effect of 280E is to greatly increase the effective tax rate of marijuana dispensaries, to the point where tax liability in some published court decisions ranges in the millions of dollars. Unsurprisingly, some marijuana dispensaries following the CHAMP decision have attempted to deduct some expenses under the premise they are engaged in two trades or business: one that trafficks in marijuana with non-deductible expenses and another that does not traffick in marijuana with deductible expenses.
Does The Non-Marijuana Business Have Its Own Employees?
While the taxpayer in CHAMP was successful in that argument, few other marijuana dispensaries have been. One point of distinction subsequent decisions have highlighted is whether employees are specifically assigned to the separate business or primarily work in the medical marijuana business and dedicate only a percentage of their time to the ‘separate’ business.
In CHAMP, 17 of the 24 employees were dedicated to the provision of caregiving services in addition to the director who was not directly involved in the provision of marijuana. In turn, 7 of the 24 employees were involved in the provision of marijuana. Due to the designation of specific employees and the director to caregiving roles, the court was able to allocate 18/25 of the taxpayer’s expenses to deductible salaries, wages, payroll taxes, employee benefits, employee development training, meals and entertainment, parking, and tools.
In contrast to CHAMP, the taxpayer in Harborside did not have specific employees dedicated to the sale of non-marijuana merchandise. In that case, the marijuana dispensary’s employees spent 80-90% of their time purchasing, processing, and selling marijuana products, and those same employees spent only 5-10% of their time selling non-marijuana merchandise. (These are the percentages identified in the opinion; the court did not identify the tasks to which the remaining percentage of the employee’s time was allocated).
Separate Employees Provide A Basis For Allocating Deductible Expenses
Clearly, the designation of specific employees to the separate business of caregiving services helped the taxpayer in CHAMP provide a basis for the allocation of deductible expenses. Where marijuana dispensaries have the same employees who primarily dispense marijuana with a small percentage of time spent on the sale of non-marijjuana products, courts have been reluctant to view the non-marijuana sales as a separate business apart from one that merely compliments the sole business of selling marijuana.