Can Your Cannabis Business Deduct Non-Marijuana Sales Like Merchandise, Books, and Pipes?

Following the CHAMP court’s reasoning and an analogy in Olive that illustrates how a free service isn’t a separate trade or business, but one which charges may be, you would think that a marijuana dispensary’s sale of products that doesn’t contain marijuana would be a separate trade or business with deductible expenses.  After all, that sales counter for pipes, clothing, and lighters has its own floor space, register, and generates revenue.  Unfortunately, despite the CHAMP holding, courts have frequently viewed a marijuana dispensary’s ‘separate’ trade or business as part of a single business of trafficking marijuana with nondeductible expenses due to IRC 280E.

CHAMP Holding

In CHAMP the court found that the taxpayer was involved in two distinct trades or businesses for purposes of 280E.  One business was the provision of medical marijuana whose expenses were nondeductible under IRC 280E.  The other business involved the provision of caregiving services, and its portion of expenses attributable to this separate business were deductible.  In the words of the court, “we hold that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner is also involved in the trafficking in a controlled substance.”

Courts Have Been Skeptical of the Separate Business Argument

Following CHAMP, other marijuana dispensaries have argued that they are engaged in separate trades and businesses such as providing ‘caregiving’ services, selling products that don’t contain marijuana, or brand development.  That argument has been met with skepticism by tax courts who often view the ‘separate’ business as sharing a ‘close and inseparable organizational and economic relationship’ with marijuana sales, with such activities being incident to the sole business of selling marijuana.  

Alterman

For instance, the marijuana dispensary in Alterman sold non-marijuana items such as pipes and other paraphernalia, and accordingly argued that the dispensary had a separate business of selling non-marijuana merchandise.  In finding that the dispensary had only a single business of selling marijuana, the court noted that the dispensary derived almost all of its revenue from marijuana sales, and the types of paraphernalia sold complemented the dispensary’s efforts to sell marijuana. 

Harborside

Similarly, the taxpayer in Harborside argued that it’s dispensary had a separate business of selling products that do not contain marijuana such as clothing, paraphernalia, and books about marijuana.  In finding that the dispensary had only a single business of selling marijuana, the court noted that non-marijuana sales accounted for only .5% (point-five-percent) of the dispensary’s total revenue.  Furthermore, the dispensary’s employees spent only 5-10% of their time selling non-marijuana items, the nonmarijuana items occupied only 25% of the floor space, and only clients who passed security to buy marijuana had access to nonmarijuana items.  

As is evident, courts are skeptical of the argument that a marijuana dispensary is engaged in two separate trades or businesses.  That argument is less likely to be successful when the two businesses share employees, floor space, management, books, and a business entity.  Moreover, when revenue is predominantly generated from the sale of marijuana, courts seem to view the alleged separate business as sharing a close and inseparable organization and economic relationship with the primary business of selling marijuana.