Revenue Is A Factor in Determining Whether A Separate Trade or Business Exists For Purposes of 280E
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Cannabis businesses that buy and sell marijuana are largely denied deductions for ordinary and necessary expenses by operation of IRC 280E. Briefly, IRC 280E denies deductions for any amount paid in a trade or business if the trade or business consists of trafficking in controlled substances prohibited by Federal law.
Cannabis businesses that buy and sell marijuana have had little success in deducting expenses in light of IRC 280E. Arguments that have sought to limit 280E to businesses that solely consist of trafficking in controlled substances have been rejected in Harborside, as have arguments in Canna Care that advance why marijuana should no longer be considered a Schedule 1 controlled substance. However, the court in CHAMP gave a narrow path to deducting expenses in its holding that 280E did not preclude the marijuana dispensary from deducting expenses attributable to its caregiving business that did not traffic in marijuana simply because the dispensary was also involved in the trafficking of marijuana.
Tax Courts Are Skeptical Of The Separate Business Argument
While CHAMP gave a path to deducting expenses that are attributable to a separate trade or business not involved in the trafficking of marijuana, dispensaries have had difficulty establishing a separate trade or business before tax courts. Time after time, tax courts have found marijuana dispensaries engaged in a unitary business of selling marijuana whose non-marijuana sales complement the sale of marijuana. At base, the decisions have found the alleged separate business as sharing a close and inseparable organization and economic relationship with, and incident to, the primary business of selling marijuana.
280E Separate Businesses Have Revenue
One factor that has distinguished the taxpayer in CHAMP from the unsuccessful taxpayers in other cases is revenue attributable to marijuana sales vs non-marijuana sales. In CHAMP, the taxpayer operated as a Nonprofit Public Benefit Corporation on approximately a break-even basis. Furthermore, the taxpayer charged members a fixed price that included extensive caregiving services and a set amount of marijuana each month; not an unlimited supply of marijuana.
Nominal Revenue Doesn’t Show A Profit Motive
In contrast to CHAMP, marijuana dispensaries in Harborside, Alterman, and Olive have been unsuccessful in convincing the court that they were engaged in separate businesses from the sale of marijuana, due in part to the fact that those dispensaries derived a majority of their revenue from the sale of marijuana for profit. For instance, in Harborside the court noted that the marijuana dispensary derived only .5% of its revenue from the sale of non-marijuana merchandise; a factor weighing against a finding that such sales constituted a separate business as opposed to sales that merely complemented the unitary business of selling marijuana. Likewise, the taxpayer dispensary in Alterman derived only 1.4% of its revenue from non-marijuana merchandise for one tax year and only 3.6% from non-marijuana merchandise in the succeeding year. Similarly, the court in Olive derived all of its revenue from the sale of marijuana and only provided additional services, food, and beverages for free.
Non-Marijuana Business Revenue Needs To Show A Profit Motive
In summary, revenue is a factor in a tax court’s analysis of whether a marijuana dispensary is engaged in two separate trades and business; that of selling marijuana and the other which is entitled to deductions for ordinary and necessary expenses. While the facts in CHAMP were numerous and persuasive, other marijuana dispensaries may have been more successful had they derived greater income from non-marijuana sales. As the tax court in Olive noted, “a taxpayer, to be engaged in a trade or business for purposes of section 162, must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit.” When revenue from an allegedly separate business is negligible or nonexistent compared to revenue generated from the taxpayer’s sale of marijuana, courts are reluctant to find the existence of a separate trade or business from that of selling marijuana.