Marijuana dispensaries face an unfortunate tax hurdle stemming from IRC 280E. Essentially, that section denies marijuana dispensaries and any cannabis business that buys and sells marijuana the ability to deduct ordinary and necessary business expenses. However, the court in CHAMP allowed that taxpayer dispensary to deduct expenses that could be allocated to its separate caregiving business. Of course, the court first concluded that the marijuana dispensary was engaged in two separate businesses; one that provided extensive caregiving services and another that trafficked in marijuana.
Many marijuana dispensaries have argued that they are engaged in two separate businesses like the taxpayer in CHAMP. However, few have been successful in that argument. Unlike the dispensary in CHAMP, marijuana dispensaries often provide nominal complimentary services, complimentary food, have employees engaged in both the sale of marijuana and the other alleged businesses, and even name their business in a fashion that promotes the sale of marijuana. (For example, the taxpayer in Olive was named ‘The Vapor Room Herbal Center.”)
The Test For A Separate Trade or Business
Understanding why CHAMP was successful in establishing two separate businesses while other marijuana dispensaries failed begins with the test employed by the courts for identifying a separate trade or business. First, for a marijuana dispensary to be engaged in two separate trades or businesses for purposes of deducting business expenses, the marijuana dispensary must be involved in the activity with continuity and regularity and the marijuana dispensary’s primary purpose for engaging in the activity must be for income or profit. That rule alone is the bar for many marijuana dispensaries that provide nominal complimentary services, food, and drinks. In brief, providing free services and items does not appear to be an activity engaged for profit; accordingly, those free services alone do not establish a separate business. Likewise, providing those services and items for nominal revenue compared to the primary revenue derived from the sale of marijuana can make that ‘separate’ business appear as an activity incident to the business of selling marijuana.
Second, tax courts look to the degree of economic interrelationship between the separate business from the business of selling marijuana. Following CHAMP, tax courts have found marijuana dispensaries selling pipes, rolling papers, branded clothing, and marijuana paraphernalia as merely selling products complimentary to the unitary business of selling marijuana and not engaged in a separate trade or business. In contrast, the medical marijuana dispensary in CHAMP provided extensive caregiving services that stood alone from the monthly dispensing of a fixed amount of marijuana, all of which was covered by a single membership fee.
Briefly, to understand why CHAMP was successful in light of the aforementioned legal analysis performed by courts to determine whether a marijuana dispensary is engaged in two separate trades or businesses, it’s worthwhile highlighting the extent of CHAMP’s caregiving services. In brief, CHAMP’s extensive caregiving services consisted of weekly support groups for members (one of which was an AIDS support group & 47% of CHAMP members suffered from AIDS), daily lunches for low-income members, hygiene supplies, one-on-one counseling in several areas, social events, field trips, and computer access. Overall, the extensive caregiving services were not focused on marijuana; rather, the dispensing of marijuana was only a facet of the services provided to members. In contrast, subsequent marijuana dispensaries that have unsuccessfully argued that they were engaged in two separate trades or businesses appear to be predominantly engaged in the sale of marijuana for profit with only nominal non-marijuana sales or complimentary food & drinks.
- How Much Does A Cannabis Tax Lawyer Cost? - September 8, 2021
- The Difference Between CHAMP Members and Marijuana Dispensary Clients - May 17, 2021
- Why Was The Taxpayer in CHAMP Succesful? - April 6, 2021
Jin Kim is a tax attorney in California representing cannabis businesses with federal and state tax debt. Her cannabis practice focuses on helping businesses in the marijuana industry navigate federal and state tax challenges with the IRS, CDTFA, and state tax agencies.
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