Cannabis companies have long loathed 280E tax code provision, but the on-again, off-again marijuana rescheduling process has led to creative strategies to deal with it.

One such approach – championed by accountants such as Justin Botillier of Oregon-based CalyxCPA, who is giving an upcoming webinar on the topic – relies on a policy conclusion from the U.S. Health and Human Services in 2023 that marijuana never should have been classified as a Schedule I narcotic.

Exemption claims

The HHS statement was enough for Botillier – and many of his cannabis tax colleagues, he said – to offer financially distressed marijuana business clients an option: File your federal returns and claim exemption to 280E based on the position that HHS has taken, which is that cannabis simply doesn’t fit the definition of a Schedule I drug and therefore 280E doesn’t apply.

Botillier’s firm has filed “hundreds” of tax returns for cannabis companies using that argument.

The catch, he noted, is that it’ll be a few years yet before the three-year statute of limitations on federal tax returns runs out, and so it’s still up in the air as to how hard the Internal Revenue Service may push back on the claims.

What is undeniable is there’s been a wave of such returns filed starting about a year ago, when Trulieve Cannabis Corp. revealed it had obtained $113 million in refunds from the IRS by claiming exemption to 280E. That has led many others to follow suit.

The IRS could reject or audit such returns, Botillier clarified. While he’s had one company receive a denial thus far, no wave of audits has materialized.

And he argued that there’s good reason to believe that the worst-case scenario for companies in such a position is they’ll be forced to pay those taxes a few years down the road without serious penalties, as long as they can prove with solid books and records that they’ve made a good-faith effort to pay their federal tax burden.

“That’s what all this is, is a good faith argument. It’s not tax evasion. We’re not breaking the law. It’s just our interpretation is different than what the IRS’s interpretation is,” Botillier said.

Intrastate commerce

But tax attorney James Mann, who represents a number of high-profile multistate operators across the U.S., said Botillier’s position is “flatly untrue.”

Mann pointed out that the HHS position has not been formally adopted by the DEA or the Department of Justice, since the rescheduling process has been put on hold. Mann noted that, according to the DOJ’s Office of Legal Counsel, the HHS conclusions are “not binding” on the DEA.

“It is not accurate to say that there is a definitive executive branch finding about cannabis rescheduling, only an HHS study,” Mann asserted.

By contrast, Mann said he’s been using a different legal tactic based on constitutional arguments that 280E doesn’t apply to intrastate commerce due to the 16th Amendment and the Constitution’s Dormant Commerce Clause.

“Some of them received significant IRS refunds and have better cash flow going forward,” Mann said.

Mann expressed skepticism about Botillier’s rationale, saying “anyone who claims there’s a magic bullet” should face skepticism from taxpayers.

“The concern is that if large numbers of taxpayers file reckless and ill-advised returns using frivolous grounds to challenge 280E, at some point it looks like a taxpayer revolt, which never ends well for the taxpayers,” Mann said. He warned that there could be a backlash from the IRS against cannabis companies that rely on the strategy Botillier is espousing.

Relieving the burden

Botillier defended his stance, and said he’s worked in conjunction with Greenspoon Marder partner Nick Richards, another noted U.S. cannabis industry tax expert.

“It’s not like I’m at this alone,” Botillier said, adding the entire area of anti-280E strategies is new and very much evolving.

“If my clients want to move forward without reducing deductions for 280E based on the arguments that I’m presenting, they should have that opportunity. They shouldn’t be proactively paying the IRS when it’s debatable … And it’s hugely debatable right now,” he said.

Regardless of the underlying argument, both Botillier and Mann agreed that an increasing number of their respective client bases are getting desperate to escape the financial hardships imposed by 280E.

“The majority of cannabis taxpayers can’t pay the tax under 280E. So either they close down or they take a position that 280E doesn’t apply to them. That is a taxpayer revolt. It’s a self-help solution, but there are different ways to do it, and some are better advised than others,” Mann said.

Las Vegas-based Planet 13 Holdings (CSE: PLTH) (OTCQX: PLNH) slowed its roll to accommodate industry setbacks, including the November loss of recreational marijuana legalization in Florida and “ongoing industry-wide price compression,” company leadership said during its quarterly earnings call last week.

That means less rapid expansion and probably not as many new store openings in 2025 as originally hoped, co-CEO Bob Groesbeck said during the call, noting that the coming year’s focus will be on “increasing productivity of our footprint, particularly here in Florida” following the acquisition of VidaCann last year.

“2024 presented industry-wide challenges, including competition from the illicit market, the rise of intoxicating hemp products and significant price compression putting pressure on margins,” Groesbeck said.

As a result, Planet 13’s strategy has shifted, particularly because the company lost almost $50 million last year and now won’t be seeing a revenue boom in Florida, given that the state has remained medical-only following the November vote.

“While we’ve had a few more dispensary openings planned for this year, including one this week, we are intentionally slowing the pace of new openings for the balance of the year,” Groesbeck said. He estimated that Planet 13 will still likely open another four or five dispensaries in Florida this year, bringing its retail footprint to 38 or 39 cannabis stores nationwide from its current number of 34 shops.

“Right now, our focus has to be Florida,” Groesbeck said. “We’re disappointed with the vote in November, but we still have close to 1 million cardholders here in Florida. And it’s a challenging market right now. And I think it requires our complete focus to really build these stores up and drive revenue and of course, get to the margins that we need.”

The company has also been able to bolster its balance sheet in recent months, CFO Dennis Logan noted, in part by recouping $10.5 million from cannabis investment firm Casa Verde and the Orange County Sheriff’s office in connection with a lawsuit.

Planet 13 also obtained $19.3 million in tax refunds from the Internal Revenue Service by filing amended tax returns that claim exemption to 280E, a strategy that has been employed by several multistate operators over the past year but which still rests on the possible outcome of either federal marijuana rescheduling – which is now very much in doubt – or the fate of one or more federal lawsuits.

But that hasn’t stopped Planet 13 – like other MSOs – from filing the amended returns going all the way back to 2020, in an attempt to claw back as much in federal taxes as they can.

“Since September of 2023, we have taken a position that 280E does not apply, and we have been making estimated tax payments as such,” Logan said. “There are several pending income tax cases ahead of us, and we anticipate that we will have a better understanding of the potential outcome and the position we have taken in the near future. The uncertain tax balances as of Dec. 31, 2024, stood at $19.3 million and is included as a separate line item and long-term liabilities on our balance sheet.”

Amid fresh uncertainty over federal marijuana rescheduling, cannabis businesses of all sizes face questions around what the best tax strategy may be for the upcoming filing season, especially as they try to maximize savings under the harsh burdens of section 280E.

But there could be good news for small cannabis companies. Enter federal tax code called 471(c).

That relatively new federal tax provision has grown in popularity over the past few years in the cannabis accounting world, specifically with cannabis operators with annual gross receipts of $29 million or less, Greenspoon Marder partner Nick Richards told Green Market Report.

Richards, a former IRS attorney turned cannabis industry lawyer, said the savings from employing the 471(c) strategy is a potential “life-saver” for small cannabis companies. He’s seen it reduce 280E tax burdens by up to 50% or more.

But, he emphasized, it still involves a lot of uncertainty and risks a potential audit.

Richards believes the 471(c) strategy is already in use broadly across much of the U.S. marijuana industry, and word on the street is that the IRS hasn’t been challenging such tax positions with audits.

And those savings could be theoretically stretched even further than they have already by the industry, depending on how much exposure a given small company is willing to risk.

“There’s a lot of cannabis companies using 471(c),” Richards said. The provision governs what exactly is allowed to be classified as “cost of goods sold” by cannabis companies, or COGS, a category that is one of few federal deductions allowed for the marijuana industry under 280E.

“It’s a very simple code section. So if that would allow cannabis companies to put all of their costs into ‘cost of goods sold,’ they could completely eliminate 280E,” Richards said.

In other words, 471(c) allows for cannabis companies to “account for inventory according to their applicable financial statements or their underlying books and records,” which can then be characterized as the “cost of goods sold” and deducted as a normal business expense, according to CPA Calvin Shannon.

The catch is that if a small cannabis company takes too extreme of a position with 471(c), it could invite an unwanted and potentially expensive audit.

For that reason, most businesses using the 471(c) position to offset 280E haven’t been very aggressive or attempted a 100% offset of the 280E burden, at least as far as Richards is aware. That in turn has meant no audit results to challenge in U.S. Tax Court, which means there isn’t real legal precedent for the industry to rely upon.

That also means it’s impossible to know where the IRS may draw a line in the sand regarding cannabis 471(c) tax deductions.

“The IRS doesn’t seem to be interested in it. CPAs are basically saying, ‘Yeah, our 471(c) clients aren’t getting audited,’” Richards said.

“If it can be taken to its ultimate extreme, then 471(c) can do away with the complete disallowance of costs under 280E. It’s hard to know how far you can go with it,”  Richards said. “If we take 471(c) at face value, what it says, it doesn’t provide a limit to what you can put into cost of goods sold, so long as it matches your books and records. … So if you’re a $25 million company, your gross is $25 million, your 280E burden is probably $5 million a year at least. So that’s huge. That’s a $5 million change.”

The cannabis industry last year probably got yet another legal arrow in its quiver with which to defend deductions claimed under 471(c), Richards said, with the Supreme Court’s decision in Loper Bright v. Raimondo, which overturned the longstanding Chevron policy.

That decision, Richards said, could have a real-world impact if or when the IRS takes a more hardline approach to cannabis deductions claimed under 471(c), because it removes power from federal agencies like the IRS.

But the code itself – as far as 471(c)’s implications for 280E deductions – is “clear as day,” Richards argued, and does not limit COGS. That may differ from the IRS’s regulations, however, which is where the Loper decision could come into play.

“It is still unproven. It could be wrong, but if your company is struggling, do you care? The alternative is going out of business,” Richards said.