The Internal Revenue Service continues to be a thorn in the side of state-legal marijuana businesses, even as their hemp industry cousins largely dodge the taxman’s scrutiny, creating an increasingly lopsided playing field.

“Hemp is not subject to 280E, or is at least reasonably interpreted as not being subject to 280E, even if you’re selling psychoactive TCHA flower or whatever the product may be,” said Rachel Gillette, partner and head of Holland & Hart’s cannabis and psychedelics industry group.

The 1980s-era tax code provision dubbed 208E was originally aimed at illegal drug dealers and prevents businesses trafficking in federally controlled substances from taking standard business deductions. For state-licensed cannabis companies, that means substantially higher effective tax rates than mainstream businesses.

“280E is still a really huge disadvantage to anyone trying to survive,” Gillette noted. “It’s certainly very unfair the way it’s being applied.”

The disparity has grown more stark as the hemp industry has reportedly outpaced regulated marijuana in size, according to Whitney Economics. Hemp-derived products with intoxicating THC levels are freely sold online, while licensed cannabis businesses face mounting compliance costs and regulatory scrutiny.

“(If) you go online to some of these websites that are selling like THCA flower, there’s not a lot of clarity of where it’s coming from,” Gillette said. “We know that there’s tests being posted, but they’re not hiding the fact that you add heat and it’s psychoactive.”

Despite the increased scrutiny and recent IRS signals, the potential seizure of cannabis inventory to satisfy tax debts post-rescheduling don’t seem feasible, Gillette said.

“I don’t think it’s realistic that they’re going to be going after your marijuana crops and selling them anytime soon,” she noted. “Bear in mind, Schedule III does not create a legal federal marketplace for these licensed state legal cannabis businesses.”

Added costs

Beyond taxes, many operators also remain stuck in a cash-heavy business model due to limited banking access.

“If there’s only one bank in the state that banks marijuana companies and your business is 300 miles from that, you may not be able to get an account,” Gillette said.

The cash-intensive nature of the business creates additional compliance headaches. Cannabis businesses must file IRS Form 8300 for cash payments of more than $10,000, for example. These extra hurdles can be hard to manage for many cannabis operators, according to Gillette.

In addition, the IRS’ current system for handling cash tax payments is largely dysfunctional and often fails to to meet businesses’ needs, she said.

“It doesn’t work because no matter what, either there’s not a location that’s nearby to make the cash payment, or they schedule you out a month from now, but you’re trying to pay your biweekly employment tax payments,” Gillette explained.

That disconnect extends to regulatory understanding of the industry’s banking challenges. “I don’t know how many IRS revenue officers I’ve talked to … that are just like, ‘Oh, it’s so easy for a marijuana business to get banking,’” she said.

Even basic accounting guidance remains elusive.

“You could ask 10 accountants whether an expense is allowable in COGS (cost of goods sold) under section 471, and you’ll get 10 different answers,” she explained.

While the American Institute of CPAs pushed for clearer transition guidelines around potential rescheduling, Gillette suggested that some IRS officials do actually understand the burden on compliant businesses.

“I think there’s a lot of people in the IRS that understand that 280E is kind of unfair,” she said. But, “they’ve got a job to do, and I’ve got a job to do.”

Gillette believes the AICPA’s recent recommendations for 280E transition rules, such as only applying it for part of the year if descheduling occurs midyear, are a step in the right direction.

“The industry has wanted guidance for a very long time, and the IRS has failed to give it,” Gillette said. “There’s a lot of things that, you know, I think the industry and the IRS could help each other with.”

The Internal Revenue Service faces mounting pressure to clarify cannabis tax rules, as a key Supreme Court decision threatens to upend the agency’s interpretative authority and rescheduling looms large over the industry.

The American Institute of CPAs in a letter this week urged the U.S. Treasury Department and the IRS to provide advance guidance for the industry’s transition away from 280E restrictions, including a decision on retroactive relief for the full tax year when rescheduling occurs.

“Since the beginning of the decriminalization and legalization of marijuana across a growing number of states, cannabis businesses and their CPAs have struggled to walk the tightrope of an industry that is locally legal, but federally illegal,” said Melanie Lauridsen, AICPA’s vice president of tax policy and advocacy.

The push comes as legal experts suggest the Supreme Court’s recent Chevron ruling could fundamentally alter how cannabis tax rules are interpreted. Jennifer Benda, a cannabis tax attorney at Holland & Hart, said the decision means courts no longer have to defer to IRS interpretations of the provision blocking marijuana businesses from taking standard deductions.

“Without Chevron deference, I would expect a court to independently determine whether or not this statement is correct,” Benda told Green Market Report, referring to a recent IRS notice maintaining 280E restrictions until rescheduling is complete.

While new IRS guidance may not be subject to such deference under the ruling, “assuming that guidance is favorable because it removes uncertainty, the taxpayers impacted are unlikely to seek to overturn that guidance,” Benda noted.

The IRS, on the other hand, is doubling down on enforcement plans. Senior Counsel Luke Ortner told accountants at an AICPA conference in Denver in August that the agency could begin seizing cannabis inventory to satisfy tax debts post-rescheduling – a marked shift from its historical approach.

Getting ahead of rescheduling

The AICPA’s recommendations are in response to this opening salvo and provides specific transitional issues that are anticipated to arise as the cannabis industry transitions out of the onerous consequences of section 280E,” Benda said, referring to the June IRS notice and the Department of Justice’s May proposal to reschedule marijuana.

At its crux is a call for full-year deduction allowances when rescheduling occurs to avoid what the AICPA warned could become “artificial behaviors” and unnecessary risks from mid-year tax status changes.

For example, if a cannabis business incurred $200,000 in normally deductible expenses (such as rent, professional services and payroll taxes) during the first three quarters of 2024 and another $100,000 in the fourth quarter when rescheduling takes effect, the group suggested the business should be allowed to deduct the full $300,000 for the year rather than just expenses after the effective date.

“Implementing accounting changes to a business in the middle of its tax year has the potential to cause significant compliance issues, which leads to confusion, unnecessary complexity, and increased tax administration expenses,” the AICPA wrote in its letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel.

The organization also called for guidance on complex technical issues around transitioning away from 280E, such as accounting method changes, partnership basis calculations and depreciation treatment. A key proposal includes establishing a voluntary disclosure program for businesses that may have already claimed deductions thinking 280E didn’t apply.

The stakes are significant: The provision currently requires cannabis companies to pay effective tax rates of 70% or higher by blocking standard business deductions. However, some businesses aren’t waiting for the smoke to clear, despite explicit warnings from the IRS. Trulieve Cannabis Corp., for example, secured $113 million in tax refunds earlier this year.

“It’s imperative that the federal government’s tax administration bodies provide guidance to these profitable businesses and their advisors in advance of the rescheduling of marijuana to help ensure a clear understanding of their federal tax obligations and mitigate noncompliance,” Lauridsen said.

A lawyer for the Internal Revenue Service told a group of accountants in Denver recently that despite the ongoing marijuana rescheduling process – which should nullify the 280E section of the federal tax code for state-legal cannabis companies – the tax policy will be enforced until rescheduling is completed. And after that, the attorney warned, the regulatory move will likely give the agency new tools with which to pursue tax-delinquent cannabis companies.

According to Marijuana Moment, IRS Senior Counsel Luke Ortner delivered the news during remarks made to the American Institute of Certified Public Accountants in August, implying that moves made by some multistate operators, such as Trulieve Cannabis Corp., to obtain 280E refunds may have been premature.

Although the message isn’t precisely a new one from the IRS – it issued a similar warning in July – Ortner suggested that the agency won’t simply close the book on past years’ 280E debts that are still outstanding for state-legal marijuana companies. The implies that the nullification of 280E likely will not be retroactive but only for future tax years.

“The IRS’s policy is not to look the other way because things have changed going forward,” Ortner said, according to a summary of his remarks shared with Marijuana Moment. “For now – unless courts say otherwise – the IRS interprets section 471(c) narrowly and will defend its position that it is not an end run around the application of 280E.”

Ortner also said that the IRS has often deferred to the Drug Enforcement Administration on enforcing past due tax liabilities, but once the rescheduling process is finished, the IRS will take a more central role in collecting on past-due federal taxes from marijuana businesses.

Previously, Ortner noted, the IRS has not seized and tried to sell cannabis inventory as a way of settling marijuana company tax debts, as it would with more mainstream companies. In the future, that may very well change, he said.

The IRS “could seize and sell a cannabis business’s assets – including marijuana inventory – to satisfy outstanding tax liabilities,” according to the summary of Ortner’s remarks.

It’s not yet clear exactly when the rescheduling process may conclude; the DEA has slated a Dec. 2 hearing on rulemaking related to effort, which will push any decision into 2025 at the earliest.