Taxation’s War on Cannabis

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Harborside, a California cannabis dispensary, appealed the Tax Court’s decision of tax deficiencies totaling over $29 million dollars for the periods between 2007 through 2012. Harborside’s tax liability stems from the IRS’s denial of deductions under IRC §280E and the disallowances of cost of goods sold reported on Harborside’s tax returns. Internal Revenue Code §280E prohibits tax deductions for businesses whose activities involve a federally controlled substance (within the meaning of schedule I and II of the Controlled Substances Act). Unfortunately, cannabis is still and at the time (of the facts in the case) a Schedule I Controlled Substance.  On appeal Harborside makes two arguments: (1) whether IRC §280E violates the Sixteenth Amendment of the U.S. Constitution; (2) whether IRC §471 regulations excludes certain inventory costs for Harborside (cannabis businesses). This article will not go into the constitutionality of IRC §280E in reference to the Sixteenth Amendment but will focus on the cost of goods sold (COGS) and IRC §471 issue. The Tax Court erred in determining that “processing costs related to inventory are not includable in Harborside’s cost of goods sold.” The IRS did not allow Harborside to include purchasing, handling, and storage costs related to the goods it purchased for resale (“indirect costs”) — costs like testing, labeling, curing, storing, trimming, manicuring, maintaining, and packaging the [cannabis], or [cannabis] products — in its cost of goods sold.  Harborside would reject [cannabis] if it wasn’t properly cured, if it hadn’t been sufficiently trimmed, if it had an incurable safety issue such as pathogenic mold, or if it didn’t contain the right “cannabinoid profile.” In response to Harborside, the IRS admits in the Appellee’s brief, “if Harborside could establish that Section 471 permits it to include indirect costs in its cost of goods sold, Section 280E would not prevent that result,…

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Source : Taxation’s War on Cannabis

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