Marijuana Dispensary Denied Business Expense Deductions


A nonprofit corporation that operates a legal medicinal marijuana dispensary in the state of California has not been allowed to claim business expense deductions under Internal Revenue Code (IRC) Section 280E.

When filing its federal taxes, the organization had fallen afoul of IRC Section 280E. This section prevents any business or trade that involves trafficking a controlled substance from claiming business expense deductions. The organization took its case to court by claiming that IRC Section 280E does not apply to them.

Disputing the Term “Consists Of”

It was the argument of the organization that its business did not “consist of” trafficking drugs. Its reasoning was IRC Section 280E should not apply to its activities. The organization argued the term “consists of” should only relate to activities that exclusively pertain to the trafficking of drugs. In this case, it would be the selling of marijuana. However, the dispensary also offers goods and services other than medicinal marijuana sales. Therefore, the nonprofit claimed IRC Section 280E should not apply to its activities.

Rejection of The Argument

Unfortunately, the court rejected the organization’s argument because it had already rejected it in a previous case for business expense deductions. The court acknowledged the term “consists of” refers to a list that is exclusive or exhaustive during common usage. However, should it apply this interpretation, it would render IRC Section 280E ineffective. The court pointed out that, should it apply this interpretation, it would not cover dealers selling uncontrolled substances. The court also referred to several other definitions of terms used in other sections. It stated there was a case that found the phrase’s meaning did not require interpretations based on its exclusiveness.

Non-Trafficking Businesses and Trades

The court ruled IRC Section 280E would apply to business deductions related to the marijuana sales of the organization. However, in the past, the court had ruled the section does not apply to non-trafficking separate businesses or trades. Therefore, the court had to consider whether some of the non-trafficking activities of the organization were separate businesses or trades. The organization stressed that it participates in several non-trafficking activities. These consist of non-marijuana product sales, brand development, and therapeutic services.

The Court’s Conclusion

The court ruled that selling non-marijuana products at the organization’s dispensary had too close of a link to marijuana sales. Therefore, it could not constitute an entirely separate business or trade. The court based its conclusion on the fact that the staff selling marijuana was also selling the other products. Also, the other products were generally related to the use of or promotion of marijuana. In addition, the court ruled it did not consider the “holistic services” offered to be a separate business or trade. This was because approximately 1% of the proceeds from the marijuana sales covered their costs. The court’s final conclusion was the organization entwined its brand development activities with its marijuana business. Therefore, it ruled the organization could not class those activities as an entirely separate enterprise.

The Costs of Sold Goods

The finding of the court was it could not allow the organization to take any business expense deductions. However, it did rule the organization was only liable for taxation on gross receipts. The costs of its sold goods reduced these expenses. The court also found the corporation could not apply IRC Section 263A to include indirect expenses because Section 263A prohibits specification capitalization of costs that would otherwise be nondeductible. In this case, these would be expenses because of drug trafficking. Therefore, it would only consider expenses classified to be direct under IRC Section 471. When applying IRC Section 471, the organization was considered to be a reseller, not a producer because it did not own the marijuana plants.

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