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American cannabis businesses cannot deduct basic expenses from their tax bills, the United States Tax Court ruled late last week, paving the way for U.S. tax collectors to receive billions of dollars in additional payments for as long as federal tax rules effectively equate cannabis businesses with drug traffickers.

The decision, issued on Nov. 29 and released publicly over the weekend, comes nearly a decade after the California-based Harborside chain of cannabis retail stores first launched a legal battle against the Internal Revenue Service for the right to claim utilities, rent, office supplies and other business expenses against its tax bills. Despite the legal defeat, Harborside intends to keep fighting for access to the same tax breaks available to virtually every other U.S. business.

“We still have the 9th Circuit Court of Appeals, which is a potential avenue for us [and] has historically been the most favourable court in the United States towards cannabis reform cases and if we were to lose there, there is always the Supreme Court of the United States,” said Steve DeAngelo, Harborside’s co-founder and chairman emeritus. “We are determined to pursue this case through every legal avenue that is open to us until we achieve justice.”

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At issue is Section 280E of the U.S. tax code, which bans individuals from taking tax deductions if their business “consists of trafficking in controlled substances.” The law was established in 1981 after a convicted dealer of amphetamines and cocaine was allowed to deduct various expenses such as gas for his car and even rent for his apartment, with Congress passing 280E in hopes of preventing anything similar from happening again. Harborside, which is in the process of going public on the Canadian Securities Exchange under the ticker “BUDD” through a merger with Toronto-based Lineage Grow, has thus far unsuccessfully argued it should be allowed to deduct basic business expenses from its tax bill going as far back as 2007, largely because it has always been compliant with laws and regulations at the state level.

“This decision is not remotely surprising [since] federal law disallows cannabis for any purpose whatsoever,” said Kate Bell, general counsel for the Marijuana Policy Project, a non-profit cannabis lobby group. “Every state-legal business, regardless of how compliant they are with state law and tax policies, is a drug kingpin as far as they’re concerned.”

Without those deductions, American cannabis businesses regularly face tax bills that represent upwards of 80 per cent of their profits. In 2015, for example, The New York Times reported Seattle-based Northwest Patient Resource Center had to pay US$46,340 in federal taxes on US$53,369 in profit, representing an 87 per cent tax rate.

Part of the reason the IRS refuses to stop applying 280E to cannabis businesses, Mr. DeAngelo said, has to do with the multibillion-dollar windfall it has already made and could continue to make from its use. According to analysis from BDS Analytics and GreenWave Advisors, U.S. tax collectors made between US$3-billion and US$8-billion in additional revenues between 2012 and 2017 specifically because cannabis businesses were unable to claim basic deductions from their totals.

Between 2018 and 2027, U.S. government coffers will be roughly US$5-billion richer if cannabis remains a controlled substance and 280E continues to be applied to the sector, according to an estimate prepared by the U.S. Congressional Joint Committee on Taxation. Pete Stark, who co-sponsored the original 280E legislation during his 40 years as a Democratic Member of the House of Representatives for California’s 8th, 9th and 13th districts, has long opposed using 280E against businesses that adhere to state laws.

“It undercuts legal medical marijuana dispensaries by preventing them from taking the full range of deductions allowed for other small businesses,” Mr. Stark said in a 2011 speech on the House floor. “It also punishes the thousands of patients who rely on them.”

Congress could pass targeted legislation that addresses the issues raised by 280E and cannabis businesses’ lack of access to banking services, the MPP’s Ms. Bell said. However, she argues broader legislation such as the proposed STATES Act, would address a multitude of issues facing the legal cannabis industry all at once.

“[The STATES Act] would make [280E] irrelevant by removing cannabis as a schedule 1 controlled substance,” Ms. Bell said. “As soon as cannabis gets off the drug schedule, the [280E] provision goes away.”

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