Federal Court Rules Cannabis Brand Liable for $4.2M in Taxes

The U.S. Tax Court on Wednesday ruled that California medical cannabis operator San Jose Wellness, a subsidiary of Harborside, is liable for $4.2 million in taxes because federal law prohibits it from claiming depreciation and charitable contribution deductions, Law 360 reports.

In the opinion, U.S. Tax Court Judge Emin Toro determined that the Internal Revenue Service had lawfully denied the company’s depreciation and charitable giving claims because they are associated with the cannabis trade and the company files taxes under IRS Code 280E which prohibits deductions because the code is used for businesses that buy or sell federally prohibited substances.

Toro said in his ruling that “the requirements of Section 280E are clear.”

Harborside had argued that the tax code requirements were unconstitutional because 280E results in a tax that is not an income tax, running afoul of the 16th Amendment. The Tax Court also ruled against the company in 2018, determining Harborside is “a giant drug trafficker, unentitled to the usual deductions that legitimate businesses can claim.”

Toro cited a separate 2019 case, Patients Mutual Assistance Collective Corp. v. Commissioner, in his ruling, which determined taxing cannabis companies under 280E was lawful, according to Law 360. Additionally, Toro said that just because San Jose Wellness sold other goods, such as t-shirts, and services, such as acupuncture, it does not qualify for any tax breaks.

The judge also suggested that the company failed to consider previous IRS guidance, case law, and legislative history “to determine its proper tax liability” before filing its petition with the court.