Cannabis companies are averse to the 280E provision of tax code, but the shifting marijuana schedules has prompted them to come up with creative solutions.
One such approach – championed by accountants such as Justin Botillier of Oregon-based CalyxCPA, who is giving an upcoming webinar on the topic – relies on a policy conclusion from the U.S. Health and Human Services in 2023 that marijuana never should have been classified as a Schedule I narcotic.
Refund claims
The HHS statement was enough for Botillier – and many of his cannabis tax colleagues, he said – to offer financially distressed marijuana business clients an option: File your federal returns and claim exemption to 280E based on the position that HHS has taken, which is that cannabis simply doesn’t fit the definition of a Schedule I drug and therefore 280E doesn’t apply.
Botillier’s company has used this argument to file “hundreds of” tax returns on behalf cannabis companies.
He noted that the Internal Revenue Service will not be in a position to respond as strongly on these claims until the statute of limitations for federal tax returns expires.
It is clear that there has been an influx of these returns since about a decade ago when Trulieve Cannabis Corp. announced it received $113,000,000 in IRS refunds by claiming the exemption from 280E. Many others have followed suit.
Botillier said that IRS can reject or audit these returns. He has had only one company denied so far. However, he does not expect a wave of audits.
The worst case scenario, he said, is that companies that are in this position will have to pay federal taxes without penalty a few more years from now as long they can demonstrate with records and books that they made a sincere effort to do so.
It’s a matter of good will. Tax evasion is not the case. No, we’re not violating the law. Botillier stated that the IRS has a different interpretation than ours.
Intrastate commerce
James Mann, a tax lawyer who represents high-profile multinational operators throughout the U.S.A., called Botillier’s statement “flatly untrue.”
Mann noted that, because the rescheduling has been put off, the HHS’s position hasn’t been formally taken up by either the DEA nor the Department of Justice. Mann stated that according to DOJ’s Office of Legal Counsel the HHS conclusion are “not binding” on the DEA.
Mann said that it is inaccurate to claim there was a conclusive executive branch decision on cannabis rescheduling. There is only a HHS study.
Mann has used a legal tactic that is different, based on arguments made under the Constitution and 16th Amendment. He argues that the 280E law does not apply intrastate due to Dormant Commerce Clause of the Constitution.
Mann explained that some of the clients received large IRS refunds. They now have a better cash flow.
Mann expressed skepticism over Botillier’s logic, saying “anyone who makes claims that there is a magic pill” should be skeptical of taxpayers.
Mann stated that “the concern is that, if a large number of taxpayers submit reckless and ill advised returns, using frivolous arguments to challenge 280E at one point, it will look like a revolt by taxpayers, which does not end well for taxpayers.” The IRS may retaliate against cannabis companies who use Botillier’s approach, he warned.
Relief from the burden
Botillier has defended his position and stated that he worked closely with Greenspoon Marder associate Nick Richards, a well-known U.S. tax expert in the cannabis industry.
Botillier added that the whole area of anti-280E strategy is very new, and constantly evolving.
If my clients wish to proceed without having their 280E deductions reduced, they can do so based on arguments I present. They shouldn’t be proactively paying the IRS when it’s debatable … And it’s hugely debatable right now,” he said.
Botillier, despite their disagreements on the fundamentals of the issue, and Mann both agreed that more of their clients were desperate to avoid the hardships of 280E.
The majority of cannabis tax payers cannot pay the tax according to 280E. Either they shut down their business or claim that the 280E tax doesn’t affect them. This is an act of taxpayer rebellion. Mann stated that it’s possible to self-help, but some people are more well advised.