A landmark case before the U.S. Court of Appeals for the First Circuit could fundamentally alter how cannabis businesses are taxed under federal law. Multi-state operator Verano Holdings Corp., along with Massachusetts-based Canna Provisions and Wiseacre Farm, are challenging the constitutionality of federal marijuana prohibition, with potential implications for IRC Section 280E.
The plaintiffs, represented by prominent attorney David Boies, argue that Congress has effectively abandoned its goal of eradicating marijuana through recent actions, including allowing state medical markets to operate and permitting cannabis legalization in Washington, D.C. Their central argument hinges on the Commerce Clause, asserting that Congress lacks authority to regulate purely intrastate cannabis commerce in states where it's legal.
If successful, this challenge could invalidate the application of Section 280E to state-licensed cannabis businesses. Currently, 280E prohibits businesses trafficking in Schedule I substances from taking standard business deductions, resulting in effective tax rates that can exceed 70% for cannabis operators.
During Thursday's oral arguments, Boies emphasized that Congress can only regulate in-state commercial activity if failure to do so would "substantially interfere with" legitimate congressional regulation of interstate commerce. The Department of Justice countered that Congress retains authority to regulate intrastate activities that could substantially affect interstate commerce in aggregate.
The timing is particularly significant as the DOJ is currently evaluating rescheduling marijuana from Schedule I to Schedule III. DOJ attorney Daniel Aguilar warned that a ruling in favor of the plaintiffs "would frustrate" these rescheduling efforts.
For tax preparers, this case presents two potential watershed moments:
- If the court rules the CSA unconstitutional as applied to state-legal cannabis, it could invalidate 280E's application to compliant businesses.
- If marijuana is rescheduled to Schedule III, it would remove these businesses from 280E's scope entirely.
The district court previously dismissed the case while acknowledging the plaintiffs' standing based on their economic injuries from the CSA. The appeals court's decision could either uphold this dismissal or set the stage for a broader constitutional challenge, potentially reaching the Supreme Court.
Tax professionals should monitor this case closely as it could dramatically affect how cannabis businesses structure their operations and report their income. Any ruling limiting federal authority over intrastate cannabis commerce could require significant revisions to current tax treatment of state-legal operators.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
Subscribe to the TPN Newsletter!
Like what you're reading?
Subscribe to our FREE newsletter and we'll deliver content like this directly to your inbox.