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ISSUES IN CANNABIS TAXATION

26 USC 280E

Since 1996, Section 280E of the Tax Code is used by the federal government to “blunt” the effects of legalization of cannabis on the state level. 

The effects of Section 280E are crippling to the state-lawful cannabis industry with the IRS often assessing tax at a rate of more than 100% of net income in a Section 280E audit. A tax rate in excess of 100% of income is fatal not only to this industry, but to any business enterprise for which such a rate is imposed.  

Additionally, the IRS has taken a position that the taxpayer must admit to facts constituting federal drug crimes in order for the IRS to allow any subtractions for Costs of Goods Sold.   This results in taxing on gross receipts rather than income.

There is momentum in Congress to change the IRS’ implementation of Section 280E against cannabis.  However, until the laws are changed, the cannabis industry must grapple with the stifling taxes that the IRS seeks to impose.

Colorado Cannabis Sales and Use Tax 

In addition to any state sales tax imposed pursuant to CRS 29-2-102 and articles 26 and 28.8 of title 39, and in addition to the state cannabis excise tax imposed pursuant to article 28.8 of title 39, CRS, each municipality in the state is authorized to levy, collect, and enforce a municipal excise tax on the first sale or transfer of unprocessed retail marijuana by a retail marijuana cultivation facility at a rate of up to five percent of the average market rate. 

The different rates and types of tax in Colorado can be confusing for cannabis businesses, especially because each municipality imposes its own taxes and rates. It is common for the municipalities to conduct sales and use tax audits on a cannabis business, and the audits become very complicated due to the nature of the business. 

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HOW WE CAN HELP YOU

It is important to stay ahead of 280E by knowing how to use current legislation and litigation to your advantage. It is also important to have the right tools and people in place to back you up once the federal or state government knocks on your door. 

Before you respond to the state or federal government, it is extremely important to know what your rights are and to contact an attorney. Our attorneys will take over the audit immediately, relieving you of any communication with the state or federal government. We are highly experienced in dealing with cannabis audits (sales, use, income, partnership, etc.) and have working relationships with a majority of the state and federal auditors in Colorado. We have achieved very successful outcomes/settlements in audits and have considerable experience litigating the issue of 280E in court. 

 

We provide tax representation in the following areas:

  • Business, trust, estate, or individual

  • Federal and State Tax Law Compliance

  • Federal and State Civil Audit Representation, to include audits, assessments, and collection activities 

  • Representation before the IRS, the Department of Justice, and state taxing authorities 

  • Pursuing federal or state administrative or judicial appeals