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Why the Harborside Tax Ruling is a Big Win for the U.S. Cannabis Industry

Harborside's ruling might save the cannabis industry millions in 280E audits.

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Taxes are one of the new ghouls scaring the cannabis industry. The Tax Code 280E bars businesses trafficking in controlled substances from taking federal tax deductions from normal operating costs. This rule can drive some cannabis business tax rates to 70%.

Many in the industry have bemoaned the law claiming it is a prohibition tax law still in place during a time when cannabis is growing into a billion-dollar industry. The IRS has not gotten the memo. Marijuana Business Daily recently wrote in an article that cannabis companies should expect a “tsunami of 280E audits.” The article goes onto say that the IRS is still forming the policy on how to audit cannabis companies saying, “the IRS now considers unlicensed companies that work with plant-touching businesses as subject to 280E if they profited from marijuana sales – including the likes of management companies, landlords, leasing firms, etc., but clarity does not exist yet.”

MJBiz’s reporting warned that the IRS could play hardball and require companies to fill out Form 8300 for current and past tax years. The penalty for not filling out that form is $25,000 per form. This would create millions of dollars in fines for large cannabis operators.

The Harborside case and its decision has largely been the reference point for audits in the industry (along with the Alternative Health case). The famous California cannabis retailer IPO’d on the CSE in June and they brought their tax audit case along with them believing they were fighting Uncle Sam for the good of the industry.

The IRS alleged Harborside owed $36 million in taxes and penalties after a 280E audit. In 2018, the company urged the court to exclude state-legal cannabis companies. They were rebuffed. However, this year Harborside has made strides for the industry even though they ultimately lost.

The IRS ruled Harborside owes $11 million in taxes and penalties for the tax years 2007 to 2012, and this reduction is a win for a less rigid interpretation of the law.

“The Tax Court’s final computation of our tax obligation in PMACC’s long-standing 280E case is a good outcome for Harborside shareholders,” CEO Andrew Berman said in a statement. “By challenging the IRS’s overly aggressive interpretation as it applies to cannabis businesses operating legally under state law, we have succeeded in reducing Harborside’s liability from the $36 million originally sought by the IRS to approximately $11 million.”

“This outcome has strengthened our already strong resolve to continue pursuing justice by appealing the decision, with the goal of modifying or reducing 280E liability for Harborside, and in the future, eliminating it for every other state legal cannabis business in the United States,” Steve DeAngelo, Harborside’s co-founder and Chairman Emeritus, also commented.

The reductions come from the court ruling that state-legal cannabis companies can claim deductions on the cost of goods sold. Now, Harborside will appeal the latest decision to amend the court’s decision about the calculations of goods sold. The California-based company is still awaiting a decision in its San Jose facility, where they owe an estimated $4.4 million in deficiencies and penalties.

Harborside’s hope here along with the rest of the industry is that state-legal cannabis businesses can avoid the teeth of a 280E audit. It would certainly help an industry that has struggled to maintain price stop downside price action.

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