State tax problem under 280E goes away

This is good news for the cannabis industry.  My read of the ILM below is that for purposes of 280E,  an excise tax, by its terms imposed on the seller, does not come into the seller’s income, and thus creates no 280E problem.  A “reduction in the amount realized” I take to mean an amount that is not includible in income.  I would think a tax on weight or THC content could be structured like a percentage tax.

A reliable source from Tax Analysts sent me ILM 201531016, saying this:

In a legal memorandum, the IRS determined that a taxpayer who paid marijuana excise tax to the state of Washington should treat the expenditure as a reduction in the amount realized on the sale of the property.

     A voter initiative approved in 2012 authorized the state liquor control board to regulate and tax marijuana for persons 21 years of age and older. As a result, licensed marijuana producers, processors, and retailers in Washington are subject to a state excise tax equal to 25 percent of the sales price of the drug.

     Section 164(a) generally provides a deduction for six enumerated categories of taxes and also for other state, local, and foreign taxes that are paid in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). However, any tax not described in the six listed categories that is paid or accrued in connection with an acquisition or disposition of property is treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.

     Under section 280E, no deduction or credit is allowed for any amount paid or incurred in carrying on any trade or business if the trade or business (or the activities that comprise the trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) that is prohibited by federal law or the law of any state in which the trade or business is conducted.

     The IRS interpreted the Washington marijuana excise tax to be a tax paid or accrued in connection with the disposition of property by a trade or business. Accordingly, a taxpayer who paid the marijuana excise tax should treat the expenditure as a reduction in the amount realized on the sale of the property rather than as either a part of the inventoriable cost of that property or a deduction from gross income. Although section 280E prohibits deductions and credits for these businesses, the IRS concluded that the marijuana excise tax is neither a deduction from gross income nor a tax credit. Consequently, a taxpayer is not precluded from accounting for the excise tax as a reduction in the amount realized on the sale of property.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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