Section 280E of the Internal Revenue Code is legalized marijuana businesses worst nightmare.  This statute disallows deductions from federal taxable income of all typical business expenses except the cost of goods sold.  See my previous articles below:

After losing in the U.S. Tax Court, the Vapor Room’s owner appealed to the 9th Circuit Court of Appeals.  On July 9, 2015, the Court of Appeals issued its opinion Olive vs. Commissioner,  and affirmed the Tax Court’s decision.

In a article called “Big Court Defeat For Marijuana Despite Record Tax Harvests” the author said,

“Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question. Virtually every business in every country pays tax only on net profits, after expenses. But the topsy-turvy rules for marijuana seem to defy logic. . . . Now, in another blow to the budding industry, is the IRS has convinced the influential Ninth Circuit Court of Appeals that marijuana dispensaries cannot deduct business expenses, must pay taxes on 100% of their gross income. The case, Olive v. Commissioner, was an appeal from a U.S. Tax Court decision.”

Another article called “Ninth Circuit: Legal Or Not, Marijuana Facility Cannot Deduct Its Expenses” states,

“a decades-old provision of the federal tax code remains firmly in place, threatening to administer a painful amount of tax on marijuana facilities, and serving as a greater barrier to entry into the industry than any outdated notion of moral or ethical impropriety. The IRS has been wielding a little known Code section — Section 280E, to be exact — to wage war on medicinal and recreational  marijuana facilities. Section 280E provides that no deduction — other than the cost to purchase or grow the marijuana inventory, or Cost of Goods Sold (COGS) — shall be allowed for any amount incurred in a business that consists of ‘trafficking in controlled substances’.”

Martin Olive argued that even though he could not deduct expenses arising from his marijuana business he should able to deduct expenses attributable to his side businesses that did not involve selling marijuana.  The Court of Appeals acknowledged the concept, but after giving an example of multiple businesses it concluded that Martin Olive did not, in fact, have any business other than the marijuana business.  The Court gave the following hypotheticals:

“An analogy may help to illustrate the difference between the Vapor Room and the business at issue in CHAMP. Bookstore A sells books. It also supplies some complimentary amenities: patrons can sit in comfortable seating areas while considering whether to buy a book; they can drink coffee or tea and eat cookies, all of which the bookstore offers at no charge; they can obtain advice from the staff about new authors, book clubs, community events, and the like; they can bring their children to a weekend story time or an after-school reading circle. The ‘trade or business’ of Bookstore A ‘consists of’ selling books. It’s many amenities do not alter that conclusion; presumably, the owner hopes to attract buyers of books by creating an alluring atmosphere. By contrast, Bookstore B sells books but also sells coffee and pastries, which customers can consume in a café-like seating area. Bookstore B has two ‘trades or businesses,’ one of which consists of selling books and the other of which ‘consists of’ selling food and beverages.


[the tax payer in a Tax Court case where the court found the taxpayer had more than one line of businesses], the court concluded, was Bookstore B. The Vapor Room, on the other hand, was Bookstore A.

See also “Why Your Dispensary Needs to Rent More Space than Needed for its Retail Store,” which discusses the CHAMP case.