California medical cannabis dispensary owes $4.2 million, US Tax Court rules

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A subsidiary of California-based cannabis retailer Harborside must pay nearly $4.2 million in back taxes and penalties after losing a case in U.S. Tax Court.

The Tax Court determined in a decision issued Wednesday that San Jose Wellness, the Harborside subsidiary, can’t claim tax deductions for depreciation or charitable contributions under Section 280E of the IRS code.

Law360 first reported the decision.

The San Jose Wellness case is separate from a larger, roughly $11 million Harborside tax case pending in the 9th Circuit Court of Appeals in San Francisco.

That case, which has been going on for several years, has been closely watched by industry officials as a landmark 280E case. The court docket indicates that oral arguments were heard earlier this month.

Section 280E prohibits marijuana businesses from taking ordinary business deductions because the plant is listed as a Schedule 1 drug under the federal Controlled Substances Act.

“The requirements of Section 280E are clear and the hypotheticals posited by SJW (San Jose Wellness) are not relevant to these cases,” Judge Emin Toro wrote in a 30-page ruling.

He in part was referring to a San Jose Wellness argument that 280E shouldn’t apply to charitable contributions as a matter of policy.

Toro ruled that the medical cannabis dispensary owed about $2 million in back taxes for the years between 2010-15. The judge also ordered San Jose Wellness to pay a $181,423 penalty in connection with a substantial underpayment in 2015.

Harborside said in a news release that the amount owed is less than the provision set aside.

“Since our new board of directors was seated on November 24, we have committed to resolving all 280E disputes with the IRS and, more importantly, the end of federal prohibition,” Harborside Chair Matt Hawkins said in the release.

Henry Wykowski, who represented San Jose Wellness and filed the Tax Court appeal, wrote in an email to Marijuana Business Daily that “we are disappointed that the Tax Court along with the IRS continues to apply 280E in a manner not intended by Congress when this section was adopted.

“280E was meant to address drug traffickers and passed in 1982, 14 years before the advent of medical cannabis. Hopefully, an enlightened Congress will pass legislation to correct this situation.”

– Jeff Smith